In the Options module, we talked about various aspects related to Options. For those who went through it, we hope that we were successful in helping the reader understand the diverse facets of Options, starting right from the basic elements before moving to more advanced and critical areas. Meanwhile, for those who haven’t yet completed the Options module, we highly recommend you go through it before proceeding with this module. We assume that the reader has a good understanding of various concepts related to Options that we have discussed previously.
Before beginning ourdiscussion on various Option Strategies, we thought that it would be a good idea to refresh some of the key Optionrelated concepts that we discussedover the last several chapters. This will help one in recollecting the key terms that are worth knowing before going throughthe Option Strategies. We shall concludethis chapter by talking about what all strategies we intend to discuss in thecoming chapters. So, let us get started.
Options: Key concepts refresher
Option Defined
An option is a derivative contract that gives the holder of the instrument (i.e. the buyer) the right, but not an obligation, to buy or sell an underlying asset at a certain fixed price on or before a predetermined date.
Types of Options
There are two types of Options, namely Call option and Put Option. A Call option is an option that gives the buyer a right, but not an obligation, to buy an underlying asset at a certain fixed price on or before a predetermined date. A Put option is an option that gives the buyer a right, but not an obligation, to sell an underlying asset at a certain fixed price on or before a predetermined date.
Strike Price (aka Exercise Price)
The preagreed price at which the asset will be exchanged on or before the predetermined date is called the strike price or the exercise price.
Option price (aka Option premium)
Option price is the price that the buyer must pay to the seller to acquire the right to the option contract. Option price is composed of two components, time value and intrinsic value.
Intrinsic Value
Intrinsic Value is the IntheMoney component of an option price. An option that is AttheMoney or OutoftheMoney has no intrinsic value.
Time Value (aka Extrinsic Value)
Time Value is the additional premium that an option buyer must pay to the option seller to compensate the option seller for taking the ‘time’ risk. The greater the time to expiration, the greater would be the time value, and vice versa.
American Option
An American option is an option that can be exercised at any time up to the expiry of the option contract.
European Option
A European option is an option that can be exercised only on the expiry day of the option contract. All options that are traded on Indian exchanges are Europeantype options.
Seven Factors that impact Option price

The type of option

The underlying price

The strike price

Time to expiration

Volatility

Interest rates

Dividend (in case the underlying is a stock)
Delta
The term Delta comes from the Greek symbol ‘Δ’. It measures the rate of change in an option price based on a 1point change in the price of the underlying. Put it simply, Delta measures the speed at which the price of an option changes for a change in the underlying price.
Gamma
The term Gamma comes from the Greek symbol ‘Γ’. It measures the rate of change in Delta based on a 1point change in the price of the underlying. Put it simply, Gamma measures the pace at which the Delta changes for a change in the underlying price.
Vega
The term Vega is commonly denoted using the symbol ‘K’. It measures the change in an option price based on a 1point change in the underlying’s implied volatility (or IV). Put it simply, Vega measures the sensitivity of an option price to changes in volatility of the underlying.
Theta
The term Theta comes from the Greek symbol ‘Θ’. It measures the change in option price based on a change in the time to expiration. Put it simply, Theta measures the rate at which the option price loses its value due to the element of time decay.
Rho
The term Rho comes from the Greek symbol ‘ρ’. It measures the rate of change in an option price based on a change in the riskfree interest rate. Put it simply, Rho measures the sensitivity of an option price to changes in interest rate.
Volatility
Volatility is the rate at which the price of an asset fluctuates over time. The higher the volatility, the higher is the magnitude of the fluctuation in price, and vice versa.
Standard Deviation
Standard Deviation, denoted by the Greek letter σ, measures the amount of dispersion around the mean, where mean is the average of the observations within the data set over the past ‘n’ periods.
Historical Volatility (aka Statistical Volatility)
Historical volatility measures the dispersion around the mean for daily returns on an annualized, percentage basis. It measures how volatile the movements in prices have been over the specified period.
Implied Volatility
Implied volatility is used to measure future volatility. It is based on what market participants imply the volatility of the underlying will be over the remaining life of an option contract.
Volume
Volume refers to the total number of contracts that are created over the course of the day. For instance, a volume of 100 represents 100 contracts have been traded on a particular option during the day.
Open Interest
Open interest refers to total number of option contracts that have been created but have not yet been closed out. In other words, it refers to the total number of open option positions till date.
Put Call Ratio (aka PCR)
Put Call ratio is a ratio showing the open interest of Put options relative to the open interest of Call options. Occasionally, volume is also used in place of open interest.
Volatility Index (aka VIX)
VIX is usually expressed as the 30day implied volatility of index options that are traded on an exchange. It is a very commonly used measure of risk and tells a lot about the prevailing risk sentiment in the market. VIX and the underlying instrument tend to move in the opposite direction.
Maximum Pain
This theory states that as the expiration approaches, there is a tendency for the price of the underlying asset to gravitate towards the strike price where the largest number of option contracts will expire worthless. In other words, Maximum Pain is that point (strike price) on the Option Chain that would cause the least amount of loss to option writers and the maximum loss to option buyers.
Objective of this Module
In this Module, we will discuss several Option strategiesstarting right from the simple, singlelegged strategies before proceeding to more complex, multilegged strategies. Unlike futures, where only a limited number of strategies can be deployed, Options open up the door for creating a multitude of different strategies using various combinations of the four basic strategies  long Call, short Call, long Put, and short Put. In some strategies, options are even combined with the underlying instrument. The type of strategies that could be created using options depends on various factors, such as the trader’s risk and reward profile (risk averse vs. risk taker), view of the underlying asset (bullish, bearish, or neutral), view about volatility (high volatility or low volatility), objective of the trader (capital appreciation,regular income, or hedging) etc.
We shall discuss each Option strategy in detail and shall devote one chapter to each strategy, wherein we shall cover various aspects of the strategy from both long perspective and short perspective. For instance, there will be one chapter devoted to buying and selling a naked Call option, one chapter devoted to buying and selling a naked Put option, one chapter devoted to buying and selling a Straddle, and so forth. Once a reader goes through and understands each of these strategies, he or she can also use them as a reference at any point in time.
While knowing these strategies will provide the reader with key inputs, we would like to caution that these strategies are not a holy grail to making money. One must know which strategy to use when and under what market conditions. One must have a view on the underlying, for instance, before taking an option position. If this view does not pan out as expected, then there is a possibility that the option strategy might turn out to be futile. Hence, one must also know when the accept that an option strategy has gone wrong and be prepared to exit the trade, if necessary. Even though some option strategies have limited risk, risk management is still important. After all, return of capital should be of foremost priority than return on capital.
Again, before starting with the discussion of Option strategies, we would suggest the reader to go through the Options Modules that we covered earlier. Also, having a knowledge of Fundamental and Technical analysis would be beneficial, given that one needs to have a view on the underlying before deploying an option strategy.
The major strategies that we intend to cover over the course of the next several chapters are as mentioned below:
Bullish Strategies  Bearish Strategies  Neutral Strategies 
Long Call  Short Call  Long Call Butterfly 
Short Put  Long Put  Short Call Butterfly 
Covered Call  Covered Put  Long Put Butterfly 
Synthetic Call  Synthetic Put  Short Put Butterfly 
Bull Call Spread  Bear Call Spread  Long Iron Butterfly 
Bull Put Spread  Bear Put Spread  Short Iron Butterfly 
Collar  Bull Put Ladder  Long Call Condor 
Diagonal Call  Ratio Put Backspread  Short Call Condor 
Diagonal Put  Long Put Condor  
Bear Call Ladder  Short Put Condor  
Ratio Call Backspread  Long Iron Condor  
Calendar Call  Short Iron Condor  
Calendar Put  Long Straddle  
Short Straddle  
Long Strangle  
Short Strangle  
Bull Call Ladder  
Bear Put Ladder 
In all, there are a total of 39 strategies that we intend to cover. Also, we have divided Option strategies into three parts: bullish, bearish, and neutral. Bullish strategies are those strategies that benefit when the price of the underlying goes up. Bearish strategies are those strategies that benefit when the price of the underlying goes down. Neutral strategies are those strategies that benefit when the price of the underlying goes in any direction, subject to certain conditions of the concerned individual strategy. Again, as stated earlier, we shall devote one chapter to each strategy, wherein we shall cover various aspects of the strategy from both long perspective and short perspective.
Next Chapter
Comments & Discussions in
FYERS Community
Prateek Gupta commented on April 10th, 2020 at 6:15 PM
Make the articals mobile responsive. Not able to zoom out and zoom in. Tables are also cutting on mobile.
Shriram commented on April 10th, 2020 at 6:40 PM
Hi Prateek, so sorry for the issues that you are facing. We will try to get this sorted out at the earliest
Sourabh commented on June 13th, 2020 at 10:03 PM
How do i deploy option strategies on fyers..?
Since now margin is reduced for hedged options..
So if i have to apply bear call spread..
The strategy blocks a margin upto 40k..
But while creating if i have to sell a call option.. It requires 1.4k..
How do i deploy this strategy in a capital of 45k..?