Due to a variety of factors, the derivatives segment of the Indian financial markets is one of the most popular among investors. Derivatives are contracts in which the value is derived from the value of an underlying security or asset.
The two standardized derivative instruments that are traded in India are futures and options. Options allow an investor to buy or sell a certain investment or asset at a predetermined price over a set period. A stock, a commodity, or even an index might be used as the underlying security. Investors favor options because they just have to pay a modest amount known as a premium to trade-in options.
When compared to traditional equities, options are more difficult and necessitate substantial research and experience. There are several tactics that, when properly followed, can help you trade options efficiently. These tactics are lawful and simple to use for newcomers.
Let's look at some of the most popular option trading methods and see which one is best for your needs.
Table of Content
6 Options Trading Strategies
1. Long Call Options
This technique necessitates buying calls and is best suited to investors who are confident in the underlying stock or asset class's prices. This method aids you in getting the most of the underlying asset's rising pricing. When trading options, this method also reduces overall risk. When trading using this technique, you are simply putting your premium at risk, but the potential reward based on the underlying asset's surge might be limitless.
2. Long Put Options
This technique is similar to the Long Call strategy in that it requires you to purchase Put Options. The main difference is that the price of the underlying security or asset should fall in this situation. If the asset's value climbs over the strike price, your risk is restricted to the amount of premium you paid. Investors frequently employ the long-put strategy to profit from declining stock prices.
3. Short Put Options
Investors that are option sellers should use this technique. The goal of a short put strategy is to profit from other investors' premiums. If an option seller sells an option to an investor and the underlying asset's price rises or stays the same, the investor is likely to let the contract expire. In this situation, the option seller will be allowed to keep the premium amount, resulting in a profit from the trade when employing the Short Put technique.
4. Covered Call Options
This method is popular among investors who want to produce money from a company they own but aren't seeing any substantial price change. The investors in this approach own a stock and sell a call option using that stock as the underlying asset. As a result, you will be paid more. In this instance, if prices do not change at any point and remain unchanged, the option buyer will let the contract expire. You will be able to keep the premium amount and profit from the transaction once it has expired.
5. Married Put Options
This method necessitates the utilization of both futures and options portions of the derivatives market. The investor buys a put option contract for every few shares purchased while simultaneously investing in stocks and options. If the stock market drops in value, the put option will protect your stock investment. The goal of this method is to protect your investment from share price declines. This approach is a little tricky to adapt, but when done correctly, it can help offset portfolio losses while waiting for share prices to rise.
6. Protective Put Options
This approach is recommended for investors who want to protect themselves from losses, as the name implies. This method requires you to purchase a long-put option on an asset that you already own. This will give you protection if the asset's price drops over time. The main difference between this and the married put strategy is that protective put is used to reduce losses from an asset you already hold, whereas a married put protects an asset you buy at the same time.
Conclusion
Options trading is particularly profitable because losses are restricted to the value of the premium, whilst winnings have no limit. It should be mentioned, however, that they are more difficult than traditional stock trading and demand substantial research and knowledge. CapitalVia can assist you if you are new to the market by giving research-based suggestions for all of your trades.
Happy Investing!
