Options strategies are those that allow traders to profit from market volatility, regardless of whether prices rise or fall. To make the best choices strategy decisions, it is important to determine how big the surge will be. These are the top options strategies for volatile markets. These strategies are simple and straightforward, so even novice stock investors can benefit.
You can choose to purchase an Out The Money put option and a call for Out The Money. Both options have the same expiry. OTM call option allows you to purchase a call option, but not a binding obligation, at a predetermined price known as the strike price. This strike price is greater than the current asset's price. OTM put option allows you to choose a strike price that is lower than the current value of the underlying assets. The strike price can be modified if desired by trader, but the current price must remain the same distance away from both the call and put strike prices.
Long strangle is more affordable because both the put and the call options are out of money and have no intrinsic worth. This strategy can yield decent returns if the underlying stock prices move significantly. The implied volatility of the prices is the key here. You don't get the same benefit as in other strategies like a short-straddle.
Markets are most likely to move in one direction if there is a significant event. It could be significant news, data disclosures, earnings releases or announcements about monetary policy. This is a great time to get into a long strangle.
Let's take an example:
Let's say that the spot price of BSE Sensex is Rs. 15,000.
You purchased an OTM call option at a strike price of Rs.16000
You purchased an OTM Put option with a strike price of Rs. 14000
A premium of Rs. 50 for OTM Call option
A premium of Rs. You paid a premium of Rs.
The net premium paid was Rs.90
The upper breakeven point would be (OTM call strike price + total premium): Rs. 16090
The lower breakeven point would be (OTM put strike price - total premium): Rs.13910.
If prices rise beyond Rs.16090, the trader will profit. 13,910-Rs.16090, in either direction.
A long straddle can be a great strategy if you're just starting out in stock investing, and want to hedge your risk. It is simple and has unlimited potential profit.
Long straddles are ideal for volatile markets where you expect substantial price movement but are uncertain about the direction of that movement. Because it involves purchasing a long option and a put option, it is simple. You purchase equal amounts of ATM call options and ATM put options contracts that expire on the same day. At the money contracts are those where the strike price equals the current price for the underlying security. To benefit from price movements, you can either choose a longer expiration date or a contract that is nearing expiration.
This is a net debit transaction because you must pay the premium upfront in order to purchase a long strangle.
Let's take a look at a hypothetical example.
Company ABC's stock trades at Rs.60
ATM calls are available for the same stock at the same strike price as Rs. 60) trade at Rs.3. 100 ATM call options can be purchased for Rs. 300
You can also buy ATM puts simultaneously (strike price Rs. 60) Trading at Rs. 4. 100 ATM options are available for Rs. 400
For the long straddle, you will be charged a net Rs.700 to cover the two premiums
If the prices are not changed at all by the expiration date, this will be your maximum loss.
If prices move in any direction, there is an unlimited potential for profit. There is one catch: prices must move in a way that covers the premium on the opposite side (call or put+premium). Let's look at the various profit and loss scenarios that you might encounter in a long straddle.
Let's say ABC stocks trade at Rs. 64 at the expiry date:
Your call options will be worth Rs. because the current price is greater than the strike price for your contract. 400 Your total debit payment of Rs.700 will be refunded Rs400
If ABC stocks trade at Rs. 69 at the expiry date:
The strike price is higher than current price. Your call options will be worth Rs.900, and your put options won't be exercised. Your debit payment of Rs.700 would be refunded and you would make a profit in the amount of Rs.200.
If ABC stocks trade at Rs. 53 at the expiry date:
The strike price of Rs.60 would be lower than what the current price is. Since you won't buy stock at the higher strike, your call options will be unexecuted. Your put options will be worth Rs. 700 You will almost break even with the premium you paid upfront.
If ABC stocks trade at Rs. 51 at the expiry date:
The strike price would be less than the current price of the underlying share. Your call options would be worth Rs.900 and your put options would remain unexecuted. A profit of Rs.200 will be earned.
Breakeven points will be:
Breakeven point 1 refers to the strike price and premium paid. It is Rs. (60+700), Rs.760
Breakeven point 2 refers to the strike price less any premium paid. It is Rs.640
A long straddle is profitable when either the breakeven point or the price on one side exceeds the other. This means that you will profit if there is significant price movement in one direction or high implied volatility. You can also sell the put or call options to end your position before the contract expires.
When investors expect a substantial drop in stock prices, they enter into a strip-straddle. This is why investors buy more call options than put options in this type straddle strategy. It is, for all practical purposes, similar to a long-straddle. You can buy call options to protect against losses should prices rise, rather than falling as much as you expected.
A strip strategy allows you to buy more call options than put options, but with the same expiration date.
Investors who expect significant price movements and expect them to be in the downtrend are best served by this indicator. The second expectation is for a dramatic drop in the prices of the underlying stocks. A strip strangle allows you to buy more OTM (out-the-money) options than OTM put options. Out the money options have no intrinsic value. You will make a profit if there is significant price movement in one direction or the other, but you will be more profitable if the stock prices fall dramatically.
Because the strike price for, let's say, the put option would be less than the stock price (since the option contract has OTM). However, you expect the strike price to be significantly lower so that it makes sense. This strategy requires you to decide how far out you want the money to go. The premium will be cheaper the further you are from the money. However, the premium will become more expensive the closer you get to the money. However, being too far away from the money can also reduce your profit.
If you are certain that there will be a significant price swing, but don't know in which direction, a long gut strategy might work for you. This strategy is also risk-free and offers unlimited profit potential. In The Money options are bought in equal amounts. The strike price is lower than current stock prices. The strike price for In The Money options is higher than current rates. You will make a profit when stock prices rise or fall significantly. Profitable situations are those in which the cost of the underlying security rises or falls beyond the breakeven points.
Upper breakeven point = Strike price for ITM call options+total Premium paid.
Lower breakeven point = Strike price of ITM Put options-total premium.
Options strategies such as the one above are easy to implement by beginners. You can also find incrementally complicated options strategies, which involve up to four transactions. You also have the option to call or put in the money, at the money, and out of the market. You can choose the outcome you want based on market expectations. Options strategies have the advantage of allowing you to profit even if you don't know the direction of price movements. There are also other strategies that allow you to make a calculated call about how volatile prices will be and whether they will stay stable. These tools are crucial hedging tools that can be used by beginners when investing in stock.