Option Strategies

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Preface
The N at ional St ock Ex change of I ndia Lt d. ( N SE) , set up in t he year 1993 , is t oday t he
largest stock exchange in I ndia and a preferred exchange for t rading in equity, debt and derivat ives
inst rum ent s by invest ors. NSE has set up a sophist icat ed electronic t rading, clearing and set t lem ent plat
form and it s infrast ruct ure serves as a role m odel for t he securities industry. The standards set by
NSE in term s of m arket practices; products and t echnology have becom e indust ry benchm arks
and are being replicat ed by m any ot her m arket part icipant s. NSE has four broad segm ent s
Wholesale Debt Market Segm ent ( com m enced in June 1994 ) , Capit al Market Segm ent ( com m
enced in Novem ber 1994 ) Fut ures and Opt ions Segm ent ( com m enced June 2000 ) and t he
Currency Derivat ives segm ent ( com m enced in August 2008 ) . Various product s which are t raded on t
he NSE include, equity shares, bonds, debentures, warrants, exchange t raded funds, m utual funds,
governm ent securit ies, fut ures and opt ions on indices & single st ocks and currency fut ures. Today NSE’s
share to the total equity m arket turnover in I ndia averages around 7 2 % whereas in the futures and
options m arket this share is around 99% .
At NSE, it has always been our endeavour t o cont inuously upgrade t he skills and proficiency of the
I ndian investor. Exchange- t raded options form an im portant class of derivatives which have st
andardized cont ract feat ures and t rade on public exchanges, facilit at ing t rading am ong invest
ors. They provide set t lem ent guarant ee by t he Clearing Corporat ion t hereby reducing count erpart
y r isk. Opt ions can be used for hedging, t aking a view on t he fut ure direct ion of t he m arket or for
arbit rage. Opt ions are also helpful for im plem ent ing various t rading st rategies such as st raddle, st
rangle, butterfly , collar et c. which can help in generat ing incom e for invest ors under various m arket
condit ions.
This m odule is being int roduced t o explain som e of t he im port ant and basic Opt ions st rat
egies. The m odule which would be of int erest t o t raders, invest ors, st udent s and anyone int erest ed in
t he opt ions m arket s. However, it is advisable t o have a good knowledge about the basics of Options
or clear the NCFM Derivatives Markets ( Dealers) Module before taking up this m odule. To get a bet t
er clarit y on t he st rat egies, it is im port ant t o read t he exam ples and t he payoff schedules. The pay-
off schedules can be worked out using a sim ple excel spreadsheet for bet t er understanding.
We hope readers find t his m odule a valuable addit ion which aids in underst anding various Options
Trading St rat egies.
OPTI ON S.................................................................................................................................................. 3
1. ............................................................................................... I N TROD UCTI ON TO OPTI ON S 3

1.1
OPTIONTERMINOLOGY................................................................................................................................ 3
1.2
OPTIONSPAYOFFS......................................................................................................................................... 4
1.2.1 . 1...................................................................Payoff profile of buyer of asset: Long asset 4
1.2.2 . 2..................................................................Payoff profile for seller of asset: Short asset 5
1.2.3 . 3.........................................................Payoff profile for buyer of call options: Long call 5
1.2.4 . 4........................................Payoff profile for writer ( seller) of call options: Short call 6
1.2.5 . 5.........................................................Payoff profile for buyer of put options: Long put 7
1.2.6 . 6.........................................Payoff profile for writer ( seller) of put options: Short put 8
STRATEGY 1 : LON G CALL................................................................................................................ 10
STRATEGY 2 : SH ORT CALL............................................................................................................. 12
STRATEGY 3 : SYN TH ETI C LON G CALL.......................................................................................14
STRATEGY 4 : LON G PUT................................................................................................................. 18
STRATEGY 5 : SH ORT PUT............................................................................................................... 20
STRATEGY 6 : COV ERED CALL......................................................................................................... 22
STRATEGY 7 : LON G COMBO.......................................................................................................... 26
STRATEGY 8 : PROTECTI VE CALL................................................................................................28
STRATEGY 9 : COV ERED PUT.......................................................................................................... 30
STRATEGY 1 0 : LON G S TRADDLE.................................................................................................32
STRATEGY 1 1 : SH ORT STRADDLE..............................................................................................34
STRATEGY 1 2 : LON G S TRAN GLE................................................................................................36
STRATEGY 1 3 . SH ORT STRAN GLE...............................................................................................38
STRATEGY 1 4 . COLLAR.................................................................................................................... 40
STRATEGY 1 5 . BULL CALL SPREAD STRATEGY.........................................................................43
STRATEGY 1 6 . BULL PUT SPREAD STRATEGY.........................................................................45
STRATEGY 1 7 : BEAR CALL SPREAD STRATEGY......................................................................47
STRATEGY 1 8 : BEA R PUT SPREAD STRATEGY........................................................................49
STRATEGY 1 9 : LON G CALL BUTTERFLY......................................................................................51
STRATEGY 2 0 : SH ORT CALL BUTTERFLY..................................................................................53
STRATEGY 2 1 : LON G CALL CON D OR..........................................................................................55
STRATEGY 2 2 : SH ORT CALL CON D OR......................................................................................58
2
OPTI ONS
1. I NTRODUCTI ON TO OPTI ON S
An opt ion is a cont ract writ t en by a seller t hat conveys t o t he buyer t he r ight — but not t he obligat ion —
t o buy ( in t he case of a call opt ion) or t o sell ( in t he case of a put opt ion) a part icular asset , at a
part icular price ( Strike price / Exercise price) in future. I n ret urn for grant ing t he opt ion, t he
seller collect s a paym ent ( t he premium ) from t he buyer. Exchange- t raded opt ions form an im port ant
class of opt ions which have st andardized cont ract feat ures and t rade on public exchanges, facilit at ing t
rading am ong lar ge nu m ber of invest ors. They provide set t lem ent guarant ee by t he Clearing
Corporat ion t hereby reducing count erpart y r isk. Options can be used for hedging, taking a view on
the future direction of the m arket , for arbitrage or for im plem enting st rategies which can help in
generating incom e for investors under various m arket conditions.
1.1 OPTI ON TERMI NOLOGY

 I ndex options: These opt ions have t he index as t he underlying. I n I ndia, t hey have a
European st yle set t lem ent . Eg. Nift y opt ions, Mini Nift y opt ions et c.
 Stock options: Stock options are options on individual stocks. A stock option contract gives the
holder the right to buy or sell the underlying shares at the specified pr ice. They have an Am erican st
yle set t lem ent .
 Buyer of an option: The buyer of an option is the one who by paying the option premium buys the r
ight but not the obligation to exercise his option on the seller/ writer.
 W riter / seller of an option: The writer / seller of a call/ put option is the one who receives the
option premium and is t hereby obliged t o sell/ buy t he asset if t he buyer exercises on him.
 Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain dat e for a cert ain price.
 Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain
dat e for a cert ain price.
 Option price/ prem ium : Option price is the price which the option buyer pays to the option
seller. I t is also referred to as the option prem ium .
 Expiration date : The date specified in the options contract is known as the expiration date, the
exercise dat e, t he st r ike dat e or t he m at urit y.
 Strike price: The price specified in the options contract is known as the strike price or the exercise
price.
 American options: American options are options that can be exercised at any time upto the expiration
dat e.
 European options: European options are options that can be exercised only on the expiration date
itself.
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 I n- the- m oney option: An in- the- m oney ( I TM) option is an option that would lead to a positive
cashflow to the holder if it were exercised im m ediately. A call option on the index is said to be in-
the- m oney when the current index stands at a level higher than the strike price ( i.e. spot price >
strike price). I f the index is m uch higher than the strike price, the call is said to be deep ITM. In the
case of a put , t he put is I TM if t he index is below t he st r ike price.
 At- the- m oney option: An at - the- money ( ATM) option is an option that would lead to zero cashflow if
it were exercised immediately. An option on the index is at - the- m oney when the current index equals
the st r ike price ( i. e. spot price = st r ike price) .
 Out- of- the- m oney option: An out - of- the- money ( OTM) option is an option that would lead to
a negative cashflow if it were exercised immediately. A call option on the index is out - of- the-
money when the current index stands at a level which is less than the strike price ( i.e. spot price <
strike price). I f the index is m uch lower than the strike price, the call is said to be deep OTM. I n the
case of a put , t he put is OTM if t he index is above t he st r ike price.
 I ntrinsic value of an option: The option premium can be broken down into two components -
intrinsic value and t im e value. The intrinsic value of a call is the am ount t h e option is I TM, if
it is I TM. I f the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic value
of a call is Max[ 0, ( St — K)] which means the intrinsic value of a call is the greater of 0 or ( St —
K). Similarly, the intrinsic value of a put is Max[ 0, K — St ] ,i.e. the greater of 0 or ( K — St ). K is
the strike price and St is the spot price.
 Time value of an option: The time value of an option is the difference between its premium and
its intrinsic value. Both calls and puts have t ime value. An option that is OTM or ATM has only t
ime value. Usually, the maximum t ime value exists when the option is ATM. The longer the t ime to
expiration, the greater is an option's t ime value, all else equal. At expiration, an option should have no
t im e value.
1.2 OPTI ONS PAYOFFS

The optionality characteristic of options results in a non- linear payoff for options. I n sim ple words, it m
eans t hat t he losses for t he buyer of an opt ion are lim it ed, however t he profit s are pot ent ially unlim
it ed. For a w r it er ( seller) , t he payoff is exact ly t he opposit e. His profit s are lim it ed t o t he opt ion
prem ium , however his losses are pot ent ially unlim it ed. These non- linear payoffs are fascinating as
they lend them selves to be used to generate various payoffs by using com binat ions of opt ions and t he
underlying. We look here at t he six basic payoffs ( pay close at t ent ion t o t hese payoffs, since all t he
st rat egies in t he book are derived out of t hese basic payoffs) .
1 . 2 . 1 Payoff profile of buyer of asset: Long asset

In t his basic posit ion, an invest or buys t he underlying asset , ABC Lt d. shares for inst ance, for Rs.
2220 , and sells it at a fut ure dat e at an unknown price, St . Once it is purchased, t he invest or is said t o be
" long" t he asset . Figure 1 . 1 shows t he payoff for a long posit ion on ABC Lt d.
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Figure 1 .1 Payoff for investor who went Long ABC Ltd. at Rs. 2220
The figure shows the profits/ losses from a long position on ABC Ltd.. The investor bought ABC Ltd. at
Rs. 2220. I f the share price goes up, he profits. I f t he share price falls he loses.
ABC Ltd.
1 . 2 . 2 Payoff profile for seller of asset: Short asset

I n t his basic posit ion, an invest or short s t he underlying asset , ABC Lt d. shares for inst ance, for Rs.
2220 , and buys it back at a fut ure dat e at an unknown price, St . Once it is sold, t he investor is said to be
" short" the asset. Figure 1. 2 shows t he payoff for a short posit ion on ABC Lt d..
Figure 1. 2 Payoff for investor who went Short ABC Ltd. at Rs. 2220
The figure shows the profits/ losses from a short position on ABC Ltd.. The investor sold ABC Ltd. at Rs.
2220. I f the share price falls, he profits. I f the share price rises, he loses.
ABC Ltd.
1 . 2 . 3 Payoff profile for buyer of call options: Long call
A call opt ion gives t he buyer t he r ight t o buy t he underlying asset at t he st r ike price specified in t he
opt ion. The profit / loss t hat t he buyer m akes on t he opt ion depends on t he
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spot price of t he underlying. I f upon expirat ion, t he spot price exceeds t he st r ike price, he m akes a
profit. Higher the spot price, m ore is the profit he m akes. I f t he spot price of t he underlying is less than
the st r ike price, he lets his option expire un- exercised. His loss in this case is the prem ium he paid for
buying the option. Figure 1. 3 gives t he payoff for t he buyer of a t hree m ont h call opt ion ( oft en
referred t o as long call) wit h a st r ike of 2250 bought at a prem ium of 86. 60.
Figure 1 . 3 Payoff for buyer of call option
The figure shows the profits/ losses for the buyer of a three- m onth Nifty 2250 call option. As can be seen,
as the spot Nifty rises, the call option is in- the- money. I f upon expiration, Nifty closes above the strike of
2250, the buyer would exercise his option and profit to the extent of the difference between the Nifty- close and
the strike price. The profits possible on this option are potentially unlimited. However if Nifty falls below the
strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying
the option.
1 . 2 . 4 Payoff profile for w r iter ( seller) of call options: Short call
A call opt ion gives t he buyer t he r ight t o buy t he underlying asset at t he st r ike price specified in t he
opt ion. For selling t he opt ion, t he writ er of t he opt ion charges a prem ium . The profit/ loss that the
buyer m akes on the option depends on the spot price of t he underlying. Whatever is the buyer's
profit is the seller's loss. I f upon expiration, the spot price exceeds t he st r ike price, t he buyer will
exercise t he opt ion on t he writ er. Hence as t he spot price increases t he writ er of t he opt ion st art s
m aking losses. Higher t he spot price, m ore is t he loss he m akes. I f upon expirat ion t he spot price
of t he underlying is less t han t he st r ike price, t he buyer let s his opt ion expire un- exercised and t
he writ er get s t o keep t he prem ium . Figure 1. 4 gives t he payoff for t he writ er of a t hree m ont h call opt
ion ( oft en referred to as short call) with a st r ike of 2250 sold at a prem ium of 86. 60.
6
Figure 1. 4 Payoff for writer of call option
The figure shows the profits/ losses for the seller of a three- mont h Nifty 2250 call option. As the spot Nifty
rises, the call option is in- the- m oney and the writer starts m aking losses. I f upon expiration, Nifty closes
above the strike of 2250, the buyer would exercise his option on the writer who would suffer a loss to the
extent of the difference between the Nifty- close and the strike price. The loss that can be incurred by the
writer of the option is potentially unlimited, whereas the maximum profit is limited to the extent of the up-
front option premium of Rs.86.60 charged by him.
1 . 2 . 5 Payoff profile for buyer of put options: Long put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. The
profit/ loss that the buyer m akes on the option depends on the spot price of the underlying. I f upon expiration,
the spot price is below the strike price, he m akes a profit. Lower the spot price, more is the profit he makes. I f
the spot price of the underlying is higher than the strike price, he lets his option expire un- exercised. His loss
in this case is the prem ium he paid for buying the option. Figure 1. 5 gives the payoff for the buyer of a
three month put option (often referred to as long put) with a strike of 2250 bought at a premium of 61.70.
7
Figure 1. 5 Payoff for buyer of put option
The figure shows the profits/ losses for the buyer of a three- month Nifty 2250 put option. As can be seen, as the
spot Nifty falls, the put option is in- the- money. I f upon expiration, Nifty closes below the strike of 2250,
the buyer would exercise his option and profit to the extent of the difference between the strike price and
Nifty- close. The profits possible on this option can be as high as the strike price. However if Nifty rises above
the strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for
buying the option.
1 . 2 . 6 Payoff profile for w r iter ( seller) of put options: Short put
A put opt ion gives t he buyer t he r ight t o sell t he underlying asset at t he st r ike price specified in the
option. For selling the option, the writer of the option charges a prem ium . The profit/ loss that the buyer m
akes on the option depends on the spot price of the underlying. What ever is t he buyer's profit is the seller's
loss. I f upon expiration, the spot price happens to be below the strike price, the buyer will exercise the option
on the writer. I f upon expiration the spot price of the underlying is m ore than the strike price, the buyer
lets his option un- exercised and the writer gets to keep the premium. Figure 1. 6 gives the payoff for the
writer of a three m onth put option ( often referred to as short put) with a strike of 2250 sold at a premium
of 61.70.
8
Figure 1. 6 Payoff for writer of put option
The figure shows the profits/ losses for the seller of a three- m onth Nifty 2250 put option. As the spot Nifty
falls, the put option is in- t he- money and the writer starts making losses. I f upon expiration, Nifty closes
below the strike of 2250, the buyer would exercise his option on the writer who would suffer a loss to the
extent of the difference between the strike price and Nifty- close. The loss that can be incurred by the writer
of the option is a m axim um extent of the strike price ( Since the worst that can happen is that the
asset price can fall to zero) whereas t he m axim um profit is lim ited to the extent of the up- front option
prem ium of Rs.61.70 charged by him.
Le t us now look a t som e m or e Opt ions st r a t e gie s.
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STRATEGY 1 : LON G CALL
For aggressive invest ors who are very bullish about t he prospect s for a st ock / index, buying calls can be
an excellent way t o capt ure t he upside pot ent ial wit h lim it ed downside r isk.
Buying a call is t he m ost basic of all opt Exam

ions ple st rat egies. I t const it ut es t he f irst opt ions t rade for som eone alre
Mr. XYZ is bullish on N ift y on 2 4 t h June, w hen t he N ift y is
W hen t o Use: I nvest or is very st r ike price of Rs. 4 6 0 0 a t a prem ium of Rs. 3 6 . 3 5 ,
bullish on the stock / index.
Risk: Lim it ed to the Prem ium . ( Maxim

e um
x pirloss if m arket
ingon 3 1 stexpires
July.IatftorheN
below t he opt above
ift ygoes ion st r ike price) .
4 6 3 6 . 3 5 , M r . XYZ w ill m a k e a net profit ( a ft er de duct
Rew ard: Unlim it ed a m a x im um loss of t he pr e m ium .
St r a t e gy : Bu y Ca ll Opt ion
Current Nift y index 4191 . 10
Call Option Strike Price ( Rs.) 4600
Mr. XYZ Pays Prem ium ( Rs.) 36 . 35
Break Even Point 4636 . 35

( Rs.) ( St r ike Price
Break even: Strike Price+ + Prem ium )
Prem ium
10
The pa yoff cha r t ( Long Ca ll)
The pa yoff sche dule
On
ex piry N ift y N et Pa yoff from Ca ll

closes a t Opt ion ( Rs.)
4100 . 00 - 3 6 .3 5
4300 . 00 - 3 6 .3 5
4500 . 00 - 3 6 .3 5
4636 . 35 0
4700 . 00 63.65
4900 . 00 2 6 3 .6 5
5100 . 00 4 6 3 .6 5
5300 . 00 663.65
AN ALYSI S: This st rat egy lim it s t he downside r isk t o t he ext ent of prem ium paid by Mr. XYZ ( Rs.
36 . 35 ) . But t he pot ent ial ret urn is unlim it ed in case of r ise in Nift y. A long call opt ion is t he sim
plest way t o benefit if you believe t hat t he m arket will m ake an upward m ove and is t he m ost com
m on choice am ong first t im e invest ors in Opt ions. As t he st ock price / index r ises the long Call m
oves into profit m ore and m ore quickly.
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STRATEGY 2 : SHORT CALL
When you buy a Call you are hoping t hat t he underlying st ock / index would r ise. When you
expect t he underlying st ock / index t o fall you do t he opposit e. When an invest or is very bearish
about a st ock / index and expect s t he prices t o fall, he can sell Call opt ions. This position offers lim
it ed profit potential and the possibility of large losses on big advances in underlying prices.
Although easy t o execut e it is a r isky st rat egy since t he seller of the Call is exposed to unlim it ed r
isk.
1 Exam ple :
A Call option m eans an Option t o buy. Buying a Call opt ion m eans an invest or expect s the underlying price of a
W hen t o use: I nvest or is very aggressiveandheisve ry
M r . XYZ is bearish about N ift y and expect s it t o fall. He sells a C
154.
St ra t egy : Se l l Ca l l Opt ion
be a r ishabout index. t he st ock/ Current Nifty index 2694
Call Option Strike Price ( Rs.) 2600

Risk: Unlim it ed
Mr. XYZ receives Prem ium ( Rs.) 154
Rew ard: Lim it ed t o t he am ount of prem ium
Break Even Point ( Rs.) ( 2754
Br e a k- even Point : St rike Price Strike Price +
+ Prem ium Prem ium ) *
* Breakeven Point is from the point of Call Option Buyer.
12
The pa yoff sche dule The pa yoff cha r t ( Short Ca ll)
2
N et Payoff from
On e x pir y t he Ca ll Opt ions
N ift y close s a t ( Rs.)
2400 154
2500 154
2600 154
2700 54
2754 0
2800 -46
2900 -146
3000 -246
AN ALYSI S: This st rat egy is used when an invest or is very aggressive and has a st rong expect at ion of
a price fall ( and cert ainly not a price r ise) . This is a r isky st rat egy since as the stock price / index r
ises, the short call loses m oney m ore and m ore quickly and losses can be significant if t he st ock price
/ index falls below t he st r ike price. Since t he invest or does not own t he underlying stock that he is
shorting this st rat egy is also called Short Naked Call.
13
STRATEGY 3 : SYN THETI C LON G CALL:
BUY STOCK, BUY PUT
I n t his st rat egy, we purchase a stock since we feel bullish about it . But what if the price of t he st
ock went down. You w ish you had som e insurance against t he price fall. So buy a Put on t he st ock.
This gives you the r ight to sell the stock at a certain price which is the st r ike price. The st r ike price can
be t he price at which you bought the stock ( ATM st r ike price) or slight ly below ( OTM st r ike price) .
I n case t he price of t he st ock r ises you get t he full benefit of t he price r ise. I n case t he price of the
stock falls, exercise t he Put Opt ion ( rem em ber Put is a r ight t o sell) . You have capped your loss in this m
anner because t he Put opt ion st ops your furt her losses. I t is a st rat egy with a lim ited loss and ( after
subtract ing the Put prem ium ) unlim ited profit ( from the stock price rise) . The result of t his st rat egy
looks like a Call Option Buy st rategy and therefore is called a Synthetic Call!
But t he st rat egy is not Buy Call Option ( Strategy 1) . Here you have t aken an exposure t o an underlying st
ock wit h t he aim of holding it and reaping t he benefit s of price r ise, dividends, bonus r ights etc. and at
the sam e t im e insuri ng against an adverse price m ovem ent .
I n sim ple buying of a Call Opt ion, t here is no underlying posit ion in t he st ock but is ent ered int o
only t o t ake advant age of price m ovem ent in t he underlying st ock.
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Exam ple
W hent ouse:When
ownership isdesiredof Mr. XYZ is bullish about ABC Lt d st ock. He buys ABC Lt d. at curre
st ockyet invest oris 3 1 st July.
concerned about near- t erm downside r isk. The out look is conservat ively bullish.
Risk: Losses lim it ed to St ock price + Put Prem ium
– Put St r ike price
Re w a r d: Profit pot ent ial is unlim it ed.
St r a t e gy : Buy St ock + Buy Put Opt ion
Buy St ock Current Market Price of 4000

( Mr. XYZ pays) ABC Ltd. ( Rs.)
Strike Price ( Rs.) 3900

Br e a k- even Point : Put
Strike Price + Put Prem ium Buy Put Prem ium ( Rs.)
+ St ock Price Price – Put Strike ( Mr. XYZ pays) 143.80
Break Even Point ( Rs.) ( 4143 . 80

Put Strike Price + Put
Prem ium + Stock Price –
Put Strike Price) *
* Break Even is from the point of view of Mr. XYZ. He has to recover t he cost of t he P
st ock price t o break even.
15
Exam ple :
ABC Ltd. is t rading at Rs. 4000 on 4t h July. Buy
100 shares of the Stock at Rs. 4000
Buy 100 July Put Options with a Strike Price of Rs. 3900 at a prem ium of Rs. 143. 80 per put .
Net Debit ( payout ) Stock Bought + Prem ium Paid Rs.
4000 + Rs. 143.80
Rs. 4, 14, 380/ -
Maxim um Loss Stock Price + Put Prem ium – Put Strike Rs.
4000 + Rs. 143.80 – Rs. 3900
Rs. 24, 380
Maxim um Gain Unlim it ed ( as the stock r ises)
Breakeven Put Strike + Put Prem ium + Stock Price – Put Strike Rs.
3900 + Rs. 143.80 + Rs. 4000 – Rs. 3900
= Rs. 4143. 80
The payoff schedule
ABC Lt d. close s a t Payoff from t he N et Payoff from t N et Payoff

( Rs.) on ex piry St ock ( Rs.) he Put Opt ion ( Rs.) ( Rs.)
3400 . 00 - 600.00 356.20 -243.8
0
3600 . 00 - 400.00 156 . 20 -243.8
0
3800 . 00 - 200.00 - 43.80 -243.8
0
4000 . 00 0 - 143.80 -143.8
0
4143 . 80 143.80 - 143.80 0
4200 . 00 200.00 - 143.80 56.20
4400 . 00 400.00 - 143.80 2 5 6 .2 0
4600 . 00 600.00 - 143.80 4 5 6 .2 0
4800 . 00 800.00 - 143.80 6 5 6 .2 0
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The pa yoff cha r t ( Synt he t ic Lon g Ca l l)
+ =
Buy St ock Buy Put Synthetic Long Call
AN ALYSI S: This is a low r isk st rategy. This is a st rat egy which lim it s t he loss in case of fall in m
arket but the pot ential profit rem ains unlim it ed when the stock price r ises. A good st rat egy when
you buy a st ock for m edium or long t erm, wit h t he aim of prot ect ing any downside r isk. The payoff
resem bles a Call Opt ion buy and is t herefore called as Synt het ic Long Call.
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STRATEGY 4 : LON G PUT
Buying a Put is t he opposit e of buying a Call. When you buy a Call you are bullish about t he st ock /
index. When an invest or is bearish, he can buy a Put option. A Put Opt ion gives t he buyer of t he Put a r
ight t o sell t he st ock ( t o t he Pu t seller) at a pre- specified price and thereby lim it his r isk.
Ex a m ple:
AlongPutisa
Mr. XYZ isratbearish
Bearishst egy. Toon N iftadvant
t ake y onage
2 4tofh June,
a w hen t he N if t y is a t 2 6 9 4 . H e buys a Put opt ion
falling invest
m arketan
or
options. can buy Put
W hent ouse:
I nvest orisbearish
aboutt he st ock /
index.
St r a t e gy : Buy Put Opt ion
Risk: Lim it ed t o t he am ount of Prem ium paid. ( Maxim um loss if st ock / index expires at or above t he opt ion st r
Rew ard: Unlim it ed Current Nift y index 2694
Put Option Strike Price ( Rs.) 2600
Mr. XYZ Pays Prem ium ( Rs.) 52
Break Even Point ( Rs.) 2548

( St r ike Price - Prem ium )
Br e a k- even Point :
St ock Price - Prem ium
18
On
ex piry N ift y N et Payoff from
closes a t Put Opt ion ( Rs.)
230 0 248
2400 148
2500 48
2548 0
2600 -52
2700 -52
2800 -52
2900 -52
The pa yoff cha r t ( Long Put )
AN ALYSI S: A bearish invest or can profit from declining st ock price by buying Put s. He limit s his
r isk t o t he am ount of prem ium paid but his profit pot ent ial rem ains unlim it ed. This is one of the
widely used st rategy when an invest or is bearish.
19
STRATEGY 5 : SHORT PUT
Selling a Put is opposit e of buying a Put . An invest or buys Put when he is bearish on a st ock.
An invest or Sells Put when he is Bu l l ish about t he st ock – expect s t he st ock price t o r ise or st ay
sideways at t he m inim um . When you sell a Put, you earn a Prem ium ( from the buyer of t he Put ) . You
have sold som eone t he right t o sell you t he st ock at t he st rike price. I f t he st ock price increases
beyond t he st r ike price, t he short put posit ion will m ake a profit for the seller by t he am ount of t he
prem ium, since t he buyer will not exercise the Put option and t he Put seller can retain the Prem ium (
which is his m axim um profit) . But, if the stock price decreases below t he strike pr ice, by m ore t han t
he am ount of t he prem ium , t he Put seller will lose m oney. The pot ent ial loss being unlim it ed ( until
the stock price fall to zero) .
W h e n t o Use : I nvest or is very Bu l l ish on t he stock / index. The m ain idea is to m ake a short t erm incom e.
Exam ple
Risk: Put St r ike Price – Put Prem ium .
M r . XYZ is bullish on N ift y w hen it is a t 4 1 9 1 . 1 0 . H e sells a Put opt ion
Rew ard: Lim it ed t o t he am ount of Prem ium received.
Rs. 1 7 0 . 5 0 expiring on 3 1 st July. I f t he N ift y index st ays
Break even: Put St r ike Price - Prem ium 4 1 0 0 , he w ill gain t he am ount of pre m ium as t he Put buyer w on’t
above
in N ift y.
St ra t egy : Sell Put Opt ion
Current Nift y index 4191 . 10
Put Option Strike Price ( Rs.) 4100
Mr. XYZ receives Prem ium ( Rs.) 170 . 5
Break Even Point ( Rs.) 3929 . 5

( St r ike Price - Prem ium ) *
* Breakeven Point is from the point of Put Option Buyer.
20
The payoff schedule The pa yoff cha r t ( Shor t Put )
N et Payoff
On expiry N ift y from t he Put
Closes a t Opt ion ( Rs.)
3400 . 00 -529.50
3500 . 00 -429.50
3700 . 00 -229.50
3900 . 00 - 2 9 .5 0
3929 . 50 0
4100 . 00 1 7 0 .5 0
4300 . 00 1 7 0 .5 0
4500 . 00 1 7 0 .5 0
AN ALYSI S: Selling Puts can lead to regular incom e in a rising or range bound m arkets. But it should
be done carefully since t he pot ent ial losses can be significant in case t he price of t he st ock
/ index falls. This st rat egy can be considered as an incom e generat ing st rat egy.
21
STRATEGY 6 : COVERED CALL
You own shares in a com pany which you feel m ay r ise but not much in t he near t erm ( or at best st ay
sideways) . You would still like to earn an incom e from the shares. The covered call is a st rat egy in
which an invest or Sells a Call opt ion on a st ock he owns ( net t ing him a prem ium ) . The Call Opt ion
which is sold in usually an OTM Call. The Call would not get exercised unless t he st ock price increases
above t he st r ike price. Till t hen t he invest or in t he stock ( Call seller) can retain t he Prem ium wit h
him. This becom es his incom e from t he st ock. This st rategy is usually adopted by a stock owner
who is Neut ral t o m odera t ely Bu l l ish about t he st ock.
An invest or buys a st ock or owns a st ock which he feel is good for m edium t o long t erm but is neut
ral or bearish for t he near t erm . At t he sam e t im e, t he invest or does not m ind exiting t he st ock at a
cert ain price ( t arget price) . The invest or can sell a Call Opt ion at t he st r ike price at which he would
be f ine exit ing t he st ock ( OTM st r ike) . By selling the Call Option the investor earns a Prem ium . No w t
he posit ion of t he invest or is t hat of a Call Seller who owns t he underlying st ock. I f t he st ock
price st ays at or below t he st r ike price, the Call Buyer ( refer t o Strategy 1) will not exercise the
Call. The Prem ium is retained by t he invest or.
I n case t he st ock price goes above t he st r ike price, t he Call buyer who has t he r ight t o buy the stock at
the st r ike price will exercise the Call option. The Call seller ( t he invest or) w ho has t o sell t he st ock t
o t he Call buyer, will sell t he st ock at t he st r ike price. This was t he price which t he Call seller ( the
investor) was anyway int erest ed in exit ing t he st ock and now exit s at t hat price. So besides t he st r
ike price which was t he t arget price for selling t he st ock, t he Call seller ( invest or) also earns t he
Prem ium which becom es an addit ional gain for him. This st rat egy is called as a Covered Call st rat
egy because t he Call sold is backed by a st ock owned by t he Call Seller ( investor) . The incom e
increases as t he st ock r ises, but get s capped aft er t he st ock reaches t he st r ike price. Let us see an
exam ple t o underst and t he Covered Call st rat egy.
22
W hen
You ownt shares
o Use: in a This is oft
company en em
which u feel ple
will not rise in the near term. You would like
Exam
ployed
yo when an invest or has a short - t to
erm neut ral t Mr. A bought XYZ Lt d. for Rs 3 8 5 0 and
earn an income
o m oderat ely from the stock.
bullish v iew onThet he simered
ult call is a strategy
aneously sells ainCall
which
opt an ioninvestor
at an st Sells
r ik ae
st ock he holds. He t akes a short posit price of Rs 4 0 0 0 . W hich m ea ns M r . A does
cov
ion option
on t heonCall
a stock he owns.
opt ion The e
t o generat not tCall
hinktiont hawhich
t t heisprice
sold inof usually
XYZ Lt d. an wOTM Call.a
ill r ise
incom e from t he opt ion prem ium . bove Rs. 4 0 0 0 . How ever, incase it r ises
Call Op Call option enables the above Selling
Rs. 4 0the0 0 an
, Mincome
r . A does by way
not of m theind Premium
get t ing
investor
Since t he to earn
st ockwould not get sim ult received. The Call k price increases above the ock
is purchased ex ercised at t hat price and ex it ing t he st at
strike
aneously wit h writ ing ( selling) t he Rs. 4 0 0 0 ( TARGET SELL PRI CE = 3 . 9 0 % ret
exercised
Call, t he stunless
rat egy the stoc
is com m investor can urnprice.
only referred on Till
t hethenst ockthe purchase
m which becomes price) .his Mincome. r . A
to as “ buy - write” . receives a prem ium of Rs 8 0 for selling t he
keep the Premium with hi adopted by a Ca Thisll. strategy
Thus neist usually
out f low l ort oBearish
M r . A about
is the stock.
( Rs. 3 8 5 0 – Rs. 8 0 ) = Rs. 3 7 7 0 . H e reduces
stock
Risk:owner
I f t hewho is Neutra
St ock Price fallsnott omind
zero, t h At the same time, he does ce. The investor can sell
t he cost of buying t he st ock by t his st r a t e gy.
he invest or loses t he ent ire value of t he St
exiting
ock but the stockt at
ret ains he aprem
certain
ium ,pri at t he Call Options at the strike price e stock. By selling the
since
I f t he st ock price st ays at or below Rs. 4 0 0 0 ,
Call will not be exercised against
which he would be fine with exiting t Call
t he Option
Call opt theion
investor earnsget
w ill not a isex
that of a Call
ercised a ndSeller
Mr
him . So m axim um r isk = Stock Price
. A can ret ain t he Rs. 8 0 prem ium , w hich is an
Premium.
Paid – Call Not
Premhe iumposition of the
ext ra (refer
incom to Strategy
e. 2), who owns stays below the
investor the underlying
Upside capped stock.
at t he St r ike priceIf plus
the t strike price the Call Buyer (Refer to he Premium is
I f t he st ock pr ice goe s a bove Rs 4 0 0 0 , t he
he Prem ium received. So if t he St ock
stock price strategy 1) will not exerciseretained Ca ll optbyion thewCall seller.
ill get ex This is anby
ercised goest above
he Ca thell
r ises beyond t he St r ike
buyer. The ent ire posit ion w ill w ork lik e t his :
the
priceCall.
t he Tinvest
income
or ( for
Call him. In gives
seller) case wthe strike price, the Call buyer who has the ill exercise
up all t he gains on the stock. St r a t e gy : Buy St ock + Se ll Ca ll Opt ion
stock price right to buy the stock at the the Call option. The Call seller who has to the stock
strike price wLim
sellit the Mr.to
A the
buysCall
the stbuyer Market
at the strike
Price (price. This was
3850ay
ed tstock to the
St rCall
Rs.)
Rew ard: o ( Call ike
Price – St ock Price paid) + Prem ium ock XYZ Lt d.
buyer will sell the price which the Call
received
interested in exiting the stock and now exits at that
seller was any price. So besides the was the target price for selling the stock the Call
Break even: St ock Price paid - Prem Call Options Strike Price ( Rs.) 4000
ium Received
Mr. A receives Prem ium ( Rs.) 80
Break Even Point 3770

( Rs.) ( St ock Price
paid - Prem ium
Received)
23
Ex a m ple :
1) ) The price of XYZ Lt d. st ays at or below Rs. 4000. The Call buyer will not exercise the Call Opt
ion. Mr. A will keep the prem ium of Rs. 80. This is an incom e for him . So if t he st ock has m oved from
Rs. 3850 ( purchase price) t o Rs. 3950 , Mr. A m akes Rs. 180/ - [ Rs. 3950 – Rs. 3850 + Rs. 80 ( Prem
ium ) ] = An additional Rs. 80, because of t he Call sold.
2) Suppose t he price of XYZ Lt d. m oves t o Rs. 4100 , t hen t he Call Buyer will exercise t he Call
Option and Mr. A will have to pay him Rs. 100 ( loss on exercise of the Call Option) . What would
Mr. A do and what will be his pay – off?
a) Sell the Stock in the m arket at : Rs. 4100
b) Pay Rs. 100 t o t he Call Opt ions buyer : - Rs. 100
c) Pay Off ( a – b) received : Rs. 4000
( This was Mr. A’s

t arget price)
d) Prem ium received on Selling Call Option : Rs. 80
e) Net paym ent ( c + d) received by Mr. A : Rs. 4080
f) Purchase price of XYZ Lt d. : Rs. 3850
g) Net profit : Rs. 408 0 – Rs. 3850
= Rs. 230
h) Return (% ) : ( Rs. 4080 – Rs. 3850 ) X 100
Rs. 3850
= 5 . 97 % ( which is m ore t han

the target return of 3. 90% ) .
24
ANALYS
XYZ Lt d. pr ice close s a t N et Payoff
( Rs.) ( Rs.)
3600 - 170
3700 - 70
3740 - 30
3770 0
3800 30
3900 130
4000 230
4100 230
4200 230
4300 230
The pa yoff cha r t ( Covered Call)
+ =
Buy St ock Sell Call Covered Call
25
STRATEGY 7 : LON G COMBO : SELL A
PUT, BUY A CALL
A Long Com bo is a Bu l l ish st rat egy. I f an invest or is expect ing t he price of a st ock t o m ove up he can
do a Long Com bo st rat egy. I t involves selling an OTM ( lower st r ike) Put and buying an OTM (
higher st r ike) Call. This st rat egy sim ulat es t he act ion of buying a st ock ( or a fut ures) but at a
fraction of the stock price. I t is an inexpensive t rade, sim ilar in payoff to Long St ock, except t here is
a gap bet ween t he st r ikes ( please see t he payoff diagram ) . As t he st ock price r ises t he st rat egy st art s
m aking profit s. Let us t ry and underst and Lon g Com bo with an exam ple.
W he nt oUse :I nvest oris

Bu l l ish on t he st ock. Ex a m ple:
Risk: Unlimit ed ( Lower St r ike

+ net debit )
A st ock ABC Lt d. is t rading at Rs. 4 5 0 . Mr. XYZ is bullish on t he
debit) is Rs. 1 .
Re w a r d: Unlim it ed
Br e a k e ve n :
Higher strike + net debit
St r a t e gy : Se l l a Pu t + Bu y a Ca l l
ABC Lt d. Current Market Price ( Rs.) 450
Sells Put Strike Price ( Rs.) 400
Mr. XYZ receives Prem ium ( Rs.) 1.00

Buys Call Strike Price ( Rs.) 500
Mr. XYZ pays Prem ium ( Rs.) 2.00
Net Debit ( Rs.) 1.00
Bre ak Eve n Po int (Rs.) Rs. 501
(Hig he r Strike + Ne t De b it)
26
The payoff schedule
Net Pa yoff from N et Payoff from t

ABC Lt d. close s a t he Put Sold he Ca ll purcha sed N et Payoff
t ( Rs.) ( Rs.) ( Rs.) ( Rs.)
700 1 198 199
650 1 148 149
600 1 98 99
550 1 48 49
501 1 -1 0
500 1 -2 -1
450 1 -2 -1
400 1 -2 -1
350 - 49 -2 -51
300 - 99 -2 -101
250 - 149 -2 -151
For a sm all invest m ent of Re. 1 ( net debit ) , t he ret urns can be very high in a Long Com bo, but
only if the stock m oves up. Otherwise the potent ial losses can also be high.
The pa yoff cha r t ( Long Com bo)
+ =
Sell Put Buy Call Long Com bo
27
STRATEGY 8 : PROTECTI VE CALL /
SYNTHETI C LONG PUT
This is a st rategy wherein an investor has gone short on a st ock and buys a call to hedge. This is an
opposit e of Synt het ic Call ( St rat egy 3 ) . An invest or short s a st ock and buys an ATM or slight ly OTM
Call. The net effect of t his is t hat t he invest or creat es a payoff like a Long Put , but inst ead of
having a net debit ( paying prem ium ) for a Long Put , he creat es a net credit ( receives m oney on short
ing t he st ock) . I n case the stock price falls the investor gains in t he dow nw ard fall in t he price.
However, incase t here is an unexpect ed r ise in t he price of t he st ock t he loss is lim it ed. The payoff
from t he Long Call will increase t hereby com pensat ing for t he loss in value of t he short st ock posit
ion. This st rat egy hedges t he upside in t he st ock posit ion while ret aining downside profit pot ent ial.
W he n t o Use : I f the investor is of t he vExiewa tm ple

hat t he: m arket s will go down ( bea r ish) but want s t o prot ect aga
Risk: Lim it ed. Maxim um Risk is Call St r ikeSuppose
Price – ABC StockLt d.Price
is t rading at Rs. 4 4 5 7 in June. An invest or Mr
+ Prem ium
Rew ard: Maxim um is St ock Price – Call Prem ium
Break even: St ock Price – Call Prem ium
St r a t e gy : Sh or t St ock + Buy Ca ll Opt ion
Sells St ock Current Market 4457

( Mr. A receives) Price ( Rs.)
Buys Call Strike Price ( Rs.) 4500
Mr. A pays Prem ium ( Rs.) 100
Break Even Point ( 4357

Rs.) ( St ock Price
– Call Prem ium )
28
Payoff from t he N et Payoff from

ABC Lt d. close s a st ock ( Rs.) t he Ca ll Opt ion N et Payoff
t ( Rs.) ( Rs.) ( Rs.)
4100 357 - 100 257
4150 307 - 100 207
4200 257 - 100 157
4300 157 - 100 57
4350 107 - 100 7
4357 100 - 100 0
4400 57 - 100 - 43
4457 0 - 100 - 100
4600 - 143 0 - 143
4700 - 243 100 - 143
4800 - 343 200 - 143
4900 - 443 300 - 143
5000 - 543 400 - 143
The pa yoff cha r t ( Synt he t ic Long Put )
+ =
Sell St ock Buy Call Synt het ic Long Put
29
STRATEGY 9 : COVERED PUT
This st rat egy is opposit e t o a Covered Call. A Covered Call is a neut ral t o bullish st rat egy, whereas a
Covered Put is a neut ral t o Be a r ish st rat egy. You do t his st rat egy when you feel the price of a stock
/ index is going to rem ain range bound or m ove down. Covered Put writ ing involves a short in a st
ock / index along wit h a short Put on t he opt ions on t he st ock
/ index.
The Put t hat is sold is generally an OTM Put . The invest or short s a st ock because he is bearish about
it , but does not m ind buying it back once t he price reaches ( falls t o) a t arget price. This t arget price is t
he price at which t he invest or short s the Put ( Put st r ike price) . Selling a Put m eans, buying t he st ock at
t he st r ike price if exercised ( St rat egy no. 2 ) . I f t he st ock falls below t he Put st r ike, t he invest or
will be exercised and will have t o buy t he st ock at t he st r ike price ( which is anyway his t arget price t
o repurchase t he st ock) . The invest or m akes a profit because he has short ed t he st ock and purchasing it
at t he st r ike price sim ply closes t he short st ock posit ion at a profit . And t he invest or keeps t he Prem
ium on t he Put sold. The invest or is covered here because he short ed t he st ock in t he first place.
I f the stock price does not change, the investor gets to keep the Prem ium . He can use this st rat egy
as an incom e in a neutral m arket . Let us understand this with an exam ple .
W he n t o Use : I f the investor is of the view t hatExam

t he mple
arket s are m ode r a t e ly bearish.
Risk : Unlim it ed if t he price of t he st ock r ises Suppose ABC Lt d. is t rading at Rs 4 5 0 0 in June. An invest or, M
substantially
Rew ard: Maxim um is ( Sale Price of

t he St ock – Strike Price) + Put Prem ium
Break even: Sale Price of St ock + Put Prem ium
St r a t e gy : Shor t St ock + Shor t Put Opt

ion
Sells St ock ( Current Market 4500
Mr. A Price ( Rs.)
receives)
Sells Put Strike Price ( Rs.) 4300
Prem ium ( Rs.) 24

Mr. A receives
( Rs.) ( Sale price of
Stock + Put
Prem ium )
30
ABC Lt d. Payoff from N et Payoff

closes a t t he st ock from t he Put N et Payoff
( Rs.) ( Rs.) Opt ion ( Rs.) ( Rs.)
4000 500 - 276 224
4100 400 - 176 224
4200 300 - 76 224
4300 200 24 224
4400 100 24 124
4450 50 24 74
4500 0 24 24
4524 - 24 24 0
4550 - 50 24 - 26
4600 - 100 24 - 76
4635 - 135 24 - 111
4650 - 160 24 - 136
The payoff cha r t ( Covered Put )
+ =
Sell St ock Sell Put Covered Put
31
STRATEGY 1 0 : LONG STRADDLE
A St raddle is a volat ilit y st rat egy and is used when t he st ock price / index is expect ed t o show large
m ovem ent s. This st rat egy involves buying a call as well as put on t he sam e st ock / index for t he
sam e m at urit y and st r ike price, t o t ake advant age of a m ovem ent in eit her direct ion, a soaring or
plum m et ing value of t he st ock / index. I f t he price of t he st ock
/ index increases, t he call is exercised while t he put expires wort hless and if t he price of the st ock /
index decreases, t he put is exercised, t he call expires wort hless. Eit her way if t he st ock / index
shows volat ilit y t o cover t he cost of t he t rade, profit s are t o be m ade. Wit h St raddles, t he invest or
is direct ion neut ral. All t hat he is looking out for is t he st ock / index to break out exponentially in
either direction.
W h e n t o Use : The invest or t hinks t hat t he underlying st ock / index will experience significa nt vola t ilit y in t he n
Exam ple
Risk: Lim it ed t o t he init ial prem ium paid.
Suppose N ift y is at 4 4 5 0 on 2 7 t h April. An
invest or, Mr. A ent ers a long st ra ddle by buying a M ay Rs 4
Re w a r d: Unlim it ed
Break even:
Upper Breakeven Point = St r ike Price of Long Call + Net Prem ium Paid
Lower Breakeven Point = St r ike Price of Long Put - Net Prem ium Paid
St r a t e gy : Buy Put + Buy Ca ll
Nifty index Current Value 4450
Call and Put Strike Price ( Rs.) 4500
Mr. A pays Total Prem ium 207

( Call + Put) ( Rs.)
Break Even Point ( 4707( U)
Rs.)
( Rs.) 4293( L)
32
On e x pir y N et Payoff from Put N et Payoff from Call N et Payoff

N ift y close s a purchased ( Rs.) purchased ( Rs.) ( Rs.)
t
3800 615 - 122 493
3900 515 - 122 393
4000 415 - 122 293
4100 315 - 122 193
4200 215 - 122 93
4234 181 - 122 59
4293 122 - 122 0
4300 115 - 122 -7
4400 15 - 122 - 107
4500 - 85 - 122 - 207
4600 - 85 - 22 - 107
4700 - 85 78 -7
4707 - 85 85 0
4766 - 85 144 59
4800 - 85 178 93
4900 - 85 278 193
5000 - 85 378 293
5100 - 85 478 393
5200 - 85 578 493
5300 - 85 678 593
The pa yoff cha r t ( Long St ra ddle)
+ =
Buy Put Buy Call Long Straddle
33
STRATEGY 1 1 : SHORT STRADDLE
A Short St raddle is t he opposit e of Long St raddle. I t is a st rat egy t o be adopt ed when t he investor feels t
he m arket will not show m uch m ovem ent . He sells a Call and a Put on t he sam e stock / index for the
sam e m aturity and st r ike price. I t creates a net incom e for the investor. I f t he st ock / index does
not m ove m uch in eit her direct ion, t he invest or ret ains t he Prem ium as neit her t he Call nor t he Put
will be exercised. However, incase t he st ock / index m oves in either direction, up or down
significantly, the investor’s losses can be significant . So t his is a r isky st rat egy and should be carefully
adopt ed and only when t he expect ed volat ilit y in t he m arket is lim it ed. I f t he st ock / index value
st ays close t o t he st r ike price on expiry of t he cont ract s, m axim um gain, which is t he Prem ium
received is m ade.
W h e n t o Use : The invest or t hinks t hat t he underlying

Exam plest ock / index will experience very lit t le vola t ilit y in t he n
Risk : Unlim it ed Suppose N ift y is a t 4 4 5 0 on 2 7 t h April. An invest or, Mr. A
Rew ard: Lim it ed to the prem ium received
Break even:
Upper Breakeven Point = St r ike Price of Short Call + St

Netr aPrem
t e gy
ium : Se ll Put + Se ll Ca ll
Received
Nift y index Current Value 4450
Lower Breakeven Point = St r ike Price of Short Put - Net Prem ium Received
Call and Put Strike Price ( Rs.) 4500
Mr. A receives Total Prem ium 207

( Call + Put) ( Rs.)
Break Even Point ( 4707( U)

Rs.)*
( Rs.)* 4293( L)
* From buyer’s point of view
34
On ex piry N ift y N et Payoff from Put N et Payoff from Call N et Payoff

closes a t Sold ( Rs.) Sold ( Rs.) ( Rs.)
3800 - 615 122 - 493

3900 - 515 122 - 393
4000 - 415 122 - 293
4100 - 315 122 - 193
4200 - 215 122 - 93
4234 - 181 122 - 59
4293 - 122 122 0
4300 - 115 122 7
4400 - 15 122 107
4500 85 122 207
4600 85 22 107
4700 85 - 78 7
4707 85 - 85 0
4766 85 - 144 - 59
4800 85 - 178 - 93
4900 85 - 278 - 193
5000 85 - 378 - 293
The pa yoff cha r t ( Shor t St r a ddle )
+ =
Sell Put Sell Call Short Straddle
35
STRATEGY 1 2 : LONG STRANGLE
A St rangle is a slight m odificat ion t o t he St raddle t o m ake it cheaper t o execut e. This st rat egy
involves t he sim ult aneous buying of a slight ly out - of- t he- money ( OTM) put and a slightly out - of- t he- m
oney ( OTM) call of the sam e underlying st ock / index and expirat ion dat e. Here again the investor
is directional neutral but is looking for an increased volatility in t he st ock / index and t he prices
m oving significant ly in eit her direct ion. Since OTM opt ions are purchased for bot h Calls and Put s it m
akes t he cost of execut ing a St rangle cheaper as com pared t o a St raddle, where generally ATM st r
ikes are purchased. Since t he init ial cost of a St rangle is cheaper t han a St raddle, t he ret urns could pot ent
ially be higher. However, for a Strangle to m ake m oney, it would require greater m ovem ent on the
upside or downside for the stock / index than it would for a Straddle. As wit h a St raddle, t he st
rat egy has a lim it ed downside ( i. e. t he Call and t he Put prem ium ) and un lim it ed upside potential.
W hen t o Use: The invest or t hinks t hat Exam ple

t he underlying st ock / index will experience very high levels of volatil
Suppose N ift y is at 4 5 0 0 in May. An invest or, Mr. A, ex ecut e
Risk: Lim it ed t o t he init ial prem ium paid
Rew ard: Unlim it ed
Break even:
Upper Breakeven Point = Strike Price of Long Call + Net Prem gy
Strate ium :Paid
Bu y OTM Pu t + Bu y OTM Ca l l
Lower Breakeven Point = Strike Price of Long Put - NetNifty

Premindex
ium Paid Current Value 4500
Buy Call Opt ion Strike Price ( Rs.) 4700
Buy Put Option Strike Price ( Rs.) 4300
36
On e x pir y N e t Payoff from Put N et Payoff from Call N et Payoff

N ift y close s a purchased ( Rs.) purchased ( Rs.) ( Rs.)
t
3800 477 - 43 434
3900 377 - 43 334
4000 277 - 43 234
4100 177 - 43 134
4200 77 - 43 34
4234 43 - 43 0
4300 - 23 - 43 - 66
4400 - 23 - 43 - 66
4500 - 23 - 43 - 66
4600 - 23 - 43 - 66
4700 - 23 - 43 - 66
4766 - 23 23 0
4800 - 23 57 34
4900 - 23 157 134
5000 - 23 257 234
5100 - 23 357 334
5200 - 23 457 434
5300 - 23 557 534
The pa yoff cha r t ( Long St ra ngle)
+ =
Buy OTM Put Buy OTM Call Long Strangle
37
STRATEGY 1 3 . SHORT STRANGLE
A Short St rangle is a slight m odificat ion t o t he Short St raddle. I t t ries t o im prove t he profit abilit
y of t he t rade for t he Seller of t he opt ions by widen ing t he breakeven point s so t hat t here is a m uch
great er m ovem ent required in t he underlying st ock / index, for t he Call and Put opt ion t o be wort h
exercising. This st rat egy involves t he sim ult aneous selling of a slightly out - of- t he- m oney ( OTM) put and
a slightly out - of- t he- m oney ( OTM) call of t he sam e underlying st ock and expirat ion dat e. This t ypically
m eans t hat since OTM call and put are sold, t he net credit received by t he seller is less as com pared t o
a Short St raddle, but t he break even point s are also widened. The underlying st ock has t o m ove
significant ly for t he Call and t he Put t o be wort h exercising. I f t he underlying st ock does not
show m uch of a m ovem ent, the seller of the Strangle gets to keep the Prem ium .
W h e n t o Use : This opt ions t rading st ratExam

egy is tple
aken when t he opt ions invest or t hinks t hat t he underlying st ock wi
Suppose N ift y is at 4 5 0 0 in M ay. An in ve st or , M r . A, exec
Risk : Unlim ited
Rew ard: Lim it ed to the prem ium received
Break even:
Upper Breakeven Point = Strike Price of Short Call + Net
Prem ium Received St ra t egy : Sell OTM Put + Sell OTM Ca ll
Lower Breakeven Point = Strike Price of Short Put Nifty index

- Net Prem ium Received Current Value 4500
Sell Call Opt ion Strike Price ( Rs.) 4700
Sell Put Option Strike Price ( Rs.) 4300
38
On ex piry N ift y N et Payoff from N et Payoff from Call N et Payoff

closes a t Put sold ( Rs.) sold ( Rs.) ( Rs.)
3800 - 477 43 - 434

3900 - 377 43 - 334
4000 - 277 43 - 234
4100 - 177 43 - 134
4200 - 77 43 - 34
4234 - 43 43 0
4300 23 43 66
4400 23 43 66
4500 23 43 66
4600 23 43 66
4700 23 43 66
4766 23 - 23 0
4800 23 - 57 - 34
4900 23 - 157 - 134
5000 23 - 257 - 234
5100 23 - 357 - 334
5200 23 - 457 - 434
5300 23 - 557 - 534
The pa yoff cha r t ( Short St ra ngle)
+ =
Sell OTM Put Sell OTM Call Short Strangle
39
STRATEGY 1 4 . COLLAR
A Collar is sim ilar t o Covered Call ( St rat egy 6 ) but involves anot her leg – buying a Put t o insure
against t he fall in t he price of t he st ock. I t is a Covered Call wit h a lim it ed r isk. So a Collar is buying a
st ock, insuring against t he downside by buying a Put and t hen financing ( part ly) the Put by selling
a Call.
The put generally is ATM and the call is OTM having the sam e expiration m onth and m ust be equal in num
ber of shares. This is a low r isk st rat egy since t he Put prevent s downside r isk. However, do not expect unlim
it ed rewards since t he Call prevent s t hat . I t is a st rat egy t o be adopted when the investor is conservat
ively bullish. The following exam ple should m ake Collar easier to understand.
Exam ple
W he n t o Use : The collar is a good
st rat egy t o use if t he invest or is
Suppose a n inve st or M r . A buys or is holding ABC Lt d. cur r e nt ly t r a ding a t Rs. 4 7 5 8 . H e de cide
writ ing covered calls t oearn
prem ium
Since s
he pays butRs. wishes t oprot
4 7 5 8 for t he ect ABC Lt d., anot her Rs. 2 7 for t he Put but receives Rs. 3 9 for selli
st ock
him self from an unexpect ed sharp drop in t he price of t he underlying securit y.
This
Riskstrate
: Lim itgy
edinvo
Rew ard: Lim it ed
Strategy : Buy St ock + Buy Put + Se ll Ca ll

Break even: Underlying
Purchase – Prem
Priceof
ium
Call Prem ium+Put ABC Lt d. Current Market Price ( 4758
Rs.)
Sell Call Opt ion Strike Price ( Rs.) 5000
Mr. A Receives Prem ium ( Rs.) 39
Mr. A Pays Prem ium ( Rs.) 27
Net Prem ium Received( 12

Rs.)
40
Ex a m ple :
1) I f the price of ABC Ltd. r ises to Rs. 5100 after a m onth, then,
a. Mr. A will sell t he st ock at Rs. 5100 earning him a profit of Rs. 342 ( Rs. 5100 –
Rs. 4758 )
b. Mr. A will get exercised on the Call he sold and will have to pay Rs. 100. c. The
Put will expire wort hless.
d. Net prem ium received for the Collar is Rs. 12
e. Adding ( a + b + d) = Rs. 342 - 100 – 12 = Rs. 254 This is
the m axim um return on the Collar Strategy.
However, unlike a Covered Call, the downside r isk here is also lim it ed : 2) I f
the price of ABC Ltd. falls to Rs. 4400 after a m onth, then,
a. Mr. A loses Rs. 358 on the stock ABC Ltd. b.
The Call expires wort hless
c. The Put can be exercised by Mr. A and he will earn Rs. 300
d. Net prem ium received for the Collar is Rs. 12
e. Adding ( a + b + d) = - Rs. 358 + 300 + 12 = - Rs. 46
This is the m axim um the investor can loose on the Collar Strategy. The
Upside in this case is m uch m ore than the downside r isk.
41
The Payoff schedule
ABC Lt d. close s Payoff from Payoff from Payoff N e t pa
at ( Rs.) Call Sold Put Purcha sed fr om st ock yoff (
( Rs.) ( Rs.) ABC Lt d. Rs.)
4400 39 273 - 358 - 46
4450 39 223 - 308 - 46
4500 39 173 - 258 - 46
4600 39 73 - 158 - 46
4700 39 - 27 - 58 - 46
4750 39 - 27 -8 4
4800 39 - 27 42 54
4850 39 - 27 92 104
4858 39 - 27 100 112
4900 39 - 27 142 154
4948 39 - 27 190 202
5000 39 - 27 242 254
5050 - 11 - 27 292 254
5100 - 61 - 27 342 254
5150 - 111 - 27 392 254
5200 - 161 - 27 442 254
5248 - 209 - 27 490 254
5250 - 211 - 27 492 254
5300 - 261 - 27 542 254
The pa yoff cha r t ( Colla r )
+ + =
Buy St ock Buy Put Sell Call Collar
42
STRATEGY 1 5 . BULL CALL SPREAD STRATEGY:
BUY CALL OPTI ON, SELL CALL OPTI ON
A bull call spread is const ruct ed by buying an in- t he- m oney ( I TM) call opt ion, and selling another out -
of- t he- m oney ( OTM) call opt ion. Oft en t he call wit h t he lower st r ike price will be in- t he- money
while the Call with the higher st r ike price is out- of- t he- money. Both calls m ust have t he sam e
underlying securit y and expirat ion m ont h.
The net effect of t he st rat egy is t o bring down t he cost and breakeven on a Buy Call ( Long Call) St rat
egy. This st rat egy is exercised when invest or is m oderat ely bullish t o bullish, because t he invest or will
m ake a profit only when t he st ock price / index r ises. I f t he st ock price falls to the lower ( bought) st
r ike, the investor m akes the m axim um loss ( cost of t he t rade) and if t he st ock price r ises t o t
he higher ( sold) st r ike, t he invest or m akes t he m axim um profit . Let us t ry and underst and t his
wit h an exam ple.
Ex
W ha emnple:
t o Use : I nvest or is
m odera t ely bullish.
Mr. XYZ buys a N ift y Call w it h a St r ik e price Rs. 4 1 0 0 at a prem ium of Rs. 1 7 0 . 4 5 a nd he sells a N i
Risk : Lim it ed t o any init ial prem ium paid in est ablishing t he posit ion. Maxim um loss occurs where t he underlying falls
Rew ard: Lim it ed t o t he difference bet ween t he t wo st r ikes m inus net prem ium cost . Maxim um profit occurs where
Br e a k- Ev e n- Point ( BEP) :
St r ike Price of Purchased call
+ Net Debit Paid St rat egy : Buy a Call w it h a low er st r ik e ( I TM ) +
Se ll a Ca ll w it h a highe r st r ik e ( OTM )
Nift y index Current Value 4191 . 10
Buy I TM Call Strike Price ( Rs.) 4100

Option
Mr. XYZ Pays Prem ium ( Rs.) 170.45
Sell OTM Call Strike Price ( Rs.) 4400

Option
Mr. XYZ Prem ium ( Rs.) 35 . 40

Receives
Net Prem ium Paid ( 135.05
Rs.)
Break Even Point ( 4235 . 05

Rs.)
43
The pa yoff sche dule :
On e x pir y N et Payoff from Call N et Payoff from N et Payoff

N ift y Closes Buy ( Rs.) Call Sold ( Rs.) ( Rs.)
at
3500 . 00 - 170.45 35 . 40 - 135.05
3600 . 00 - 170.45 35 . 40 - 135.05
3700 . 00 - 170.45 35 . 40 - 135.05
3800 . 00 - 170.45 35 . 40 - 135.05
3900 . 00 - 170.45 35 . 40 - 135.05
4000 . 00 - 170.45 35 . 40 - 135.05
4100 . 00 - 170.45 35 . 40 - 135.05
4200 . 00 - 70.45 35 . 40 - 35.05
4235 . 05 - 35.40 35 . 40 0
4300 . 00 29 . 55 35 . 40 64 . 95
4400 . 00 129.55 35 . 40 164.95
4500 . 00 229.55 - 64.60 164.95
4600 . 00 329.55 - 164.60 164.95
4700 . 00 429.55 - 264.60 164.95
4800 . 00 529.55 - 364.60 164.95
4900 . 00 629.55 - 464.60 164.95
5000 . 00 729.55 - 564.60 164.95
5100 . 00 829. 55 - 664.60 164.95
5200 . 00 929.55 - 764.60 164.95
The Bull Call Spread St rat egy has brought t he breakeven point down ( if only t he Rs. 4100 strike price
Call was purchased t he breakeven point would have been Rs. 4270. 45) , reduced t he cost of t he t rade
( if only t he Rs. 4100 st rike price Call was purchased t he cost of t he t rade would have been Rs. 170.
45) , reduced t he loss on t he t rade ( if only t he Rs. 4150 strike price Call was purchased t he loss
would have been Rs. 170. 45 i. e. t he prem ium of t he Call purchased) . However, t he st rat egy also has
lim it ed gains and is t herefore ideal when m arkets are m oderately bullish.
The pa yoff cha r t ( Bull Ca ll Sprea d)
+ =
Buy lower st r ike Call Sell OTM Call Bull Call Spread
44
STRATEGY 1 6 . BULL PUT SPREAD
STRATEGY: SELL PUT OPTI ON, BUY PUT OPTI
ON
A bull put spread can be profit able when t he st ock / index is eit her range bound or r ising. The
concept is t o prot ect t he downside of a Put sold by buying a lower st rike Put , which act s as an
insurance for t he Put sold. The lower st r ike Put purchased is furt her OTM t han t he higher st r ike Put
sold ensuring t hat t he invest or receives a net credit , because t he Put purchased ( furt her OTM) is
cheaper t han t he Put sold. This st rat egy is equivalent t o t he Bull Call Spread but is done to earn a
net credit ( prem ium ) and collect an incom e.
I f the stock / index r ises, both Puts expire worthless and the investor can retain the Prem ium . I
f t he st ock / index falls, t hen t he invest or’s breakeven is t he higher st r ike less t he net credit
received. Provided t he st ock rem ains above t hat level, t he invest or m akes a profit . Ot herwise he
could m ake a loss. The m axim um loss is t he difference in st r ikes less t he net credit received. This st
rat egy should be adopt ed when t he st ock / index t rend is upward or range bound. Let us underst and
t his wit h an exam ple.
Ex a m ple:
W hen t o Use: When t he
Minvestor is a Nmiftode
r . XYZ sells r a topt
y Put e lyion w it h a st r ik e price o f Rs. 4 0 0 0 at a prem ium of Rs. 2 1 . 4 5 and b
bullish.
Risk : Lim it ed. Maxim um loss occurs where t he underlying falls t o t he level of the lower strike or below
Re w a r d: Lim it ed t o t he net prem ium credit . Maxim um profit occurs where underlying r ises t o t he level of t he higher
Break even: Strike Price of Short Put - Net Prem ium

Received
St r a t e gy : Se ll a Put + Buy a Put
Nift y I ndex Current Value 4191 . 10
Sell Put Option Strike Price ( Rs.) 4000
Mr. XYZ Receives Prem ium ( Rs.) 21 . 45
Mr. XYZ Pays Prem ium ( Rs.) 3.00
Net Prem ium 18 . 45

Received ( Rs.)

( Rs.)
45
On ex piry N ift y N et Payoff from Put N et Payoff from N et Payoff

Closes a t Buy ( Rs.) Put Sold ( Rs.) ( Rs.)
3500 . 00 297.00 - 478.55 - 181.55
3600 . 00 197.00 - 378.55 - 181.55
3700 . 00 97 . 00 - 278.55 - 181.55
3800 . 00 - 3.00 - 178.55 - 181.55
3900 . 00 - 3.00 - 78.55 - 81.55
3981 . 55 - 3.00 3.00 0.00
4000 . 00 - 3.00 21 . 45 18 . 45
4100 . 00 - 3.00 21 . 45 18 . 45
4200 . 00 - 3.00 21 . 45 18 . 45
4300 . 00 - 3.00 21 . 45 18 . 45
4400 . 00 - 3.00 21 . 45 18 . 45
4500 . 00 - 3. 00 21 . 45 18 . 45
4600 . 00 - 3.00 21 . 45 18 . 45
4700 . 00 - 3.00 21 . 45 18 . 45
4800 . 00 - 3.00 21 . 45 18 . 45
The st rat egy earns a net incom e for t he invest or as well as lim it s t he downside risk of a Put sold.
The pa yoff cha r t ( Bull Put Spr e a d)
+ =
Buy lower st r ike Put Sell OTM Put Bull Put Spread
46
STRATEGY 1 7 : BEAR CALL SPREAD
STRATEGY: SELL I TM CALL, BUY OTM CALL
The Bear Call Spread st rat egy can be adopt ed when t he invest or feels t hat t he st ock / index is either
range bound or falling. The concept is to protect the downside of a Call Sold by buying a Call of a higher
strike price to insure the Call sold. I n t his st rat egy t he investor receives a net credit because t he Call
he buys is of a higher st r ike price t han t he Call sold. The st rat egy requires t he invest or t o buy
out - of- t he- money ( OTM) call opt ions while sim ultaneously selling in- t he- money ( I TM) call opt ions
on t he sam e underlying st ock index. This st rat egy can also be done wit h bot h OTM calls wit h t he
Call purchased being higher OTM st r ike t han t he Call sold. I f t he st ock / index falls bot h Calls will
expire wort hless and t he invest or can ret ain t he net credit . I f t he st ock / index r ises t hen t he
breakeven is t he lower st r ike plus t he net credit . Provided t he st ock rem ains below t hat level, t he
invest or m akes a profit . Ot herwise he could m ake a loss. The m axim um loss is t he difference
in st r ikes less t he net credit received. Let us understand this with an exam ple.
Exam
W henple
t o :use : When t he investor is m i ldly be a r ish on m arket .
Mr. XYZ
Risk: Limisit bearish on N ift y.betHe
ed t o t he difference sells
ween t hean
two I stTM callm inus
r ikes opt the
ion net
w itprem
h stium
r ik. e pr ice of Rs. 2 6 0 0 at a prem iu
Rew ard : Lim it ed t o t he net prem ium received for t he posit ion i. e., prem ium received for t he short call m inus
Break Even Point : St r a t e gy : Se ll a Ca ll w it h a low e r st r ik e ( I TM )

Lower Strike + Net credit
+ Bu y a Ca ll w it h a h igh e r st r ik e ( OTM )
Sell I TM Call Strike Price ( Rs.) 2600

Option
Mr. XYZ Prem ium ( Rs.) 154
receives
Buy OTM Call Strike Price ( Rs.) 2800
Option
Mr. XYZ pays Prem ium ( Rs.) 49
Net prem ium received ( 105

Rs.)
47
On e x pir y
N ift y Closes N et Payoff from Call N et Payoff from Call N et Payoff
at Sold ( Rs.) bought ( Rs.) ( Rs.)
2100 154 - 49 105
2200 154 - 49 105
2300 154 - 49 105
2400 154 - 49 105
2500 154 - 49 105
2600 154 - 49 105
2700 54 - 49 5
2705 49 - 49 0
2800 - 46 - 49 -95
2900 - 146 51 -95
3000 - 246 151 -95
3100 - 346 251 -95
3200 - 446 351 -95
3300 - 546 451 -95
The st rat egy earns a net incom e for t he invest or as well as lim it s t he downside risk of a Call sold.
The pa yoff cha r t ( Bea r Ca ll Sprea d)
+ =
Sell lower st r ike Call Buy OTM Call Bear Call Spread
48
STRATEGY 1 8 : BEAR PUT SPREAD STRATEGY:
BUY PUT, SELL PUT
This st rategy requires the investor to buy an in- t he- m oney ( higher) put opt ion and sell an out - of- t
he- m oney ( lower) put opt ion on t he sam e st ock wit h t he sam e expirat ion dat e. This st rat egy creat
es a net debit for t he invest or. The net effect of t he st rat egy is t o bring down t he cost and raise t he
breakeven on buying a Put ( Long Put ). The st rat egy needs a Bearish outlook since the investor will m ake
m oney only when the stoc k price / index falls. The bought Put s will have t he effect of capping t he
invest or’s downside. While t he Put s sold will reduce t he invest ors cost s, r isk and raise breakeven
point ( from Put exercise point of view) . I f t he st ock price closes below t he out - of- t he- m oney ( lower)
put opt ion st r ike price on t he expirat ion dat e, t hen t he invest or reaches m axim um profit s. I f t he st ock
price increases above t he in- t he- m oney ( higher) put opt ion st r ike price at t he expirat ion dat e, t hen t he
investor has a m axim um loss pot ent ial of t he net debit .
Ex a m ple:
W hen t o use: When you are m ode r a t e ly be a r ish on m arket direct ion
N ift y is present ly a t 2 6 9 4 . M r . XYZ ex pect s N ift y t o fa ll. H e buys one N ift y I TM Put w it h a st r i
Risk:Lim it edt ot henet am ount paid for t he spread.
i. e. the prem iumpaid for
long posit ion less prem ium received for short positio n.
Re w a r d:Lim it edt o difference bet ween t he

st r ike prices m inus the
St r a t e gy : BUY A PUT w it h a highe r st r ik e

( I TM ) + SELL A PUT w it h a low er st r ik e ( OTM )
t he t wo net Nifty index Current Value 2694

for t he
Buy I TM Put Option Strike Price ( Rs.) 2800
prem ium paid
position.
Sell OTM Put Option Strike Price ( Rs.) 2600
Break Even Point : St r ike PriceofLongPut-Net
Prem ium Paid Mr. XYZ receives Prem ium ( Rs.) 52
Net Prem ium Paid 80

( Rs.)
( Rs.)
49
The payo ff schedule
On ex piry N ift y N et Payoff from N et Payoff from N e t pa

closes a t Put Buy ( Rs.) Put Sold ( Rs.) yoff (
Rs.)
2200 468 - 348 120
2300 368 - 248 120
2400 268 - 148 120
2500 168 - 48 120
2600 68 52 120
2720 - 52 52 0
2700 - 32 52 20
2800 - 132 52 -80
2900 - 132 52 -80
3000 - 132 52 -80
3100 - 132 52 -80
The Bear Put Spread St rat egy has raised t he breakeven point ( if only t he Rs. 2800 st rike price Put was
purchased t he breakeven point would have been Rs. 2668 ) , reduced t he cost of the trade ( if only t he
Rs. 2800 st rike price Put was purchased t he cost of t he t rade would have been Rs. 132) , reduced t he loss
on t he t rade ( if only t he Rs. 2800 st rike price Put was purchased t he loss would have been Rs. 132 i. e. t
he prem ium of t he Put purchased) . How ev er, the strategy also has lim ited gains and is
therefore ideal when m arkets are m oderat ely bearish.
The pa yoff cha r t ( Be a r Put Spr e a d)
+ =
Sell lower strike Put Buy Put Bear Put Spread
50
STRATEGY 1 9 : LONG CALL BUTTERFLY: SELL 2
ATM CALL OPTI ON S, BUY 1 I TM CALL
OPTI ON AND BUY 1 OTM CALL OPTI ON.
A Long Call Butterfly is to be adopt ed when t he invest or is expect ing very lit t le m ovem ent in t he
st ock price / index. The invest or is looking t o gain from low volat ilit y at a low cost . The st rat egy
offers a good r isk / reward rat io, t oget her wit h low cost . A long but t erfly is sim ilar t o a Short St
raddle except your losses are lim it ed. The st rat egy can be done by selling 2 ATM Calls, buying 1 I TM
Call, and buying 1 OTM Call options ( there should be equidistance bet ween t he st r ike prices) . The
result is posit ive incase t he st ock / index rem ains range bound. The m axim um reward in t his st rat
egy is however rest r ict ed and t akes place when t he st ock / index is at t he m iddle st r ike at expirat
ion. The m axim um losses are also lim it ed. Let us see an exam ple t o underst and t he st rat egy.
W hen t o use : When t he investor is ne ut r a l on m a rk et direct ion and bearish on vola t ilit y .
Ex a m ple:
Risk Net debit paid.
N ift y is a t 3 2 0 0 . M r . XYZ ex pect s very lit t le m ovem ent in N ift y. H
Rew ard Difference

bet ween adj acent st r ikes m inus net debit
Brea k Even Point :

STRATEGY : SELL 2 ATM CALL, BUY 1 I TM CALL OPTI ON
Upper Breakeven Point = St r ike Price of Higher Strike Long Call - Net Prem ium Paid
AN D BUY 1 OTM CALL OPTI ON
Nifty
Lower Breakeven Point = St r ike Price index St r ike Long Call + Net
of Lower Current Value
Prem ium Paid 3200
Sell 2 ATM Call Option Strike Price ( Rs.) 3200
Mr. XYZ receives Prem ium ( Rs.) 195.80
Buy 1 I TM Call Opt ion Strike Price ( Rs.) 3100
Buy 1 OTM Call Opt ion Strike Price ( Rs.) 3300

Rs.)

Lower) ( Rs.)
51
The Payoff Schedule
On e x pir y N et Payoff from N et Payoff from 1 N et Payoff from 1

N ift y 2 ATM Ca lls Sold I TM Ca ll pur cha se d OTM Ca ll pur cha se d N et Payoff
Closes a t ( Rs.) ( Rs.) ( Rs.) ( Rs.)
2700 . 00 195.80 - 141.55 - 64 - 9 .7 5
2800 . 00 195.80 - 141.55 - 64 - 9 .7 5
2900 . 00 195.80 - 141.55 - 64 - 9 .7 5
3000 . 00 195.80 - 141.55 - 64 - 9 .7 5
3100 . 00 195.80 - 141.55 - 64 - 9 .7 5
3109 . 75 195.80 - 131.80 - 64 0
3200 . 00 195.80 - 41.55 - 64 90.2
5
3290 . 25 15 . 30 48 . 70 - 64 0
3300 . 00 - 4.20 58 . 45 - 64 - 9 .7 5
3400 . 00 - 204.20 158.45 36 - 9 .7 5
3500 . 00 - 404.20 258.45 136 - 9 .7 5
3600 . 00 - 604.20 358.45 236 - 9 .7 5
3700 . 00 - 804.20 458.45 336 - 9 .7 5
3800 . 00 - 1004. 20 558.45 436 - 9 .7 5
3900. 00 - 1204. 20 658.45 536 - 9 .7 5
The pa yoff cha r t ( Long Ca ll But t e r f ly)
+ + =
Buy Lower Buy higher
Sell m iddle Sell m iddle Long Call
St r ike Call strike call strike call strike call Butterfly
52
STRATEGY 2 0 : SHORT CALL BUTTERFLY:
BUY 2 ATM CALL OPTI ONS, SELL 1 I TM CALL
OPTI ON AND SELL 1 OTM CALL OPTI ON.
A Short Call But t erfly is a st rat egy for volat ile m arket s. I t is t he opposit e of Long Call But t
erfly, which is a range bound st rat egy. The Short Call But t erfly can be const ruct ed by Selling one lower
striking in- t he- m oney Call, buying t wo at- t he- m oney Calls and selling another higher st r ike out - of-
t he- m oney Call, giving the investor a net credit ( t herefore it is an incom e st rat egy) . There should be
equal dist ance bet ween each st r ike. The result ing position will be profitable in case there is a big m ove in
the stock / index. The m axim um r isk occurs if t he st ock / index is at t he m iddle st r ike at expirat
ion. The maxim um profit occurs if t he st ock finishes on eit her side of t he upper and lower st r ike
prices at expirat ion. However, t his st rat egy offers very sm all ret urns when com pared t o st raddles, st
rangles wit h only slightly less r isk. Let us understand this with an exam ple.
W hen t o use : You are Ex a m ple:

neut ra l on m a rk et
direct ion and bullish on N ift y is at 3 2 0 0 . Mr. XYZ expect s large volat ilit y in t he
volat ilit y . Neutral m eans N ift y ir respect ive of w hich direct ion t he m ovem ent is,
t hat you expect t he m arket t o upw ards or dow nw ards. M r . XYZ buys 2 ATM N ift y Call
m ove in eit her direct ion - Options w ith a strike price of Rs. 3 2 0 0 a t a prem ium of
i. e. bullish and bearish. Rs. 9 7 . 9 0 ea ch, sells 1 I TM N ift y Ca ll Opt ion w it h a st r ik e
price of Rs. 3 1 0 0 at a prem ium of Rs. 1 4 1 . 5 5 and sells 1
Risk Lim it ed to t he net OTM N ift y Call Opt ion w it h a st r ike price of Rs. 3 3 0 0 at
a
difference bet ween t he prem ium of Rs. 6 4 . The N et Credit is Rs. 9 . 7 5 .
adj acent st r ikes ( Rs. 100 in
t his exam ple) less t he STRATEGY
prem ium received for t he
position. BUY 2 ATM CALL OPTI ON S, SELL 1 I TM CALL OPTI ON AN D
SELL 1 OTM CALL OPTI ON .
Rew ard Lim it ed t o t he net
prem ium received for t he Nifty index Current Market Price 3200
option spread.
Buy 2 ATM Call Option Strike Price ( Rs.) 3200
Brea k Even Point : Mr. XYZ pays Prem ium ( Rs.) 195.80
Sells 1 I TM Call Option Strike Price ( Rs.) 3100
Upper Breakeven Point =
Strike Price of Highest Strike Mr. XYZ receives Prem ium ( Rs.) 141.55
Short Call - Net Prem ium Sells 1 OTM Call Option Strike Price ( Rs.) 3300
Received
Mr. XYZ receives Prem ium ( Rs.) 64
Lower Breakeven Point = Break Even Point 3290 . 25
Strike Price of Lowest Strike Short
Call + Net Prem ium ( Upper) ( Rs.)
Received Break Even Point
( Lower) ( Rs.) 3109 . 75
53
The Payoff Schedule
On e x pir y N et Payoff from N et Payoff N et Payoff from N et Payoff

N ift y Closes 2 ATM Ca lls from 1 I TM 1 OTM Ca ll sold ( Rs.)
at Pur cha se d ( Rs.) Ca ll sold ( Rs.) ( Rs.)
2700 . 00 - 195.80 141.55 64 . 00 9 .7 5

2800 . 00 - 195.80 141.55 64 . 00 9 .7 5
2900 . 00 - 195.80 141.55 64 . 00 9 .7 5
3000 . 00 - 195.80 141.55 64 . 00 9 .7 5
3100 . 00 - 195.80 141.55 64 . 00 9 .7 5
3109 . 75 - 195.80 131.80 64 . 00 0
3200 . 00 - 195.80 41. 5 5 64 . 00 - 9 0 .2
5
3290 . 25 - 15.30 - 48.70 64 . 00 0
3300 . 00 4.20 - 58.45 64 . 00 9 .7 5
3400 . 00 204.20 - 158.45 - 36.00 9 .7 5
3500 . 00 404.20 - 258.45 - 136.00 9 .7 5
3600 . 00 604.20 - 358.45 - 236.00 9 .7 5
3700 . 00 804.20 - 458.45 - 336.00 9 .7 5
3800 . 00 1004 . 20 - 558.45 - 436. 00 9 .7 5
3900 . 00 1204 . 20 - 658.45 - 536.00 9 .7 5
The pa yoff cha r t ( Shor t Ca ll But t e r f ly)
+ + =
Sell Lower Buy m iddle Buy m iddle Sell higher Short Call
St r ike Call strike call strike call strike call Butterfly
54
STRATEGY 2 1 : LON G CALL CON DOR: BUY 1 I TM
CALL OPTI ON ( LOW ER STRI KE) , SELL 1 I TM CALL
OPTI ON ( LOW ER M I DDLE) , SELL 1 OTM CALL
OPTI ON ( H I GH ER M I DDLE) , BUY 1 OTM CALL
OPTI ON ( H I GH ER STRI KE)
A Long Call Condor is very sim ilar t o a long but t erfly st rat egy. The difference is t hat t he t wo m iddle
sold opt ions have different st rikes. The profit able area of t he pay off profile is wider than that of the
Long Butterfly ( see payoff diagram ) .
The st rat egy is suitable in a range bound m arket. The Long Call Condor involves buying 1 I TM
Call ( lower st r ike) , selling 1 I TM Call ( lower m iddle) , selling 1 OTM call ( higher m iddle) and buying
1 OTM Call ( higher st r ike) . The long opt ions at t he out side st r ikes ensure t hat t he r isk is capped
on bot h t he sides. The result ing posit ion is profit able if t he st ock / index rem ains range bound and
shows very lit t le volat ilit y. The m axim um profit s occur if t he st ock finishes bet ween t he m iddle st r ike
prices at expirat ion. Let us underst and t his wit h an exam ple.
W hen t o Use: When an

Ex a m ple: N ift y is at 3 6 0 0 . M r . XYZ e x pe ct s lit t le vola t
invest or believes t hat t he
ilit y in t he N ift y a nd ex pect s t he m a rk et t o rem a in
underlying m arket will t
rangebound. Mr. XYZ buys 1 I TM N ift y Call Opt ions w it h a
rade in a range with low volat
st r ike price of Rs. 3 4 0 0 at a prem ium of Rs. 4 1 . 2 5 , sells 1
ilit y unt il t he opt ions expire.
I TM N ift y Call Opt ion w it h a st r ike price of Rs. 3 5 0 0 at a
prem ium of Rs. 2 6 , sells 1 OTM N ift y Call Opt ion w it h a
Risk Lim it ed to t he st r ike price of Rs. 3 7 0 0 at a prem ium of Rs. 9 . 8 0 and buys
m inim um of t he difference bet 1 OTM N ift y Call Opt ion w it h a st r ike price of Rs. 3 8 0 0
ween t he lower st r ike call at a prem ium of Rs. 6 .0 0 . The Net debit is Rs. 1 1 .4 5 w hich
spread less t he higher call is a lso t he m a x im um possible loss.
spread less the total prem ium
paid for the condor.
STRATEGY : BUY 1 I TM CALL OPTI ON ( LOW ER
STRI KE) , SELL 1 I TM CALL OPTI ON ( LOW ER M I DDLE) ,
Rew ard Lim it ed. The m
SELL 1 OTM CALL OPTI ON ( H I GH ER M I D D LE) , BUY 1
axim um profit of a long condor
OTM CALL OPTI ON ( H I GH ER STRI KE)
will be realized when t he st
ock is t rading bet ween t he t
wo m iddle st r ike prices.
Buy 1 I TM Call Opt ion Strike Price ( Rs.) 3400
Brea k Even Point :
Mr. XYZ pays Prem ium ( Rs.) 41 . 25
Sell 1 I TM Call Option Strike Price ( Rs.) 3500
Upper Breakeven Point =
Highest St r ike – Net Debit Mr. XYZ receives Prem ium ( Rs.) 26 . 00
Sell 1 OTM Call Option Strike Price ( Rs.) 3700
Lower Breakeven Point = Mr. XYZ receives Prem ium ( Rs.) 9.80
Lowest Strike + Net Debit Buy 1 OTM Call Opt ion Strike Price ( Rs.) 3800
Upper) ( Rs.)

( Lower) ( Rs.)
55
The Payoff Schedule
On e x pir y N et Payoff N et Payoff N et Payoff N et Payoff Ne t Pa yoff

N ift y from 1 I TM from 1 from 1 fr om 1 OTM ( Rs.)
Closes a t Call I TM Ca ll OTM Ca ll Call
purchased sold ( Rs.) sold ( Rs.) purchased
( Rs.) ( Rs.)
3000 . 00 - 41.25 26 9.80 -6 - 1 1 .4 5
3100 . 00 - 41.25 26 9.80 -6 - 1 1 .4 5
3200 . 00 - 41.25 26 9.80 -6 - 1 1 .4 5
3300 . 00 - 41.25 26 9.80 -6 - 1 1 .4 5
3400 . 00 - 41.25 26 9.80 -6 - 1 1 .4 5
3411 . 45 - 29.80 26 9.80 -6 0 .0 0
3500 . 00 58 . 75 26 9.80 -6 88.55
3600. 0 0 158.75 - 74 9.80 -6 88.55
3700 . 00 258.75 - 174 9.80 -6 88.55
3788 . 55 347.30 - 263 - 78. 8 -6 0 .0 0
3800 . 00 358.75 - 274 - 90. 2 -6 - 1 1 .4 5
3900 . 00 458.75 - 374 - 190. 2 94 - 1 1 .4 5
4000 . 00 558.75 - 474 - 290. 2 194 - 1 1 .4 5
4100 . 00 658.75 - 574 - 390. 2 294 - 1 1 .4 5
4200. 00 758.75 - 674 - 490. 2 394 - 1 1 .4 5
Ex a m ple :
Suppose Nift y is at 3600 in June. An invest or ent ers a condor t rade by buying a Rs. 3400 st r ike
price call at a prem ium of Rs. 41. 25, sells a Rs. 3500 st r ike price call at a prem ium of Rs. 26 . sells anot
her call at a st r ike price of Rs. 3700 at a prem ium of Rs. 9 . 80 and buys a call at a st r ike price of Rs.
3800 at a prem ium of Rs. 6 . The net debit from t he t rades is Rs. 11. 45. This is also his m axim um
loss.
To further see why Rs. 11. 45 is his m axim um possible loss, let s exam ine what happens when Nifty
falls to 3200 or r ises to 3800 on expiration.
At 3200, all the options expire worthless, so the init ial debit taken of Rs. 11. 45 is t he investors m
axim um loss.
At 3800 , t he long Rs. 3400 call earns Rs. 358. 75 ( Rs. 3800 – Rs. 3400 – Rs. 41 . 25 ) . The two calls
sold result in a loss of Rs. 364. 20 ( The call with st r ike price of Rs. 3500 m akes a loss of Rs. 274 and
t he call wit h st r ike price of Rs. 3700 m akes a loss of Rs. 90. 20) . Finally, t he call purchased wit h a
st r ike price of Rs. 3800 expires wort hless result ing in a loss of Rs. 6 ( the prem ium ) . Total loss ( Rs.
358. 75 – Rs. 364. 20 – Rs. 6 ) works out t o Rs. 11 . 45 . Thus, the long condor t rader st ill suffers the m
axim um loss that is equal to the init ial debit taken when ent ering t he t rade.
56
I f instead on expiration of the contracts, Nifty is st ill at 3600, the Rs. 3400 st r ike price call purchased and
Rs. 3700 st r ike price call sold earns m oney while t he Rs. 3500 st r ike price call sold and Rs. 380 0
strike price call sold end in losses.
The Rs. 3400 st r ike price call purchased earns Rs. 158 . 75 ( Rs. 200 – Rs. 41. 25) . The Rs. 3700 st r ike
price call sold earns t he prem ium of Rs. 9 . 80 since it expires wort hless and does not get exercised. The
Rs. 3500 st r ike price call sold ends up with a loss of Rs. 74 as the call get s exercised and t he Rs. 3800
st r ike price call purchased will expire wort hless result ing in a loss of Rs. 6 . 00 ( t he prem ium ) . The
total gain com es to Rs. 88. 55 which is also t he m axim um ga in the investor can m ake with this st
rategy.
The m axim um profit for the condor t rade m ay be low in relation to other t rading st rategies but it
has a com parat ively wider profit zone. I n t his exam ple, m axim um profit is achieved if t he
underlying st ock price at expiration is anywhere between Rs. 3500 and Rs. 3700.
The pa yoff cha r t ( Long Ca ll Condor )
+ + =
Buy Lower Sell m iddle Sell m iddle Buy higher Long Call
St r ike Call strike call strike call strike call Condor
57
STRATEGY 2 2 : SHORT CALL CON DOR : SHORT 1
I TM CALL OPTI ON ( LOW ER STRI KE) , LON G 1 I TM
CALL OPTI ON ( LOW ER MI DDLE) , LON G 1 OTM CALL
OPTI ON ( HI GHER MI DDLE) , SHORT 1 OTM CALL
OPTI ON ( HI GHER STRI KE) .
A Short Call Condor is very sim ilar t o a short but t erfly st rat egy. The difference is t hat t he two m
iddle bought opt ions have different strikes. The st rat egy is suit able in a volat ile m arket . The
Short Call Condor involves selling 1 I TM Call ( lower st r ike) , buying 1 I TM Call ( lower m iddle) ,
buying 1 OTM call ( higher m iddle) and selling 1 OTM Call ( higher st r ike) . The result ing posit ion is
profit able if t he st ock / index shows very high volat ilit y and t here is a big m ove in t he st ock /
index. The m axim um profit s occur if t he st ock / index finishes on either side of the upper or lower st r
ike prices at expiration. Let us underst and t his wit h an exam ple.
W he n to Use: When an
Exam ple: N ift y is at 3 6 0 0 . M r . XYZ ex pect s high volat
invest or believes t hat t he ilit y in t he N if t y a nd e x pe ct s t he m a r k e t t o br e a k ope
underlying m arket will break n significa nt ly on a ny side . M r . XYZ se lls 1 I TM N ift y Ca ll
out of a t rading range but is Opt ions w it h a st r ik e price of Rs. 3 4 0 0 at a prem ium of
not sure in which direct ion. Rs. 4 1 . 2 5 , buys 1 I TM N ift y Call Opt ion w it h a st r ik e
price of Rs. 3 5 0 0 at a prem ium of Rs. 2 6 , buys 1 OTM
N ift y Ca ll Opt ion w it h a st r ik e price of Rs. 3 7 0 0 a t a
Risk Lim it ed. The m
prem ium of Rs. 9 . 8 0 and sells 1 OTM N ift y Call Opt ion
axim um loss of a short condor w it h a st r ik e price of Rs. 3 8 0 0 at a prem ium of Rs. 6 . 0 0 .
occurs at t he cent er of t he The N et credit is of Rs. 1 1 . 4 5 .
opt ion spread.
Rew ard Lim it ed. The m

axim um pro fit of a short
condor occurs when t he
underlying stock / index is t
rading past t he upper or lower
st r ike prices.
Break Even Point :
Uppe r Br e a k e ve n
Point
= Highest Strike – Net Credit
Low e r Br e a k Eve n
Point
= Lowest Strike + Net Credit
STRATEGY : SH ORT 1 I TM CALL OPTI ON ( LOW ER
STRI KE) , LON G 1 I TM CALL OPTI ON ( LOW ER M I D D LE) ,
LON G 1 OTM CALL OPTI ON ( H I GH ER M I D D LE) , SH ORT
1 OTM CALL OPTI ON ( H I GH ER STRI KE)
Sell 1 I TM Call Option Strike Price ( Rs.) 3400
Prem ium ( Rs.) 41 . 25
58
Buy 1 I TM Call Option Strike Price ( Rs.) 3500
Prem ium ( Rs.) 26 . 00
Buy 1 OTM Call Option Strike Price ( Rs.) 3700
Prem ium ( Rs.) 9.80
Sell 1 OTM Call Option Strike Price ( Rs.) 3800
Prem ium ( Rs.) 6.00
Upper) ( Rs.)
Lower) ( Rs.)
59
The Pa yoff Sche dule :
On e x pir y N et Payoff N et Payoff from N et Payoff N et Payoff N et

N ift y from 1 I TM 1 I TM Ca ll fr om 1 OTM fr om 1 OTM Payoff
Closes a t Ca l l sold ( purchased ( Rs.) Ca ll purcha sed Ca ll sold ( Rs.)
Rs.) ( Rs.) ( Rs.)
3000 . 00 41 . 25 - 26 - 9.80 6 11.45
3100 . 00 41 . 25 - 26 - 9.80 6 11.45
3200 . 00 41 . 25 - 26 - 9.80 6 11.45
3300 . 00 41. 2 5 - 26 - 9.80 6 11.45
3400 . 00 41 . 25 - 26 - 9.80 6 11.45
3411 . 45 29 . 80 - 26 - 9.80 6 0
3500 . 00 - 58.75 - 26 - 9.80 6 - 8 8 .5 5
3600 . 00 - 158.75 74 - 9.80 6 - 8 8 .5 5
3700 . 00 - 258.75 174 - 9.80 6 - 8 8 .5 5
3788 . 55 - 347.30 263 78 . 75 6 0
3800 . 00 - 358.75 274 90 . 20 6 11.45
3900 . 00 - 458.75 374 190.20 - 94 11.45
4000 . 00 - 558.75 474 290.20 - 194 11.45
4100 . 00 - 658.75 574 390.20 - 294 11.45
4200 . 00 - 758.75 674 490.20 - 394 11.45
The pa yoff cha r t ( Shor t Ca ll Condor )
+ + =
Buy m iddle Buy m iddle Short Call
Sell Lower Sell higher
St r ike Call strike call strike call strike call Condor
60

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1. ............................................................................................... I N TROD UCTI ON TO OPTI ON S 3

STRATEGY 1 : LON G CALL................................................................................................................ 10

STRATEGY 2 : SH ORT CALL............................................................................................................. 12

STRATEGY 3 : SYN TH ETI C LON G CALL.......................................................................................14

STRATEGY 4 : LON G PUT................................................................................................................. 18

STRATEGY 5 : SH ORT PUT............................................................................................................... 20

STRATEGY 6 : COV ERED CALL......................................................................................................... 22

STRATEGY 7 : LON G COMBO.......................................................................................................... 26

STRATEGY 8 : PROTECTI VE CALL................................................................................................28

STRATEGY 9 : COV ERED PUT.......................................................................................................... 30

STRATEGY 1 0 : LON G S TRADDLE.................................................................................................32

STRATEGY 1 1 : SH ORT STRADDLE..............................................................................................34

STRATEGY 1 2 : LON G S TRAN GLE................................................................................................36

STRATEGY 1 3 . SH ORT STRAN GLE...............................................................................................38

STRATEGY 1 5 . BULL CALL SPREAD STRATEGY.........................................................................43

STRATEGY 1 6 . BULL PUT SPREAD STRATEGY.........................................................................45

STRATEGY 1 7 : BEAR CALL SPREAD STRATEGY......................................................................47

STRATEGY 1 8 : BEA R PUT SPREAD STRATEGY........................................................................49

STRATEGY 1 9 : LON G CALL BUTTERFLY......................................................................................51

STRATEGY 2 0 : SH ORT CALL BUTTERFLY..................................................................................53

STRATEGY 2 1 : LON G CALL CON D OR..........................................................................................55

STRATEGY 2 2 : SH ORT CALL CON D OR......................................................................................58

1.1 OPTI ON TERMI NOLOGY

1.2 OPTI ONS PAYOFFS

1 . 2 . 1 Payoff profile of buyer of asset: Long asset

1 . 2 . 2 Payoff profile for seller of asset: Short asset

1 . 2 . 3 Payoff profile for buyer of call options: Long call

Figure 1 . 3 Payoff for buyer of call option

1 . 2 . 4 Payoff profile for w r iter ( seller) of call options: Short call

1 . 2 . 5 Payoff profile for buyer of put options: Long put

1 . 2 . 6 Payoff profile for w r iter ( seller) of put options: Short put

Le t us now look a t som e m or e Opt ions st r a t e gie s.

Buying a call is t he m ost basic of all opt Exam

Risk: Lim it ed to the Prem ium . ( Maxim

Current Nift y index 4191 . 10

Call Option Strike Price ( Rs.) 4600

Mr. XYZ Pays Prem ium ( Rs.) 36 . 35

Break Even Point 4636 . 35

ex piry N ift y N et Pa yoff from Ca ll

St ra t egy : Se l l Ca l l Opt ion

be a r ishabout index. t he st ock/ Current Nifty index 2694

Call Option Strike Price ( Rs.) 2600

* Breakeven Point is from the point of Call Option Buyer.

St r a t e gy : Buy St ock + Buy Put Opt ion

Buy St ock Current Market Price of 4000

Strike Price ( Rs.) 3900

Break Even Point ( Rs.) ( 4143 . 80

ABC Ltd. is t rading at Rs. 4000 on 4t h July. Buy

100 shares of the Stock at Rs. 4000

Net Debit ( payout ) Stock Bought + Prem ium Paid Rs.

4000 + Rs. 143.80

Rs. 4, 14, 380/ -

4000 + Rs. 143.80 – Rs. 3900

Rs. 24, 380

Maxim um Gain Unlim it ed ( as the stock r ises)

3900 + Rs. 143.80 + Rs. 4000 – Rs. 3900

The payoff schedule

ABC Lt d. close s a t Payoff from t he N et Payoff from t N et Payoff

Buy St ock Buy Put Synthetic Long Call

Put Option Strike Price ( Rs.) 2600

Mr. XYZ Pays Prem ium ( Rs.) 52

Break Even Point ( Rs.) 2548