Options are touted as one of the most common ways to profit from market swings. Whether you are interested in trading futures, and currencies or want to buy shares of a corporation, options offer a low-cost way to make an investment with less capital.
When options are traded algorithmically, it is known as algorithmic options trading. Unlike automated trading techniques, options Algo-trading is more perceptive to changing market scenarios. This brings about a systematic order to the options trade, generating a better liquidity position on the market.
The majority of the traders lose money whilst trading in options owing to market speculation, emotional trading and lack of risk management. There are a variety of options algorithmic trading strategies that can be created from the combination of call and put options, buying and selling, weekly and monthly, at various strike prices. Selecting the right strategy for the market conditions is the biggest hassle. Given below are a few of the common options trading strategies presented:
1. Bull Spread: In this strategy, one at-the-money(ATM) option is bought and one Out-The-Money(OTM) is sold of the same option. Where option refers to either call option or puts option.
2. Bear Spread: A strategy achieved by combining two options of the same type. By buying one option at a strike price and selling another option at a lower strike price.
3. Synthetic Option: This strategy is used when you have expectations of a trending day in the market, be it bullish or bearish.
A Synthetic Call begins with an investor buying and holding shares. Moreover, a put option of the same stock at an at-the-money price is also bought to protect against depreciation. This strategy is also known as a married call or protective call. When you are expecting a bullish market, a Synthetic Call is used.
Whereas for bearish expectations, Synthetic Put is used. This strategy begins with selling a stock position along with buying a call option on the same stock to protect against appreciation of the stock price.
4. Straddles: This strategy revolves around buying or selling both call and put options at the ATM strike price. If the options are bought, the strategy is called a long straddle, whereas if they are sold, the strategy is called a short straddle.
5. Strangles: Similar to straddles, with a small difference that the options(call & put) are bought at OTM strike prices for a long strangle and are sold at OTM strike prices for a short strangle.
6. Butterfly: One of the neutral options trading strategies, comprising a combination of bullish spread and bearish spread with a fixed risk and a capped profit. This usually involves 4 options contracts at 3 strike prices. There are four types of butterfly spread strategies possible to be executed based on the type of options contract written:
- Long Call: Buying Call options for one in-the-money strike price, two at-the-money strike prices, and one out-the-money strike price
- Short Call: Selling Call options for one in-the-money strike price, two at-the-money strike prices, and one out-the-money strike price
- Long Put: Buying Put options for one in-the-money strike price, two at-the-money strike prices, and one out-the-money strike price
- Short Put: Selling Put options for one in-the-money strike price, two at-the-money strike prices, and one out-the-money strike price
7. Iron Condor: One of the more complicated strategies that we will be discussing today, this strategy involves 2 puts and 2 calls, and 4 strike prices with the same expiration date. Maximum profit occurs when the underlying asset closes in between the middle strike prices at expiry.
While these are few of the common strategies, there exists more strategies that can be derived from a combination of two or more of the strategies present above. Remember to backtest a strategy before running it live.
The strategies generated by Chatur Wealth are executed solely on the Nifty options market with a focus on the stability of the Indian market compared to other more risky options. Doing this assures better returns.