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Options Trading Guide

 

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BULL CALENDER SPREAD

Bull Calendar Spread Option Strategy

This strategy is implemented when a trader is bullish on the underlying stock/index in the short term say 2 months or so. A trader will write one Near Month OTM Call Option and buy one next Month OTM Call Option, thereby reducing the cost of purchase, with the same strike price of the same underlying asset. This strategy is used when a trader wants to make profit from a steady increase in the stock price over a short period of time.
Risk: Limited
Reward: Unlimited

Example
Suppose NIFTY is trading at 5300 levels, Mr. X is bullish on the market and expects it to rise in the near future say 2 months or so. He will sell one 5400 NIFTY April (near-month) OTM Call Option for a premium of Rs.25 and buy one 5400 NIFTY May (next-month) OTM Call Option at a premium of Rs.110. The lot size of NIFTY is 50. Hence, his net investment will be Rs.4250. [(110-25)*50]

Case 1: At Near-Month (April) expiry if NIFTY closes at 5000, then Mr. X will get to keep the premium amount i.e. Rs.1250. (25*50) At Mid-Month (May) expiry if NIFTY closes at 4800, then Mr. X will make a loss of premium amount i.e. Rs.5500. (110*50). His net payoff will result in a loss of Rs.4250. (5500-1250)
Case 2: At Near-Month (April) expiry if NIFTY closes at 5100, then Mr. X will get to keep the premium amount i.e. Rs.1250. (25*50) At Mid-Month (May) expiry if NIFTY closes at 5300, then Mr. X will make a loss on premium amount i.e. Rs.5500. (110*250). His net payoff will result in a loss of Rs.4250. (5500-1250)
Case 3: At Near-Month (April) expiry if NIFTY closes at 5500, then Mr. X will incur a loss of Rs.3750. [(100-25)*50] At Mid-Month (May) expiry if NIFTY closes at 5700, then Mr. X will make a profit of Rs.9500. [(300-110)*250] His net payoff will result in a profit of Rs.5750. (9500-3750)

Note: Calendar Straddle Option Trading Strategy is similar to this Bull Calendar Spread; the only difference is the position acquisition. In Bull Call Calendar Spread we trade in only Call Options, whereas in a Calendar Straddle we will sell one Near-Month Straddle and buy 1 Mid-Month Straddle (Straddle = 1 Call Option + 1 Put Option). The payoffs, ideology and construction of a Calendar Straddle will remain same as of Bull Calendar Spread.
 
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Options Trading Strategies

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Frequently Asked Question

When you buy an options contract, it gives you the right but not the obligation to buy or sell an underlying asset at a set price on or before date. Call option grants you the right to buy a stock and put option grants you the right to sell a stock.
It provides large exposure by doing a single trade. It helps in lowering the costs and risks while trading. It also helps in lowering the volatility related to trade.
Relative Strength Index (RSI) is an indicator used in technical analysis to check the bullish and bearish momentum. It is generally used by technical traders and value oscillates between 0 to 100, value below 30 indicates that the option contract is oversold and value above 70 indicates that option contract is overbought.
To trade in options, one must research before buying. The options trading is not as riskier as trading in individual issues of the stocks or bonds. If one does the trade in the appropriate manner then it can be more lucrative.
The long dated options gets expire on the last Thursday of the month. If Thursday is a holiday then the expiry day is on the previous trading day.
The long dated options are the contract that has the maturity of up to 3 years. The other features of the long dated options are similar as of the monthly contracts.
The Exotic options are the non-standardized options. These options have complex features in the underlying asset and the calculation and the payment of payoffs.
The minimum amount required to buy an option will be the premium paid in addition to the brokerage and other charges.
The index options are the contracts in which an underlying asset is Index.
The Options are of two types: a) Call Options. b) Put Options.
The options contracts are settled in the cash on the daily basis and on the expiration date. The traders do not need to hold any stocks.
You will get the premium immediately upon the successful execution of your option trade.
There are various indicators to figure out whether the option contract has been adjusted or not. Some of them are: a) The option is either too cheap or too expensive. b) There are various two symbols for the options of same month and strike price. c) The liquidity of the adjusted options is less than the options.
When an individual buys an options contract then they don’t need to pay the margin as the loss incurred is limited. An individual needs to pay a premium amount. The loss will be further limited to the premium value. At the time of selling the option contract, one needs to pay a margin need as there can be a chance of the unlimited loss and limited profit.
These are the option whose pay off depends on if the option choses ITM or OTM on the expiry.
The long dated options offers various benefits such as: a) It provides the long-term exposure in the stock or index to a trader. b) The long-term hedging against the equity position. c) It further minimizes the risk by allowing the traders to make investment for longer period of time.
Relative Strength Index (RSI) = 100–100/(1+RS) Where, RS = (Average gain/n) / (Average loss/n) n = Time frame
No, there is no really any cause for your broker to charge you for writing a put.
Naked option trading is also known as uncovered option trading. It’s a strategy of selling an option without holding position in the underlying. It also refers to an option sold without any previously set aside shares to fulfil the option obligation at expiration. Naked option strategy run the risk of large loss from rapid price change before expiration. Naked call and put option that are exercised to create a short and long position in the seller’s account respectively.
After hours options trading refers to the buying or selling of Option in the aftermarket hours i.e. 9:30 AM to 3:30 PM. After hours options trading is done with the helps of After Market Orders (AMO).
It is an option where an underlying asset is also another option. This type of option has two strike price and expiry dates.
Every trader has its own strategy to earn from the market. But there are many technical strategies available through which one can understand the trend of market. • One should understand the nature of market whether it is bullish, bearer or neutral. • Before investing, check the past trend of stocks. • Evaluate yourself. • Take experience from the market. • Pick your strategy wisely.
These are the option whose payout is calculated by deducting the average from the strike price.
In India, NSE and BSE are the options trading exchanges. Both of these exchanges are regulated by SEBI to provide the transparent trading environment.
The market timings to trade in Index and single stock options in NSE and BSE is from 9:15 AM to 3:30 PM on the trading days. You can place orders to buy and sell the options in this period.
These are option whose payoffs completely depends on the price of the underlying that further crosses a level during the option’s lifetime.
A lot size refers to the minimum number of shares in an options contract. The NSE F&O is different from index to index and stock to stock.
As per the SEBI regulations, Adjustments means the modifications to the positions and or contract the specifications so the value of positions of the buyers or sellers continues to remain same.
The traders lose money because they try to hold the options that are too close to the expiry. So, if you are getting good price then it is better to exit at a profit when there is time value left in the option.
Paired Option contract is the new facility that allows a trader to take positions on 2 different contracts belonging to the same underlying asset at the same strike price and expiry date. This contract allows a trader to take two different positions on the same option in single order.
A Sell to Open refers to the various instances in which an option investor initiate or open an option trade by selling or creating a short position in an option. It allows the option seller to receive the premium paid by the buyer on the opposite side of the transaction.
The index options include Nifty 50 index option, NIFTY IT Index option, FTSE 100 Index Options, etc.
Yes, it is possible to trade in Nifty or stock options Intraday.
Buying or selling the call or put options depends on the market outlook of an individual. If you think that market will rise in this month then you must consider the “Buy Call Option” or “Sell Put Option” and vice versa.
It is an Options Trading Strategy in which a trader will buy and sell multiple option of the same type either call or put with the same underlying asset. Mainly there are three types of Option spread strategy. • Vertical Spread Strategy. • Horizontal Spread Strategy. • Diagonal Spread Strategy. Traders can use these spreads to lower their cost of investment as you pay premium for buying option and receive premium on selling option.
Yes, one can trade in options in day trading. The day-trading margin rule is applied to the day trading in any security that includes options.
Option is a contract that gives the holder the right to buy or sell the underlying asset that is obligated to honour the contract at a predetermined price and time. It requires less margin. A future is a contract that is made buy or sell the underlying asset at predetermined price and time. It requires higher margin.
No, an individual cannot place the options order in pre-market trading. Only equity cash is allowed to trade in the pre-market session.
Bull call spread is a strategy which involves two positions of buying a call and selling a call option. Generally, it is used by traders, when they are bullish in the market. Profit and loss are limited in this strategy.
This type of option permits a trader to select the purchased option is a call or out after the specific time period.