What are Paired Options Contracts?
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- Updated On:01-May-2021
- Replies:2
Short Answer
A paired options contract is an options trading strategy where 2 option contract of the same underlying asset is executed at the same time. It involves a combination of buying a Call option and selling a Put Option or vice versa. Some strategies of a paired options contract are Straddle, Strangle Spread, etc.
Detailed Answer
Paired Options Contract
Paired options contracts involve taking at least two option positions in the same underlying asset at any particular point in time. As the name suggests there has to be at least a pair of options contracts in the strategy. It can be termed as a multi-legged option strategy where a Call option, as well as a Put option, is bought or sold of the same underlying Stock or Index at a particular point in time.
Paired option strategies are mainly used to mitigate the risks and maximize profits. In some cases, the profit is capped in such a strategy but that is much better compared to facing the risk of unlimited losses in naked option selling.
Some ideal examples of a paired options strategy are-
Straddle, Strangle, Spreads, etc - In a Straddle a Put option as well a Call Option is bought of the same Stock or Index at the same time for the same expiry. Some things to ensure while implementing a paired option strategy -
- Both the Call, as well as the Put option, should be of the same underlying asset.
- Both of them should be of the same expiry
A paired options contract like a long straddle is used when there is an anticipation of a big move but the direction of it is unknown. This strategy is used mainly before any major events such as Quarterly results, Union Budgets, Election results, etc. In all these cases there is 2 maximum outcome which is either "Good or Bad" reacting to which either the market will go Up or Down and in either of these cases this strategy will make money.
Some problems of this strategy-
- As we are anticipating a big move in a Long straddle, and if the price fails to move more than our break-even then in that case there will be a loss due to Theta Decay of option premiums.
- Volatility or the VIX should be low while implementing a Long straddle because as the VIX falls the options premiums will fall alongside causing a loss.
On the other hand, a Strangle is a strategy that benefits from the high VIX and high option prices as it involves selling of a Call & Put option of the same underlying asset and enjoying the theta decay.
So to sum it up it is clear that if the right type of paired options contract is implemented at the right time then the chances of profits are very high. It can be also considered as a price neutral strategy which means that irrespective of the price going Up or Down, implementing this strategy can make money either way.
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Discussion (1)
Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.
If you're looking for a straightforward and comprehensive take on options trading, then Sensibull should do the job perfectly. However, if you're and expert and want more complex trading tools, then Opstra is the one to choose.
In this current day and age, options trading has become the new cool thing that everyone wants to try. There are many option trading platforms out there that provide various Option trading tools. Sensibull and Opstra Definege are 2 of the most prominent names in the industry.
Both of them provide all the necessary tools like OI (Open Interest) Charts, PCR (Put-call Ratio), IV (Implied Volatility) chart, etc. But the main question lies, which one of them is a better platform for Options trading. Let's find the answer to that question.
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With the increasing exposure of the stock markets, more and more people are trying a hand in options trading. Options trading have become a lucrative place for individuals to earn money. The reality is certainly different. More than 95% of individuals lose money in Options trading, There are various reasons behind this. Find out the reasons for losses and the steps by which you can be a profitable options trader here.
Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.
Open Interest is a parameter used by technical analysts and options traders to judge the mood of the market. Open Interest is the total number of outstanding option contracts in a particular strike price of an underlying asset. The OI is an important factor as it defines liquidity and the total number of contracts that are traded at a particular point in time.
Options trading is different from traditional share trading in many ways. Trading in options includes multiple factors like high leverage, delivery obligation on the date of expiry, unlimited loss potential, etc. All these factors make trading in options riskier.
Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.
Harshil Patel
These are contracts that have put and call options contracts taken at the same time, with the same value and the same expiration date. It's quite risky considering that you never know how much you might lose or gain. But one could compliment one another and it's a broadly used strategy amongst retail traders to have a lower loss ratio but a higher profit margin.