In the last few years, the retail trading community in India has really found a love for options. They are volatile, you can double your money in a day if you get it right and you can buy a truckload of contracts in comparison to futures which require more margin. All great. Then why do most options traders lose money? Because there is a flipside to volatility and leverage. If you don’t have a trading strategy, you can hit the grounder sooner than you expect. Instead of designing a plan, many retail traders go for the jugular by taking a naked position by buying Out of the Money (OTM) Call and Put options hoping to make great returns. I’m not saying this is not viable. It can be, but to think of this approach as a great money making formula is the long run is wrong.
The markets are dynamic and the outcomes of today may not necessarily give you indications of tomorrow. Considering the risk in taking naked positions and hoping for things to pan out your way can be dangerous. I’m sure many silent spectators of the stock market would agree with me here. One has to understand that option trading strategies are extremely flexible in a way that you can manage your risk most effectively. Unlike trading in Nifty or stock futures, where the scope for risk management is based on stop losses, Options give you the choice to do a variety of different things to express your views on the stock market. There are strategies for every kind of market situation and you could possibly make profits in circumstances which you would have previously thought to be impossible.
One of the primary reasons why most retail traders don’t use advanced option strategies is because they are not very easy to design. It will require you to have solid fundamental understanding of how options work and fluency in math. Most people lack either the knowledge or the inclination to sit and design their own option trading strategies.
We understand that it is a hard job and we decided to make it easy for you by building a complex tool which takes care of everything for you which can help you trade option strategies like a pro without having to know anything beyond your view on the stock market.
The success in trading options strategies depend on:
• Whether your market outlook is correct.
• The strike prices you choose to trade.
• The complexity of options strategies used.
• The risk you take (Whether you sell far OTM options or buy ITM options)
• Timing just as any other instruments in trading.
For retail traders, it was very difficult to get ready-made calculators until we developed Options Strategies Calculator.
This tool actually helps you choose strategies based on your market outlook. Something which used to take a long time can now be done in less than 2 minutes.
Let me show you how to use it:
When you’re at the tool, you will be able to see all the 44 option strategies listed down with their payoff graphs so you can recognize and choose immediately if you want to.
But we recommend you use the preferences to filter out the unwanted ones and focus more on what makes sense according to your view on the stock market.
Step 1 - Choose your market outlook:
You can choose strategies based on your outlook on the stock market. Rather than just giving two choices of bullish or bearish, we have made it far more precise to help you make superior trading strategies. You can choose from 6 different outlooks:
• Bearish Neutral with high volatility
• Bullish Neutral with high volatility
• Neutral with high volatility
• Neutral with no volatility
It basically covers all possible market scenarios so you can get the right kind of tailor made strategies.
Step 2 - Choose the number of legs:
A leg is a component of the trading strategy. So every contract which is used in a trading strategy is called referred to as a leg. It could be combined with other components to tailor make it to your needs. You can go up-to 4 legs in option strategies.
1 Leg Strategy – They are basically a naked position.
2 Legs Strategy - Simple trading strategies. There's a lot of variety to choose from here.
3 Legs Strategy - These are more complicated strategies and might need a second reading for semi-pros.
4 legs Strategy – Here you have the Iron butterflies, Iron condors etc. They are more for neutral / range bound strategies because the upside and the downside are protected with limited risk and limited profit potential.
Step 3 - You can segregate based maximum profit (Limited/Unlimited):
Limited profits are not necessarily bad. It depends on how you manage risk. Most institutional traders are on the selling side of the trade as they target lower but surer returns. They don’t have the urgency to make massive returns in the same expiry. There is a popular misconception about unlimited risk. Practically speaking, the chances of losing all your money by selling options is rare and the risk involved in buying options is much higher considering the risky trader’s mindset. Both contain risk. It just depends on what strike price one is willing to buy or sell that makes all the difference.
Step 4 - Maximum Loss (Limited/Unlimited):
You can also segregate based on your loss tolerance too. It is based on the same principles of profit potential.
Step 5 - Credit/Debit:
Lastly, you can select strategies based on whether you have a credit or debit. Our Options Strategies tools have 15 and 16 debit strategies. The wide variety available for option trading is incredibly useful. Once you have arrived at your chosen strategy, the rest becomes easy.
You can either follow the sequence that we have shown above or filter trading strategies using either of the multiple preferences given to arrive at the most optimal choice. Upon selecting any one, everything is explained and you can enter your preferred strike prices and price to get results and pay off graph. This way, you can trade even the most complex strategies using our Option Strategies tool.
Step 6 – Project your future profits:
If you want to learn about the strategy, you can click on the highlighted area as shown above. There you will be able to get the theoretical explanation of the option strategy. In this example, we have the Long Strangle strategy for Nifty. The input fields are already defined and you only need to select your preferred strike prices and enter the current market prices. Based on your inputs, you will get to know:
• Net Premium
• Upper Breakeven Point
• Lower Breakeven Point
• Maximum Profit
• Maximum Loss
If you scroll down a bit, you can view the payoff graph as well.
The X axis shows the underlying price at the expiry.
The Y axis shows the Profit & Loss at the expiry.
You can also calculate your potential Profit & Loss at a specific price based on the strategy. If you’re wondering why there are so many of them it’s because there is no golden rule and the best trading strategies vary depending on the market circumstances. So that’s it. Now you can use this tool to trade 44 options strategies right away for FREE without having to study big text books written on them. If you have any questions or doubts, you can always ask us.