Stock market trading might sound like it involves a lot of complex calculations, but there is no reason to worry. This guide presents 5 strategies of options trading that are popular in India, especially during the weekly expiry.
To demystify it further, we will take Nifty and Bank Nifty as examples and break it down to a level that even children will grasp easily.
What Is Weekly Expiry?
Picture this scenario: you possess a ticket for an amusement park, however, the ticket only remains valid till Thursday. Post Thursday, the ticket is rendered useless.
Similarly, weekly options function the same way. They are available for use every Thursday and traders try to utilize them for quick earning opportunities. However, as in a race, speed and intelligence matter a lot.
What Is Options Trading?
Options can be compared to making a reservation for a movie — without the need of purchasing the whole cinema. You pay a small fee (called a premium) to reserve trading rights on a particular stock as long as it remains above or below a certain threshold within a set timeframe.
Now, let’s explore 5 basic options strategies with relatable Indian examples.
1. Short Straddle - Profit when Market is Stabilized
What Is It?
Investors sell a call and a put option for the same underlying asset and strike price. In this case, you wish for the market to be uneventful.
Example (Nifty):
· Nifty is at 22,000
· Sell 22,000 Call Option for Rs. 100
· Sell 22,000 Put Option for Rs. 120
· You receive Rs. 220 as income (premium)
You win if:
Nifty remains around 22,000 until Thursday. Both options will reduce in price, and most of the Rs. 220 is retained.
You lose if:
A big move in nifty (say 21,500 or 22,500). One of the options will incur severe losses.
Simple Tip:
Only apply this strategy when you expect no volatility in the market.
2. Long Strangle – Profit when Market is Volatile
What Is It?
You buy a Call Option and a Put Option—but their strike prices are different. You profit when either direction of the market movement is large enough.
Example (Nifty):
· Nifty is at 22,000
· Buy 22,100 Call for Rs. 70
· Buy 21,900 Put for Rs. 60
· Cost = Rs. 130
You will win if:
Nifty moves significantly, exceeding 22,230 or below 21,770.
You lose if:
Nifty remains within the range of 21,900 to 22,100 both options incur losses.
The Simple Tip:
This strategy is useful during times of high volatility (for instance, elections, budget announcements, or RBI monetary policies).
3. Iron Condor – A Secure Return Within Limited Movement
What Is It?
This is a less risky version of a straddle. You still sell a call and put, however, you also purchase an extra call and put as a hedge.
Example (Nifty):
· Nifty is at 22,000
· Sell 22,100 Call for Rs. 70
· Buy 22,200 Call for Rs. 30
· Sell 21,900 Put for Rs. 65
· Buy 21,800 Put for Rs. 25
· Total received = Rs. 135
· Total paid = Rs. 55
· Net profit = Rs. 80
You win if:
Nifty between 21,900 and 22,100, all options lose value, and you gain Rs. 80.
You lose if:
Nifty trades below 21,800 or above 22,200. There are limits to how much you can lose.
Simple Tip:
If you think the market will be tight this is the strategy for you.
4. Bull Call Spread - Gain When the Market Rises
What Is It?
You purchase lower Call Option and sell higher Call Option. You do this when a market is likely to increase, but only at a slow pace.
Example (Bank Nifty):
· Bank Nifty 48,000
· Buy Call 48,000 at 130
· Sell Call 48,200 at 60
· Net cost Rs. 70
You win if:
Bank Nifty goes above 48,200 and you are winning.
You lose if:
Bank Nifty remain below 48,000, you lose 70Rs.
Simple Tip:
Use when the market has a slow upward trend.
5. Bear Put Spread – Lose When Market Falls
What Is It?
This is the converse of Bull Call Spread. You buy one Put Option and sells a lower Put Option. Use this strategy when the market is likely to decrease but at a slow rate.
Example (Bank Nifty):
· Bank Nifty is at 48,000
· Buy Put 48,000 at 120
· Sell Put 47,800 at 50
· Net cost 70 Rs
You win if:
bank Nifty goes below 47,800 and put option is in profit.
You lose if:
bank nifty above 48,000, loss of 70Rs.
Straightforward Strategy:
Use this strategy when the market is gradually declining.
Final Advice Concerning Weeklies Expiry
1. Don’t procrastinate to the last minute: The premium for the option decays significantly on the day of expiry.
2. Monitor implied volatility: Selling is better when IV is high as it suggests overpriced premiums.
3. Make sure to demo trade: Participate in paper (virtual) trading to practice your skills.
4. Always minimize your risk: Options should not be sold without a hedge in place.
5. Place a stop-loss order: Always delineate a fixed allowable loss threshold and adhere to it.
Final Summary (To Simplify)
· Short Straddle: Capitalize with no movement in the market.
· Long Strangle: Profit from significant market movements.
· Iron Condor: Capitalize with small movements in the market.
· Bull Call Spread: Gains from gradual upward market shifts.
· Bear Put Spread: Gains from gradual downward market shifts.
Key Remarks
Options trading is like a game of chess. It isn’t a gamble, but strategically calculated moves.
Winning more along with evading heavy losses is possible by using the correct strategy during the right moment.
There is no need for exceptional intelligence. Instead, curiosity, caution, and perseverance are what matter most.
Always strive to keep learning and refining your skills. Ultimately, you will reach the point where you are teaching these concepts to others.
