Top 10 Most Used Derivative Strategies by Indian Traders: Explained with Case Studies

Beginning

Derivatives trading in India is a very active area where traders and investors use a variety of strategies to protect themselves from losses, make bets, and get the most out of their investments. As more people get involved in equity, index, commodity, and currency derivatives markets, it's important for both new and experienced traders to know how to use common strategies.

This article looks at the ten most popular derivative strategies used by Indian traders. It goes into detail about each strategy and gives examples from the Indian market to show how they work.

1. Strategy for Long Futures

Idea

A trader buys a futures contract as part of a long-term strategy, hoping that the price of the underlying asset (like the Nifty Index or Reliance stock) will go up in the future.

A Case Study

In July 2023, an Indian trader thought that Nifty would go up because the macroeconomic data was good.

Nifty spot price: 18,000
Nifty Futures were bought at 18,020.
Nifty goes up to 18,500 after a month.
Profit: (18,500 – 18,020) × Lot Size (75) = ₹36,750.

A lot of intraday and positional traders like it, especially when the market is moving strongly.

2. Strategy for Short Futures

What is a concept?

A short futures strategy means selling futures contracts when the trader thinks the price of the underlying asset will go down.

Example Study

A trader shorted Bank Nifty futures in September 2023, when the market was correcting itself.

Bank Nifty futures went for 41,000.
Bank Nifty dropped to 40,200 after a week. Profit: (41,000 – 40,200) × Lot Size (20) = ₹16,000 Application

Used when the market is going down or to protect long positions.

3. Strategy for Covered Calls

Idea

To make money, the trader sells a call option on the underlying stock and keeps it.

Case Study

An investor has 100 Infosys shares, each worth ₹1,500.

Sells Infosys Call Option (Strike 1,550) for ₹30 a share.
If the stock stays below 1,550 at the end of the term, the premium is income.
Good thing

Makes extra money in sideways or slightly bullish markets.

4. Strategy for Protective Put

Idea

An investor buys a put option to protect their long position in the stock from losing value.

Example of a case study

An investor owns shares in HDFC Bank worth ₹1,300 and buys a put option with a strike price of ₹1,250 for ₹20.

If the stock drops to ₹1,200 at expiration, the put option helps make up for the loss.
Good thing

Works like insurance when the market is volatile.

5. Bull Call Spread

Idea

At the same time, it buys a call option with a lower strike price and sells another call option with a higher strike price, which lowers the cost up front.

Example Study

Buy a Nifty Call with a strike price of ₹150.
Sell Nifty Call (Strike 18,200) for ₹90
Total cost: ₹60
Max Profit: 18,200 – 18,000 – ₹60 = ₹140 for each unit.
Use

Used when the market is moderately bullish to keep costs and risks low.

6. Bear Put Spread

Idea

Buying a put option with a higher strike price and selling a put option with a lower strike price.

Case Study

Buy Nifty Put (Strike 18,000) for ₹150
Sell Nifty Put (Strike 17,800) for ₹100
Total cost: ₹50
The most money can be made if Nifty drops below 17,800.

Use

Adopted when the market was moderately bearish.

7. The Straddle Strategy

The Idea

Betting on volatility by buying both a call and a put option at the same strike price.

A Look at a Case

Nifty at 18,000
Buy a Nifty Call (Strike 18,000) for ₹200.
Buy Nifty Put (Strike 18,000) for ₹180
Total premium paid: ₹380
The strategy is profitable if Nifty moves strongly in either direction (above 18,380 or below 17,620).

Use

Used for things like announcing the budget, holding RBI policy meetings, or giving quarterly results.

8. The Strangle Strategy

Idea

It's like a straddle, but the strike prices for the call and put are different, which makes it cheaper.

A Study of a Case

Nifty is at 18,000
Buy Nifty Call (Strike 18,200) for ₹120
Buy Nifty Put for ₹100 with a strike price of 17,800.
Paid a total of ₹220 in premiums. Will make money if Nifty moves a lot.

Use

Traders who expect volatility like this better because it costs less than a straddle.

9. Spread on the Calendar

Idea

Buying and selling options that have the same strike price but different expiration dates.

Case Study

Buy a Nifty Call for ₹200. It will expire next month.
Sell Nifty Call (Strike 18,000, expiring this week) for ₹120. You will lose ₹80.
If near-term options expire worthless and long-term options stay valuable, the trader makes money.

Use

Used when you don't expect much movement in the short term but do expect a trend in the long term.

10. Spread of Ratios

The idea

Buying and selling options in different amounts to take advantage of price changes.

Example Study

Buy one Nifty Call (Strike 18,000) for ₹150.
At ₹80 each, sell 2 Nifty Calls (Strike 18,200).
Nett Premium: (2×80) – 150 = ₹10 in cash.
If the underlying stays below 18,200 or goes up a little, the strategy makes money.

Why These Strategies Are Important in India

The rules that govern the environment

SEBI makes sure that things are clear and stops too much speculation.
Position limits stop people from manipulating the market.
Margin requirements help keep systemic risk in check.
Market Fluctuation

India's markets react strongly to news about the economy as a whole, global events, and company earnings. These strategies help traders deal with market swings in a smart way.

Things You Shouldn't Do

Over-Leverage: Not paying attention to risk management and margin requirements can cost you a lot of money.
Poor Timing: Not knowing when expiration cycles or market events happen can make a strategy useless.
Ignoring Transaction Costs: Having more than one option leg raises brokerage and tax costs, which hurts profits.
The End

The ten derivative strategies listed above give Indian traders a wide range of ways to manage risk, speculate, and get better returns. Depending on how you see the market, how much risk you're willing to take, and how you want to allocate your capital, each strategy has its own use.

New traders should start with simple strategies like Long/Short Futures and Covered Calls. Then, as they get more comfortable, they can try more complicated combinations like Straddle, Calendar, and Ratio Spreads. Always put risk management first, especially when the market is leveraged.

The Indian derivatives market is growing quickly, which is good news for both small and large investors. Traders can make smart choices and deal with the complexities of the derivatives market when they have a deep understanding of these strategies, backed up by case studies and real-world examples.