Nifty options trading strategies involve the simultaneous purchase and/or sale of different Nifty option contracts.
That is, if a trader thought that Nifty’s price was going to increase over the next month a simple way to profit from this move while limiting his/her risk is to buy a call option of Nifty index. Of course, he/she could also sell a put option.
But what if he/she bought a call and a put option at the same strike price in the same expiry month? How could a trader profit from such a scenario? Let’s take a look at this option combination.
In this example, imagine you bought (long) one 5900 December call option and also bought one 5900 December put option. With the underlying trading at 5900, the call costs you Rs. 85 and the put costs Rs. 85 also.
Now, when you’re the option buyer (or going long) you can’t lose more than your initial investment. So, you’ve outlaid a total of Rs. 170, which is you’re maximum loss if all else goes wrong.
But what happens in the Nifty options trading strategies if the market rallies? The put option becomes less valuable as the market trades higher because you bought an option that gives you the right to sell the asset – meaning for a long put you want the market to go down. You can look at a long put diagram here.
However, the call option becomes infinitely valuable as the market trades higher. So, after you break away from your break even point your position has unlimited profit potential.
The same situation occurs if the market sells off. The call becomes worthless as trades below 5985 (strike of 5900 minus what you paid for it – Rs. 85), however, the put option becomes increasingly profitable.
If the market trades down 10%, and at expiry, closes at 5310, then your option position is worth Rs. 505. You lose the total value of the call, which cost Rs. 85, however, the put option has expired in the money and is worth Rs. 505. Subtract from this to total amount paid for the position, Rs. 170 and now the position is worth Rs. 505. This means that you will exercise your right and take possession of the underlying asset at the strike price.
Now, how to calculate your probable profit and losses in Nifty options trading strategies. We recommend using OptionsOracle, a nice FREE option strategy builder. Since options trading is more complex and can involve much higher risk than simple stock trading, traders need to fully understand the Nifty options trading strategies before investing in it. This is where OptionsOracle comes to help. OptionsOracle is a powerful tool that allows testing of different options strategies using real-time options & stock-market information. The tool provides an easy interface to build a stock/options position and then test it using graphs and analytical tools.
OptionsOracle is simple to use tool that includes a built-in tutorial. After entering the stock symbol, the software will automatically download the real-time information of the stock and its options. Next, using either the wizard with the pre-configured template or using the manual setting, the tested position is built. Lastly, the analysis tools will provide information about the position gain/loss given the stock price and time, enabling you to better understand the position.
For building your own Nifty options trading strategies we are sharing OptionsOracle here. You can freely download OptionsOracle by clicking the button below.
2017 Update: Option Oracle does not work anymore. The provider Samoa Sky has closed there site. We have posted a solution for that with a working version here: Option Oracle Pasi – An End To Option Oracle Problem.
Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.