Actually, there are 18 option trading strategies, which most of the option investors and traders use in their daily trading. However, mastery over these three important strategies can make you an experienced options trader for online trading india.
Three strategies of Trading Opions
- a) Condor
- b) Collar
- c) Butterfly
Condor Strategy
Condor strategy has four major combinations. Two of them are for fixed market and the other two are for fluctuating (volatile) market. Long call with put condor are for fixed market while short call with put condor are for volatile or dynamic market. The former strategy has four ways to buy and sell as, in the money and out of the money call option with an equal amount of contract units.
With this strategy, profit can be easily generated provided the stock price does not show volatility, move out from the up side and down side differing breakeven level. Short call with put condor are for volatile market, which is done in four steps like the long call with put condor method. The difference is that in short call with put condor, the strike prices of the stock options that have been purchased must be within the determined strike prices of the options that is sold. For short call with put condor method, profit is seen when the stock price moves out of the up side and down side breakeven level. The upside breakeven level is calculated by summing the whole stock position to total pay outs or receive to the highest strike price as per actuals. The downside breakeven point is calculated by subtracting the whole position total pay or receive to the lowest strike price in the strategy.
Combo Strategy
Combo Strategy has two combinations that cater to two types of investors; bullish and bearish traders combo. Bullish combo strategy is preferred by bullish traders while the bearish combo is for bearish investors.
This strategy involves two steps; buying and selling, this means buying out of the money option and selling in the money option. If the stock price rises more than the higher strike price, profit is registered. But if the stock value drops lower than the lowest strike price, loss is incurred by the trader. If the security value fluctuates within the higher or lower strike price, you won’t lose anything. This strategy can give you unlimited profit, conversely it also can cause an unlimited loss undermined by the market direction, depending on the strategy used by you.
Butterfly Spread Strategy
Butterfly spread strategy is almost similar to the condor strategy. It has also 4 combinations; long at the money call with put butterfly spread and short at the money call with put butterfly spread.
Long at the money call with put butterfly spread are for fixed market and short at the money call with put butterfly spread are for dynamic market.
The four steps followed in long at the money call butterfly spread are represented by buying in the money and out of the money call option, this is followed by selling at the money call option. The amount of contract units at the money call option must be added to the number of contract units of in and out of the money option. Profit is seen provided the stock price does not move away from the up side and down side breakeven range.
The up side breakeven level is determined by adding the total pay out of the stock position to the highest strike price. The down side breakeven level is further decided by subtracting the lowest strike price with the total pay outs of the stock position.
The short at the money call butterfly spread is developed by putting off or selling in and out of the money call option and following by buying at the money call option. Number of contract units at the money option must be two times the number of contract units of in and out of the money option. As long as the stock price has moved away from the up side and down side breakeven range, scope of making profit is seen. This strategy makes limited earning. Similarly, it also causes limited loss if the stock price does not go to the anticipated direction.
Now that you are aware of some of the important strategies, its right time for demat account introduction so that you can proceed further to open demat account online.
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