Best Options Trading Strategies for Beginners in 2022
In recent times, options trading has become very popular and constitutes the lion’s share of the daily trading volume on our exchanges. Among options traders, most high-volume trading is done by institutional traders and HNIs. That said, many retail investors also trade options. Some retail traders are well equipped to trade options. And there are others who try to trade options like stocks and some are beginners. In this article, we are going to discuss some of the best options trading strategies for beginners.
Intraday or Swing? What is the best choice for options trading for beginners?
We all know that options have a limited lifespan. We have weekly options which have a lifespan of 7 days, monthly options which have a lifespan of 28 days. But for index options and commodity options, we have options that have a life of 2 months, 3 months, 6 months and more.
Most options trading strategies for beginners focus on weekly and monthly options. Bank Nifty options trading for beginners also prefer weekly options. On a related note, you might want to check out our primer on options basics.
Traders who want to make money buying options should opt for intraday trading. Because options that have a short lifespan lose premiums very quickly due to theta decay, on a daily basis.
But many traders sell premium theta decay hedging and consumption options. These traders can keep the trade open until the options expire. They are swing traders.
It has been seen that many novice traders prefer to buy options with the expectation of unlimited profit. But it should also be mentioned that option buyers practically lose money most of the time. Therefore, our strategies will mainly focus on combination strategies.
Options trading strategies for beginners
Here are some options trading strategies for beginners. These strategies are also used for Bank Nifty options trading for beginners. There are many options strategies that traders use. Some of them are complicated strategies, many of them are situation-based strategies.
Below are the most popular and comparatively safest strategies which are also versatile. Beginners can easily implement these strategies and will also benefit from margin facilities. These are risk-adjusted strategies that are best suited for beginners.
It is a combined strategy. In this strategy, we take a long position in a stock or a futures contract and write a nearby strike price call.
Suppose the price of a stock or a futures contract is INR 4,900. We buy a lot of a forward or spot segment. We can either buy the stock or a future lot. Let’s say we bought 100 shares at INR 4,900 or bought a lot of futures contracts at INR 4,900 comprising 100 shares.
And we sold a Call lot (100 shares per lot) at the strike price of INR 5,000.
Why did we adopt this strategy? We expect the stock to continue to rise. If the stock price drops, the sold call will protect us.
If the stock goes up, we will place the option at INR 5,000. Then we will lose some call option money, but the rise in the stock price or future price will adequately compensate for the loss.
The projected P/L (profit and loss) chart of a covered call looks like this.
Assuming we bought the Call option for INR 70 each, we get a wide price range which is profitable for us. At expiration, if the stock price drops even to INR 4,830, we don’t lose money. This is a no-profit – no-loss zone. After that, we profit until the price rises to INR 5,400. At INR 5,000, we get maximum profit. Below INR 4830 we lose money.
Also Read: Best Indicators for Options Trading
Put of protection
The protective put is another combination strategy. In this strategy, we buy stocks or futures and also buy a Put. In a protective put strategy, the downside is limited to the premium paid on the sale while the upside is unlimited.
As in the previous example, we buy the stock/future at INR 5,000 and also buy a put of INR 4,900 with a premium of INR 70.
Now let’s look at the P/L chart below.
We can calculate the P/L here. The total cost price of shares + Put = INR5,000+INR70 = INR5,070. So INR 5,070 is our break even point above which we will make profit.
Below 5070 INR is our deficit zone until 4900 INR, when the maximum loss of 170 INR is reached. Options trading for beginners should be easy to understand and this strategy fits the bill perfectly.
The straddle is a call and sell combination strategy of the same strike price. The Straddle can be long or short.
In a Long Straddle, we buy both the call option and the put option of the same strike price. We adopt this strategy when we expect high volatility and strong price increases in both directions. Such price behaviors can be observed before a big event (like the annual budget) or before the annual result when an important announcement should be made.
The P/L diagram of a Long Straddle looks like this.
Let’s say we bought the call at INR 70 and bought the put at INR 40. Both the Call and the Put were at the strike price of INR 5,000.
So the cost price is = INR70 + INR40 = INR110
Therefore, the break-even point on the high side is INR5,000 + INR110 = INR5,110 and the break-even point on the low side is INR5,000 – INR110 = INR4,890.
If the stock price fluctuates between INR 4,890 and INR 5,110, we do not make any profit. But, if the stock breaks above this price range, we can have unlimited profit, making it one of the best options trading strategies for beginners.
The maximum loss is INR 110 if the stock stays at INR 5,000. This is the Long Straddle strategy.
In a Short Straddle strategy, we write both the Call and the Put at the same strike price. Our maximum profit will be the premium we collected when selling the options, i.e. INR 110 over the stock price of INR 5,000 at expiration.
An options seller keeps this profit if the stock remains stable at INR 5,000 at expiration. We adopt this strategy when we do not expect the market to move much during the expiration period. Short straddles are not only good options trading strategies for beginners, but also for experts.
Strangles are also combination strategies. For this strategy, we choose two options, Call on the upside and Put on the downside, generally equidistant from the stock price.
This strategy also has long and short versions. For the long strangle strategy, we buy two options, Call and Put, as described earlier, when we expect the stock to move one way or the other. These movements should be greater than what is required in long overlaps.
We buy INR5,000 Put at INR70 and INR5100 Call at INR40 when the stock is at INR4,950. The profit is more than INR 5,210 and less than INR 4,980 because the cost price is INR 70 + INR 40 = INR 110. Limited risk and unlimited profits on big moves make this one of the best options trading strategies for beginners.
Similar is the Short Strangle. We employ this strategy when we expect the stock to move within a short range. We write the call INR5100 at INR40 and also write the INR5,000 Put at INR70.
In Short Strangle, the max profit range should be between INR 5,000 and INR 5,100 and the max profit is INR 110. Because when we wrote the options, we collected INR70+INR40=INR110 beforehand. Above INR 5,210 and below INR 4,890 at expiry, the loss is unlimited.
The options trading strategies for beginners described above are relatively simple and can be used after a little practice. A trader should understand market expectations and trends before employing these strategies. These strategies are good for Nifty and Bank Nifty trading strategies for beginners. They can also be applied to stock options.
Most of these options trading strategies for beginners are risk adjusted and suitable for swing trading. But a trader needs to pull out of the legs to control losses if the market starts behaving in the opposite direction. There are a number of strategies that require advanced understanding and are therefore not suitable for beginners.