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Options Trading Strategies Every Trader Must Know

•6 min read•by Angel One
Options trading strategies use combinations of call and put contracts to respond to bullish, bearish, or neutral market expectations while managing potential risk and reward in the derivatives market.
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Options trading strategies are combinations of call and put contracts used to manage risk and respond to different market conditions in the derivatives market. These strategies are built by combining contracts with different strike prices, expiry dates, or positions as a buyer or seller. Understanding how these strategies work can help traders make more structured decisions while participating in the derivatives segment of the stock market. 

Key Takeaways 

  • Options trading strategies combine call and put contracts with different strike prices and expiry dates to structure trades based on market expectations. 

  • Traders apply strategies differently depending on whether the market outlook is bullish, bearish, neutral, or expecting volatility. 

  • Common strategies include long calls, spreads, straddles, strangles, and protective positions such as covered calls or married puts. 

  • Options involve leverage, hedging opportunities, and premium income potential, but they also carry risks such as volatility impact and time decay. 

What Are Options Strategies?

Options strategies are combinations of one or more types of option contracts designed to help you gain profits or limit losses in different situations in the stock market.  

The combinations in each of the options trading strategies differ from each other based on: 

  1. Strike price, i.e., the price at which the option contract can be exercised, regardless of the spot price of the underlying asset. 

  1. ITM, OTM, and ATM, i.e., whether the option is in-the-money, out-of-the-money, or at-the-money. 

  1. Expiry date, i.e., the day when the option expires in the stock market. 

  1. Nature of the option, i.e., whether the option is a call or put, and whether you are the buyer or seller. 

Option Trading Strategies That Every Trader Should Know 

The following options trading strategies are designed to manage potential risk while allowing traders to respond to changing market scenarios: 

Bullish Option Strategies 

Bullish option trading strategies are used when you are confident that the underlying asset will increase in price by the expiry date. You can use the following strategies to handle a bullish scenario: 

  1. Long Call  

This strategy involves buying a call option at a strike price you expect to be below the spot price at expiry. For example, if you expect the spot price to be ₹1,000 on the expiry date, buy a call option at a strike price lower than ₹1,000, such as ₹900.  

If the spot price on the expiry date is ₹1,000, then you can buy the underlying asset at ₹900, based on the call option, and sell it for ₹1,000 in the spot market. 

  1. Bull Call Spread 

This involves buying an at-the-money (ATM) call option and selling an out-of-the-money (OTM) call option at a higher strike price, which will limit both your losses and your gains.  

This strategy is used when the trader expects a moderate increase in the spot price. For example, if you expect the spot price to be around ₹1,550 or more on expiry day, then you can buy a call at ₹1,400 and sell a call at ₹1,700 to deploy this strategy. 

  1. Bull Put Spread 

This strategy involves selling a put option at a higher strike price and buying a put option at a lower strike price. It is used when a moderate upward movement is expected. For example, if you expect the price to be around ₹1,000-1,200, you can sell a put at ₹1,200 and buy a put at ₹800 to implement this strategy. 

  1. Short Put 

This involves selling a put option at a strike price, expecting the spot price to remain below it until expiry. For example, if you expect the price to be ₹1,000, then sell the put at ₹900. If the spot price is actually ₹1,000 on the expiry date, the person holding the put option would rather sell the asset in the spot market and thus not exercise the put option you had sold.  

Also Read More About: What are Options? 

Bearish Option Strategies

Bearish option trading strategies are used when you are confident that the underlying asset is going to decrease in price by the expiry date. You can use the following strategies to handle a bearish scenario: 

  1. Long Put 

This involves simply buying a put option at a strike price you expect to be above the spot price on expiry. For example, if you expect the spot price to be ₹1,000 on the expiry date, then buy a put option at a strike price higher than ₹1,000, such as ₹1,100. 

  1. Bear Put Spread 

This involves buying a put option at a higher strike price and selling a put option at a lower strike price. This limits both risk and potential returns. 

  1. Bear Call Spread 

This strategy involves selling a call option and buying another call option at a higher strike price. It is used when the price is expected to remain below a certain level. 

  1. Short Call 

This involves selling a call option with the expectation that the price will remain below the strike price at expiry. The premium received may result in gains if the option expires unexercised. 

Neutral Stance Option Strategies

Neutral option trading strategies are usually used when you are confident that the underlying asset's price will remain within a particular range until expiry and will not experience much volatility. You can use the following strategies to handle a neutral scenario: 

  1. Short Straddle 

This strategy involves selling a call and a put option at the same strike price. You gain profits, specifically the total premium received from selling the options, as long as the spot price remains within a particular range. 

  1. Short Strangle 

The short strangle option strategy involves selling a put and a call at different strike prices. Unlike long straddles, profits occur when the spot price remains within the range between the two strike prices. However, the range in this case is wider than in the case of a short straddle, the exact width depending upon the difference in the strike prices of the call and put options. 

  1. Short Iron Butterfly 

A short straddle has the potential for unlimited losses, depending upon how volatile the spot price is. In such cases, a short iron butterfly option strategy can be used to limit losses in the event of volatility. You can do so by combining a short straddle with protective options at lower and higher strike prices and then buying a put option at a lower strike price and buying a call option at a higher strike price. 

  1. Short Iron Condor 

Similar to a short iron butterfly, a short iron condor option strategy also aims to limit losses if the spot price moves beyond the profitable range of a neutral stance trading strategy. However, instead of basing it on a short straddle, you first set up a short strangle. Then, simply buy a put option at a lower strike price and buy a call option at a higher strike price than the strike prices of the initial short strangle. 

Breakout Trading Strategies

These are option strategies that expect a breakout of the spot price from a particular range. It could be both a bullish or bearish breakout. In either case, these strategies can give you profits. 

Intraday Option Trading Strategies 

Intraday option trading strategies focus on opening and closing positions on the same day to capitalise on short-term price movements. These strategies include: 

  1. Long Straddle 

This straddle option strategy involves buying a call and a put option at the same strike price. You gain profits as long as the spot price moves outside a particular range. 

  1. Long Strangle 

This strategy involves buying a put option and then buying a call option at a higher strike price. Similar to long straddles, you may gain profits when the spot price moves significantly above or below the strike prices. However, the range in this case is wider than in a long straddle, with the exact width depending on the difference between the strike prices of the call and put options. 

  1. Long Iron Butterfly 

To reduce the amount of money committed to a long straddle, a long iron butterfly can instead be used by selling an at-the-money call and put while buying a call at a higher strike price and a put at a lower strike price. 

  1. Long Iron Condor 

Similar to a long iron butterfly, a long iron condor can be used to reduce the amount of money committed to a long strangle, while also generating some money by selling a put option at a lower strike price and a call option at a higher strike price. 

Other Strategies 

  • Covered call 

This involves holding the underlying stock and selling a call option on it. The premium received may provide additional income if the price does not rise significantly. 

  • Married put 

This involves buying a stock and also buying a put option on that stock. The put option then acts as a stop-loss because it gives you the right to sell the stock at the strike price, even if the market price falls.  

There can be many more option strategies, such as synthetic calls and puts, call ratio back spreads, etc. You can also create multi-legged option strategies, i.e., option strategies involving multiple types of option contracts, by yourself, based on your own predictions of risk and market trends. 

Risk vs Reward in Option Strategies 

The primary risk of any of the option trading strategies is the risk of the underlying asset’s price moving in the opposite direction from what was expected. This includes the scenario in which the price does not move at all, even when a strategy expecting volatility had been set up. This is why many traders prefer a downside protection options strategy, such as a protective put, to protect their bases. 

The best option trading strategy for you is the one that accommodates: 

  1. Your prediction of the market trend. 

  1. A balance between the amount of reward that you can get and the amount of money you are putting at risk. 

  1. Your trading balance available at the moment, including the amount that you can get under the margin trading facility. 

Advantages of Trading Options 

Advantage 

Explanation 

Leverage 

Enables exposure to larger positions with less capital than buying the underlying asset. 

Hedging 

Can reduce potential portfolio losses through protective positions, such as put options. 

Flexibility 

Allows different strategies based on bullish, bearish, or neutral market outlooks. 

Potential income 

Selling options may generate income if contracts expire unexercised. 

Disadvantages of Trading Options 

Disadvantage 

Explanation 

Complexity 

Involves multiple variables such as strike price, expiry, and volatility. 

Time decay 

Option value may decline as expiry approaches if price movement is limited. 

Uncertainty of returns 

Options strategies rely on future price expectations, and profits occur only if the market moves in the anticipated direction. 

Regulatory requirements 

Requires completion of derivatives risk disclosures as per SEBI norms. 

Volatility risk 

Changes in volatility can impact option pricing independent of price movement. 

Conclusion

Options trading strategies help traders approach the derivatives market with structured methods based on their expectations of price movements and volatility. By using different combinations of call and put options, traders can respond to bullish, bearish, or neutral market conditions while managing potential risks.  

Understanding these strategies is important for anyone participating in futures and options trading, as it allows traders to make more informed decisions and apply risk management while navigating changing market conditions. 

FAQs

There are several strategies that traders use when buying options in India. One common strategy is buying a call option, which allows traders to benefit if the price of the underlying asset rises. It's important to note that the best strategy for options buying will depend on the individual trader's goals, risk tolerance, and market outlook. It's always a good idea to thoroughly research and test any strategy before putting it into practice. 

There is no one-size-fits-all strategy for options trading. The best strategy depends on the trader's goals, risk tolerance, and market conditions. Some commonly used options trading strategies include: Covered Call Bull Call Spread Bear Put Spread Iron Condor
No options strategy can be considered the safest, as the risks and potential rewards of any given strategy will depend on a variety of factors, including market conditions, the specific options being traded, and the investor's individual risk tolerance and investment goals.
The riskiest option strategy can vary depending on market conditions and individual circumstances. However, naked call writing, short straddles/strangles, and directional bets using out-of-the-money options are considered to be highly risky. It's important to understand the risks involved with any option strategy and use proper risk management techniques, such as limiting position size and using stop-loss orders.
Here are some basic steps for beginners in India to start trading options: Learn the basics Choose a broker Open an account Fund your account Start trading Monitor your trades Practice good risk management
Option selling can be a complex and risky strategy that requires a thorough understanding of market dynamics and risk management techniques to imply any strategy that can work. Therefore, there is no one best strategy.

There is no officially verified record identifying the most profitable options trader in India. Profitability in options trading depends on individual strategy, discipline, and risk management over time. 

There is no single options strategy that is always successful because market conditions change frequently. Traders usually choose strategies based on their market outlook, risk tolerance, and trading experience. 

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