Option strategies that can be implemented based on Implied

Volatility
Long Call
When to initiate a Long call?
Long call is best used when you expect the underlying asset to increase significantly in a relatively short period of time.
It would still benefit if you expect the underlying asset to rise slowly. However, one should be aware of the time decay
factor, because the time value of call will reduce over a period of time as you reach near to expiry.

Why to use the Long call

This is a good strategy to use because downside risk is limited only up to the premium/cost of the call you pay, no
matter how much the underlying asset drops. It also gives you the flexibility to select risk to reward ratio by choosing the
strike price of the options contract you buy.

Strategy Buy/Long Call Option

Market Outlook Extremely Bullish

Breakeven at expiry Strike price + Premium paid

Risk Limited to premium paid

Reward Unlimited

Margin required No

Let’s try to understand with an Example:

Current ABC Ltd Price 8200

Strike price 8200

Premium Paid (per 60

share)

BEP (strike Price + 8260

Premium paid)

Lot size 75

Suppose the stock of ABC Ltd is trading at Rs. 8,200. A call option contract with a strike price of Rs. 8,200 is trading at
Rs. 60. If you expect that the price of ABC Ltd will rise significantly in the coming weeks, and you paid Rs. 4,500 (75*60)
to purchase single call option covering 75 shares. So, as expected, if ABC Ltd rallies to Rs. 8,300 on options expiration
date, then you can sell immediately in the open market for Rs. 100 per share. As each option contract covers 75 shares,
the total amount you will receive is Rs. 7,500. Since you had paid Rs. 4,500 to purchase the call option, your net profit
for the entire trade is, therefore Rs. 3,000. For the ease of understanding, we did not take into account commission
charges.
Analysis Of Long Call Strategy:
Long call strategy limits the downside risk to the premium paid which is coming around Rs. 60 per share in the above
example, whereas potential return is unlimited if ABC Ltd moves higher significantly. It is perfectly suitable for traders
who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount
directly in the underlying security.

Long Put Options Trading

When should you initiate a Long Put Options Trade?

A Long Put strategy is best used when you expect the underlying asset to fall significantly in a relatively short period of
time. It would still benefit if you expect the underlying asset to fall gradually. However, one should be aware of the time
decay factor, because the time value of put will reduce over a period of time as you reach near expiry.

Why should you use Long Put?

This is a good strategy to use because the downside risk is limited only up to the premium/cost of the put you pay, no
matter how much the underlying asset rises. It also gives you the flexibility to select the risk to reward ratio by choosing
the strike price of the options contract you buy. In addition, Long Put can also be used as a hedging strategy if you want
to protect an asset owned by you from a possible reduction in price.

Strategy Buy/Long Put Option

Market Outlook Extremely Bearish

Breakeven at expiry Strike price - Premium paid

Risk Limited to premium paid

Reward Unlimited

Margin required No

Let’s try to understand with an example:

Current Nifty Price Rs 8200

Strike price Rs 8200

Premium Paid (per share) Rs 60

BEP (Strike Price - Premium paid) Rs 8140

Lot size (in units) 75

Suppose Nifty is trading at Rs 8200. A put option contract with a strike price of Rs 8200 is trading at Rs 60. If you expect
that the price of Nifty will fall significantly in the coming weeks, and you paid Rs 4,500 (75*60) to purchase a single put
option covering 75 shares.
As per expectation, if Nifty falls to Rs 8100 on options expiration date, then you can sell immediately in the open market
for Rs 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs 7,500 (100*75).
Since, you had paid Rs 4,500 (60*75) to purchase the put option, your net profit for the entire trade is therefore Rs
3,000. For the ease of understanding, we did not take into account
commission

How to manage risk?

A Long Put is a limited risk and unlimited reward strategy. So carrying overnight position is advisable but one can keep
stop loss to restrict losses due to opposite movement in the underlying assets and also time value of money can play
spoil sports if underlying assets doesn’t move at all.

Conclusion:
A Long Put is a good strategy to use when you expect the security to fall significantly and quickly. It also limits the
downside risk to the premium paid, whereas the potential return is unlimited if Nifty moves lower significantly. It is
perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than
investing the same amount directly in the underlying security.

Bear Put Spread Options Trading Strategy?

A Bear Put Spread strategy involves two put options with different strike prices but the same expiration date. Bear Put
Spread is also considered as a cheaper alternative to long put because it involves selling of the put option to offset
some of the cost of buying puts.
When To Initiate A Bear Put Spread Options Trading?
A Bear Put Spread strategy is used when the option trader thinks that the underlying assets will fall moderately in the
near term. This strategy is basically used to reduce the upfront costs of premium, so that less investment of premium is
required and it can also reduce the affect of time decay. Even beginners can apply this strategy when they expect
security to fall moderately in near the term.

How To Construct The Bear Put Spread?

Buy 1 ITM/ATM Put
Sell 1 OTM Put
Bear Put Spread is implemented by buying In-the-Money or At-the-Money put option and simultaneously selling Out-
The-Money put option of the same underlying security with the same expiry.

Strategy Buy 1 ITM/ATM put and Sell 1 OTM put

Market Outlook Moderately Bearish

Breakeven at expiry Strike price of buy put - Net Premium Paid

Risk Limited to Net premium paid

Reward Limited

Margin required Yes

Let’s try to understand Bear Put Spread Options Trading with an example:
Nifty current market price Rs. 8100

Buy ATM Put (Strike Price) Rs 8100

Premium Paid (per share) Rs 60

Sell OTM Put (Strike Price) Rs 7900

Premium Received Rs 20

Net Premium Paid Rs 40

Break Even Point (BEP) Rs 8060

Lot Size (in units) 75

Suppose Nifty is trading at Rs 8100. If you believe that price will fall to Rs 7900 on or before the expiry, then you can
buy At-the-Money put option contract with a strike price of Rs 8100, which is trading at Rs 60 and simultaneously sell
Out-the-Money put option contract with a strike price of Rs 7900, which is trading at Rs 20. In this case, the contract
covers 75 shares. So, you paid Rs 60 per share to purchase single put and simultaneously received Rs 20 by selling Rs
7900 put option. So, the overall net premium paid by you would be Rs 40.
So, as expected, if Nifty falls to Rs 7900 on or before option expiration date, then you can square off your position in the
open market for Rs 160 by exiting from both legs of the trade. As each option contract covers 75 shares, the total
amount you will receive is Rs 15,000 (200*75). Since, you had paid Rs 3,000 (40*75) to purchase the put option, your
net profit for the entire trade is, therefore Rs 12,000 (15000-3000). For the ease of understanding, we did not take in to
account commission charges.
Following is the payoff schedule assuming different scenarios of expiry.
The Payoff Schedule:
On Expiry NIFTY Net Payoff from Put Net Payoff from Put Net Payoff (Rs)
closes at Buy (Rs) Sold (Rs)

7500 540 -380 160

7600 440 -280 160

7700 340 -180 160

7800 240 -80 160

7900 140 20 160

8000 40 20 60

8100 -60 20 -40

8200 -60 20 -40

8300 -60 20 -40

8400 -60 20 -40

8500 -60 20 -40

8600 -60 20 -40

8700 -60 20 -40

Bear Put Spread’s Payoff Chart:

The overall Delta of the bear put position will be negative, which indicates premiums will go up if the markets go down.
The Gamma of the overall position would be positive. It is a long Vega strategy, which means if implied volatility
increases; it will have a positive impact on the return, because of the high Vega of At-the-Money options. Theta of the
position would be negative.

Analysis of Bear Put Spread strategy:

A Bear Put Spread strategy is best to use when an investor is moderately bearish because he or she will make the
maximum profit only when the stock price falls to the lower (sold) strike. Also, your losses are limited if price increases
unexpectedly higher.

How to make Profit in a Volatile Market at low cost - Long Strangle

Option Strategy
A Long Strangle strategy is one of the simplest trading strategies, which can be used to make profit in an extremely
volatile market. A Long Strangle is a slight modification of the Long Straddle strategy and also cheaper to execute as
both the calls and puts are Out-the-Money. It can generate good returns when the price of an underlying security moves
significantly in either direction. It means that you don’t have to forecast the trend of the market, but you have to bet on
the volatility.

When to initiate a Long Strangle?

If you believe that an underlying security is going to make a move because of any events, such as budget, monetary
policy, earning announcements etc, then you can buy OTM call and OTM put option. This strategy is known as Long
Strangle.

How to construct a Long Strangle Option strategy?

Long Strangle is implemented by buying Out-the-Money call option and simultaneously buying Out-the-Money put
option of the same underlying security with the same expiry. Strike price can be customized as per convenience of the
trader but the call and put strikes must be equidistant from the spot price.

Strategy Buy OTM Call and Buy OTM Put

Market Outlook Significant volatility in underlying movement

Motive Capture a quick increase in implied volatility/ big

move in underlying assets

Upper Breakeven Strike price of Long call + Net Premium Paid

Lower Breakeven Strike price of Long put - Net Premium Paid

Risk Limited to Net premium paid

Reward Unlimited

Margin required Limited to the premium paid

Let’s try to understand with an example:
Nifty Current spot price Rs 8800

Buy OTM Call Strike Price Rs 9000

Premium Paid (per share) Rs 40

BUY OTM Put Strike price Rs 8600

Premium Paid (per share) Rs 30

Upper breakeven 9070

Lower breakeven 8530

Lot Size 75
Suppose, Nifty is trading at 8800. An investor Mr A is expecting a significant movement in the market, so he enters a
Long Strangle by buying 9000 call strike at Rs 40 and 8600 put for Rs 30. The net premium paid to initiate this trade is
Rs 70, which is also the maximum possible loss. Since this strategy is initiated with a view of significant movement in
the underlying security, it will give the maximum loss only when there is very little or no movement in the underlying
security, which comes around Rs 70 in the above example. Maximum profit will be unlimited if it breaks the upper and
lower break-even points. Another way by which this strategy can give profit is when there is an increase in implied
volatility. Higher implied volatility can increase both call and put’s premium.
For the ease of understanding, we did not take in to account commission charges. Following is the payoff schedule
assuming different scenarios of expiry.
The Payoff Schedule:
On Expiry NIFTY Net Payoff from Call Net Payoff from Put Net Payoff (Rs)
closes at Buy (Rs) Buy (Rs)

8300 -40 270 230

8400 -40 170 130

8500 -40 70 30

8530 -40 40 0

8600 -40 -30 -70

8700 -40 -30 -70

8800 -40 -30 -70

8900 -40 -30 -70

9000 -40 -30 -70

9070 30 -30 0

9100 60 -30 30

9200 160 -30 130

9300 260 -30 230

Impact of Option Greeks:
Delta: The net delta of a Long Strangle remains close to zero. The positive delta of the call and negative delta of the put
are nearly offset by each other.
Vega: A Long Strangle has a positive Vega. Therefore, one should buy Long Strangle spreads when the volatility is low
and expect it to rise.
Theta: With the passage of time, if other factors remain same, Theta will have a negative impact on the strategy,
because option premium will erode as the expiration dates draws nearer.
Gamma: Gamma estimates how much Delta of a position changes as the stock prices changes. Gamma of the Long
Strangle position will be positive since we have created long positions in options and any major movement on either
side will benefit this strategy.

How to manage risk?

A Long Strangle is exposed to limited risk up to premium paid, so carrying overnight position is advisable but one can
keep stop loss to further limit losses.

Analysis of Long Strangle spread strategy

A Long Strangle spread strategy is best to use when you are confident that an underlying security will move significantly
in a very short period of time, but you are unable to predict the direction of the movement. Maximum loss is limited to
debit paid and it will occur if the underlying stocks remain between the two buying strike prices, whereas upside reward
is unlimited.