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:
- 1. Beginners : Long Call
- 2. Beginners : Long Put
- 3. Beginners : Cover Call
- 4. Beginners : Synthetic Call
- 5. Beginners : Synthetic Put
- 6. Intermediate : Bear Call Spread
- 7. Intermediate : Bull Put Spread
- 8. Intermediate : Straddle
- 9. Intermediate : Strangle
- 10. Intermediate : Long Iron Buttefly
- 11. Intermediate : Long Iron Condor
- 12. Advance : Bull Put Ladder
- 13. Advance : Bear Call Ladder
- 14. Expert : Strip
- 15. Expert : Guts
Before proceeding you need understand the basics of options trading, you can learn it from our other post.
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#1 Long Call
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Beginners | Upward | 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 Name | |
|---|---|
| Stock Exchange | NASDAQ |
| Current Price | $1140.99 |
| Strike Price | $1100.00 |
| Call Premium | $43.60, amount you pay |
| Option Status | In money |
| Max Risk | $43.60 (call premium) |
| Max Reward | unlimited with the stock price increment |
| Breakeven | $1100.00 + $43.60 = $1143.60 Call strike + call premium |
If google share moves above $1143.60, option contract will start making money.
Long call option payoff graph
#2 Long Put
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Beginners | Downward | 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 Name | ONGC |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹157.35 |
| Strike Price | ₹160 |
| Put Premium | ₹4.00, amount you pay |
| Option Status | In money |
| Max Risk | ₹4.00 (put premium) |
| Max Reward | unlimited with the stock price increment |
| Breakeven | ₹160 – ₹4 = ₹156 Put strike + put premium |
That means if ONGC shares moved below ₹156, then put option will start making money.
Long put option payoff graph
#3 Cover Call
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Beginners | Upward | 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 Name | TATAMOTORS |
|---|---|
| Stock Exchange | NSE |
| Current Price (Buy stock) | ₹225.40 |
| Strike Price | ₹235 |
| You pay | ₹214.95 |
| Option Status | Out 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.
#4 Synthetic Call
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Beginners | Upward | 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 Name | WIPRO |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹289.40 |
| Strike Price | ₹288.75 |
| Net Debit | ₹2894 + ₹13.20 = ₹2907.2 stock price + put premium |
| Option Status | Out of money |
| Max Risk | ₹1385 stock price + put premium – put strike |
| Max Reward | unlimited |
| 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.
#5 Synthetic Put
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Beginners | Downward | 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 Name | HDFCBANK |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹2287.90 |
| Strike Price | ₹288.75 |
| Net Credit | ₹2206.90 stock price- call premium |
| Option Status | In 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.
#6 Bear Call Spread
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Intermediate | Downward | 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 Name | LUPIN |
|---|---|
| Stock Exchange | NSE |
| 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.
#7 Bull Put Spread
| Difficulty | Market Direction | Max Risk | Max Reward |
|---|---|---|---|
| Intermediate | Upward | 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 Name | ICICI Bank |
|---|---|
| Stock Exchange | NSE |
| 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.
#8 Straddle
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Intermediate | Range | High | 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 Name | IDEA |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹18.05 |
| Net Debit | ₹3.15 Total premium |
| Max Risk | ₹3.15 Net debit |
| Max Reward | unlimited |
| 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.
#9 Strangle
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Intermediate | Range | High | 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 Name | Suzlon |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹7.40 |
| Net Debit | ₹2.5 Total premium |
| Max Risk | ₹2.5 Net debit |
| Max Reward | unlimited |
| 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.
#10 Long Iron Buttefly
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Intermediate | Range | Low | 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 Name | ASIANPAINT |
|---|---|
| Stock Exchange | NSE |
| 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.
#11 Long Iron Condor
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Intermediate | Range | Low | 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 Name | GAIL |
|---|---|
| Stock Exchange | NSE |
| 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
#12 Bull Put Ladder
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Advance | Downward | High | 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 Name | INDIGO |
|---|---|
| Stock Exchange | NSE |
| 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 Reward | unlimited |
| 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.
#13 Bear Call Ladder
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Advance | Upward | High | 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 Name | YESBANK |
|---|---|
| Stock Exchange | NSE |
| 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 Reward | unlimited |
| 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.
#14 Strip
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Expert | Downward | High | 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 Name | JETAIRWAYS |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹175.50 |
| Net Debit | (₹34.30×2)+ ₹32.15 = ₹100.75 Total premium |
| Max Risk | ₹100.75 net debit |
| Max Reward | unlimited |
| 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.
#15 Guts
| Difficulty | Market Direction | Volatility | Max Risk | Max Reward |
|---|---|---|---|---|
| Expert | Range | High | 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 Name | DHFL |
|---|---|
| Stock Exchange | NSE |
| Current Price | ₹160.70 |
| Net Debit | ₹49.55 Total premium |
| Max Risk | ₹29.55 net debit – difference in strike price |
| Max Reward | unlimited |
| 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.
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.
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