What are Safe Strategies in Options?

Published by Sharekhan Education | July 28, 2023

Behzad Elavia | Sharekhan Education

Options being a very dynamic instrument, are considered a double-edged sword. Although it is observed that 90% of the traders trading in the Options segment ended up on the losing side; it is seldomly treated as a protective instrument (hedge) too. This is broadly, because of the lack of education and awareness circulated among the traders. Here, in Sharekhan Education we help you to upgrade this knowledge by educating you on how to trade options as a hedged instrument by means of basic as well as advanced option strategies with a mix of Demand and Supply concepts. The timing of options and proper participation in institutional areas provide us an extra “edge with an edge”.

Important Concepts :

Now, let’s delve deeper into additional concepts essential for focusing more on selecting strategies in options trading. While participating in any option strategy, a trader must give more importance to 2 things.

1. Institutional participation in HTF
2. Necessary strategy in options to reap the utmost benefit.

Importance of understanding HTF

As you must be all aware that it’s impossible for any trader to cash in on all opportunities, however, the main crux is to understand whether the scrip (or area) is good for us to participate or not. 80% of the analysis is well cleared if we understand the broader time frames. It helps us to know to be a buyer/seller, along with the trend / sideways / against. My principal is very clear, i.e.,if you give me big moves on the price chart on the HTF along with clear demand/supply zones, I would be more than happy to participate in it. Losing is not a problem, but against a calculated loss if I can earn better returns then it makes sense. Thus, if my world of equity trading is clear and specific, then only I look forward in participating with derivatives for higher profits, else it doesn’t make sense. Remember this, we do not have unlimited source of capital to fund at every step. Thus, press the button wisely before being greedy.

Importance of Multi Legged Options

Trading options is indeed a boon, provided you know how to use them wisely along with its properties. Many times, even if the prices are not in our favour, options would result into profits, thanks to the implied volatility factor and the Theta. It is imperative for any option trader to choose a decent strike price, calculated pay-off while entering/exiting the option set-up, expiry, and the trend. Depending on the trend we choose appropriate strategy and check various Greeks resulting in profitable scenarios till expiry/exits. Remember, option buyers must focus on ITM strikes favouring them near to 1 Delta pricings. Option seller should opt to sell OTM strikes favouring maxing Theta with high implied volatility for best pay-off till expiry.

Therefore, while carrying any important positions overnight, an unforeseen situation cannot be ruled out while opening the next morning, especially in these earning days. It is always wise to hedge the positions both ways. The main leg (Anchor Unit) must focus on the direction of the trade while the second leg (Off-setting Unit/hedge leg) must lock unforeseen situation of loss. By doing this, the position is locked with limited risk, limited reward and very less margin for any option strategy.

Safe strategies along with the trend

Friends, I would like you to know that when I started my journey with multi-leg option strategies, blocking capital of approx. less than Rs. 30,000/set-up, I preferred to go with the trend / sideways. Some commonly used set-ups were:

Moderately bullish  Bull Call spread and Bull Put spread.

Moderately bearish  Bear Put spread and Bear Call spread.

Sideways  Short Strangles and Iron Condors.

The above strategies are far more reliable for any beginner to understand and trade with intra-day/expiry market scenarios rather than single-leg strategies resulting in a loss (80-90% of the time). Basic option strategies are being taught by us in our Options 101 course.

To Conclude…

Every trader must start his journey on a safer note and know the risks/rewards while trading this dynamic instrument. Options are a beautiful concept, provided, you know how to use them along with the data. Thus, in my opinion, you must start with a small capital, have proper education, know the pay-off and Greeks, and most importantly have patience. Remember, we cannot become rich overnight. Even if we do strike a lottery, it would not sustain for long. You would be greedy and thus shall fall over and over again!

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