Options Trading Strategies Every Trader Must Know

To trade in the options market, you need to do more than simply buy or sell an options contract. It is more nuanced than stock trading, so you need to have specific strategies in place to make the most of potential market movements. In this article, we take a closer look at some of the best options strategies for every kind of market condition. 

Top Options Trading Strategies Every F&O Trader Must Know

Anybody who is interested in trading in options must know some basic and advanced strategies. If you are keen on participating in the options market, here are some of the best options strategies you should be aware of for different market conditions. 

1. Bullish Strategies

These options strategies are best suited for when you expect the price of the underlying asset to rise by expiry. Here are some commonly used bullish options trading strategies.

• Long Call

The long call is one of the simplest options trading strategies. Here, you simply buy a call option of the underlying asset whose price you expect to increase beyond the option's strike price. Therefore, by expiry, you can exercise the option and purchase the underlying asset at a lower price and profit from the difference between the strike and spot prices. 

• Covered Call

This options trading strategy builds on the naked long call position. Here, you write (or sell) a call option for an underlying asset that you already own. This way, if the stock price does not rise above the strike price, the call option becomes worthless and you profit from the premium. If the stock price does rise above the strike price, you can sell your shareholdings at the strike price. This may limit the upside potential but it also covers the downside risk.

• Bull Call Spread

In a bull call spread, you purchase an ITM call option and sell another OTM call option with a higher strike price. Here, the ITM call can be profitable if your bullish outlook holds true and the stock price increases significantly. However, if the price increase is minimal or if the price falls, the OTM call sold helps protect your losses. 

• Bull Put Spread 

This is another options trading strategy to consider if you have a bullish outlook. Here, you sell an ITM put option with a high strike price and buy an OTM put option that has a lower strike price. 

Here, if the stock price at expiry is above the higher strike price, you get to earn the maximum profit from the strategy, which is the net premium you receive. If the stock price at expiry is below the lower strike price, it leads to the maximum loss from the position, which is the difference in the strike prices minus the net premiums received.

2. Bearish Strategies 

If you expect that the price of the underlying stock will decline by expiry, you can implement a bearish options trading strategy. Some such strategies include the following:

• Bear Call Spread

Like the bull call spread, this options trading strategy is also a vertical spread. To set up the bear call spread, you sell an ITM call option with a lower strike price and buy an OTM call option with a higher strike price. 

If the price of the underlying asset falls below the lower strike price as expected, both the call options will become worthless and you retain the net premium received as your profit. However, if the price of the underlying asset rises above the higher strike price, the OTM call you purchased gains value and can help offset the losses from the ITM call sold. 

• Bear Put Spread

This options trading strategy is an alternative to short selling if you have a bearish outlook. Here, you purchase an ITM put option with a higher strike price and sell an OTM put option with a lower strike price. Both the options have the same expiry. If the stock price at expiry is less than the OTM put’s strike price, you can earn the maximum profits possible from this trade. However, if the stock price is above the ITM put’s strike price at expiry, you will have to face the maximum loss potential. 

• Married Put 

In this options strategy, you own the shares of a company and also purchase a put option with the same shares as the underlying asset. This put option protects you from the downside risk if the stock price declines below the put’s strike price — as you expected. 

This options trading strategy has unlimited profit potential because it benefits you greatly if the stock price rises beyond the put option’s strike price. The downside risk is limited to the difference between the stock’s purchase price and the put option's strike price, plus the premium paid for the put option. 

3. Neutral Strategies 

A neutral market outlook is when you do not expect the market to move specifically in either direction. Instead, you only anticipate the quantum of price movements — which may be large or minimal, but in any direction. For such an outlook, you need to look into neutral options strategies such as the following:

• Long Straddle 

In this options trading strategy, you buy both put and call options of the same underlying asset. Both options should have the same strike price and expire on the same date. This strategy typically works best if you have a neutral volatile outlook, meaning that you expect a significant price movement but are not sure of the direction of price change. 

• Short Straddle 

In a short straddle options strategy, you sell or take a short position in both put and call options of the same underlying asset. Both the options must again have the same strike price and expiry. You can implement this strategy if you expect the price of the stock to remain within a specific range or not move substantially in any direction. 

• Long Strangle 

Like the long straddle, the long strangle is also best suited for when you expect significant volatility in the price of the underlying asset. To set up the long strangle options trading strategy, you simultaneously purchase and sell OTM call options with the same expiry and strike price. The strike price of the long call should be higher than that of the long put. 

• Short Strangle

A short strangle is another neutral options trading strategy suitable for when you expect little to no significant price changes in the underlying asset. So, you have a neutral non-volatile outlook. To set up a short strangle, you sell a call option with a higher strike price and sell a put option with a lower strike price.

Conclusion

This should give you a clear idea of how options trading strategies work and how you can choose a strategy based on your market outlook. If you are looking for an easy way to find and implement the best options and strategies for different market conditions, check out the inbuilt ‘Options Strategy’ feature available in the Motilal Oswal Research 360 platform. 

Using this feature on the platform, you can choose the underlying asset, select your market outlook and find strategies that align with these inputs. The MO Research 360 platform also offers strategy suggestions for bullish, bearish and neutral (volatile and non-volatile) market views. What’s more, you can even evaluate each strategy using the ‘What If Analysis’ feature, which shows you the potential payoffs at different target prices, the maximum possible profit and loss from a position and the options Greeks in detail. 

Sign up on the platform today to find and execute the best options strategies for your trades.