Want handsome returns with low risk? Go for these Options strategies!
It’s important to understand that a trader needs to have a view of the underlying assets before initiating any options strategy.
Many options traders trade with the objective of becoming rich overnight! However, as you know, there is no shortcut to success and this applies to options trading as well. .
So, in this article, we will talk about options strategies (two-leg strategies), which have the potential to provide decent returns by keeping the risk under check.
Before we begin, 0
So, let us begin the strategy construction.
In case our view is moderately bullish, we may use this strategy:
If a trader is expecting that there would be a moderately bullish view on the underlying stock’s price during the options’ term, he/she may initiate a Bull Put Spread Option Strategy.
What is Bull Put Spread? It is a two-leg option strategy and as the name suggests, it is constructed by using only Put options. It involves shorting one Put option with a higher strike price (in-the-money) and buying one Put option with a lower strike price (out-of-the-money) of the same expiration date. Strike selection should be based on a broad view of the stock or index and its winning probability.
Is it a debit or credit spread strategy? It is a credit strategy as sold premium is more than the bought premium. So, we receive a net credit.
Example for the construction of this strategy: Let’s say a stock i.e. ABC is trading at Rs 332. We executed a Bull Put Spread by shorting 340 strike price put (in-the-money) at Rs 16 and subsequently, buying (long) 320 strike price put (out-of-the-money) at Rs 6. Assuming a lot size of stock ABC is 1,750 shares. Net credit for this strategy is Rs 10 per share (Rs 16-Rs 6), where Rs 16 has been received by selling an in-the-money option of 340 strike price, and Rs 6 is outflow as we had bought out-of-the-money Put of strike 320.
Maximum profit potential: The trader would get maximum profit on this strategy when the stock price expires above the short put strike price (340 strike price). The maximum profit potential is limited up to the net premium received. In the above example, it would be Rs 10 (per share) *1,750 (lot size) = Rs 17,500.
Maximum loss for this strategy: A trader would incur a maximum loss in case the stock expires below the long-put strike price (320 strike price). Here is a formula to calculate maximum loss: Strike price of short put strike (340) - strike price of long put strike price (320) – net credit received at the time of initiating a trade (10) = Rs 10 * 1,750 (lot size) = Rs 17,500.
Break-even point of this strategy: Break-even point= Strike price of short put (340) – net premium received (10) = Rs 330.
In case the view is moderately bearish, one may use this strategy:
If a trader is having a moderate bearish view of the underlying stock’s price during the options’ term, he/she may initiate a Bear Call Spread Option Strategy.
What is Bear Call Spread? It is a two-leg strategy, which is constructed by buying one out-of-the-money (OTM) Call option and selling one in-the-money (ITM) Call option of the same underlying asset of the same expiration date.
Is it a debit or credit spread strategy? It is a credit strategy as sold premium is more than the bought premium. So, we received a net credit.
Example for construction of this strategy: Let’s say a stock i.e. XYZ is trading at Rs 7,222. One can execute a Bear Call Spread by buying 7,400 call strike prices call at Rs 40 and subsequently, selling a 7,100 strike price call option at Rs 140. Net credit for this strategy is Rs 100 per share (Rs 140 - Rs 40). The lot size for this stock is 100.
Maximum profit potential: Maximum potential profit is limited to the net premium received.
Maximum loss for this strategy: Maximum loss in the above example would be the difference between the strike prices i.e. 300 (7,400-7,100) and net credit received, which is 100 per share. The maximum loss would, therefore, be 200 (300-100) per share.
Break-even point of this strategy: Break-even point=Strike price of short call (7,100) + net premium received (100) = Rs 7,200
PS: If we receive more than ten comments on this article, we will also share a payoff graph for these strategies.