Option Buying and Selling Strategies
Comprehensive Guide to Option Buying and Selling Strategies
This guide covers key options strategies in depth with use cases, profit/loss analysis, charts, and real-life examples. Suitable for both beginners and experienced traders.
1. Long Call (Bullish)
Definition: Buying a call option gives you the right (not obligation) to buy an asset at a fixed strike price before expiration. You profit if the asset rises above the strike plus premium.
When to Use: When you're strongly bullish on a stock or index.
Risk: Limited to premium paid
Reward: Unlimited
Example: Buy NIFTY 20,000 CE @ ₹100. If NIFTY expires at 20,400, profit = ₹300 - ₹100 = ₹200.
2. Long Put (Bearish)
Definition: Buying a put option gives the right to sell an asset at a fixed price. Profit occurs when the asset falls below strike price minus premium.
When to Use: When you're bearish on the market or stock.
Risk: Limited to premium paid
Reward: Substantial (up to strike price minus premium)
Example: Buy NIFTY 19,500 PE @ ₹80. If NIFTY expires at 19,100, profit = ₹400 - ₹80 = ₹320.
3. Short Call (Naked Call)
Definition: Selling a call option without holding the underlying. You profit if the stock stays below the strike price.
When to Use: When you expect no upside movement or are neutral-to-bearish.
Risk: Unlimited if price surges
Reward: Limited to premium received
4. Short Put (Naked Put)
Definition: Selling a put option expecting that the price will not fall below the strike.
When to Use: When bullish on a stock and ready to buy it at a discount.
Risk: High, but limited to strike - premium if price goes to zero
Reward: Premium received
5. Bull Call Spread
Definition: Buying a call at a lower strike and selling another at a higher strike. Reduces cost and limits profit.
When to Use: When moderately bullish
Example:
| Action | Strike | Premium |
|---|---|---|
| Buy Call | 19800 | ₹150 |
| Sell Call | 20000 | ₹80 |
| Net Premium: ₹70, Max Profit: ₹130 | ||
6. Bear Put Spread
Definition: Buy higher strike put, sell lower strike put. Used to limit premium outlay while betting on downside.
When to Use: When moderately bearish
7. Iron Condor
Definition: Sell an OTM Put and Call, and buy further OTM Put and Call to limit losses. Ideal for range-bound markets.
Example: Sell 19500 PE, Buy 19300 PE. Sell 20500 CE, Buy 20700 CE.
Max Profit: Net premium received if price remains between short strikes.
8. Long Straddle
Definition: Buy ATM Call + Buy ATM Put. Used to benefit from major moves in either direction.
When to Use: Before major events (budget, earnings)
Break-even: Strike ± total premium paid
9. Long Strangle
Definition: Buy OTM Call + Buy OTM Put. Cheaper than Straddle but requires larger move.
10. Covered Call
Definition: Own stock and sell call. Generates income but caps upside.
Ideal For: Investors who want passive income from held stocks.
11. Protective Put
Definition: Buy a put to protect stock downside while still participating in upside.
Ideal For: Hedging portfolios during uncertainty.
Strategy Selector Table
| Market View | Best Strategies |
|---|---|
| Strong Bullish | Long Call, Bull Call Spread |
| Strong Bearish | Long Put, Bear Put Spread |
| Sideways | Iron Condor, Short Straddle |
| High Volatility | Long Straddle, Long Strangle |
| Low Volatility | Iron Condor, Credit Spreads |
Greeks and Risk Management
- Delta: Measures directional exposure
- Gamma: Rate of change of delta
- Theta: Measures time decay
- Vega: Sensitivity to volatility
Conclusion
Options strategies offer powerful ways to profit or hedge in all market conditions. Whether you're bullish, bearish, or neutral, there’s a strategy to suit your outlook. Learn each in depth, manage risks, and evolve with experience.
About C K Mehta
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