Option Trading Strategies

Content outline
• Introduction

• Option Trading Strategies

• Bullish Options Strategies

• Bearish Option Strategies

• Non Directional /Neutral Strategies

 Introduction
 Option trading means buying and selling Options.
A trader will go for buying a call option when he expects that price of
underlying is likely to increases
A trader will go for buying a put option when he expects that the price of
the underlying assets is likely to fall
A trader may be the option buyer (holder) or option seller(writer)
Seller is exchange the options for some consideration is known as the
premium.
A majority of stock options are American style and the can be exercised
anytime between the day they are purchased and date of official
expiration
 The principle of option trading is to maximize pay-off or minimize
potential risk.
Exercises of option contract

Call Market Price > Exercise price +Premium

Put Market price < Exercise price + Premium

The profit of the option holder is equal to the loss of the option writer
when the option is exercised.
In case the option is not exercised the loss of the option holder is
equal to the profit of the option writer.
Option Trading strategies
• Option trading Strategies are about the way a trader constructs an
option position, or combination of positions.
• The prime objective of constructing an option position to maximize
profit or minimize risk
• There are four factors for developing an option trading strategy.
• Buying an option
• Call/put
• American /European style
• Selling an Option
• Call/Put
• American/European style
• Strike Price
• Expiration Date
Categories of most popular option trading strategies
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\Financial Derivatives\option Trading strategies.docx
Bullish Option Strategies
When the option trader expects that the price of the underlying stock
will likely to move upward, then he will implement bullish strategy
in option trading.
Option trader will asses how the stock price can go and the time frame
in which the rally will occur. On this basis he will select the most
appropriate strategy as follows
BULLISH OPTION STRATEGIES
VERY BULLISH MODERATE BULLLISH MIDDLY BULLISH
 Long Call  Call Bull Spread  Covered Call
 Short Put  Put Bull Spread  Protective Put
 Long Synthetic
 Call Back Spread
Long Call
• The most bullish of options trading strategies is the simple call
buying strategy.

• Features :
• When the market moves the buyer of a call option will exercise his option
• When the market moves downward and the stock price is below the strike
price then the call holder will not exercise his option.
Short put
• In case of a put option the holder has the right to sell while the put
writer has the obligation to buy if the option isexercised.

• Features
• When the market moves upward the seller of the put option will have
maximum gain which is limited to the premium received for selling the put
option
• When the market moves downward the short put will carry unlimited
potential loss
• Continues…….