While trading in options, you very well know that the same strategy does not generate profits in different market trends. The traders need to adapt and adopt strategies based on the movement of the market and their views. This also means dealing in multi-legged options strategies, involving more than one options trade. In this blog, we will share a few options strategies which a trader can execute as per the market trends. There are four types of market trends: bullish, bearish, volatile and range-bound. Let's go through each strategy one by one.
Bullish: If your view on the market or the stock is bullish, you can deploy any of the following strategies:
1. Bull call spread: In this strategy, a trader can buy lower strike price call options and parallelly sell higher price call options. Here, the sell order of the call option acts as a hedge against the buy order. For this strategy, both profit and loss are limited.
2. Long call: Here, a trader buys a call option when their view is bullish. If the trader's view turns right and the market moves up, the trade will turn profitable. While deploying the long call strategy, a trader places only one order and buys a call option.
Bearish: If you think that market or the stock has gone into oversold territory and might face some correction in the short and long term. Then, you can deploy any of the following strategies::
3. Bear put spread: Here, a trader places two orders of put options. While executing the trade, one can buy higher strike price put options and sell lower price put options. So, the sell order of the put option acts as a hedge against the buy order, which protects the trader against unlimited loss if the view goes wrong.
4. Long put: A long put is an option buying strategy in which a trader buys a put option when their view is bearish, and they think that market may correct from current levels towards the downside. If the trader's view goes right and the market goes down as anticipated, the trade will be profitable.
Volatile: If you expect that the market or stock will remain highly volatile for a few days and can make huge swings up and down–then you can deploy the following strategy:
5. Long Straddle: In this case, a trader can buy both call and put options of the current strike price. However, if the stock or the index stays in a range until expiry and closes near your entry price, the strategy will give you a loss. In this strategy, the movement in selected stock or index needs to be sharp either way for you to come out profitably from the trade.
Neutral: If you expect that the index or stock will stay range-bound and will not make wild swings in the coming days–then traders can deploy any of the following strategies:
6. Short straddle: A short straddle is a two-leg strategy. In this strategy, a trader sells both call and put options at the current price(ATM). This strategy will be in profit if the market remains range-bound as per the trader's view. However, if the view goes wrong and the market starts swinging and turns volatile, this strategy will make a loss.
7. Iron condor: The strategy is very similar to a short straddle. The only difference is that short straddle is a two-leg strategy, whereas Iron Condor is a four-leg strategy. In this strategy, a trader can sell one call and one put option at the current price (ATM). Along with this, they can hedge their sell positions by buying a far away(OTM) call option strike and a far away put option strike.
Have you been implementing and adopting these strategies as per market trends? If not, then Upstox has made deploying these strategies simple for you. Upstox will soon launch its advanced options strategy builder for all its platforms. Through the strategy builder, you will have a disciplined approach, better downside protection, automated P & L calculations, and above all, a hassle-free multi-leg order placement in just 3 clicks. So, stay tuned.