Top reason behind the wide popularity of options trading, is the uncapped profit target. Risk low & gain high with right usage of different income options strategies. With options with traders can generate regular income monthly, at least 3-4% return per month by properly blending buy & sell option legs. Almost 20-30% yearly gain which is the most demanding profit target among all institutional fund managers. For some strategies, income is more than 100%, we will explain it below.

Strategies:

Before proceeding you need understand the basics of options trading, you can learn it from our other post.


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Options Trading Basics


#1 Long Call

DifficultyMarket DirectionMax RiskMax Reward
BeginnersUpward Limited Unlimited

We have explained the basics of long call and long put many times before. Here we will demonstrate once again with a clear example.

Trade Setup:
  • Buy a call option
Time Period for Trade:

With this kind of trade, time decay works against it, therefore it its wise to buy at least three months expiry options contracts.

Long Call Example
Stock NameGoogle
Stock ExchangeNASDAQ
Current Price$1140.99
Strike Price$1100.00
Call Premium$43.60, amount you pay
Option StatusIn money
Max Risk$43.60 (call premium)
Max Rewardunlimited with the stock price increment
Breakeven$1100.00 + $43.60 = $1143.60
Call strike + call premium
long call option payoff graph

If google share moves above $1143.60, option contract will start making money.

Long call option payoff graph


#2 Long Put

DifficultyMarket DirectionMax RiskMax Reward
BeginnersDownward Limited Unlimited
Trade Setup:
  • Buy a put option
Time Period for Trade:

Same way before, time decay works against it, therefore it its wise to buy at least three months expiry put options contracts.

Long Put Example
Stock NameONGC
Stock ExchangeNSE
Current Price₹157.35
Strike Price₹160
Put Premium₹4.00, amount you pay
Option StatusIn money
Max Risk₹4.00 (put premium)
Max Rewardunlimited with the stock price increment
Breakeven₹160 – ₹4 = ₹156
Put strike + put premium
long put option payoff graph

That means if ONGC shares moved below ₹156, then put option will start making money.

Long put option payoff graph


#3 Cover Call

DifficultyMarket DirectionMax RiskMax Reward
BeginnersUpward Limited Limited
Call strike – stock price + call premium
Trade Setup:
  • Buy stock
  • Sell out of money call option
Time Period for Trade:

As this strategy is used for creating monthly dividend from your own stock. So its better to sell the call options monthly.

Covered Call Example
Stock NameTATAMOTORS
Stock ExchangeNSE
Current Price (Buy stock)₹225.40
Strike Price₹235
You pay₹214.95
Option StatusOut of Money
Max Risk₹214.95 (100% of total expense)
Max Reward₹20.05 (9%)
Breakeven₹214.95
Stock price paid – call premium

April TATATMOTORS stock price ₹225.40, Sell May TATAMOTORS option contract at ₹10.45.

cover call option payoff graph
cover call option payoff graph

#4 Synthetic Call

DifficultyMarket DirectionMax RiskMax Reward
BeginnersUpward Limited Unlimited
Trade Setup:
  • Buy stock
  • Buy at money or out of money put option
Time Period for Trade:

Buy the puts with at least one month extra time period. Longer time period avoid the bad effect of time decay.

Synthetic Call Example
Stock NameWIPRO
Stock ExchangeNSE
Current Price₹289.40
Strike Price₹288.75
Net Debit₹2894 + ₹13.20 = ₹2907.2
stock price + put premium
Option StatusOut of money
Max Risk₹1385
stock price + put premium – put strike
Max Rewardunlimited
Breakeven₹302.6
Strike price + put premium + stock price – put strike price

Buy 100 shares of WIPRO at ₹289.40.
Buy 1 MAY put option contract at ₹13.20 with 288.75 strike.

synthetic call option payoff graph
synthetic call option payoff graph

#5 Synthetic Put

DifficultyMarket DirectionMax RiskMax Reward
BeginnersDownward Limited Unlimited
Trade Setup:
  • Sell stock
  • Buy at money or out of money call option
Time Period for Trade:

Buy the call with at least one month extra time period. Longer time period avoid the bad effect of time decay same as before with synthetic put option.

Synthetic Put Example
Stock NameHDFCBANK
Stock ExchangeNSE
Current Price₹2287.90
Strike Price₹288.75
Net Credit₹2206.90
stock price- call premium
Option StatusIn money
Max Risk₹73.1
call premium + call strike – stock price
Max Reward₹2206.90
stock price- call premium
Breakeven₹2206.9
stock price – call premium

Sell 10 shares of HDFCBANK at ₹2287.90 on April.
Buy 1 MAY call option contract at ₹81 with 2280 strike.

synthetic put option payoff graph
synthetic put option payoff graph

#6 Bear Call Spread

DifficultyMarket DirectionMax RiskMax Reward
IntermediateDownward Limited Limited
Trade Setup:
  • Sell lower strike call option
  • buy higher strike call option with same amount & same expiray date. Both strike price should be higher than current market price.
Time Period for Trade:

Can be traded on short term, one month or less expiray dates.

Bear Call Spread Example
Stock NameLUPIN
Stock ExchangeNSE
Current Price₹827.45
Net Credit₹9.75
sell premium – buy premium
Max Risk₹10.25
higher strike – lower strike – net credit
Max Reward₹9.75
net credit
Breakeven₹829.75
lower strike + net credit

LUPIN is trading at ₹827.45.
Sell May option call with strike rate of 820 at ₹46.80.
Buy May option call with strike rate of 840 at ₹37.05.

bear call spread option payoff graph
bear call spread option payoff graph

#7 Bull Put Spread

DifficultyMarket DirectionMax RiskMax Reward
IntermediateUpward Limited Limited
Trade Setup:
  • Buy lower strike put option
  • Sell higher strike put option with same amount & same expiray date. Both strike price should be lower than current market price.
Time Period for Trade:

Can be traded on short term, one month or less expiray dates.

Bull Put Spread Example
Stock NameICICI Bank
Stock ExchangeNSE
Current Price₹403.90
Net Credit₹8.3
sell premium – buy premium
Max Risk₹6.7
higher strike – lower strike – net credit
Max Reward₹8.3
net credit
Breakeven₹403.3
higher strike – net credit

ICICIBANK is trading at ₹403.90.
Buy May option put with strike rate of 395 at ₹12.25.
Sell May option put with strike rate of 410 at ₹20.55.

bull put spread option payoff graph
bull put spread option payoff graph

#8 Straddle

DifficultyMarket DirectionVolatilityMax RiskMax Reward
IntermediateRangeHigh Limited Unlimited
Trade Setup:
  • Buy at money strike put
  • Buy at money strike call with same expiry date & same strike price.
Time Period for Trade:

Longer time is better, 2-3 months expiry is reasonable.

Straddle Example
Stock NameIDEA
Stock ExchangeNSE
Current Price₹18.05
Net Debit₹3.15
Total premium
Max Risk₹3.15
Net debit
Max Rewardunlimited
Breakeven up₹14.85
strike – net debit
Breakeven down₹21.15
strike + net debit

IDEA is trading at ₹18.05 April.
Buy May option put with a strike rate of 18 at ₹2.40.
Buy May option call with a strike rate of 18 at ₹0.75.

straddle option payoff graph
Straddle option payoff graph

#9 Strangle

DifficultyMarket DirectionVolatilityMax RiskMax Reward
IntermediateRangeHigh Limited Unlimited
Trade Setup:
  • Buy out of money lower strike put
  • Buy out of money strike call with same expiry date & with higher strike price.
Time Period for Trade:

Longer time is better, 2-3 months expiry is reasonable.

Strangle Example
Stock NameSuzlon
Stock ExchangeNSE
Current Price₹7.40
Net Debit₹2.5
Total premium
Max Risk₹2.5
Net debit
Max Rewardunlimited
Breakeven down₹3.35
low strike – net debit
Breakeven up₹10.5
high strike + net debit

Suzlon is trading at ₹7.40 April.
Buy May option put with a strike rate of 6 at ₹1.5.
Buy May option call with a strike rate of 8 at ₹1.

strangle option payoff graph
Strangle option payoff graph

#10 Long Iron Buttefly

DifficultyMarket DirectionVolatilityMax RiskMax Reward
IntermediateRangeLow Limited Limited
Trade Setup:
  • Buy out of money lower strike put option.
  • Sell at money middle strike put option.
  • Sell at money middle strike call option.
  • Buy out of money higher strike call option.
Time Period for Trade:

When position in profit, time decay is positve when positive in loss, time decay is negative.

Strangle Example
Stock NameASIANPAINT
Stock ExchangeNSE
Current Price₹1468.45
Net Credit₹31.85
Net premium
Max Risk₹8.15
differenence in strike – net credit
Max Reward₹31.85
net credit
Breakeven down₹1428.15
middle strike – net credit
Breakeven up₹1491.85
middle strike + net credit

ASIANPAINT is trading at ₹1468.45 April.
Buy May put option with a strike rate of 1420 at ₹27.85.
Sell May put option with a strike rate of 1460 at ₹40.
Sell May call option with a strike rate of 1460 at ₹61.20.
Buy May call option with a strike rate of 1500 at ₹41.50.

long iron butterfly option payoff graph
Long iron butterfly option payoff graph

#11 Long Iron Condor

DifficultyMarket DirectionVolatilityMax RiskMax Reward
IntermediateRangeLow Limited Limited
Trade Setup:
  • Buy out of money lower strike put option.
  • Sell out of money lower middle strike put option.
  • Sell out of money higher middle strike call option.
  • Buy out of money higher strike call option.
Time Period for Trade:

When position in profit, time decay is positve when positive in loss, time decay is negative.

Strangle Example
Stock NameGAIL
Stock ExchangeNSE
Current Price₹352.10
Net Credit₹2
Net premium
Max Risk₹3
differenence in strike – net credit
Max Reward₹2
net credit
Breakeven down₹348
lower middle strike – net credit
Breakeven up₹357
uper middle strike + net credit

GAIL is trading at ₹352.10 April.
Buy May put option with a strike rate of 345 at ₹10.80.
Sell May put option with a strike rate of 350 at ₹11.70.
Sell May call option with a strike rate of 355 at ₹15.15.
Buy May call option with a strike rate of 360 at ₹14.05.

long iron condor option payoff graph

Long iron condor option payoff graph


#12 Bull Put Ladder

DifficultyMarket DirectionVolatilityMax RiskMax Reward
AdvanceDownwardHigh Limited Unlimited
Trade Setup:
  • Buy lower strike put
  • Sell middle strike put with same expiry date & with same amount.
  • Sell higher strike put with same expiry date .
Time Period for Trade:

Medium to longer time is better, 2-3 months expiry is reasonable.

Bull Put Ladder Example
Stock NameINDIGO
Stock ExchangeNSE
Current Price₹1637.95
Net Debit₹68.95
Total premium paid – premium receive
Max Risk₹88.95
Difference between middle & higher strike price + net debit
Max Rewardunlimited
Breakeven down₹1511.05
low strike – max risk
Breakeven up₹1728.95
high strike + max risk

INDIGO is trading at ₹1637.95 April.
Buy May put option with a strike rate of 1600 at ₹80.
Buy May put option with a strike rate of 1620 at ₹90.25.
Sell May put option with a strike rate of 1640 at ₹101.30.

bull put ladder option payoff graph
Bull put ladder option payoff graph

#13 Bear Call Ladder

DifficultyMarket DirectionVolatilityMax RiskMax Reward
AdvanceUpwardHigh Limited Unlimited
Trade Setup:
  • Sell lower strike call
  • Buy middle strike call with same expiry date & with same amount.
  • Buy higher strike put with same expiry date & with same amount.
Time Period for Trade:

Medium to longer time is better, 2-3 months expiry is reasonable.

Bear Call Ladder Example
Stock NameYESBANK
Stock ExchangeNSE
Current Price₹257.20
Net Debit₹10.70
Total premium paid – premium receive
Max Risk₹20.70
Difference between middle & higher strike price + net debit
Max Rewardunlimited
Breakeven down₹239.30
low strike – net debit or (+ net credit)
Breakeven up₹290.70
high strike + max risk

YESBANK is trading at ₹257.20 April.
Sell May call option with a strike rate of 250 at ₹24.
Buy May call option with a strike rate of 260 at ₹19.45.
Buy May call option with a strike rate of 270 at ₹15.25.

bear call ladder option payoff graph
Bear call ladder option payoff graph

#14 Strip

DifficultyMarket DirectionVolatilityMax RiskMax Reward
ExpertDownwardHigh Limited Unlimited
Trade Setup:
  • Buy two at money put option
  • Buy one at money call option with same expiry date.
Time Period for Trade:

Medium to longer time is better, 2-3 months expiry is reasonable.

Strip Example
Stock NameJETAIRWAYS
Stock ExchangeNSE
Current Price₹175.50
Net Debit(₹34.30×2)+ ₹32.15 = ₹100.75
Total premium
Max Risk₹100.75
net debit
Max Rewardunlimited
Breakeven down₹119.62
strike – (net debit/2)
Breakeven up₹270.75
strike + net debit

JETAIRWAYS is trading at ₹175.70 April.
Buy two May put option with a strike rate of 170 at ₹34.30.
Buy one May call option with a strike rate of 170 at ₹32.15.

strip option payoff graph
Strip option payoff graph

#15 Guts

DifficultyMarket DirectionVolatilityMax RiskMax Reward
ExpertRangeHigh Limited Unlimited
Trade Setup:
  • Buy in money lower strike call option
  • Buy in money put option with same expiry date.
Time Period for Trade:

Medium to longer time is better, 2-3 months expiry is reasonable. Never setup guts on the last month of the expiry dates. Closer to the expiry date value loses faster with the effect of time decay.

Guts Option Example
Stock NameDHFL
Stock ExchangeNSE
Current Price₹160.70
Net Debit₹49.55
Total premium
Max Risk₹29.55
net debit – difference in strike price
Max Rewardunlimited
Breakeven down₹120.45
low strike – max risk
Breakeven up₹199.55
high strike + max risk

DHFL is trading at ₹160.70 April.
Buy May call option with a strike rate of 150 at ₹26.50.
Buy May put option with a strike rate of 170 at ₹23.05.

guts option payoff graph
Guts option payoff graph

Conclusion:

It is always advised to use technical analysis side by side before making an option trading decision. Each strategy mentioned above work for different types of markets based on their metrics. Some are for a bearish high volatile market. Some are for the bullish high volatile market. Even some are for range market. So first find stocks, index, currency options matching with these metrics, then confirm its trend with technical analysis. Find a sweet spot & make an entry with good price & risk-reward ratio.

Options Trading Strategies

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