If you are looking at options strategies, you are probably playing the derivatives market with a lesser risk instrument. Options can provide that for you, being a derivatives contract whereby one can purchase the right to buy or sell an underlying asset without having to bear the actual obligation of carrying out the transaction.
There are various options strategies which are used by investors. Such strategies can favor different movements in the market, such as a bullish or bearish trend or could be neutral. When one opts for neutral strategies, it could be further classified as bullish or bearish based on the volatility of the price movements. Most investors exercise two types of options – call and put and can maintain long or short positions on such stances.
If you are opting for bullish strategies, these usually indicate that as an investor, you are expecting the price of the underlying asset to move upward. In such cases, one assesses how high the price of the asset will move and accordingly choose the appropriate trading strategy. Most novice investors in case of bullish trends, decide to exercise their call option and use the buying strategy.
If you consider the bearish trends, the strategies vary accordingly. Bearish options indicate when investors feel that the price movement of the underlying asset is going to be negative. In such cases, investors assess as to how low the price will go and then decide on their trading strategy accordingly. Many novice investors decide to exercise their put options and sell in such circumstances. Since stock prices generally do not go down steep, most bearish options investors will set an average price decline estimate and will use bear spreads to minimize cost. Bear call spread, bear put spread are the common strategies employed in such cases.
Neutral strategies on the other hand are used when the price movement is indeterminate. In such cases, the profit to be made is calculated by the strategy undertaken and not by the price movement of the underlying asset. There are several neutral strategies such as Guts, Straddle, Butterfly and Risk Reversal which can be studied in detail by investors willing to play the options market.
Thus, options trading strategies can be several and one needs to understand them in detail before deciding to dabble with futures and options trading in India. Amongst the two, options are less risky investment instruments and if played right, can help one to reap profits in the long run.