Part 8 Trading Master Class

1. Core Option Trading Strategies

These are the foundational option strategies every trader must know. They are relatively simple, easy to implement, and help beginners understand how options behave in different market conditions.

1.1 Covered Call Strategy

What It Is:
A covered call involves owning the underlying stock and simultaneously selling (writing) a call option on the same stock.

How It Works:
Suppose you own 100 shares of TCS at ₹3,500 each. You sell a call option with a strike price of ₹3,700, receiving a premium of ₹50 per share.

If TCS rises above ₹3,700, you may have to sell your stock at ₹3,700, but you keep the premium.

If TCS stays below ₹3,700, you keep both the stock and the premium.

Best Used When:
You expect the stock to remain flat or rise slightly.

Advantages:

Generates regular income (option premiums).

Provides partial downside protection.

Risks:

Limits profit if the stock price rises sharply, because you must sell at the strike price.

1.2 Protective Put (Married Put)

What It Is:
A protective put involves owning the underlying stock and buying a put option to hedge against potential losses.

How It Works:
Imagine you own 100 shares of Infosys at ₹1,600. To protect yourself from a market downturn, you buy a put option at ₹1,550 by paying a premium of ₹30.

If Infosys drops to ₹1,400, you can still sell at ₹1,550 (limiting your losses).

If Infosys rises, your put option expires worthless, but your stock gains.

Best Used When:
You’re bullish long-term but worried about short-term downside risk.

Advantages:

Insurance against big losses.

Peace of mind for long-term investors.

Risks:

Premium cost reduces net profit.

1.3 Long Call

What It Is:
Buying a call option when you expect the stock price to rise.

How It Works:
Suppose Nifty is at 24,000. You buy a call option at a strike of 24,200 for a premium of ₹100.

If Nifty rises to 24,500, your option is worth 300 points (500 – 200), making a profit.

If Nifty stays below 24,200, your option expires worthless and you lose the premium.

Best Used When:
You’re bullish on the market/stock.

Advantages:

Limited risk (only the premium).

High profit potential if the stock rises sharply.

Risks:

Options can expire worthless.

Time decay works against you.

1.4 Long Put

What It Is:
Buying a put option when you expect the stock price to fall.

How It Works:
Say HDFC Bank is trading at ₹1,600. You buy a put option at strike ₹1,580 for a premium of ₹25.

If HDFC falls to ₹1,520, you profit from the difference.

If it stays above ₹1,580, you lose only the premium.

Best Used When:
You’re bearish on the stock/market.

Advantages:

Limited risk, big profit potential if the stock falls sharply.

Can be used as portfolio insurance.

Risks:

Options lose value quickly if the stock doesn’t move.

1.5 Cash-Secured Put

What It Is:
Selling a put option while holding enough cash to buy the stock if assigned.

How It Works:
Suppose you want to buy Reliance shares at ₹2,300, but it’s trading at ₹2,400. You sell a put option at ₹2,300 for a ₹40 premium.

If Reliance falls below ₹2,300, you must buy it at ₹2,300 (your target price), and you also keep the premium.

If Reliance stays above ₹2,300, you don’t buy it, but you still keep the premium.

Best Used When:
You’re bullish on a stock but want to buy it cheaper.

Advantages:

Generates income if the stock doesn’t fall.

Lets you buy stock at your desired entry price.

Risks:

Stock could fall far below strike price, leading to losses.

1.6 Collar Strategy

What It Is:
A collar combines owning stock, buying a protective put, and selling a covered call.

How It Works:
You hold Infosys stock at ₹1,600.

You buy a put at ₹1,550 (insurance).

You sell a call at ₹1,700 (income).

This creates a “collar” around your stock’s possible price range.

Best Used When:
You want protection but are willing to cap profits.

Advantages:

Reduces risk with limited cost.

Works well in uncertain markets.

Risks:

Limited upside profit.

Complex compared to basic strategies.