Index

Basic of Derivatives….2 Option….9 Terminology of option…..14 moneyness….17

Six building block of option….18 Factors affecting price of option….19
Option Greek….21 Option Indicators (Open Interest /IV/PCR)….28
Liquidity measurement….31

Trading strategy basic….32 Long Call….33 Long Put….34 Short call….35

Short Put….36

Advance Strategy….37 Bull call spread….38 Bear Put Spread….41

Bull Put Spread….43 Bear Call Spread….44 Long Staddle….45
Short Straddle….46 Long Strangle….47 Short Strangle….48
Bull long Call Ration….49 Bear Long Call Ration….50 Long call Butterfly….51
Short Butterfly….53 Long Condor….54 Short Condor….55
Short Iron Butterfly….56 Long Iron Butterfly….57 Iron Condor short….58
Long Iron Condor….59 Calendar Spread….60
Combination of Future & Option Strategy….61
Covered call ….62 Married put….63 Other strategies 64

How To choose strategies….65

1
Basics of Derivatives

Derivative is a contract or a product whose value is derived from value of some

other asset known as underlying. Derivatives are based on wide range of
underlying assets. These include:
Equity /Index/currency and commodities
Derivatives includes Future and potion

Derivatives Market – History

In 1865, the( Chicago Board of Trade )CBOT listed the first ‘exchange
traded” derivative contract in the US. These contracts were called ‘futures
contracts”.
Indian Derivatives Market
The exchange traded derivatives started in India in June 2000 with SEBI
permitting BSE and NSE to introduce equity derivative segment. To begin
with, SEBI approved trading in index futures contracts based on CNX Nifty
and BSE Sensex, which commenced trading in June 2000. Later, trading in
Index options commenced in June 2001 and trading in options on
individual stocks commenced in July 2001.

2
Forwards
It is a contractual agreement between two parties to buy/sell an
underlying asset at a certain future date for a particular price that
is pre-decided on the date of contract

Futures A futures contract is similar to a forward, except that the

deal is made through an organized and regulated exchange rather
than being negotiated directly between two parties. Indeed, we may
say futures are exchange traded forward contracts.

Future Terminology

Spot Price :- The price at which an asset trades in the market.

Future price:- The price at which futures contracts trades in the
Future market
Contract Cycle :- The period over which a contract trade e.g.
One month, two month and three month expiry cycles which
Expiry on the last Thursday of the month .

3
Future Terminology

Expiry date :- This is the last day on which the contract will be traded .
Contract size :- The amount of asset that has to be delivered under one Contract
Initial margin :- To save the market from liquidity crisis arising out of defaults
Minimum margin is mandatory as stipulated by stock exchange.
Margin to settle mark to market :- in the futures market , at the end of each
Trading day , the margin account is adjusted to reflect the investors gain or
Loss depending upon the futures closing price . This is called mark to market
Discount :- if the future price is below the spot price , the difference is
Known as discount .
Premium :- if the future price is above the spot price the difference is
Known as premium
Beta :- it is a measure of the volatility or systematic risk , of a security or
Portfolio comparison to the market as a whole . High beta stock react more
Sharply than market during rise or fall.
Final Settlement price :- Final settlement price in the future is the closing
Price on the last trading day of contract . (currently its last half an hour
Weighted average value ) The option writers pull the market in the last
30 minutes to eat the premium because if the way the final settlement
Price calculated .

4
 Why to talk Derivatives

High Leverage : Derivative contracts enables the investor

to take an exposure to the full value of underlying shares
for a fraction of its value in the form of margin.

High Liquidity : Derivative contracts offers very high

liquidity compared to cash market.

Hedge : Hedge against any unforeseen event and

leverage.

Market Participant

1 Hedgers
2 Speculators/Traders
Arbitrageurs

5
Understanding Profit and Loss Graph

P
R
O
F
I
T

0 X Axis
Price

L
O
S
S

6
 PAY OFF GRAPH OF BUYER OF FUTURE
Buyer of the future has bullish view But with unlimited Loss OR
Unlimited Profit
PROFIT

+100

7900 8000 8100

0

-100

LOSS

7
 PAY OFF GRAPH OF Seller OF FUTURE
Seller of the future has bearish view But with unlimited Loss OR
Unlimited Profit

PROFIT

+100

7900 8000 8100

0

-100

LOSS

8
 OPTIONS

CRM:- Capital Risk Management is the No.1 reason for using options strategies

CBOE :- Chicago Board of Options Exchange have gives the names to standard
32 Strategies for option , The Traders have their own combination of standard strategies
Other than named by CBOE are know as HYBRID strategies.

Call Options (Buying Rights ):- call option gives the holder the right but not the
Obligation to buy an asset by certain date for certain price call buyer buy call
By paying premium to the seller

Call Seller or writer :- He receives the premium given by call buyer and hence he has
to perform obligation of selling the assets to the call buyers.

Put options (selling rights ):- A put option gives the holder the right but not the obligation
To sell an asset by a certain price , put buyer one who buys a put option by giving
Premium to put sellers .
Put seller or writer:- He receives the premium from option buyer & he has to perform
The obligation of buying the assets from option buyers

9
 Options are Rights

Buying Rights (calls)

Buying of buying rights Selling (writing ) of

(Calls) Buying rights (Calls)
Strongly Bullish Must not be Bullish

Direction Direction

Only right & no Obligation Only Obligation and no rights

Losses value every day hence Losses value every day hence
Negatives positive
Pays Premium Receive Premium

Limited Loss Unlimited loss

Unlimited Profit Limited profit

10
 Options are Rights

Selling rights (Puts)

Buying of selling rights Selling (writing ) of

(puts) Selling rights (Puts)
Strongly Strong Bearish Must not be Bearish

Direction Direction

Only right & no Obligation Only Obligation and no rights

Losses value every day hence Losses value every day hence
Negatives positive
Pays Premium Receive Premium

Limited Loss Unlimited loss

Unlimited Profit Limited profit

11
• Think the strike of the Call as the Buying price of the stock for for call Buyers
And the selling price of the stock for call sellers .
• Think the strike of the Put as the Selling price of the stock for put Buyer
And the Buying price of the stock for put seller .

Working for Call

cmp
Call Strike
Premium
Profit/Loss
For Call Buyer Unlimited Profit Limited Loss Breakeven Point

For CALL Seller Unlimited loss Limited Profit Breakeven Point

12
 Working for Put

cmp
PUT Strike
Premium
Profit/Loss
For PUT Buyer Unlimited Profit Limited Loss Breakeven Point

For PUT Seller Unlimited loss Limited Profit Breakeven Point

13
 Terminology of Option

Strike Price :- The price specified in the option contract is known as the
Strike price or the exercise price . This difference that spot price & future
Price . The strike price are specified at the intervals . While Choosing
Strike , you must calculate minimum move required to generate BEP
( Break Even Point ) and minimum profit

Exercise Price : Is the price at which the contracts is settled even by making
Full payment

Expiration Date :- Last date when the option expires

America Option :- American option are exercised at any time up to the

Expiration date

European Option :- European Option are exercised only on the expiration

Date itself.
14
 Terminology of Option

The option Premium :- It is the Price of option, The option premium

Can be broken down into two components- intrinsic value & time value

The intrinsic value :- for in-the-money option is the absolute value of the
Difference between the current price of the underlying and the strike
Price of the option

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 time
Value . An option that is OTM or ATM has only Time value Usually.
1) Maximum time value exist when the option is ATM
2) The longer the time to expiration, the greater is an options time
value, all else equal . At expiration , an option should no time value.

15
 Terminology of Option

Moneyness :- Money means Current market price

At The Money Option (ATM) :- for call or put when the strike is at the level or
Near CMP then strike is know as ATM

In-the-money option (ITM):- profitable strike

For call When strike is lower then CMP , the strike is called as ITM and when
Much lower, then it called Deep ITM
For Put When strike is higher than CMP , The strike called as ITM and when
Much higher then it is called Deem ITM on profitable strike

Out of the money option (OTM) :- non profitable strike

For Call When strike is higher than CMP , the strike is called as OTM
And when much higher , then it is called Deep OTM
For Put When strike is lower than CMP the Strike is called as OTM and
When much lower, then it is called Deep OTM

16
 Moneyness

Deep far ITM or OTM are illiquid , you may not find buyers or he will ask low
Price. Study IV of ATM call and put is higher commoner are bullish but we
Are bearish . Highest time value at ATM

Intrinsic Premium call Strike Put Premium Intrinsic Time

Time Value Spot/Future Value Value
Value Price
Deep Deep
ITM ITM
ITM ITM

ATM ATM

OTM OTM

Deep Deep
OTM OTM

17
 Six Building Blocks of option

Stock Call Put

Long

Short

18
 Factors affecting price option
Use option calculator on Trade Tiger or Black and Scholes Calculator

Factors Call Put

Current Stock Price:- Increase in value of stock Increase in value of stock

(Changing) price results incise in Price result in decrease in
premium Premium of put option

Expiration Time :- Far off the expiration time Far off the expiration time
(Changing) higher the premium of higher the premium of the
call option put option

Price Volatility :- Higher the price volatility Higher the price volatility
(Changing) of the underlying stock of the underlying stock
of the call option , higher of the put option , higher
would be the premium would be the premium

Interest Rate :- Higher the interest rates, Higher the intrest rate,
higher the call option higher the put option
premium premium
19
 Factors affecting price option

Factors Call Put

Strike Price As the Strike Price goes up As the Strike Price goes up
(Changing) the chances of the option the chances of the put option
becoming profitable to yielding profit improve and
exercise diminish and as accordingly the premium on
such the premium on the the put option appreciates.
option declines .

Cash Dividend Ex-dividend rate of the stock Ex-dividend rate of the stock
is usually lower than the cum it usually lower than the cum
dividend rate by an amount dividend rate by an amount
approximately equal to the approximately equal to the
cash dividend per share . Cash dividend per share. the
The fall in the value of the fall in the value of the stock
stock decreases the value incises the value of the put
of the call option. Option.

20
 Option Greek
Use option calculator Black & scholes or Trade Tiger

1) Delta :- measure the change in the option price against the change in the
Price of the underlying, The delta is between 0 and +1 for calls and between
0 to -1 for puts (thus a call option with delta of 0.5 will increase in price of
Call by Rs.50 for every rise of 100 in the underlying ). For ATM 50% (40 to 60%)
For Deep ITM 80% to 90% , and for Deep OTM it is 10 % to 20% . One can fix
The target in option accordingly . ( you can buy future and buy 2 puts
Totaling to 1 delta )
Delta= change in option Price /change in stock price)

2)Theta:- As time passes options will lose time value and the theta indicates
The extent of loss in option price , this is called Time decay . And therefore
Have a negative theta . Note that the decay of option is nonlinear in that the
Rate of decay will accelerate as the option approaches expiry, one can fix
The holding period of options
21
 Option Greek

3)Vega :- measures effect of the change in implied volatility on an

Options price . Both calls & puts will tend to increase in value as
Volatility increases , as this rises the probability ATM option will
Move ITM . Out-of-The money option are not having intrinsic value
They are 100% governed by vega . Vega measures how much will
Be the rise in option price if the IV is increased by 1% e.g. TCS
Was quoting ar Rs. 2650/- Its 2650 call was quiting Rs 81 IV is 27.55%
Its vega is 2.5665. Now say that price has not move a penny but due to
Coming annual result IV has increased to30% then option price will be 87
(increase in IV 30-27.55=2.45% now iv increase 2.45 vega
2.5665=6.29 CMP 81+6.29=87

4)Gamma :- measure change in delta against the change in the underlying .

Gamma is always positive for buyers (e.g. if a call option has a delta of 0.5
And gamma of 0.05 this indicates that the new delta will be 0.55 if the
Underling price moves up by one full point and 0.45 if the underlying price
Moves down by one full point) Thuse underlying the call option price will
Incrise by 55 and put option price will fall by Rs 45 22
 Option Greek
Importance wise option Greek
!) Delta (Direction)
2) Vega (volatility)
3) Theta (Time)
4) Gamma

Time value Decay Curve

The Direction represented by Delta is more important than Theta

During first week
Time Value

Time decay will be highest in last week, All else

Equal sell options in first week or last week
Far month options has highest time value so
Do Calendar spread by buying near month and
Selling far month, on expiry of near month you
Can take profit of time value.

Expiry 23
 Working for option Greek

Strike
Premium
Delta
Calls Theta
Vega

Strike
Premium
Delta
Puts Theta
Vega

24
 Premium are based on Mathematical formula i.e. Black & scholes or binary
How do Greeks affect the option Price? + means beneficial – means negative

Greek Greeks Long call Short all Long put Short put
(+c) (-c) (+p) (-p)

(+) Delta means profit on rise Delta (+) (-) (-) (+)
of price & Loss on fall

(+) Gamma means profit Gamma (+) (-) (+) (-)

When there is movement

(-) Theta means looses Theta (-) (+) (-) (+)

Value every passing day

(+) vega means profit Vega (+) (-) (+) (-)

When IV increases and
Loss when IV decreases
25
 How Do Greeks affect the ITM, ATM,OTM Options.
Position DELTA- if GAMMA- if THETA – if VEGA-if
Underline is Underline is Underline is Underline is

Above strike

Above strike

Above strike
Above strike
Below strike

Below strike

Below strike

Below strike
At strike

At strike

At strike

At strike
+Call OT ATM ITM ++ +++ ++ - -- - + ++ +
M ++ +++
+
-Call - -- --- -- --- -- + ++ + - -- -

+Put ITM ATM OTM ++ +++ ++ - -- - + ++ +

--- -- -

-Put +++ ++ + -- --- -- + ++ + - -- -

26
 How to choose strikes
NIFTY CMP 8370 Long put Nifty 28 july-2026
CMP 8370 on 5 July 2016 Expecting fall of 8100 in 23 days = fall of 2 70 pts
(static Example , changes in Delta , Gamma, Vega & exercise scenario is not considered )
Strike Option Int Time Qty Invest Delta Theta Delta Theata Net
Price Val Value Effect Effect gain
Gain Loss

8400 95 30 65 75 7125 0.47*7 -1.24* 270* 93*24 7218

5 75 35 =-2232
35 -93 9450

8300 55 55 75 4125 0.32*7 -1.32 270* 99*24 4104

5 *75 24 =-2376
24 -99 6480

8200 29 29 75 2175 0.197* -1.12* 270* 84*24 1764

75 75 14 =-2016
14 84 3780

OTM Options are cheaper but low delta can not compensate erosion in price due to theata
27
 Option Indicators
Open Interest (get from option chain )
Long buildup:- means price are rising along with rise in open interest
Short buildup:- means price are falling along with rise in open interest
Short covering:- means prices are rising along with fall in open interest
Long unwinding:- means prices are falling along with fall in open interest
The OTM call strike where maximum O.I. concentration is placed is known as Resistant
The OTM put strike where Maximum O.I. Concentration is placed is known as Support

Price Volume Open Interest Interpretation

UP UP UP Strength in up trend
Long building
UP DOWN DOWN Weakness in uptrend
Short Covering
DOWN UP UP Strength in Down trend
Shorts Buildings
DOWN DOWN DOWN Weakness in Down trend
Long Unwinding

If O.I. increases by 30% without much rise in price, the upside breakout is very much possible
28
 Option Indicators

Implied Volatility of options

1) Volatility:- means annualized standard deviation of the price change of the future
historical data
2) Implied Volatility :- Implied volatility relates to option and it increase when the
market is bearish and decreases when the market is bullish is due to the belief
that bearish markets are more risky than bullish markets. IV is calculated by
putting 2 nearest puts and calls in black & scholes formula and revers calculation
is done . It is also know as fear gause of writers
3) I.V. of the option is based on volatility of underline
4) reduce every passing till it becomes 0 on expiry.

Particulars Low IV – Volatility Medium IV- High IV Volatility

Band Volatility Band Band
Nifty/Bank Nifty Less Than 15 15 to 20 Above 20

Stocks Less than 20 20 to 40 Above 40

IV and Volatility terms are relative to be understood when changes occurs in their
readings at extreme readings 29
 Option Indicators

Put/Call Ratio
The Put/Call Ratio is an indicator that shows put volume relative to call volume. Put
options are used to hedge against market weakness or bet on a decline. Call options are
used to hedge against market strength or bet on advance. The Put/Call Ratio is above 1
when put volume exceeds call volume and below 1 when call volume exceeds put
volume. Typically, this indicator is used to gauge market sentiment. Sentiment is deemed
excessively bearish when the Put/Call Ratio is trading at relatively high levels, and
excessively bullish when at relatively low levels. Chartist can apply moving averages and
other indicators to smooth the data and derive signals

Historically – 1.06 - 2.00 is bullish. Above 2 and below 1.06 one may expect a
sharp fall.

Calculation

Put/Call Ratio = Put Volume / Call Volume

30
 Liquidity measurement

Liquidity Measurement

Offer/Ask Price A

Bid Price B

Spread in ask price C A-B=C

Spread in % 100*C/A

Future Options

Spread in Nifty/Bank Nifty 0.05% 0.50%

Speed in stocks 0.50% 5%

Spread must be lesser than above percentage

31
Trading Strategies

32
 1) Long Call (Extreme Bullish strategy)

A long call gives you the right to buy the underlying stock
at strike price A.
Direction :- Extreme Bullish Profit
Volatility :- IV is low but likely to explode
Time Decay :- hurts position
Profit:- unlimited in rising market
Loss:- limited to the initial premium A
Break-even:- Strike price+ premium

Example :-
Nifty trading at 8323 Buy 8400 call @ 76Lot size 75
BEP :- 8400+76= 8476 / Risk:- 76*75=5700
Reward:- unlimited
IF nifty goes 8600 his gain = 8400-8600-76=134 Buy A Call
If goes down to 8300 or more down Buyer
Will not exercise his right his loss = premium paid Loss
Net loss = 76*75= 5700

33
 2) Long Put (Extreme Bear strategy)

A long put gives you the right to sell the underlying Profit
stock at strike price A.
Direction:- Extreme Bearish
Volatility;- low but likely to increase
Risk:- limited to premium paid
Reward:- unlimited in falling market below BEP
Time Decay:- Heart position
BEP:- Strike price minus premium paid

Example:-
Nifty trading at 8367 Buy 8300 put @ 38 Lot size 75
BEP :- 8300-38= 8262 / Risk:- 38*75=2850 A
Reward:- unlimited
IF nifty goes 8100 his gain = 8300-8100-38=162 Buy A Put
If goes up to 8300 or more down Buyer
Will not exercise his right his loss = premium paid
Loss
Net loss = 38*75= 2850

34
 3) Short Call (When trend bearish and IV high)

Profit
Example:- short/sell a call at A
Direction :- Bearish
Volatility :- IV is high & likely to fall
Risk:- Unlimited in rising market
Reward:- Limited to premium received
Volatility :- Hurt
Time Decay :-Helps Position A
BEP:- strike price falls from A by premium received

Loss

35
 4)Short Put (When trend is Bullish and IV high)

Profit
Example:- short/sell a Put at A
Direction :- Bullish
Volatility :- IV is high & likely to fall
Risk:- Unlimited in falling market
Reward:- Limited to premium received A
Volatility :- Hurt
Time Decay :-Helps Position
BEP:- strike price falls from A by premium received

Loss

36
Advance Derivative Strategies

37
 1)Bull Call Spread

Expenditure spread /Greek Effect Spread/Risk spread

Profit
If use call , Call spread if use put ,Put spread

Buy 1 call (Primary Leg) at A (ITM) Sell 1 call (Secondary Sell a call (OTM)
Leg) at higher strike at B(OTM) – Debit Spread B

Direction:- Moderate Bullish to bullish

AIM:- is to reduce risk and optimize profit & to earn
time value.
Volatility :- if increase jelp or hurts depend on strike
Chosen. A
BEP:- Long call strike plus net premium paid
When to use:- strong supply zone away from CMP Buy a call (ITM)
Beyond which market will not go
Monitoring:- Exit when primary leg crosses exit line
Loss
Or sold call become ITM , exit when direction
Becomes bearish , or loss comes to predefined level.

38
 Bull Call Spread Example Reliance CMP 1009

Buy 1000 CA @ 26 Sell 1040 CA @ 10, Net Premium – 26 + 10= - 16 (Lot Size = 500)

Market Expectation : Bullish

If Reliance goes up to 1060:

Profit on 1000 CA = 1060 – 1000 -16 = 44

Loss on 1040 CA = 1040 – 1060 + 10 = -10

His Gain = 44 – 10 = 34

Net Gain = 500 * 34 = 17000

If Reliance Down to 950:

Loss on 1000 CA = -26

Profit on 1040 CA = 10

His Gain = - 26 + 10 = -16

Net Gain = 500 * -16 = - 8000

39
 Effect of Greeks
Strategy Strike Premium Delta Theta Vega
Option:-1
Option:-2

Option:-3

Option:-4

Net Effect of Greeks

If the CMP

40
 2) Bear Put Spread Strategy

Profit
Sell 1 OTM put of lower strike and buy
1 ATM Put at a higher strike
Direction:- Bearish and will not go
Beyond sold put
Volatility :- if increase or hurt Sell a OTM put
Reward :- limited Difference of strike B
Premium paid when fall below BEP
Time Decay:- helps or hurts depend
On strike chosen
BEP:- Long put strike minus net premium
Paid
When to use:- strong demand zone is away
From CMP beyond which market will not
Fall. A
Monitoring:- Exit trend becomes bullish
When prices up loss comes to predefined Buy a ATM Put
Level. Sold put becomes just ITM

Loss
41
 Bear Put Spread Example Reliance CMP 1009
Buy 1020 PUT @ 22 Sell 980 PUT @ 8, Net Premium - 22 + 8=14 (Lot Size = 500)

Market Expectation : Bearish

If Reliance goes down to 960:
Profit on 1020PUT = 1020-960-22 = 38
Loss on 980 PUT = 960 – 980 + 8= - 12
His Gain = 38 – 12 = 26
Net Gain = 500 * 26 = 13000

If Reliance goes up to 1040:

Loss on 1020 PUT = - 22

Profit on 980 PUT = 8
His Gain = - 22 + 8 = -14
Net Gain = 500 * -14 = - 7000
42
 3)Bull Put Spread Spreads
It is credit spread means money come
Profit
When to use:- You're bullish. You may also be
anticipating neutral activity if strike B is
out-of-the-money. IV is high and going to
Reduce Sell a PUT (ITM)

The strategy :- A short put spread is an

B
alternative to the short put . In addition
to selling a put with strike B, you’re buying
the cheaper put with strike A to limit your
risk if the stock goes down.

BEP:- strike B minus the net credit received

when selling the spread
A
Max Profit/Loss :- You want the stock to be at
or above strike B at expiration, so both options
will expire worthless. Potential profit is limited Buy a PUT (OTM)
to the net credit you receive when you set
Loss
up the strategy. Loss limited to the difference
between strike A and strike B, minus the net
credit received 43
 4)Bear Call Spread Spreads

When to do it:- You’re bearish. You may also be Profit

expecting neutral activity if strike A is
out-of-the-money. Sell a ITM Call

The strategy :- A short call spread is an alternative

to the short call. In addition to selling a call with
A
strike A, you’re buying the cheaper call with strike
B to limit your risk if the stock goes up.

BEP:- Strike A plus the net credit received when

opening the position.

Max Profit/Loss:- Potential profit is limited to B

the net credit received when opening the position.
Risk is limited to the difference between strike
A and strike B, minus the net credit received. Buy a OTM Call

Loss

44
 5) Long STRADDLE
(Neutral + Volatility strategy/Delta neutral)

When to use:- Very important event/triggers

Expected and current volatility is low, options
are cheaper on result volatility expands.
Profit
Example:- Buy 1 call 1 put at same strike mostly
At ATM total absolute value of delta is same during
Horizontals or triangles waiting for break out in
Either direction.

Risk/Reward:- risk limited to premium paid will be

Greatest if the underlying is at strike A . Reward
Unlimited when there is large movement in the
Underlying. A
Loss Buy a ATM call & put
Time Decay :- Hurt position double
This is closed ended strategy having
BEP:- Two BEP Limited loss and unlimited profit. Good if
1) Call strike plus premium paid Expiry is away by 2 week from event day,
2) Put strike minus premium paid Major gaps are seen during previous events,
45
 6) Short STRADDLE

Neutral strategy never use in trending market

Profit
When to use:- Very Important events are about Sell a ATM call & put
To over when volatility is high, options are costly.
A
Example:- Sell1 call , Sell 1put at same strike ATM

Direction:- unknown/neutral anticipating sideways

Or range bound market.

Volatility:- must be bearish, if increase hurts position

Risk/reward:- risk unlimited, if market become

Loss
Volatile with upward or downward bias. Reward
Limited of premium received & when moves within This is open ended strategy having
Narrow range. Unlimited loss and limited profit.
Exit when market changes from
Time Decay:- Helps position Sideways to directional and prices
Are likely to breakout.
This is credit strategy credit received
BEP:- two points 1) Call strike plus premium received
When both call and put sell
2) Put strike minus premium received. 46
 7) Long STRANGLE

Neutral volatility strategy measure movement then straddle expected

When to use:- Very Important events expected

and current volatility is low , options are cheaper
& likely to explode.
Example:- Buy a put (A), buy a call at higher
Strike(B) i.e. OTM

Direction:- market neutral/uncertain

Volatility :- bullish expects a major movement

Than straddle but option are cheaper. Used A B
During horizontals or triangles waiting for Buy an Buy an
Breakouts either direction. OTM Put OTM call

Risk/Reward:- risk limited to the premium paid This is closed ended strategy having
Reward unlimited on substantial move Limited loss and unlimited profit.
When one leg become ITM,ITM
BEP: two BEP 1) Call strike plus premium paid Leg will be a winning leg & it will give
2) Put strike minus premium paid larger profit and loosing trade will
Giv lesser loss .
47
 8) Short STRANGLE

Neutral strategy –never use in trending market

When to use:- Very Important events are over and

Volatility is high, sold as option are costly, Now Profit
Market to go in side ways with in distinct Supply
And Demand Zones
Example:- Sell 1 call with higher (OTM) strike
Sell Sell
Sell 1 put with lower strike (OTM)
OTM Put OTM Call
Direction :- Neutral unknown direction
Volatility:- bearish bias, hurts if increases A B
Risk/Reward:- risk unlimited(Open ended )
Reward limited to premium received.
Time Decay:- Helps position
BEP:- TWO BEP 1) Call strike plus premium received
2) Put strike minus premium received
Monitoring:- Exit when there is sharp movement
Within short time of events, market is changing from
Sideways to directional or any one leg become ITM
Loss

48
 9)Long Butterfly
When to use:- After big event anticipating
minimal movement on the stock within a
specific time frame.
Sell Two call
Example:- A long call butterfly spread is a
ATM
combination of a long call spread  and a 
short call spread with the spreads B
converging at strike price B. Ideally, you want
the calls with strikes B and C to expire worthless
while capturing the intrinsic value of the in-the
-money call with strike A. Because you’re selling
the two options with strike B, butterflies are a
relatively low-cost strategy. So the risk vs.
reward can be tempting. However, the odds A C
of hitting the sweet spot are fairly low.
Buy one call Buy one call
BEP:-There are two break-even points:- ITM OTM
Strike A plus the net debit paid.
Strike C minus the net debit paid

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 Long butter fly example nifty near 8500

Buy 8300 strike Call @ 254, Sell two 8500 strike Call @ 110 * 2
Buy one 8700 strike Call @ 30

Net Premium Paid : 254-

220+30 = 64
Break Even Upside : 8636
Break Even Downside :
5364
Risk = If goes below 8364
or above 5636 levels
(254+30-220 = 64)
Reward =
Maximum reward at 8500
(-54+220-30 = 136)

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 10)Short Butterfly

Using calls, the short butterfly can be constructed by

writing one lower striking in-the-money call, buying two at-
the-money calls and writing another higher striking out-of-
the-money call, giving the trader a net credit to enter the
position. Maximum profit for the short butterfly is obtained Sell one Sell one
when the underlying stock price rally pass the higher strike ITM call OTM call
price or drops below the lower strike price at expiration A C
The formula for calculating maximum profit is given
below:
Max Profit = Net Premium Received - Commissions
Paid
Max Profit Achieved When Price of Underlying <=
Strike Price of Lower Strike Short Call OR Price of B
Underlying >= Strike Price of Higher Strike Short Ca Buy two
Breakeven Point(s) ATM call
There are 2 break-even points for the short butterfly
Upper Breakeven Point = Strike Price of Highest
Strike Short Call - Net Premium Received Combination of bear long call
Lower Breakeven Point = Strike Price of Lowest Strike And bear short call
Short Call + Net Premium Received
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 11) Long condor

When to Do:- You’re anticipating minimal

movement on the stock within a specific
time frame. You can do it with put
The Setup:- Buy a call, strike price A ITM call OTM call
Sell a call, strike price B Sell Sell
Sell a call, strike price C B C
Buy a call, strike price D
Generally, the stock will be between
strike price B and strike price C
The Strategy:- You can think of a long condor CMP
spread with calls as simultaneously running
an in-the-money long call spread and an
out-of-the-money short call spread Ideally,
you want the short call spread to expire A D
worthless, while the long call spread achieves ITM call OTM call
its maximum value with strikes A and B Buy Buy
in-the-money
BEP:- There are two break-even points:
Strike A plus the net debit paid
Strike D minus the net debit paid
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 12) Short condor
When to use :- The short condor is a volatile
strategy similar to the short butterfly. It is a
limited risk, limited profit trading strategy t
hat is structured to earn a profit when the
ITM call OTM call
 underlying stock s perceived to be making
Sell Sell
a sharp move in either direction.
Using calls, the options trader can setup a A D
short condor by combining a bear call
Spread and a bull call spread . The trader
enters a short call condor by buying a lower
strike in-the-money call selling an even lower
striking in-the-money call, buying a higher strike
 out-of-the-money call and selling another even
higher striking out-of-the-money call. A total of
4 legs are involved in this trading strategy and a B C
net credit is received on entering the trade
ITM call OTM call
BEP:- Upper Breakeven Point = Strike Price of
buy buy
Highest Strike Short Call - Net Premium Paid
Lower Breakeven Point = Strike Price of Lowest
Strike Short Call + Net Premium Paid
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 13)Short Iron Butterfly

Neutral Bullish

The trade:- Buy Straddle sell Strangle with

Strike prices above and below the strike price
Of Straddle , i.e. Sell a Put (A), buy a put
And a call at higher strike (B), sell a call at an Sell a put Sell a call
even higher strike(C) A C
Direction:- neutral/unknown
Volatility:- bullish . Holder expects a market
Move in either direction . The position will also
Benefit from an increase in volatility.
Profit:- limited maximized where the
Underlying rise to strike C or fall to strike A.
Loss:- Limited to the net debit in establishing B
The position, greatest if underlying is at B. Buy a put
BEP:- reached when underlying is &
Above or below strike price B by the same Buy a call
Amount as the initial debit.
Monitoring:- exit for profit at A or C
Exit for loss when remains at B and goes
Sideways for longer period.
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 14)Long Iron Butterfly

Neutral Bearish for range bound market

Example:- Sell Straddle, buy Strangle with strike price This is credit call spread and credit
Above and below the strike price of the Straddle, i.e. Put spread i.e. Buying deep OTM call
Buy put (A) , sell put and call at higher strike (B), buy and put and selling ATM call & put
Call at equally higher strike (C)
Direction:- Direction neutral
Sell a put
Volatility :- bearish if the underlying is at or above strike
B and is expected to remain at this level , or it is felt that &
Volatility will fall. Sell a call
Risk:- Limited loss occurs if there is a directional move in B
The market maximized at the lower strike A, and the
Higher strike C
Reward:- Limited to the net credit
Time Decay :- Typically help position
BEP:-Reach when underlying is above short call + net
Premium credit or below strike price B-net credit
Exit:- for maximum profit at A or C
A C
Buy a Buy a
put call
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 15)Iron condor short

When to do it :- anticipating
minimal movement on the stock
within a specific time frame.
Event just over IV should high

Setup:- Buy a put, strike A

Sell a put, strike B P/B P/S C/S C/B
Sell a call, strike C A B CMP C D
Buy a call, strike D

BEP:- There are two break-even

Points : Strike B minus the net
credit received . Strike C plus
the net credit received.

Monthly income strategy Short

Bull Put Strangle Bear Call
spread spread
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 16)Long Iron condor
Short Strangle

Long Strangle

When to do it :- IV should be less

Coming event expect market move
Somewhere at list by expiry
P/S P/B C/B C/S
Setup:- Sell a put strike A A B CMP C D
Buy a put strike B
Buy a call, strike C
Sell a call, strike D

Bear put spread Bull call spread

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 17) Calendar Spread

 It can be used to generate extra income in a neutral market.

 Income by profiting from time decay

Sell current month Call

Buy next month call of same strike price

Sell June 8600 strike Call @ 110

Buy July 8600 strike Call @ 165

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Combination of future & option strategies

59
 1)Covered Call
WHEN
 This strategy is used when Reliance FUT :- 990 | BUY Reliance FUT @ 990;
we are bullish on a stock.
Sell 1000 CALL @ 21 | Lot Size = 250
 And want to reduce the
cost of the future but it BEP :- 990 - 21 = 969 | RISK :- Unlimited |
limits the profit to the REWARD = 250 * 31 = 7750 LIMITED
strike price of the call.
HOW Market Expectation : Bullish
 In this strategy we first buy Example :- If Reliance goes up to 1080
a future and sell a call of
strike price higher than the FUT Gain 1080-990 =90, Opt Loss= 1000-
future price. 1080+21=-59
His gain = 90 - 59 = 21
Net Profit = 250 * 21 = 7750 Limited
-------------------------------------------------
If Reliance goes down to 900
FUT loss 900-990 = - 90, Opt Profit = 21
His Loss = - 90 + 21 = - 69
Net Loss = 250 * - 69 = - 17250 to unlimited
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 2) Married Put/proactive put

Reliance FUT :- 990 | BUY Reliance FUT @

990; BUY 980 PUT @ 22 | Lot Size = 250
When to do:- When Technically
Bullish and positive triggers or BEP :- 990+22 = 1012 | RISK :- 250 * - 32 = -
Result are expected but to 8000 | REWARD = UNLIMITED
Safeguard against bearish mood
How :- Buy future + buy put Market Expectation : Bullish
Example :- If Reliance goes up to 1080
FUT Gain 1080-990 =90, Option Loss = - 22
His gain = 90-22 = 68
Net Profit = 250 * 68 = 17000 to unlimited
-------------------------------------------------
If Reliance goes down to 900
FUT loss 900-990 = - 90, Opt Profit 980-900-22=
58
His Loss = - 90 + 58 = - 32
Net Loss = 250 * -32 = - 8000 limited

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3) Call Hedge :- sell future + buy call- when technically bearish and
negative result are expected but to safeguards against bullish mood

4) Covered Put :- Sell future + sell ITM put.

5) Collar :- Buy Future +sell OTM call + Buy ATM put

Combination of Put hedge and Covered call
 Buying an at the money put to protect from downside risk
 Sell an slightly out of the money call to reduce the cost of
 hedging, usually a level where we feel that stock or index
 may take hurdle.

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 Price/volatility Decision Matrix

Step 1:- study IV form opinion whether it will , stay the same or no opinion by process of
Elimination after comparing with current to historical IV
Step 2:- Study the price of this scrip, its Demand Zone , Supply Zone top , bottoms trends
etc to form the opinion as shown in the matrix
Step 3:- Now combine the Opinions formed at step 2& 3 to find the Matrix combination.
Find the strategy here since IV is likely to rise I will buy option instead of selling (both call
Or put incised its option price when IV is likely to increase) (when IV is lowest-the option price is
Lowest and therefore likely to rise. When iv is highest the option price is highest, And likely to fall.)
Since the price is likely to move out of range , I will buy straddle (ATM) or Strangle (OTM) i.e.
Simultaneously buying of call and put.

How To Read the market

Whether price is in treading , consolidation, broken the consolidation.

Step1:- Open interest in Future addition or reduction in O.I. with rise or fall in price i.e. whether
A) Longs or B) short building or C) short covering or D) long unwinding
Step 2:- Whether Implied volatility is high or low , has it increased significantly-suggest that
Uncertainty will continue.
Step 3) Major events likely or over.

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 Example how to read market to decide strategy
Tools Particulars Facts Reading
News RBI policy , US Fed No clear signals Uncertainty to
Meet to come etc increase volatility
Future Open Interest + by 6% with fall in Short position
price by 3% added
O.I. Shifted Downside in call Undertone is
From 6500 to 6300 bearish

Open Interest O.I.in Call Max build up in Resistant 6300

6300
O.I. in Put Max build up in Support at 6000
6000 put
I.V. High/med/low Low at 18 , may rise Buy long straddle at
– coming events 6150 or long
strangle buy
6100pe and 6200ce

Exit Exit by booking loss When total prem

falls by 30%
Exit by booking When total prem
profit rise by 50% 64
 Step to Decide strategies

Triggers :- Major Events coming/over.

Trend Analysis :- Bullish/Bearish/Maximum upper levels/lower levels

Demand Zone /Supply Zone :- Support/Resistant

Concentration of call/put :- on support /resistant

Volatility levels:- IV of Tradable options.

Strategies

Find enter exit for profit/exit for loss/target

Monitoring when moving in favor & when not moving in favor .

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 Strategies to be used when Market view

Bullish Bearish Range Bound Volatile

 Long Future  Short Future  Short Straddle  Long Straddle
 Long Call  Long Put  Short Strangle  Long Strangle
 Short Put  Short Call  Long Butterfly  Short Butterfly
 Bull Call  Bear Put  Short Strip  Long Strip
Spread Spread
 Short Strap  Long Strap
 Bull Put Spread  Bear Call
 Long Condor  Short Condor
 Covered Call Spread
 Put Hedge  Call Hedge
 Covered Put

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