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Indian investors are more attracted towards option trading than regular stock market intraday trading because of the high returns.
As a result, the Indian stock market has seen a sudden rise of active derivatives traders from less than 7 lakh in 2019 to over 45 lakh now.
As of now, more than 80% of the global options traders are from India, where 93% of retail traders in equity F&O suffered huge losses during FY 22 and FY 24. In contrast to the profits they traded, they caused more losses.
This sudden rise in option traders is due to several misconceptions, such as low risk-high reward or influencers promoting videos with the tag “options trading: 5000 to 1 lakh in an hour,” and many others.
In reality, option trading is highly rewarding, but it comes with high risk and is more complicated to understand than regular stock market investing or intraday trading.
Traders commonly use Nifty stocks and indices for option trading due to high liquidity.
Options trading involves understanding the landscape and dynamics of the derivative market as well as other fundamentals of options trading.
If you are a beginner and finding your way into becoming a successful options trader, then you should have a plan and strategy.
Due to various market factors, coming up with a rigid trading strategy may be quite difficult.
Therefore, we will be exploring some of the best option trading strategies in Nifty to help you identify which one is best for you.
It is impossible to single out just one or two of the best nifty option trading strategies.
Trading strategies are used in accordance with the conditions and trends of the market.
Thus, large losses may result from using the incorrect strategy at the wrong time.
To maximise potential returns, it is crucial to comprehend the fundamentals of various strategies and when to put them into practice.
Examine each of the strategies for nifty option trading and choose the one that works best for you.
Long call option trading strategy is a basic strategy used by options traders as a call option, where a buyer bets on an underlying stock to rise in value in the future and draws a contract that allows the buyer to purchase or sell an asset at a predetermined price in the future.
This contract is completed by setting the expiry date, strike price, and paying a premium to the seller.
If the price of the asset you purchased through a long call rises above the strike price on the predetermined date, you can expect to gain a profit.
However, if it doesn’t, then they will not exercise the right, ensuring potential losses don’t exceed the premium.
A long-call strategy should be exercised only if the market is in a bullish uptrend.
Only purchase in the long-call option if you believe that the asset price will rise to the predetermined price.
A short put is when option traders take put positions. A put option is where a buyer bets on an asset to lose its value in the future and has the right to sell the underlying asset in the future.
Similarly to the long call option, a contract is drafted by setting a strike price and expiry date and completed upon paying a premium.
In this case, if the price of the underlying asset falls below the strike price on the expiry date.
You can make a profit by selling the asset for the strike price at the expiration.
However, if the price remains above, then the option contract is worthless.
Long-put strategies are mainly used to hedge against long-call option contracts. It is implemented in case the underlying asset price heads towards a bearish position in the market.
A covered call is an options trading strategy where a trader holds a position in an underlying asset and sells the call option on the same asset to generate income.
This strategy is used by investors when they believe that the price will not rise sharply over the near term.
By taking a covered call, you can hold an underlying asset for the long term and also generate income through premiums of the sold call options.
The investors benefit most if the price stays below the option’s strike price as the option expires worthless and the investor gets to keep the stock and premium.
However, if the price rises and the buyer decides to exercise the option, then you are obligated to provide the share at the strike price.
Protective put is a risk management strategy for nifty option trading used by traders to limit potential losses.
A protective put is implemented when the trader thinks of a possible decline in an underlying asset after purchasing an asset.
This strategy is implemented by purchasing put options for the same underlying asset with a strike price below the price of the underlying asset to protect against losses.
If the stock price remains stable or increases, the contract remains null, and the investor only loses the minimum amount.
If the price declines, the value of the put option increases, resulting in more profits.
A bull call spread is a spread strategy that requires two or more option transactions.
This strategy is implemented by buying a call option and selling a call option simultaneously.
A bull call spread is done by buying a call option on an underlying asset at the same strike price as the asset’s price for a specific expiry time, which gives the right to purchase the asset at the strike rate before the expiration date.
At the same time, sell a call option on the same asset for a premium with the same expiration date but a higher price.
In the event of expiration, the trader has the right to exercise the options or close out the position by selling the long-call option and buying back the short-call option.
The trader would achieve maximum profit if the strike price rose above the underlying asset of the short-call option.
This strategy is used when a trader thinks that the price of an underlying asset will rise moderately in the future.
Bear call spread, also known as short call spread, is a conservative strategy used by traders when they expect the price of an asset to fall moderately.
A bear call spread is when a trader makes a short call option for a lower strike price than the asset’s price.
Simultaneously, the trader buys the same number of call options at a higher strike price with the same expiration.
The trader can achieve maximum profits if the underlying asset falls below the strike of the short-call option on the day of the expiration.
However, if the price does not fall, then the loss is limited to the net premium paid for the options.
Bear Put Spread is a type of option spread strategy used by traders when they expect an underlying asset price to decline in the future and hope to reduce the cost of holding the option trade.
As we know, spread strategies require two or more option trades.
A bear put spread strategy is completed when a trader takes a long position for a higher strike price than the asset’s price while selling the same number of put options on the same asset for a lower strike price with the same expiration.
Upon expiration, traders can earn huge profits by limiting the risks if the price falls by a limited amount between the trade date and expiration.
If the price falls more than the predicted amount, the trader loses the ability to make additional profits.
A bull put spread strategy involves purchasing and selling option traders.
A bull put strategy is used when an asset’s price is expected to rise moderately and profit from it.
This strategy involves selling one put option for a higher strike price and buying another with a lower strike price than the asset price and the same expiration date.
The trader aims for the stock price to close above the higher strike price of the short put option to get maximum profits from the difference in the premium costs of the two options.
Long straddle is an option strategy in which you buy call and put options on the same asset with the same strike price and expiration date.
This strategy is used when it is unclear whether the price of an asset will rise or fall.
It works by purchasing a call option with a higher strike price near its current price while purchasing a put option at the same strike price and expiration.
By doing so, you can profit from either the call option or the put option, as the profit from the winning option may outweigh the combined cost of the two options if it rises or falls dramatically.
A short straddle is the opposite of a long straddle. Selling one call option and the put option are the two short options that are used in this strategy.
This strategy is employed when an investor expects the price to remain stable and aims to make a profit from the premiums.
This strategy involves selling a call option and a put option at the same strike price, closer to the current stock price, with the expectation that the stock price will remain below the strike price of the short call option and above the strike price of the short put option.
If the stock price remains near the strike price, the option becomes worthless at expiration, and you can keep both the stocks and the premium.
If the stock price rises or falls significantly, either of these options may incur losses.
Intraday option trading is more time-limited and riskier than option trading due to its requirement to open and execute option trades on the same day.
The above-listed strategies can be implemented according to the market conditions in intraday trading, but quick decision-making, managing risks, and capitalising on rice movement requires a unique set of strategies to make consistent profits from intraday options trading.
A momentum strategy is a type of strategy that requires understanding certain important events, such as the latest news, announcements, quarterly and yearly reports, etc. of the asset you are trading on.
This strategy involves identifying the moment when the stock price is going to rise or fall. Intercepting such crucial information can help you identify the moment and make successful trades based on the information.
The breakout strategy is used when there is a possible breakout of price movement from its support and resistance.
It involves analysing breakout points of the stock price from their threshold using various technical indicators and other fundamental analyses.
If a stock price is expected to break the threshold and rise, it indicates purchasing the stocks.
The reversal strategy involves taking successful trades based on trend reversals. Trend reversals can be used to identify them using technical indicators like Bollinger bands, moving averages, and the relative strength index. the relative.
Analysing these technical indicators will help you identify possible trend reversals caused by various market factors.
Making successful call and put option trades based on the trend reversal can help you execute profitable option trades.
Intraday option trading is basically purchasing and selling options on the same day. Therefore, traders can make profits in small price movements occurring in a day.
The scalping strategy involves taking multiple trades a day. Take short or long options based on the market movement and close it immediately for smaller profits.
Increase the number of trades you make each day to generate multiple small profits that add up to a single large profit.
In conclusion, option trading strategies for nifty are available in many, each catering to different market conditions, risk management, and price movements.
It is essential to learn about these strategies before using them while option trading. Beginners can start with basic strategies like long call, long put, covered call, and protective put before going to the advanced strategies to capitalise on the modern market.
For intraday options traders, it is essential to understand certain key strategies like momentum strategy, breakout strategy, scalping, and others to make potential profits during intra-trading. Trading in options requires knowledge and a disciplined approach; if managed poorly, it can lead to potential losses.
Therefore, traders must cultivate a holistic approach and apply risk management decisions while options trading to avoid potential drawbacks and aim to build a consistently profitable approach using these strategies.
Hashim Manikfan
Hashim Manikfan is a professional financial content writer with extensive experience in creating engaging and informative articles on a wide range of financial topics. With academic background in Communication and Journalism, Hashim has published numerous articles aimed at educating readers on essential financial principles. His work covers areas such as financial markets, investment strategies, economic trends, and more. His writing style ensures complex topics are accessible and interesting, making financial literacy attainable for a broad audience.
