Options Trading Strategies

How to trade a major event: Just ahead of a big event, like an election or a credit policy or a result markets and stocks tend to move in a small range before blasting away in one direction. Since the outcome is unknown the best strategy during such times is to create a straddle or a strangle. 

Straddle is created by buying a call and put of the same strike. However, as the date of the event nears, the premium of call and put both increases substantially thus reducing the chance of a profit. 

Strangle is created by buying a call and put of various strikes. In the case of Nifty a trader can buy a 8400 put and 8600 call in anticipation of market moving away on one direction.

How to protect your profits: In case a stock or the index that a trader has bought moves up sharply and the trader is keen on protecting his profit, he creates a ‘Protective collar’ strategy. The trader purchases an out of the money put option and at the same time writes an out of the money call option. 

The beauty of option is it allows one to be very creative, but a trader needs to keep in mind his cost of setting up a strategy. The most important reason professional traders prefer options is because it informs them of their risk and potential reward in various market scenario.