The options market has become a favorite market for both the retail traders and the institutional traders. The institutional investors are attracted to the options market due to its risk profile that suits them well and the retail traders get attracted by the returns potential the options market has to offer. But, the fact also states that most of the retail traders lose money in the end more often and have only a rare win.
The reasons for this are many and one of the primary reason is that the traders do not have a strategy. The other reason is that they have a similar strategy for every occasion. The normal trend is that If they feel bullish, they buy a call option and if they feel bearish, they buy a put option. This is the basic trend they practice, which is only useful in some of the situations and not everytime.
It is needed that a retail trader must have a few basic strategies. A strategy can be used on the basis of the stocks and the index. The share markets are either trending or are sideways.
In the case of a Sideways or medium bullish or bearish market, since the stocks move slowly, one can use the ‘covered call’ or ‘covered put’ strategy to earn money when the trader expects slight change in the price of the underlying stock. A covered call strategy needs a trader to buy the underlying stock or future and sell an out of the money call option. In case the stock fails, the trader will still make money from the premium retrieved by selling the call option. If the stock goes higher than the strike price, the underlying stock or the future will cover it.
To cite an example, if the Nifty option chainis trading at 8500 and a bullish trader buys a covered call and sell the 8600 call, he will cap his profit at 8600. If Nifty rises, his losses will be set off against the profit from his futures position and if the Nifty falls, he is protected due to his call option premium.
To protect a downside risk, one can create ‘Vertical spread’. A bullish trader can set up vertical call spread and buyan ‘in-the-money’ call and sellan ‘out-of-the-money’ call option.
If the Nifty is in the range of 8400 and 8600 and the budget is likely to be announced, one can create a short straddle by selling both the call and put option of the same strike price like 8500 call as well as put option. The gain will be maximum if Nifty closes at 8500. One can also create short strangle by selling call and put options of different strike prices, like 8400 put and an 8600 call in this case.
To trade in a big event, the best strategy is to create a straddle or a strangle. One can create straddle by buying a call and put of the same strike. However, as the date comes close, the premium of call and put both rises and profit reduces.
Check out live put call ratio values on BloombergQuint.