Options Trading Strategies Quick Guide With Free PDF by Stelian Olar For investors in every field, hedging against the unknown and the inherent risks in their core business should be the ultimate goal. In professional trading, options trading strategies are one of the most important trading methods to both create profit and minimize risks Options Trading Strategies There are numerous options for trading strategies. The popular ones include; Covered call This strategy is popular among options traders because it OPTIONS TRADING AND HEDGING STRATEGIES BASED ON MARKET DATA ANALYTICS. Computer Science & Information Technology (CS & IT), Download Free PDF Options can also be traded on futures, bonds, interest rates, currencies and ETF’s. CALL VS PUT There are two basic types of options – call options and put options. As a reminder A Of course there are various ways to constructmost strategies. We have underlinedthe most common method and used that method in our explanations of Profit, Loss, Volatili ty and Time ... read more

The holder of this put option can sell the stocks at the set price, with each contract worth shares. The long strangle strategy involves a trader buying an out-of-the-money call option and an out-of-the-money put option simultaneously, on the same underlying security, and with the same expiration date.

This involves a combination of two different contracts. This strategy involves an investor combining a bear spread strategy and a bull spread strategy. The iron condor strategy is where the trader simultaneously holds a bear call and a bull put spread.

The trader buys an out-of-the-money put option and sells an at-the-money put at the same time. The trader will also buy an out-of-the-money call option and sell an at-the-money call. This involves buying calls at a set price and selling the same number of calls at a higher stake price simultaneously. The two call options will have the same underlying asset and expiration date. This is a form of vertical spread where the trader simultaneously buys put options at an agreed strike price and sells the same number of puts at a lower strike price.

This strategy comes into play by buying an out-of-the-money put option and writing an out-of-the-money call option at the same time.

The underlying security and expiration date of the contract remains the same. This strategy takes place when the trader simultaneously purchases a call and put option on the same asset or commodity with the same expiration date and strike price. Avatrade is one of the best options trading brokers currently available to traders globally. To make it easy for you, Avatrade supports 13 major trading strategies, provides automatic spreads and also risk reversals for some trading strategies.

The interactive page on Avatrade makes it easy to trade options or Forex. The historical chart indicates the past, while the confidence interval displays the likely direction of the market. You can test out Ava options trading here. The Avatrade options trading platform is one of the best at the moment.

Without loss of generality, we investigate the effectiveness of several trading constraints and technical indicators by scrutinizing and back testing with the long-term market data. The second issue is to use the spread strategies for risk control when being an options seller. Note that a spread position is constituted where one buys an option and sells another option against it. In general, we develop a scheme to simulate different trading strategies and thus identify some simple but profitable strategies.

Experimental studies show that our strategies yield good profit in the TAIFEX market during to Elmar Valizada. Volatility derivatives are a class of derivative securities where the payoff explicitly depends on some measure of the volatility of an underlying asset.

Prominent examples of these derivatives include variance swaps and VIX futures and options. We provide an overview of the current market for these derivatives. We also survey the early literature on the subject. Finally, we provide relatively simple proofs of some fundamental results related to variance swaps and volatility swaps.

Bruce Martin. Sifat biswas. Louis Cheng. We use the net buying pressure hypothesis of N. Bollen and R. Whaley to examine the implied volatilities, options premiums, and options trading profits at various time-intervals across five different moneyness categories of Hong Kong Hang Seng Index HSI options.

The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out-of-the-money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis.

First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. Jrl Fut Mark —, Yohan Théatre. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Abstract Based on mathematics and engineering point of view, we aim to explore the establishment of model structure, and thus calculate the benefits and risks of a financial product.

Continue Reading Download Free PDF. Related Papers. Volatility Derivatives. Download Free PDF View PDF. Pricing and Hedging Financial Derivatives. Journal of Futures Markets Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options. Markov Regime Switching Model: Application to FX Trading. KEYWORDS Data Analytics, Financial Engineering, Futures Options 1.

Moreover, rising demand from institutions, electronification and improved market access may drive continuous volume growth. In other words, the futures options market may still be in relative infancy and has not experienced the growth in other similar market. Also, the market has evolved to become a trading arena that supports increasingly sophisticated investment strategies today. A futures option is an option contract in which the underlying is a single futures contract e.

The option buyer has the right but not the obligation to assume a particular futures position at a specified price i. On the other hand, the option seller must assume the opposite futures position when the buyer exercises this right.

One of the main reasons why investors trade options is to avoid the reverse fluctuation of market risk, resulting in loss of underlying assets and to arbitrage between the same target and different types of financial instruments, or using the underlying asset price change to make a profit. Thus, the primary function of futures options is to hedge stocks or index, which is the most commonly used tool for institutional investors [1].

Natarajan Meghanathan Eds : CCSIT, NCWMC, DaKM - pp. The usual rules in a trading strategy include indicators based on technical analysis, fundamental analysis, quantitative methods, or a combination of several factors. In this work, we investigate two crucial factors to determine an appropriate trading strategy. The first one is to discover the appropriate timing for profitable trading.

There are many technical indicators being created to predict the trend and can be included in our strategy. The second one is hedging that is closely related to risk tolerance of an investor. Note that there are always risks in the financial market, especially for being a seller who earns the time value to the futures options [2].

The rest of this paper is organized as follows. Preliminaries and related works are generally reviewed in Sec. Our proposed scheme is developed and illustrated in Sec.

To evaluate the effectiveness of our approach, experimental studies based on real market data are explored in Sec. Finally, this paper concludes with Sec. Next, to know how to hedge, the method of hedging is discussed in Sec. Moreover, prior works on identifying future trends using different technical indicators are explored in Sec.

BASICS OF FUTURES OPTIONS In finance, a futures contract is a contract between two parties to buy or sell a specified asset of standardized quantity for a price agreed upon today with payment and delivery occurring at a future date.

The trading of futures options can be modeled as a zero-sum game. In other words, the gain of one party necessarily implies the loss of the other party, i. Options represent the right, but not the obligation, to take some action on the specified date [4].

There are two types of options, i. In European options, a call option is bought when the investor expects the underlying value will rise before the expiry date, and also gives the trader the right to buy an asset at a strike price on the expiry date.

This is opposite of a put option, which bought when the trader expects the underlying value will plunge before the expiry date, and gives the trader the right to buy an asset at a strike price on the expiry date. And there are two sides to each of the option transaction — the party of selling the options, and the party of buying the options.

Each side takes its own risks and has a different portfolio. The relationship of the payoff of a call option and the price of the underlying investment is shown in Fig.

Figure 1. 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. The trading volume of futures options is more than that of any other derivate product. For example, futures options account for over 50 percent in trading volume in Taiwan [5]. However, before that, those options are valuable no matter for time value or hedging value.

An futures option is a derived and volatile trading tool that a trader can either be the buyer or seller [7]. The seller in the futures options like an insurer, if there is not an unexpected situation appears they can obtain a stable profit and the buyer on the contrary. In other words, the buyer and the seller have different views of the volatility.

If buying and selling different options at the same time, it can combine a strategy to reduce the volatility risk. However, Specifically, being the options seller has several advantages [7], including 1 The odds are in the favour; 2 Taking profits becomes simple; 3 Time is on the side; 4 Being close is good enough; 5 Perfect timing is no longer necessary; and 6 Definable risk control.

A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. They have an American style settlement. It is also referred to as the option premium. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price i.

If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price. An option on the index is at- the-money when the current index equals the strike price i. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price i. If the index is much lower than the strike price, the call is said to be deep OTM.

In the case of a put, the put is OTM if the index is above the strike price. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic value of a call is Max[0, St — K ] which means the intrinsic value of a call is the greater of 0 or St — K. Similarly, the intrinsic value of a put is Max[0, K — St], i.

the greater of 0 or K — St. K is the strike price and St is the spot price. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. At expiration, an option should have no time value.

OPTIONS PAYOFFS The optionality characteristic of options results in a non-linear payoff for options. In simple words, it means that the losses for the buyer of an option are limited; however, the profits are potentially unlimited. For a writer seller , the payoff is exactly the opposite. His profits are limited to the option premium; however, his losses are potentially unlimited. These non- linear payoffs are fascinating as they lend themselves to be used to generate various payoffs by using combinations of options and the underlying.

We look here at the six basic payoffs pay close attention to these pay-offs, since all the strategies in the book are derived out of these basic payoffs. Payoff profile of buyer of asset: Long asset In this basic position, an investor buys the underlying asset, ABC Ltd.

Figure 1. The investor bought ABC Ltd. If the share price goes up, he profits. If the share price falls he loses. Payoff profile for seller of asset: Short asset In this basic position, an investor shorts the underlying asset, ABC Ltd.

The investor sold ABC Ltd. If the share price falls, he profits. If the share price rises, he loses. Payoff profile for buyer of call options: Long call A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option.

If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher the spot price more is the profit he makes. If the spot price of the underlying is less than the strike price, he lets his option expire un-exercised. His loss, in this case, is the premium he paid for buying the option. As can be seen, as the spot Nifty rises, the call option is in-the-money.

If upon expiration, Nifty closes above the strike of , the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible with this option are potentially unlimited. However, if Nifty falls below the strike of , he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option. Payoff profile for writer seller of call options: Short call A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option.

For selling the option, the writer of the option charges a premium. If upon expiration, the spot price exceeds the strike price, the buyer will exercise the option on the writer. Hence as the spot price increases, the writer of the option starts making losses. Higher the spot price more is the loss he makes. If upon expiration the spot price of the underlying is less than the strike price, the buyer lets his option expire un-exercised and the writer gets to keep the premium.

As the spot Nifty rises, the call option is in-the-money and the writer starts making losses. If upon expiration, Nifty closes above 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 Nifty-close and the strike price. Payoff profile for buyer of put options: Long put A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option.

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.

Financial markets have enjoyed a wide array of investment options over the years. One of the most popular trading means available is options trading. This post goes through options trading and everything a beginner trader needs to know about options trading. NOTE: Get your Options Trading Strategies PDF Download Below. Free PDF Guide: Get Your Options Trading Strategies PDF Guide. An option is a conditional derivative contract that permits contract buyers to either buy or sell an asset as a predetermined price.

If the price of the asset becomes unfavorable for the options holders, the option will expire worthlessly. This can make sure that the losses are not above the premium amount. However, the option sellers also known as options writer takes on a greater risk than the option buyers, which is the reason why they charge the premium.

Options are divided into two major categories; call and put options. A call option is a financial markets contract that gives the buyer the right but not the obligation to purchase an agreed security at a predetermined price within a specific time period. The security could be a stock, commodity, bond, or other assets. The buyer of a call option profits when the price of the underlying security increases. With a put option, the owner has the right but not the obligation to sell an agreed asset at a predetermined price within a specific time frame.

The buyer of the put option has the right to sell the asset once it hits the predetermined price. We multiply by because, in most options contracts, the option is to buy shares. A deliverable settled option is a type of option that requires the transfer of the underlying stocks or asset that the option has a contract on. For some options contracts they are cash settled.

This means the difference between the strike price and the expiry price will be paid out in cash. Some of the risks associated with options trading include;. There are numerous options for trading strategies. The popular ones include;. This strategy is popular among options traders because it generates income while reducing the risks of being long on an asset. It involves buying a stock and simultaneously writing or selling a call option on the same asset. With this strategy, the investor buys an asset and simultaneously purchases put options for the same number of shares.

The holder of this put option can sell the stocks at the set price, with each contract worth shares. The long strangle strategy involves a trader buying an out-of-the-money call option and an out-of-the-money put option simultaneously, on the same underlying security, and with the same expiration date. This involves a combination of two different contracts. This strategy involves an investor combining a bear spread strategy and a bull spread strategy.

The iron condor strategy is where the trader simultaneously holds a bear call and a bull put spread. The trader buys an out-of-the-money put option and sells an at-the-money put at the same time. The trader will also buy an out-of-the-money call option and sell an at-the-money call. This involves buying calls at a set price and selling the same number of calls at a higher stake price simultaneously.

The two call options will have the same underlying asset and expiration date. This is a form of vertical spread where the trader simultaneously buys put options at an agreed strike price and sells the same number of puts at a lower strike price. This strategy comes into play by buying an out-of-the-money put option and writing an out-of-the-money call option at the same time.

The underlying security and expiration date of the contract remains the same. This strategy takes place when the trader simultaneously purchases a call and put option on the same asset or commodity with the same expiration date and strike price. Avatrade is one of the best options trading brokers currently available to traders globally. To make it easy for you, Avatrade supports 13 major trading strategies, provides automatic spreads and also risk reversals for some trading strategies.

The interactive page on Avatrade makes it easy to trade options or Forex. The historical chart indicates the past, while the confidence interval displays the likely direction of the market.

You can test out Ava options trading here. The Avatrade options trading platform is one of the best at the moment. With AvaOptions, traders have more control over their portfolio. You can also balance your risk and reward to match your market view. AvaOptions comes with professional risk management tools, portfolio simulations, and much more. You can test out Ava options trading platform here. Options trading provides alternative trading strategies, allowing you to profit from the underlying asset.

There are various strategies involved in trading options, and it is best to choose one that favors your trading style. Keep in mind: whilst there are many benefits to trading options, there are also risks you need to be mindful of.

If you are new to Forex, then learning how to read a price action chart can be incredibly confusing. I am using all aspects of technical analysis and price action in my trading with a goal to help you learn to do the same. Skip to content. Table of Contents. Featured Brokers IC Markets. Tightly regulated around the world Small minimum deposit Superior trader support Latest trading platforms Very small trading costs.

Trade Now. Investagal If you are new to Forex, then learning how to read a price action chart can be incredibly confusing.

Options can also be traded on futures, bonds, interest rates, currencies and ETF’s. CALL VS PUT There are two basic types of options – call options and put options. As a reminder A Of course there are various ways to constructmost strategies. We have underlinedthe most common method and used that method in our explanations of Profit, Loss, Volatili ty and Time Options trade in contracts. Each options contract provides the owner the right to purchase shares of the underlying stock. When an investor purchases one option contract for $1 they Options Trading Strategies There are numerous options for trading strategies. The popular ones include; Covered call This strategy is popular among options traders because it OPTIONS TRADING AND HEDGING STRATEGIES BASED ON MARKET DATA ANALYTICS. Computer Science & Information Technology (CS & IT), Download Free PDF The Bible of Options Strategies, I found myself cursing just how flexible they can be! Different options strategies protect us or enable us to benefit from factors such as strategies ... read more

Log in with Facebook Log in with Google. Reprinted : by NSE Academy Ltd. The investor is covered here because he shorted the stock in the first place. NSE Academy has tied up with premium educational institutes in order to develop pool of human resources having right skills and expertise which are apt for the financial market. Without loss of generality, we investigate the effectiveness of several trading constraints and technical indicators by scrutinizing and back testing with the long-term market data. In light of that, using the spread strategy helps to limit the risk [8]. Given that another factor the rest date to the expiration date, we divide nearby month and back month to research the difference of their profit ratio and explore are there any characteristic we can expand to use in our work.

When to Use: This options trading Example strategy is taken when the options Suppose Nifty is at in January,