Option strategies for different equity market situations

Nifty Options are slowly catching up with Nifty Futures in terms of participation interest. Especially in times where taking any directional trading call is becoming increasingly difficult & volatility has become order of the day, options (with its risk : return profile) can come quite handy to tackle the situation to one's benefit.

Using options, one can define one's risk (in terms of money which may be lost, but may also be limited) and one's reward too, (which may be limited or unlimited, depending on the strategy used)

Here, I'll discuss the various strategies which one can use with options. There are some strategies which use only one leg of option (eg. plain vanilla buying put), two legs (eg. staddle - buying a put + buying a call), and some which have more than two legs (eg. butterfly, condors, etc)

Plain vanilla "one legged" strategies can be taken anytime during the month, with even a shorter time period in mind, in terms of target - eg. Current Nifty = 4000; one may buy a PUT 4000 with a target of sub 3900 in one week's time, so if that target is achieved within one week & one is not bearish for more downside, then one may choose to square off the leg and book profit.

But, all other strategies, ESPECIALLY THE COMPLEX ONES USING MORE THAN TWO LEG OF OPTIONS, are taken with an eye on the expected settlement price of the underlying on the expiry/settlement day. (this will be understood in the relevant strategy's discussion)

Categorised the various strategies (Recommended by option king)

[ I ] BULLISH STRATEGIES - when one is having a bullish view on the direction of the underlying and expects the price of the underlying to rise over time. Various strategies under this are:
1. Long Call
2. Short Put
3. Bull Spread (using Call OR Put)
4. Bullish Combo / Synthetic Long (using Call AND Put)
5. Call Backspread (Ratio spread)
6. Short Put Spread + Call
7. Long Straddle + Put


[ II ] BEARISH STRATEGIES - when one is having a bearish view on the direction of the underlying, and expects the price of the underlying to fall over time. Various strategies under this are:
1. Long Put
2. Short Call
3. Bear Spread (using Call OR Put)
4. Bearish Combo / Synthetic Short (using Call AND Put)
5. Put BackSpread (Ratio Spread)
6. Short Call Spread + Put
7. Long Straddle + Call


[ III ] NEUTRAL STRATEGIES - when one is having no clue & view on the direction of the price of the underlying, but expects increased volatility to result in a one-sided directional movement (breakout or breakdown). Every trader's dream scenario where "Heads I win, Tails I win too" strategy is undertaken... but there are two scenarios here:

A. MARKET NEUTRAL BUT VOLATILITY BULLISH - when, one expects a good directional move in the price of the underlying, though is uncertain about the direction of the move.
1. Long Straddle
2. Long Strangle
3. Long Guts
4. Short Butterfly (with Call OR Put)
5. Short Condor (with Call OR Put)
6. Long Iron Butterfly (with Call AND Put)

B. MARKET NEUTRAL BUT VOLATILTY BEARISH - when, one expects the market to be stagnant and expects the underlying's price to expire around a particular level, or within a particular range. These are High Risk strategies, where one wants to earn premium by "selling" the strategy. One has to be absolutely sure about the expected expiry/settlement price or the very short term period expected price range. Taking advantage of TIME DECAY over here is the main aim/idea.
1. Short Straddle
2. Short Strangle
3. Short Guts
4. Long Butterfly (with Call OR Put)
5. Long Condor (with Call OR Put)
6. [Short Iron Butterfly (with Call AND Put)