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Best Option strategies- Bull, Bearish and Range Bound markets

Bullish-bearish-range-bond

Best Option strategies- Bull, Bearish and Range Bound markets

 

2:1 Call ratio Back Spread

The main difference between ratio spread and back spreads is if a trader sells one option then implementing a back spread options strategy would require buying more than one option of the same underlying and expiration with a strike price that is farther from at-the-money. Traders implement this option trading strategy if they foresee a volatile move on the upside in the life of the option contract.

Setup of the strategy

Sell 1 ITM Call

Buy 2 OTM Calls

A call ratio back spread strategy is a 3-leg bullish options trading strategy and executing a call ratio back spread, would require selling one in-the-money (ITM) call and buying two out-of-the-money (OTM) calls. This options trading strategy is designed to maximise profit from volatility in the underlying with the bias toward the upside in the near term. The combination of long and short options limits risk, decreasing cost while maintaining theoretically unlimited profit potential from the strategy. The 2:1 or 3:2 ratio refers to the ratio of the long and short call option. This is a best option strategy for bullish investor, if the trader holds highest level of judgment that stock will move in upward direction. The implementation may be put into place for a net credit or debit, depending on the option strike prices, the distance between the strike prices, volatility, etc.

If the strategy is made for debit and underlying inches only a bit, even though it moves in favorable direction, a back spread can lose money. A substantial move in the favorable direction that is to the upside will generate theoretically unlimited returns.

Suppose the Nifty is trading at 18107 and the trader foresees bullish movement in the underlying. He can build a bullish strategy through Traderadar or explore other bullish strategy which favors traders trading scenario.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25-01-2023 17950 163.65 Sell 1
CALL 25-01-2023 18150 31.7 Buy 2

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry
17700 0 0 100.25 100.25
17750 0 0 100.25 100.25
17800 0 0 100.25 100.25
17850 0 0 100.25 100.25
17900 0 0 100.25 100.25
17950 0 0 100.25 100.25
18000 -50 0 100.25 50.25
18050 -100 0 100.25 0.25
18100 -150 0 100.25 -49.75
18150 -200 0 100.25 -99.75
18200 -250 100 100.25 -49.75
18250 -300 200 100.25 0.25
18300 -350 300 100.25 50.25
18350 -400 400 100.25 100.25
18400 -450 500 100.25 150.25
18450 -500 600 100.25 200.25
18500 -550 700 100.25 250.25

Call-ratio-Back-Spread

Strap option trading strategy

Setup of the strategy

Buy 2 AT-THE-MONEY (ATM) Call

Buy 1 AT-THE-MONEY (ATM) Put

A strap is a bullish option trading strategy similar to a long straddle, except that the trader purchases two call options instead of one. This strap strategy entails purchasing one at-the-money (ATM) put and two at-the-money (ATM) calls of the same underlying asset, expiration date, and strike. Straps are costly because the consumer must pay a premium upfront. To breakeven in the strap strategy, the stock price must rise sufficiently to cover the cost of three long options.

Straps are options trading strategies with infinite reward and little risk that are utilised when the options trader believes the underlying stock price will undergo high volatility in the short term. Profit can only be achieved if the security rises or falls dramatically, but a higher profit can only be earned if the security breaks in an upward direction, taking advantage of the gain from the two calls. The risk is limited but significant, equivalent to the premium and commissions paid for purchasing call and put options.

Maximum Profit: Unlimited

Maximum Loss: Limited to the net Premium Paid

Profit

When price go up = 2 x (Underlying price- Strike Price of Calls) – Net Premium Paid

When price of underlying fall = Strike Price of Puts – Price of Underlying – Premium Paid

Suppose LTI Mindtree is trading at 4275 and you thought of implementing a strap option strategy before the result.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25-01-2023 4250 117 Buy 2
PUT 25-01-2023 4250 75.75 Buy 1

 

PayOff Details

Max Risk Max Reward Lower Break Even Upper Break Even
309.75 Unlimited 3940.25 4404.875

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry
3900 0 350 -309.75 40.25
3950 0 300 -309.75 -9.75
4000 0 250 -309.75 -59.75
4050 0 200 -309.75 -109.75
4100 0 150 -309.75 -159.75
4150 0 100 -309.75 -209.75
4200 0 50 -309.75 -259.75
4250 0 0 -309.75 -309.75
4300 100 0 -309.75 -209.75
4350 200 0 -309.75 -109.75
4400 300 0 -309.75 -9.75
4450 400 0 -309.75 90.25
4500 500 0 -309.75 190.25
4550 600 0 -309.75 290.25
4600 700 0 -309.75 390.25
4650 800 0 -309.75 490.25
4700 900 0 -309.75 590.25

Strip-option-strategy-Bearish

Strip option strategy

Setup of the strategy

Buy 1 Call AT-THE-MONEY (ATM)

Buy 2 Puts AT-THE-MONEY (ATM)

A trader can implement this option trading strategy when he/she expects big movement in the price of the underlying security, although not completely sure in which direction, but bias toward a downward movement is more likely than an upside move.

A strip is a bearish option trading strategy similar to a long straddle, except that the trader purchases two put options instead of one. The strip option strategy entails purchasing at-the-money (ATM) call and twice as many at-the-money (ATM) puts of the same underlying asset, expiration date, and strike price. Strips are costly because the consumer must pay a cost premium upfront. To break even on the strip approach, the stock price must rise sufficiently to cover the cost of three long options.

It can be used when one anticipates a large fluctuation in the price of the underlying stock but is unsure which direction it will take. A downward movement is more likely than an upward movement.

Profit

When price fall = 2 x (Put strike –Underlying Price) – Net Premium Paid

When price rise = Underlying Price– Strike Price of Calls –Premium Paid

Maximum Profit = Unlimited

Max Loss = Premium and Commissions Paid

Suppose a security is trading at 3910 and an investor hold a bearish outlook with some optimism. You thought of implementing a strip option strategy.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25-01-2023 3900 89 Buy 1
PUT 25-01-2023 3900 91.6 Buy 2

Pay-Off Details

Max Risk Max Reward Lower Break Even Upper Break Even
272.2 Unlimited 3763.9 4172.2

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry Option PayOff At 9 Days To Expire
3500 0 800 -272.2 527.8 519.77
3550 0 700 -272.2 427.8 427.92
3600 0 600 -272.2 327.8 340.58
3650 0 500 -272.2 227.8 259.38
3700 0 400 -272.2 127.8 186.09
3750 0 300 -272.2 27.8 122.46
3800 0 200 -272.2 -72.2 70.039
3850 0 100 -272.2 -172.2 29.94
3900 0 0 -272.2 -272.2 2.736
3950 50 0 -272.2 -222.2 -11.63
4000 100 0 -272.2 -172.2 -13.8
4050 150 0 -272.2 -122.2 -4.895
4100 200 0 -272.2 -72.2 13.627
4150 250 0 -272.2 -22.2 40.173
4200 300 0 -272.2 27.8 73.161
4250 350 0 -272.2 77.8 111.13
4300 400 0 -272.2 127.8 152.84

Strip-option-strategy-Bearish

Short Combo Option Strategy

Setup of the strategy

Long 1 at-the-money PUT

Short 2 at-the-money Call

A short combo or short combination option trading strategy is used when a trader holds a pessimistic perspective on the market or securities. This is a two-legged option strategy that is similar to synthetic short stock in that it replicates the payout of shorting the underlying asset. A short combo strategy is purchasing an ATM put option and selling an ATM call option with the same expiry and underlying asset. The short call position in this strategy can partially or completely cover the cost of the long put option. This inevitably reduces the cost of executing the strategy.

Investors shouldn’t have mindset that this is an option trading for beginners. Because when employing this strategy, the trader must be vigilant because the potential loss is limitless in case the security rises to the upside. The outflow from this spread is rather low since the premium received from the short call option position is utilised to offset the purchase price of the long put option position.

Depending on the relative pricing of the call and put options, the technique can be concluded for debit or credit. The outcome is a net credit if the premium generated from the short call option is greater than the cost of the long put option position. The outcome is a net debit if the premium paid for going long on a put option is larger than the premium received.

Initial cash flow = call premium received – put premium paid

Short combo option trading example has been shown when trader holds a pessimistic perspective on the market.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25-01-2023 2040 47.8 Sell 1
PUT 25-01-2023 2020 33.75 Buy 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
Unlimited Unlimited 2054.05 2054.05

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry
1900 0 120 14.05 134.05
1920 0 100 14.05 114.05
1940 0 80 14.05 94.05
1950 0 70 14.05 84.05
1960 0 60 14.05 74.05
1980 0 40 14.05 54.05
2000 0 20 14.05 34.05
2020 0 0 14.05 14.05
2040 0 0 14.05 14.05
2050 -10 0 14.05 4.05
2060 -20 0 14.05 -5.95
2080 -40 0 14.05 -25.95
2100 -60 0 14.05 -45.95
2120 -80 0 14.05 -65.95
2140 -100 0 14.05 -85.95
2150 -110 0 14.05 -95.95
2160 -120 0 14.05 -105.95

Short-Combo-Option-Strategy-Bearish

Long call Condor Option Strategy

Setup of the strategy

Buy 1 deep ITM Call

Sell 1 ITM Call

Sell 1 OTM Call

Buy 1 deep OTM Call

A Long Call Condor is a limited risk range-bound option strategy comparable to a Long Butterfly. When compared to other options trading strategies, the maximum profit from this approach may be minimal. The options method works well when the trader expects the underlying price to fluctuate very little throughout the option’s tenure.

Long Call Condor is a four-leg strategy that involves option buying as well as option selling. It entails purchasing one deep ITM call, selling one ITM call above the long deep ITM call, selling one OTM call, and buying one deep OTM call, all with the same expiration date and underlying asset.

The selection of strike prices distinguishes a long call condor strategy from a butterfly strategy. The pay-off profile’s lucrative field is substantially larger than that of the long butterfly.

The long OTM call option is used for limiting the risk. The resulting position is favorable if the stock stays within its range and exhibits little volatility. At expiry, an investor can maximise profits if the stock closes between the middle strike prices of the two sold options.

Max Gain
The biggest profit will be realised if the underlying expires between the two short call strikes. The difference between the first and second strikes less the net outflow is the maximum profit.

Max Loss
Maximum loss from this strategy is the net premium paid

Suppose the Nifty is trading at 17998 and for implementing this strategy you need to sell 1 lot of 17950 and 1 lot of 18000 call and Buy 1 lot of 18050 call and Buy 1 lot of 17900 Call.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25-01-2023 18050 138.95 Buy 1
CALL 25-01-2023 17900 230.4 Buy 1
CALL 25-01-2023 17950 197.8 Sell 1
CALL 25-01-2023 18000 167.15 Sell 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
-4.399994 54.399994 17895.6 18054.4

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Payoff 4 Net Premium Option PayOff At Expiry
17600 0 0 0 0 -4.4 -4.4
17650 0 0 0 0 -4.4 -4.4
17700 0 0 0 0 -4.4 -4.4
17750 0 0 0 0 -4.4 -4.4
17800 0 0 0 0 -4.4 -4.4
17850 0 0 0 0 -4.4 -4.4
17900 0 0 0 0 -4.4 -4.4
17950 0 50 0 0 -4.4 45.6
18000 0 100 -50 0 -4.4 45.6
18050 0 150 -100 -50 -4.4 -4.4
18100 50 200 -150 -100 -4.4 -4.4
18150 100 250 -200 -150 -4.4 -4.4
18200 150 300 -250 -200 -4.4 -4.4
18250 200 350 -300 -250 -4.4 -4.4
18300 250 400 -350 -300 -4.4 -4.4
18350 300 450 -400 -350 -4.4 -4.4
18400 350 500 -450 -400 -4.4 -4.4

Long-call-Condor-Option-Strategy-Range-Bound

Short Guts Option Strategy
Setup of the strategy

Sell 1 ITM Call

Sell 1 ITM Put

Short Gut is a range-bound option selling strategy and a variant of the Short Strangle option strategy that allows an options trader to benefit when the underlying stock remains inside a pre-determined trading range. This strategy is implemented by selling in-the-money calls and puts on the same underlying stock and expiration date. The short guts are implemented for credit. The strategy is distinguished by unlimited risk in both directions as well as limited profit. This option trading strategy caries higher chance of ending up in full profit than a short strangle. If volatility is high when the trader enters into the position, but when the market conditions improve and volatility follows suit, the high volatility option might provide a profit.

This isn’t an option trading for beginners, the reason being if the trader forecast of range bound market fails and underlying stock move aggressively in one direction, the potential loss is limitless and can accumulate to extremely large amounts. The margin requirements for this technique are rather large because of the possibly limitless risk. The short guts strategy’s maximum gain is restricted and comes when the underlying stock price on the expiry date trades between the strike prices of the options sold.

Explaining this option strategy through an example on Nifty. Suppose the Nifty is trading at 17998, for implementing this strategy would require selling 17800 Call, and Selling 18150.0 Put.

Option Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 25-01-2023 18150 199.55 Sell 1
CALL 25-01-2023 17800 304.05 Sell 1

 

Payoff Chart

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry
17600 -550 0 503.6 -46.4
17650 -500 0 503.6 3.6
17700 -450 0 503.6 53.6
17750 -400 0 503.6 103.6
17800 -350 0 503.6 153.6
17850 -300 -50 503.6 153.6
17900 -250 -100 503.6 153.6
17950 -200 -150 503.6 153.6
18000 -150 -200 503.6 153.6
18050 -100 -250 503.6 153.6
18100 -50 -300 503.6 153.6
18150 0 -350 503.6 153.6
18200 0 -400 503.6 103.6
18250 0 -450 503.6 53.6
18300 0 -500 503.6 3.6
18350 0 -550 503.6 -46.4
18400 0 -600 503.6 -96.4

Short-Guts-Option-Strategy

 










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