Option Buying, Selling & Hedging: Key Nifty Strategies
Hey traders! Today, we’re diving into the exciting world of options trading. We’ll compare three key strategies: Option Buying , Option Selling , and Option Hedging . Let’s break them down with a real-time example of Nifty options and understand how each of them works.
Option Buying (Call Option)
Trade Details:
Strike Price: 22950 CE
Expiry Date: 27th February 2025
Premium: 191
Probability of Profit: 33.36%
Maximum Profit: Undefined
Maximum Loss: 14,325 (-99.85%)
Breakeven Point: 23141.0
Payoff Chart Analysis:
When you buy a Call Option , your loss is limited to the premium you paid (14,325).
The profit potential is unlimited if the underlying asset (Nifty) moves significantly higher.
The payoff chart shows a steep upward curve , indicating significant profit if the market goes up, but also highlighting the steep loss if the market doesn’t move in your favor.
Option Selling (Put Option)
Trade Details:
Strike Price: 22950 PE
Expiry Date: 27th February 2025
Premium: 189.6
Probability of Profit: 61.54%
Maximum Profit: 14,220 (7.41%)
Maximum Loss: Undefined
Breakeven Point: 22761.0
Payoff Chart Analysis:
When you sell a Put Option , you receive premium upfront and aim to profit from minimal market movement.
Maximum loss is potentially unlimited if the market falls drastically.
Profit is capped at the premium received (14,220), making it a strategy suited for range-bound markets .
The payoff chart shows a gradual upward slope , with limited profit potential and high risk if the market moves sharply lower.
Option Hedging (Buy and Sell Combination)
Trade Details:
Sell Put Option (22950 PE) at 189.6
Buy Put Option (22850 PE) at 146.65
Net Credit: 3,221 (7.72%)
Maximum Loss: 4,279 (-10.26%)
Breakeven Point: 22908.0
Payoff Chart Analysis:
Option Hedging involves combining option buying and option selling to limit risk while maintaining profit potential.
The maximum loss is capped , which is crucial for managing risk in volatile markets.
This strategy offers moderate profit (3,221) with a relatively higher probability of profit (50.49%).
The risk-to-reward ratio (1:0.75) suggests a more balanced approach than buying or selling options alone.
Real-World Application:
Option Hedging is beneficial when you expect volatility but want to control potential losses by limiting exposure.
Example: Combining a short Put with a long Put to create a bullish or neutral strategy in uncertain market conditions.
Key Comparisons
Profit Potential:
Buying options offers unlimited profit .
Selling options offers limited profit but carries unlimited risk .
Hedging offers a moderate profit with capped loss , balancing risk and reward.
Risk and Loss:
Buying options has a limited loss (premium paid).
Selling options exposes you to unlimited loss .
Hedging reduces risk by capping both profit and loss, offering more control.
Probability of Profit:
Selling options usually has a higher probability of profit due to premium collection .
Buying options typically has a lower probability due to the need for significant market movement.
Hedging strikes a balance, with 50.49% probability of profit .
Break-even Point:
For option buyers , the break-even point is above the strike price, meaning the underlying asset needs to rise substantially for you to profit.
For option sellers , the break-even point is lower than the strike price, meaning the underlying asset can drop slightly before you start losing money.
Hedging combines both, providing a controlled risk environment.
Real-World Application
Option Buying (Call):
Great for when you expect sharp upward moves .
Example: You buy a Call option because you believe the market is going to soar, and you want to capture that upside.
Option Selling (Put):
Ideal for stable or slightly bullish markets .
Example: You sell a Put option because you believe the market will stay the same or rise slightly, and you’re comfortable taking the risk in exchange for the premium.
Option Hedging:
Perfect when you expect volatility but don’t want to take on excessive risk.
Example: You combine a short Put with a long Put to create a bullish or neutral strategy in uncertain market conditions.
Risk Management Considerations
For Option Buying:
Know your maximum loss (the premium you paid) and never risk more than you can afford to lose.
Control your risk by picking options that fit your risk tolerance and market expectations.
For Option Selling:
Ensure you have enough margin to cover potential losses.
Always be aware of the unlimited risk that comes with selling options.
For Hedging:
Balance risk and reward effectively by using both buying and selling strategies.
Helps you minimize the impact of extreme market movements while still being in the game.
Conclusion
All three strategies— Option Buying , Option Selling , and Option Hedging —have their pros and cons. The best one for you depends on your market outlook, risk tolerance, and trading goals.
What strategy do you prefer? Let me know in the comments!
