Option Strategies That All Options Traders Should Know

In Continuation in Previous Posts

How Option Prices are Determined

How To Calculate An Expected Range For The Market using Options ?

Understanding Option Greeks

This Options concept are shared by Mr Raja Mohan an Expert Option Trader. I am thankful to Him for sharing his knowledge to all the Readers.

Directional Option Strategies:-

Identify Strong Support/Resistance using OI or Technicals and Closely observe Intraday Movements

• If the Market moves higher after Testing Support, Sell OTM Put option
• If the Mkt moves lower after test Resistance Sell OTM Call option

Directional to Sideaways and high IV
SL:- Imp Break of Sup/Res

Non-Directional  Strategies :-

• Short Strangle 
• Short Stradle
• Iron condor

Short Strangle (Sell OTM Call, Sell OTM Put ):-

Mkt sideways and high IV
Delta 20%
Tgt -50% of premium
Duration- 10 days or more away from exipry
Ex:- If Nifty 11000 Sell 11500 Call and 10500 Put

Dangerous if unexpected move (Black swann event) happend and get big move. Avoid Black swann events use Iron condor for hedging

Iron condor:-

Take Strangle + Buy 200 Pts away call (11700) and Put 10300 Put (Hedging purpose)
By this, Profit chances will come down

Short straddle:-

Sell ATM call Sell ATM Put
Mkt sideways and high IV
Delta 50%
Duration- 45 days or more away from exipry
Tgt- 10% premium
Ex:- If Nifty is 12000, sell 12000 Call and 12000 Put of middle or next month expiry

Buy Call:-

Market View
Very Bullish
When you expect quick, big, up moves
Ideally when IV is low
Not for small moves or slow up moves

Gains if IV goes up
Loses time value every day

Sell a Call Option

Market View-Mildly Bearish

When To Do
If the stock will not go up – that is

i) stays still,

ii) small or big downmove or

iii) A very small upmove

Avoid selling when IV and premium is low

Time and Volatility
Gains time value every day
Loss if IV goes up

Buy Put:-

Market View-Very Bearish
The Trade Buy a Put Option

When To Do
When you expect very quick, very big, down moves
Ideally when IV is low,Not for small moves or slow down moves

Time and Volatility
Loses time value everyday
Gains if IV goes up

Bull Call Spread:-

Market View
Moderately Bullish
The Trade
Buy a call and sell a higher strike cheaper call to reduce premium

When To Do-
When you expect a big but limited up move

Time and Volatility
Loses a little time value every day
Gains moderately if IV goes up

Sell Put:-

Market View-Mildly Bullish
The Trade
Sell a Put Option

When To Do
If the stock will not go down – that is i) stays still, ii) small or big upmove or iii) a very small downmove

Avoid selling when IV is low

Time and Volatility
Gains time value every day
loses if IV goes up

Bull Put Spread:-

Market View- Mildly Bullish

The Trade
Sell a put, and buy a lower strike cheaper put for protection

When To Do
If the stock will not go up – that is i) stays still, ii) small or big upmove or iii) a very small downmove.
Avoid selling when IV is low.

Time and Volatility-
Gains a little time value every day
Loses slightly if IV goes up

Bear Put Spread:-

Market View-Moderately Bearish
The Trade
Buy a Put, and sell a lower strike cheaper Put to reduce premium

When To Do
When you expect a big but limited down move

Time and Volatility
Loses a little time value everyday
Gains moderately if IV goes up

Bear Call Spread:-

Market View-Mildly Bearish

The Trade
Sell a call and buy a higher strike cheaper call for protection

When To Do
If the stock will not go up – that is i) stays still, ii) small or big downmove or iii) A very small upmove
Avoid selling when IV and premium is low

Time and Volatility
Gains a little time value every day
Loses slightly if IV goes up

Short Straddle:-

Market View-Range Bound, Not moving

The Trade
Sell a Put and Call at the same strike near the stock price. Your view is that the stock will not go up or down

When To Do
When the stock stays still and expires near the sell option strike.
Avoid trending markets
Avoid selling low IV

Time and Volatility
Gains time value every day
Loses if IV goes up
Delta Neutral – Immune to small moves

Short Strangle:-

Market View
Range-bound, Not moving

The Trade
Sell a Put below stock price and sell a Call above the stock price. Your view is that the stock will not cross the call or put strikes.

When To Do
If the stock will stay still and expire between the call and put strike.
Avoid trending markets
Avoid selling low IV

Time and Volatility
Gains time value decay every day
Loses if IV goes up
Delta Neutral – Immune to small moves

Short Iron Butterfly

Market View-Range-bound, not moving

The Trade
Sell a put and call at the same strike near the stock price. Your view is that the stock wont go down or up. Buy a lower Put and a higher call for protection on both sides just in case you’re wrong.

When To Do
If the stock will stay still and expire near the sell call and sell put strike.
Avoid trending markets
Avoid selling low IV

Time and Volatility
Gains time value everyday
Loses moderately if IV goes up
Delta Neutral – Immune to small moves.

Short Iron Condor

Market View- Range-bound, not moving
The Trade
Sell a Put below stock price and sell a Call above the stock price. Your view is that the stock won’t cross these strikes. Buy a lower Put and a higher Call for protection on both sides just in case you’re wrong.

When To Do
If the stock will stay still and expire between the call and put strike
Avoid trending markets
Avoid selling low IV
Delta Neutral – Immune to small moves.

Time and Volatility
Gains time value every day
Loses moderately if IV goes up

Long Straddle:-

Market View-A big move up or down

The Trade
Buy a put and call at the same strike near the stock price. Your view is that the stock will either go down or up in a big way.

When To Do
When the stock is going to move big in one direction
Avoid buying high IV

Time and Volatility
Loses time value decay every day
Gains if IV goes up
High Vega and Theta Risk

Long Strangle:-

Market View-A big move up or down

The Trade
Buy a Put below stock price and buy a Call above the strike price. Your view is that if there is a breakout, the stock will cross either of these strikes by a margin

When To Do
When the stock is going to move big in one direction
Avoid buying high IV

Time and Volatility
Loses time value every day
Gain if IV goes up
High Vega risk and Theta Risk

Long Iron Butterfly:-

Market View-A significant move up or down

The Trade
Buy a put and call at the same strike near the stock price. Your view is that the stock will go down or up. Sell a lower put and a higher call on both sides for reducing premium

When To Do
When the stock is going to move big in one direction
Avoid buying high IV

Time and Volatility
Loses time value every day
Gains slightly if IV goes up
Low Vega risk and theta risk

Long Iron Condor:- (Iron condor= Short strangle+ Long call+ Long Put)

Market View-A significant move up or down

The Trade
Buy a Put below stock price; Buy a Call above the stock price. Your view is that the stock will cross these strikes. Sell a lower put and a higher call for reducing premium

When To Do
When the stock is going to move big in one direction
Avoid buying high IV

Time and Volatility
Loses time value every day
Gains slightly if IV goes up
Low Vega risk and theta risk

Buying straddles (Buy CE and Put near strike price) near weekends or expiries does not end well.

Sideways mkt/slow moving mkt. Stradle work
When VIX higher levels or VIX explodes. Short strangle works better

Some free site on Options analysys:-

Sensibull
Option action
Option oracle
Option-Price.com