If upon expiration, the spot price is below the strike price, he makes a profit. Lower the spot price more is the profit he makes. If the spot price of the underlying is higher than the strike price, he lets his option expire un-exercised.

As can be seen, as the spot Nifty falls, the put option is in-the-money. If upon expiration, Nifty closes below the strike of , the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. The profits possible on this option can be as high as the strike price. However if Nifty rises above the strike of , he lets the option expire. If upon expiration, the spot price happens to be below the strike price, the buyer will exercise the option on the writer.

If upon expiration the spot price of the underlying is more than the strike price, the buyer lets his option un-exercised and the writer gets to keep the premium. As the spot Nifty falls, the put option is in-the-money and the writer starts making losses. If upon expiration, Nifty closes below the strike of , the buyer would exercise his option on the writer who would suffer a loss to the extent of the difference between the strike price and Nifty- close. However, to protect your investment if the stock price falls, you buy a Put Option on the stock.

This gives you the right to sell the stock at a certain price which is the strike price of the Put Option. The strike price can be the price at which you bought the stock ATM strike price or lower OTM strike price. In case the price of the stock rises you get the full benefit of the price rise.

However, if the price of the stock falls, exercise the Put Option remember Put is a right to sell. You have capped your loss in this manner because the Put Option stops your further losses. It is a strategy with a limited loss and after subtracting the Put premium unlimited profit from the stock price rise.

The payoff of this strategy looks like a long Call Option and therefore, it is also called as Synthetic Call! But the strategy is not to buy Call Option.

Here you have taken an exposure to an underlying stock with the aim of holding it and reaping the benefits of price rise, dividends, bonus shares, rights issue, etc. and at the same time insuring against an adverse price movement.

In simple buying of a Call Option, there is no underlying position in the stock but is entered into only to take advantage of price movement in the underlying stock. When to use: When ownership Example is desired of stock yet investor Mr. XYZ is bullish about ABC Ltd stock. He buys ABC is concerned about near-term Ltd.

To downside risk. The outlook is protect against fall in the price of ABC Ltd. his risk , conservatively bullish. he buys an ABC Ltd. XYZ pays of ABC Ltd. XYZ pays This is a strategy which limits the loss in case of fall in the market but the potential profit remains unlimited when the stock price rises. A good strategy when you buy a stock for the medium or long term, with the aim of protecting any downside risk.

The pay-off resembles a Call Option buy and is therefore called as Synthetic Long Call. COVERED CALL You own shares in a company which you feel may rise but not much in the near term or at best stay sideways. You would still like to earn an income from the shares. The covered call is a strategy in which an investor Sells a Call option on a stock he owns netting him a premium. The Call Option which is sold in usually an OTM Call.

The Call would not get exercised unless the stock price increases above the strike price. Till then the investor in the stock Call seller can retain the Premium with him. This becomes his income from the stock. This strategy is usually adopted by a stock owner who is Neutral to moderately Bullish about the stock. An investor buys a stock or owns a stock which he feels is good for medium to long term but is neutral or bearish for the near term.

At the same time, the investor does not mind exiting the stock at a certain price target price. The investor can sell a Call Option at the strike price at which he would be fine exiting the stock OTM strike. By selling the Call Option the investor earns a Premium. Now the position of the investor is that of a Call Seller who owns the underlying stock. If the stock price stays at or below the strike price, the Call Buyer refer to Strategy 1 will not exercise the Call.

The Premium is retained by the investor. In case the stock price goes above the strike price, the Call buyer who has the right to buy the stock at the strike price will exercise the Call option. The Call seller the investor who has to sell the stock to the Call buyer, will sell the stock at the strike price. This was the price which the Call seller the investor was any way interested in exiting the stock and now exits at that price.

So besides the strike price which was the target price for selling the stock, the Call seller investor also earns the Premium which becomes an additional gain for him.

This strategy is called as a Covered Call strategy because the Call sold is backed by a stock owned by the Call Seller investor. The income increases as the stock rise, but gets capped after the stock reaches the strike price.

Let us see an example to understand the Covered Call strategy. A bought XYZ Ltd. Which means Mr. A does not a short position on the Call option think that the price of XYZ Ltd. Thus net outflow to Mr. He reduces the cost Risk: If the Stock Price falls to zero, of buying the stock by this strategy. A against him. So if the option will get exercised by the Call buyer.

The Stock price rises beyond the Strike entire position will work like this: price the investor Call seller gives up all the gains on the stock. The Call buyer will not exercise the Call Option. This is an income for him. What would Mr. A do and what will be his pay — off? Payoff XYZ Ltd. LONG COMBO SELL A PUT AND BUY A CALL A Long Combo is a Bullish strategy.

If an investor is expecting the price of a stock to move up he can do a Long Combo strategy. It involves selling an OTM lower strike Put and buying an OTM higher strike Call.

This strategy simulates the action of buying a stock or futures but at a fraction of the stock price. It is an inexpensive trade, similar in pay-off to Long Stock, except there is a gap between the strikes please see the payoff diagram.

As the stock price rises the strategy starts making profits. Let us try and understand Long Combo with an example.

A stock ABC Ltd. XYZ is Risk: Unlimited Lower Strike bullish on the stock. He does a Long Combo. Otherwise the potential losses can also be high. This is an opposite of Synthetic Call Strategy 3. An investor shorts a stock and buys an ATM or slightly OTM Call. The net effect of this is that the investor creates a pay-off like a Long Put, but instead of having a net debit paying premium for a Long Put, he creates a net credit receives money on shorting the stock.

In case the stock price falls the investor gains in the downward fall in the price. However, in case there is an unexpected rise in the price of the stock the loss is limited. The pay-off from the Long Call will increase thereby compensating for the loss in value of the short stock position.

This strategy hedges the upside in the stock position while retaining downside profit potential. When to Use: If the investor is of Example: the view that the markets will go Suppose ABC Ltd. down bearish but wants to protect An investor Mr. The net price of the stock. Risk: Limited. COVERED PUT This strategy is opposite to a Covered Call. A Covered Call is a neutral to bullish strategy, whereas a Covered Put is a neutral to Bearish strategy.

The Put that is sold is generally an OTM Put. The investor shorts a stock because he is bearish about it, but does not mind buying it back once the price reaches falls to a target price. This target price is the price at which the investor shorts the Put Put strike price. Selling a Put means, buying the stock at the strike price if exercised Strategy no.

If the stock falls below the Put strike, the option will be exercised and the investor will have to buy the stock at the strike price which is anyway his target price to repurchase the stock.

The investor makes a profit because he has shorted the stock and purchasing it at the strike price simply closes the short stock position at a profit. And the investor keeps the Premium on the Put sold. The investor is covered here because he shorted the stock in the first place.

If the stock price does not change, the investor gets to keep the Premium. He can use this strategy as an income in a neutral market. Let us understand this with an example. When to Use: If the investor is of the Example: view that the markets are moderately Suppose ABC Ltd. in June.

An investor, Mr. The net credit rises substantially received by Reward: Maximum is Sale Price of the Mr. With Straddles, the investor is direction neutral. index will experience significant An investor, Mr. A enters a long straddle by volatility in the near term. which is also his maximum possible loss. SHORT STRADDLE A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. It creates a net income for the investor.

So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited. An experience very little volatility in investor, Mr. A, enters into a short straddle by the near term.

LONG STRANGLE A Strangle is a slight modification to the Straddle to make it cheaper to execute. Since OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as compared to a Straddle, where generally ATM strikes are purchased.

Since the initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher. As with a Straddle, the strategy has a limited downside i. the Call and the Put premium and unlimited upside potential.

An experience very high levels of investor, Mr. A, executes a Long Strangle by volatility in the near term. SHORT STRANGLE A Short Strangle is a slight modification to the Short Straddle. This typically means that since OTM call and put are sold, the net credit received by the seller is less as compared to a Short Straddle, but the break-even points are also widened.

The underlying stock has to move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the Premium. When to Use: This options trading Example strategy is taken when the options Suppose Nifty is at in January.

An investor thinks that the underlying investor, Mr. COLLAR A Collar is similar to Covered Call but involves another leg — buying a Put to insure against the fall in the price of the stock. It is a Covered Call with a limited risk. So a Collar is buying a stock, insuring against the downside by buying a Put and then financing partly the Put by selling a Call. This is a low-risk strategy since the Put prevents downside risk.

However, do not expect unlimited rewards since the Call prevents that. It is a strategy to be adopted when the investor is conservatively bullish. The following example should make Collar easier to understand. When to Use: The collar is a good Example strategy to use if the investor Suppose an investor Mr. A buys or is holding is writing covered calls to earn ABC Ltd. The Put will expire worthlessly. This is the maximum return on the Collar Strategy.

However, unlike a Covered Call, the downside risk here is also limited: 2 If the price of ABC Ltd. The Call expires worthless c. The Put can be exercised by Mr. The upside, in this case, is much more than the downside risk. Payoff Payoff from ABC Ltd. BULL CALL SPREAD STRATEGY BUY ITM CALL AND SELL OTM CALL A bull call spread is constructed by buying an in-the-money ITM call option and selling another out-of-the-money OTM call option. Often the call with the lower strike price will be in-the-money while the Call with the higher strike price is out-of-the-money.

Both calls must have the same underlying security and expiration month. The net effect of the strategy is to bring down the cost and breakeven on a Buy Call Long Call Strategy. If the stock price falls to the lower bought strike, the investor makes the maximum loss cost of the trade and if the stock price rises to the higher sold strike, the investor makes the maximum profit. Let us try and understand this with an example.

When to Use: Investor is Example: moderately bullish. Maximum loss occurs level of the lower strike or below. The concept is to protect the downside of a Put sold by buying a lower strike Put, which acts as insurance for the Put sold. The lower strike Put purchased is further OTM than the higher strike Put sold ensuring that the investor receives a net credit because the Put purchased further OTM is cheaper than the Put sold. This strategy is equivalent to the Bull Call Spread but is done to earn a net credit premium and collect an income.

Provided the stock remains above that level, the investor makes a profit. Otherwise, he could make a loss. The maximum loss is the difference in strikes less the net credit received. When to Use: When the investor is Example: moderately bullish. The concept is to protect the downside of a Call Sold by buying a Call of a higher strike price to insure the Call sold.

In this strategy, the investor receives a net credit because the Call he buys is of a higher strike price than the Call sold. The strategy requires the investor to buy out-of-the-money OTM call options while simultaneously selling in-the-money ITM call options on the same underlying stock index.

Provided the stock remains below that level, the investor makes a profit. When to use: When the investor Example: is mildly bearish on market. XYZ is bearish on ABC Ltd. BEAR PUT SPREAD BUY ITM PUT AND SELL OTM PUT This strategy requires the investor to buy an in-the-money higher put option and sell an out-of-the-money lower put option on the same stock with the same expiration date.

This strategy creates a net debit for the investor. The net effect of the strategy is to bring down the cost and raise the breakeven on buying a Put Long Put. While the Puts sold will reduce the investors costs, risk and raise the breakeven point from Put exercise point of view.

If the stock price closes below the out-of-the-money lower put option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the in- the-money higher put option strike price at the expiration date, then the investor has a maximum loss potential of the net debit.

When to use: When you are Example: moderately bearish on market ABC Ltd. is presently at XYZ expects direction ABC Ltd. share price to fall. He buys one ABC Ltd. received for short position. Current Value position. Read Online. Summary The ORIGINAL Options Trading Crash Course. For a beginner, the options market is incomprehensible. All that jargon, all those calculations -- it's a hard game to break into and even harder to get right from the start. On the other hand, learning the ropes opens the door to an exciting new way to calculate risk, find the right investments and ultimately make your bank balance happy.

This book is here to teach you how to understand the options market from scratch. By the time you finish reading, you'll know exactly how to navigate your choices -- and how to make them with wisdom. Let's Get Started With Options Trading! Options trading is all about understanding what lies beneath the market and this guide will walk you through that exciting process.

Give it ONE WEEK and you'll TRIPLE your chances of making a profit on the options market.

Read Online. Summary The ORIGINAL Options Trading Crash Course. For a beginner, the options market is incomprehensible. All that jargon, all those calculations -- it's a hard game to break into and even harder to get right from the start. On the other hand, learning the ropes opens the door to an exciting new way to calculate risk, find the right investments and ultimately make your bank balance happy.

This book is here to teach you how to understand the options market from scratch. By the time you finish reading, you'll know exactly how to navigate your choices -- and how to make them with wisdom.

Let's Get Started With Options Trading! Options trading is all about understanding what lies beneath the market and this guide will walk you through that exciting process. Give it ONE WEEK and you'll TRIPLE your chances of making a profit on the options market. Give it a month and you'll see you're not just confident enough to make investments at will, you're doing so in the right way to make a tidy deposit into your trading account. Chapter List 25 chapters : Chapter 1: Options Trading Crash Course: The 1 Beginner's Guide to Make Money with Trading Options in 7 Days or Less!

Chapter 2: Taking the Risk Chapter 3: What is an Option? Chapter 4: Why Options Rather than Stocks? Chapter 5: Why is Options trading Worth the Risk? Chapter 6: How to Get Started in Options trading Chapter 7: Learning the Lingo Chapter 8: The Role of the Underlying Stock Chapter 9: Understanding the Strike Price Chapter Options Payoff Diagram Chapter Basic Trading: Selling Covered Calls Chapter Strategy for Selling Covered Calls Chapter Outcomes of a Covered Sell Chapter Stepping Up a Tier: Buying Calls Chapter Strategies for Buying Calls Chapter Understanding Time Value Chapter Understanding Volatility Chapter Keeping an Eye on Your Calls Chapter Exercising Your Right to Buy the Stock Chapter How to Buy and Sell Puts Chapter Understanding the Greeks Chapter Strategies for New Options Traders Chapter Options Trading Tips for Beginners Chapter In Conclusion Chapter Special Thanks.

Your review Optional. Garbers Daniel M. Hardy Major Adrian Rainier Byers Miranda Seymour Jacques Evans Ancízar Narváez Montoya WILSON KAIGA GIDION GUDAHI Michael Jinkins Wcnne Aittman Antonio Reyes Chumacero Shck Tchamna Hoda Barakat Horst-Dieter Radke Nicole König Ina von Brunn Friederike M. Schmit Jaroslaw Piwowarski Kathy Lester Rita Ribeiro Voss.

Payoff of a call option In prior works, a number of options trading and hedging strategies are developed, including single trading strategy, bullish strategies, bearish strategies, neutral or non-directional strategies. Accounting Books. STRATEGY : SHORT 1 ITM CALL OPTION LOWER Reward Limited. Experimental Environment 4. If upon expiration, the spot price is below the strike price, he makes a profit. If the call is OTM, its intrinsic value is zero. Figure 1.

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