Option Trading Strategies

1. Covered Call writing: Writing a call when one holds the asset. Useful when the market is
stagnant and no upside price movement is expected, so one can earn some premium.
2. Writing a put when no downside movement is expected to earn some premium.
3. Speculation with Options: Buy a call when the market is bullish and write a put when the
market is bearish.
4. Long Straddle: Buy a call and buy a put at the same exercise price and same expiration day.
Useful when a huge price change may happen on either side.
5. Short Straddle: Write a call and write a put at the same exercise price and same expiration
date. Useful when the expected price change is range bound.
6. Long Strangle: Similar to Long Straddle, except the strike prices for call and put are different.
For a long strangle, the strike price of the call is higher than the spot price and the strike
price of the put is lower than the spot price. Useful when a huge price change may happen
on either side.
7. Short Strangle: Similar to Short Straddle, except the strike prices for call and put are
different. For a short strangle, the strike price of the call is higher than the spot price and the
strike price of the put is lower than the spot price. Useful when the expected price change is
range bound.
8. Strip: Buy two calls and one put. Useful when the volatility is expected to be higher on the
up side.
9. Strap: Buy two puts and one call. Useful when the volatility is expected to be higher on the
down side.
10. Bull Spread using call: Useful when one is moderately bullish about the market. Buy a call at
X1 and write a call at a higher strike price X2. That means X2>X1. It is called a debit spread as
there is an initial cash outflow.
11. Bull Spread using put: Useful when one is moderately bullish about the market. Buy a put at
X1 and write a put at a higher strike price X2. That means X2>X1. It is called a credit spread as
there is an initial cash inflow.
12. Bear Spread using call: Useful when one is moderately bearish about the market. Buy a call
at X1 and write a call at a lower strike price X2. That means X1>X2. It is called a credit spread as
there is an initial cash inflow.
13. Bear Spread using put: Useful when one is moderately bearish about the market. Buy a put
at X1 and write a put at a higher strike price X2. That means X2>X1. It is called a debit spread
as there is an initial cash outflow.
14. Butterfly Spread using call: one long call at X1, two short calls at X2 and another long call at
X3, where X1<x2<X3. The two calls written at X2 are around the current market price. It is a
credit spread and can be thought of a combination of one bull spread and one bear spread.
15. Butterfly Spread using put: one long put at X1, two short puts at X2 and another long put at
X3, where X1<x2<X3. The two calls written at X2 are around the current market price. . It is a
debit spread and can be thought of a combination of one bull spread and one bear spread.
16. Condor Spread using call: Long calls with two outer strike prices at X1 and X4. Short calls with
two strike prices in between i.e X2 and X3, where X1<X2<X3<X4. It can be thought of as a
combination of a bull spread and bear spread. Calls with X1 and X2 make a bull spread and
calls with X3 and X4 make a bear spread.
17. Condor Spread using put: Long puts with two outer strike prices at X1 and X4. Short puts with
two strike prices in between i.e X2 and X3, where X1<X2<X3<X4. It can be thought of as a
combination of a bull spread and bear spread. puts with X1 and X2 make a bull spread and
puts with X3 and X4 make a bear spread.
18. Condor Spread using call and put: Long call at a strike prices of X1 followed by short call at X2
Long put at X3 followed by short put with a strike price of X4, where X1<X2<X3<X4 .
19. Calendar Spread: Calendar spread are formed by using two options with same strike price
but with different expiration dates. Profit is made by taking time value of money into
account. A bullish investor buys a distant call and writes a near call on the assumption that
the price of the asset would not increase enough in the near term but would exceed a
predetermined level in the longer term.
A bearish investor on the other hand buys a near call and writes a distant call on the
assumption that price would rise enough in the near term to make the near call in the
money, but will fall thereafter, making the distant call out of the money. He tries to make
money from writing the distant call which provides a greater premium than the near call
bought by him.
An investor in a calendar spread plays on the time value of option.
20. Diagonal Spread: Diagonal spreads are constructed by using different strike prices with
different expiration dates on the same underlying.
e.g. an investor can buy a September call at a strike price of ₹150 at a premium of ₹20 and
write an October call at a strike price of ₹170 at a premium of ₹25 on the assumption that
price will exceed ₹150 in September but will remain below ₹170 in October.

21. Box Spread: Buy a call and sell a put at the same strike price and same expiration date.
Again buy a call and sell a put at the same strike price and expiration date but higher than
that of the previous one. e.g. First buy a call and sell a put at a strike price of say ₹ 210 and
then buy another call and sell a put at a strike price of ₹ 225.
Exotics:

1. Forward Start Option: In forward start option the right is conferred now but it
commences some time in future.
2. Binary or Digital Option: A Binary or Digital option has only two payoffs. Either a fixed
sum of money or nothing depending upon the price of the underlying and the exercise
price.
3. Chooser Option: A Chooser option gives the right to the buyer to have either a call or put
option at time t, at a strike price of X and time to maturity T, where T>t. The buyer of the
option has to decide within time t whether he/she will have a call or put for the
remaining period of T-t.
4. Shout Option: The holder of a shout option has the right to shout any time before
maturity to ensure a minimum payoff. At maturity, he gets higher of the intrinsic value
at the time of shout or the payoff at maturity whichever is higher.
5. Exchange option: The holder of an Exchange option has the right to exchange one risky
asset for another risky asset. The holder already owns one asset and surrenders it for
acquiring another asset.
6. Gap option: A Gap option is similar to a regular option except that the quantum of
payoff is decided independent of the strike price. Payoff in a regular option is a function
of the strike price. But payoff in a Gap option is a function of another variable.
7. Pay-Later option: The premium of the pay-later option is paid later and not upfront. The
premium is adjusted with the payoffs. The premium is payable only when the option is in
the money. No premium is payable when the option is out of the money.
8. Compound option: A Compound option is an option on an option. In a compound option
the underlying is another option which gives the right to buy or sell another asset.
9. Barrier Option: The Barrier options either come to life or expire at a specific level, called
the Barrier price. In a normal option, payoff is determined by the value of the underlying
at maturity or at the time of exercise, which is compared with the strike price. But in
case of a Barrier option, there is another reference, which is called the Barrier and which
determines whether the option is dead or alive. If it is alive then payoff will be like a
normal option.
10. Knock-in and Knock-out Barrier option: A Knock-in Barrier option becomes alive when
the spot price touches the Barrier, otherwise they are worthless. On the other hand a
Knock-out Barrier becomes dead when it touches the Barrier otherwise it is alive.
11. A Knock-in option can be up and in, that means when the spot price goes above the
Barrier, it becomes alive. A Down-and-in option becomes alive when the spot price goes
below the Barrier.
12. Similarly a Knock-out option can be up-and-out when the spot price goes above the
Barrier and it becomes worthless. On the other hand a Down-and-out Knock-out option
becomes worthless when the spot price goes below the Barrier.
13. A Knock-in option becomes alive upon touching the Barrier. On the other hand a Knock-
out option becomes dead when it touches the Barrier.
14. Asian option: Asian options have payoffs which is not entirely dependent upon the price
of the underlying at maturity but also on the average price during the life of the asset.
15. Look Back option: It allows the holder of a call option to buy the asset at the minimum
price over a given past period and allows the holder of a put option to sell the asset at
the highest price over a given past period.