The trading world is full of surprises. At one moment you are the king of the world, at the very next moment, your whole world turns upside down. On the other hand, if you know your way around the alleys and labyrinths of the money market, you won’t be as disappointed or hopeless as you dread. There are some smart trading strategies that you can follow without risking much, and options trading is one of those ways that can get you some good returns on investment (ROI).
Options Trading – A Revision!
In the previous 2 parts of this series, our SEBI Certified Research Analyst, Ashutosh Bhardwaj has thrown some light on options trading, simplifying the bullish and bearish trading techniques for your convenience. If you have not gone through those 2 parts, then just take 5 minutes and grasp the gist of part 1 here and part 2 here. Besides, if you have paid attention to those and implemented the same in your trading stratgey, here is a quick revision about Options Trading.
It is a financial derivative which usually includes buying and selling of options contracts. These options could be any financial instrument that gives the holder (investor or trader) the right to buy or sell an underlying asset at a strike price that has already been predetermined on (or before) a particular expiration date. The underlying asset include stocks, bonds, commodities, and other financial instruments to name a few.
Coming to the third part of this series, ‘neutral trading’ as a component of options trading.
What is Neutral Trading in Options Trading?
These are the trading strategies that are specifically designed to help you make a profit from no movement at all or little movement in the underlying asset’s price. It is a very common assumption when it comes to neutral trading that the price of that underlying asset will remain unchanged within a predetermined spectrum.
Types of Neutral Trading
1. Short Strangle
Under this neutral trading strategy, you have to sell both an out-of-the-money (OTM) call option and an OTM put option that happens to have the same expiration date but different strike prices. The ultimate goal of this strategy is to make a profit from the time decay of options in a limited or somewhat neutral market outlook. To implement a short strangle strategy, you have to select the underlying asset, accurately choose strike prices, make sure that both the call and put options should have the same expiration date, and at the end, collect a premium for both call and put.
2. Iron Butterfly
When the underlying asset has a stable price and low volatility, there are more chances of involving both calls and puts, which benefit the investor instantly by creating such a position. To implement the Iron Butterfly technique, first, you have to ‘Buy a Straddle’ that you can purchase with an at-the-money (ATM) call option, then buy an ATM put option where these both have to have the same expiration date. Secondly, you have to ‘Sell a Strangle’ where you sell an out-of-the-money (OTM) call option with a higher strike price, and then sell an OTM put option with a lower strike price. Keep in mind that both options must have the same expiration date as the options bought (straddle).
3. Short Iron Condor
In this strategy, there is one long and one short put as well as one long and one short call where all of them have different strike prices but the same expiration date. With the advantage of limited risk, it lets investors, inventors, and traders to profit from the low unpredictability in the market. One thing that makes it different from any other trading option is, that when the underlying asset’s price is somewhere between the middle strike price at the time of expiration, the potential to make a profit is maximum which many trading experts are aware of, hence, they look forward to bank on it.
4. Batman Strategy
It doesn’t have many demarcated or associated risks but is exclusively custom-built to give lucrative benefits to the trader involved. Being asymmetric in nature, Batman strategy offers high profitability because of high returns and minimal risk. Under this strategy, traders usually get more time to make any trade-related decision and adjust their trading positions accordingly. It makes them stress-free from the apprehension of instant profit or loss. They get to make some small profits but ample opportunities to make big profits. in other words, it has the potential to return distribution positively, i.e., with higher profits.
5. Double Ratio Spread
When an investor buys and sells different options contracts with different strike prices and/or different expiration dates, simultaneously, we can say it is a Double Ratio Spread technique. Unlike other options trading strategies, it offers multiple options contracts in a single trade. It also happens to be a limited-risk, limited-reward profile. This strategy can also be devised for managing risks by balancing the purchased options’ cost with the selling options’ premium.
Conclusion
The SEBI Registered Research Analyst at Logical Nivesh ensures that you learn about the latest market trends and make a profit in every way possible. If you want to learn more about the trading world, get enrolled in our online trading courses o Logical Nivesh Academy.
