Nifty options trading strategies imply the simultaneous buying and selling of multiple Nifty options contracts. For example, suppose a trader thinks that Nifty’s price is going to increase over the next month. So, a simple and easiest way to profit from this movement while limiting the risk is to buy a Nifty Index call option. Besides this, the trader could also sell a put option.
Example Of Nifty Options Trading Strategies
Here, we also need to assume that what if the Trader buys a call and a put option at the same strike price in the same expiry month? How could a trader make a profit from the scenario? So, let’s have a look at this combination of options.
Imagine a trader buy or long one 5900 December call option, as well as one 5900 December, put option. With the underlying trading at the 5900 levels, the call costs Rs.85 while the put cost also Rs.85.
Now, let’s think you’re an option buyer (or going long) you can’t lose more than your initial investment. Therefore, you’ve outlaid a total amount of Rs. 170, which is the maximum loss if all else goes wrong.
Scenario 1: Market Rallies
What Happens options trading strategies if the market rallies? The put options generally become less valuable as the trades are high. If you want to trade on put options, the market needs to go down.
Therefore, call options to become more valuable because of the higher market trades. On the opposite side, during lower market trades, put options to become more profit potential.
Scenario 2: Market Sells Off
The same situation happens if the market sells off. The call becomes valueless as trades is below 5985 (here the strike of 5900 minus what you paid for it – Rs. 85), therefore, the put option becomes much profitable.
If the market trades down to 10%, and at expiry, closes at the level of 5310, then the option position is worth Rs. 505. The trader will lose the total value of the call, which costs Rs. 85, so, the put option has expired in the money and it worths Rs. 505. So, subtract from this to the total amount paid for the position, Rs. 170 and now the position is worth Rs. 505 amount. This means that the trader will exercise his right and take possession of the underlying asset at the strike price.
Valuable Information About Nifty Options Trading Strategies
Most of the time, traders do not have a proper plan to apply the same plan for all occasions again and again. If they feel a bullish market they buy a call and if they feel the bearish market they buy a put. The strategy is only useful in a handful of situations. Further, markets trend less than 30% of the time, most of the time the market is moving in a narrow range.
There are multiple strategies that have been showed in various books. But not all are useful for a retail trader. The trading cost on account of higher brokerages in most conventional broking outfits and higher tax structure makes most of these strategies uneconomical.
A retail trader must look at some basic strategies with a minimum number of legs that he could use on his everyday trade.
The main ingredient of using a strategy is to assume what is expected from the stocks or the index. Observe the stock or the market is most significant in deciding which strategy to use. Buying a call in bullish or a put in bearish works only if the market moves in the favor sharply. Markets and stocks casually grind their way up or down and only in few cases do they move up or down sharply. Buying of calls and puts thus does not work properly in favor in most of the cases.
Let’s take into consideration different scenarios in the market and look at multiple strategies. Markets are either up and down trending or are sideways. Various strategies have to be adopted in such situations.
How To Calculate Your Probable Profit And Losses?
We strongly recommend using OptionsOracle, it is a nice FREE option strategy builder. As the options trading is much complex and can involve a much higher risk than simple share trading, traders have to fully understand the Nifty options trading strategies prior to investing in it. This is where OptionsOracle can be utilized properly. OptionsOracle is a powerful or strong tool that allows the testing of multiple options strategies using real-time options as well as stock-market information. The tool gives an easy and simple interface to build a stock/options position and then test it using the graphs and analytical tools.
More On Options Oracle
OptionsOracle is quite simple to use tool which includes a built-in tutorial. After entering the stock code or symbol, it will automatically download the real-time data of the stock and its options. Next, by using either the wizard with the pre-configured template or using the manual setting, the tested position can be built. Finally, the analytical tools will give information regarding the position gain/loss given the stock price and time, enabling you to better understand the position.
In order to build your own Nifty options trading strategies, we are sharing OptionsOracle here. You can freely download OptionsOracle by clicking the link below.
2017 Update: Option Oracle is not working anymore. The provider Samoa Sky has closed the site. We have posted a solution for that with a working version over 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.