In the world of F&O trading, options emerge as a very good means of mitigating risks and providing opportunities to make profits. Beginners mostly content themselves with basic strategies of either purchasing calls or puts. However seasoned traders appreciate that the true beauty is only revealed when they learn how to outperform by applying advanced option strategies.
Such policies enable you to manage and leverage the price swings of the market and also protect yourself against any losses to come up with an optimal portfolio aimed at achieving super profits. Keep reading to understand the type of option strategies you can utilise to maximise your gains from the market.
1. Iron Condor: Best Suited For Sideways Markets
Trades who expect little or no price action make use of the iron condor option strategy. This strategy entails the selling of calls and put options at a strike price. Simultaneously, it involves buying puts and calls at a much higher strike price to cap a potential loss.
Time decay profits are sought as long as the underlying instrument trades within the range formed by the sold options. This kind of strategy comes with a limited risk/reward profile, which suits range-bound markets. Investors utilise this approach when they believe that the market is likely to stay stagnant.
2. Straddle: Making the Most Out of High Volatility
For those who expect extreme price movements but are not sure which side to take, one of the best option strategies to utilise is the straddle. It consists of purchasing both a call and a put with the same strike price. By holding both positions, you will profit if the price of the underlying becomes too high or too low.
On the contrary, if the price does not change or oscillate scarcely, then both of these options will expire, causing you to encounter a loss. As this strategy is time-sensitive, some of its best use would be during earnings announcements when one is almost certain that high volatility is bound to occur.
3. Butterfly Spreads: Make Money While Reducing Risk
The Butterfly Spread is one F&O strategy where traders are able to make money in a market with low volatility without too much exposure. This involves the transaction of three options at different strike prices.
Specifically, a trader will buy one in-the-money call (or put), sell two at-the-money calls (or puts), and buy one out-of-the-money call (or put). Both the risk and the reward of this future and option trading strategy are limited, but it is a good strategy in case you do not expect much price action and would want to take a safe bet and make some money when the market runs flat.
4. Calendar Spread: Taking Advantage of Time Decay
Calendar Spread is used to exploit the differences in time movements of the underlying asset. It involves selling a short-term option and buying a longer-term asset at the same strike price but with different expiry dates.
Little price action in these options is expected in a short period, but inactivity will not last long, and some volatility will ensue. Such differences between the two options can be exploited to generate profit.
5. Covered Call: Earning Regular Returns
The Covered Call is a simple and effective future and options trading approach, especially when one seeks to use the features of the stock market profitably and regularly. For instance, when seeking to generate income from the asset owned, an investor can issue a call option on it.
If the asset price is lower than the call option’s strike price, they will hold on to the premium. If the asset price increases, one is likely to get rid of the option since they would want to sell the asset above its present market value and keep the received premium. This is a low-risk investment strategy that increases returns.
Final Words
The advanced options trading approaches provide an ability to profit in almost all market circumstances. Learning these techniques will help you develop strategies that will enhance the profit potential while controlling risks that will ensure your continued success in the F&O arena. Apart from becoming familiar with these methods, investors should use stock screening tools like the Research 360 app from Motilal Oswal to enhance their trading experience.
