Why Options Strategies are Important

Why Options Strategies are Important

Options strategies are conditional contracts that allow option holders to buy or sell at a chosen price. The sellers charge buyers an amount for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthlessly.

Now, if you are asking in a simple line, What is Option Strategy

I can say Options strategies is the technical analysis study of price, volume, and open interest data to initiate trade based on the anticipation of the price movement 

Note: Derivatives are weapons of mass destruction unless handled carefully. They are highly leveraged instruments, so traders need to be disciplined and robotic. No emotions should be involved while trading. Money management and Risk Management are key to success. Twenty percent of trading is logic, which studies price, volume, and open interest data, whereas 80 percent is psychology, which plays a vital role in trading.

Critical Points of Options Strategies Before Entering Option Trade:

1. What is your Technical Anticipation of the price movement?
2. Which Strike price do you need to select?
3. When to initiate buying/writing Options?

The first and foremost important point while trading options is the spot price that moves; hence, you must follow technical chart patterns according to the spot price, which is the study of price and volume data. Further, while trading options as a derivative strategy analyst, the survey of open interest in futures analyzes what is currently happening in the market, whether there is long/short build-up or long/short unwinding. After interpreting futures, one needs to analyze option chains and see the open interest, which can give you an unambiguous indication of whether the price movement will be swift.

For stocks that consolidate and move very slowly, it is prudent to do the writing by selling options. When you buy options, you need to ensure that the price moves in your favor very fast, as there would be a time decay. 

A few important points for stock selection in Options strategies:

• The security needs to be highly liquid in options
• Time decay favors the writer/seller of the options
• Volatility is a double-edged sword. If it increases after you enter the trade, it will be icing on the cake, or else if it decreases, it will take away a few gain points.
• When you buy options, you should trade in those stocks that either give the target or stop loss very quickly. For stocks that consolidate, it would be advisable to write options.

Strategies used while trading options:

Covered Call /Covered Put –

With these calls, one simple strategy is buying an option. You can also structure it as an introductory covered call. This is a viral strategy because it will generate your income and reduce your risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price at the short strike price.

If you are going to execute this strategy as you purchased stock as you usually can and simultaneously write or sell a call option on those same shares.

However, if you need to learn how to trade, you need to get expert knowledge, and you have to get into the share trading course in Delhi to trade with proper strategies.

In general, you can say it helps you generate additional income and provides limited loss protection.

Synthetic Call/Put – The ASynthetic Call/Put strategy is generally used by traders currently holding an underlying asset and bullish on it for the long term. But he would be worried about the risks and downsides in the future. This strategy offers unlimited income potential with limited risk. The approach is used by buying put options for the underlying if you have held this for a long time. This strategy can lock profit while profit is riding in your Future position. 

Spread Strategies

A Spread strategy involves a position in one or more options, with the cost of buying an option funded entirely or in part by selling another option in the same underlying. 

Bull/Bear Call Put Spread – 

Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying security and the same expiration month. On the other side Bear call, spreads can be implemented by buying call options of a specific strike price and selling the same number of call options of lower strike price on the same underlying security expiring in the same month.

Both calls put spreads would be a low-risk strategy with limited profit and loss. Further, when to deploy straight Buying ATM/Selling OTM or Reverse Selling ATM/Buying OTM would depend on your anticipation of the price based on intraday/weekly options/monthly options, price target, and technical chart moving average.