Options trading can be done in diverse ways. You can trade Options in unhedged or Naked positions as well as use multi-leg strategies to limit the losses. An endless combination of options can be used to put together a strategy. This can get complex sometimes. But many simple Option strategies can be used by Beginners. More of such strategies are discussed here.

Options are derivatives contracts that go up and down in value with respect to the underlying. This price volatility is used by traders to get profits. Options are contracts that are traded with a promise to exchange the underlying assets on a particular date at a particular price.

Options trading can be done in numerous alternative ways. There are single-leg or naked strategies where you can buy or sell Options. There are multi-leg options strategies that can be implemented to reduce the risks involved in options trading. Let's see some of the simplest option trading strategies for beginners.

Options trading involve many risks. To limit some of the risks, options traders use multiple options simultaneously to limit the risk. These are known as multi-leg options strategies that hedge the position. Hedged positions are easy to implement, and you can calculate the profits and losses in such strategies. let's look at some of the simple multi-leg options strategies.

Option Spread is a simple multi-leg strategy that is easy to implement. Option spread includes buying and selling of an Option in the same underlying with different strike prices. Spreads can be of various types. Bullish, Bearish, Call Spread, Put Spread, etc. Let's consider an example of a Bull Spread.

In a Bullish Spread, the view on the underlying asset has to be moderately bullish. To implement a **Bull spread**, you need to **buy an ATM** (At The Money) **Call Option** and **Sell an OTM** (Out of The Money) **Call option**. By this, the maximum profits are capped to the total Debit of this strategy, and the maximum profit is also limited to the spread (Difference between the 2 strike prices).

Spreads are flexible option strategies that can be implemented in countless ways. This offers the trader to have full control of the risk and reward factor of the trade.

Another simple options strategy is the **'Straddle'**. This is a price neutral strategy. This means it can be implemented when the direction of the underlying is unknown. Straddles are of two types, Long straddle, and short straddle.

To implement a Long straddle the direction on the underlying can be unknown. But a massive move should be anticipated for a straddle to work. To apply a Long straddle, you have to buy a **Call and Put option** of the same underlying and the same expiry and at the **same strike price**. The maximum loss in a straddle is limited to the premium paid whereas the profit potential is unlimited. This strategy works nicely if the underlying performs a massive move of more than 2%. A Short straddle can be created in the same way by selling a Call and Put option in the same place. Here the maximum profit can be earned if the underlying expires ATM and does not perform any significant move.

These were two of the simplest hedged options trading strategies for beginners. Using hedged positions not only limits the losses but also requires less margin. You can use option buying or selling or use multi-leg strategies. The risks involved in options trading remain the same hence hedge your positions so that you are protected from any major losses and draw-downs.

Tagged With: Option TradingOption SpreadLong StraddleOption SellingOption Buying

Categories: Option Trading

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Related FAQs

What is the Best strategy for Options Trading?

There are many complex Option Trading strategies out there but the most profitable are some of the simpler ones. The top 3 of them are Long & Short Straddles, Long & Short Strangles and Bull/Bear spreads.

Which strategies should a Options Buyer use to make money?

Option Buying is more common when compared to options selling. This is because option buying requires less capital and the maximum profit is uncapped. This lures many small retail traders who ultimately lose money when it comes to options buying for various reasons. Follow these strategies to increase your chances of generating profits.

How much money is required for Options trading?

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.

How much money do you need to begin Options Selling?

Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.

Which is the best time frame for Options Trading?

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.

How to use Opstra Options Strategy Builder?

Opstra Definedge is a platform that provides many tools and features to Derivative traders. Both Options as well as Future traders can make use of this platform. Some of the primary tools of Opstra are the Strategy Builder, IV (Implied Volatility) chart, Options Backtesting, Options Simulator, and many more. The Options Strategy Builder is one of the most intensively used tools on the platform.

What to not do when trading Options?

Options trading offers many options to traders, investors as well as hedgers. There are some common mistakes that option traders commit. Five of the most common mistakes are, taking too much leverage, not having a pre-defined stop loss and target, acting on tips on social media, adhering to buying options, and taking unhedged trades.

Why is Options Trading considered risky?

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.

How does Gamma affects risk in Options trading?

Gamma is an Option Greek that affects the change in the Option premiums. Options traders need to know about Gamma and some other Option greeks to calculate the risk per trade. The effect of Gamma becomes stronger as the expiry approaches. The Gamma also increases as an Option becomes ITM or ATM from OTM. Know more about it here.

Is Intraday trading good for beginners?

Intraday trading is more risky and challenging when compared to long-term investing. Is it not a preferred option for beginners as it requires considerable capital, expertise, adequate knowledge about trading, and multiple other factors. For beginners, the best way is to deploy the majority of your capital towards long-term investments and use the remaining for hedging or short-term trading.