If you are involved in options trading, you must know that it is not easy to master in one night and is also not so tough to master. Nobody is born with the skills; they gradually develop with constant practice and learning from mistakes. It can take you a few years to fully understand the complex nature of Options trading.
While trading options, if you have proper knowledge on the subject, adequate tools to draw conclusions, and knowledge of tactfully applying options strategies, then you can win the market and can optimize your wealth.
You can see three types of the market environment; Bearish, Bullish, and Neutral. It is essential to see what type of environment it is currently and what steps you should seek in order to make a profit.
In this article, you will find the options strategies in Bullish and bearish markets in a very understandable manner so that you, too, can learn and apply the same during trading options.
Bullish Options Strategies:
When an investor believes that the underlying asset price, or stock price, will increase and eventually gain him some profit, he uses Bullish options strategies in these situations. If his belief system proves wrong, he may face an adverse problem by incurring a loss.
How can you protect yourself, against such a situation, without losing a dime? The answer is by using various options strategies.
Buying a call option:
A call option offers you the authority to buy the underlying shares, generally a set of 100 shares per contract at a pre-fixed price, on or before the contract's expiry date. Let us say if the price of the stock increases, then the call options price would also increase, resulting in a profit.
There is also a situation wherein the stock price does not rise, and you may incur a loss. If the length of the contract is long, or there is high speculation in the stock price of an underlying asset, you may lose either a portion or total amount of the Call option value. In such scenarios, you can always rely on option trading calculators or expert opinions to secure your money.
Buying a put (protective):
Let us assume you are holding 100 shares of XYZ Company and want to protect the investment from risks such as volatility and uncertainty in the stock market. In such situations, you can use a strategy to hedge your funds against unforeseen events. How? Let us discuss.
The option contract holder has the authority to sell the 100 shares per contract at a predefined price on or before the contract expires.
This put option plays the role of insurance for the stock, and you can enter into the contract by paying the small amount known as the premium. When you think there will be more fluctuations, you may sell out the stock and encash them, or if you have not sold them, you incur the loss of the only amount you paid as the premium.
Bearish Options strategies:
Almost all beginners and online traders learn this thing first. You are selling the stock short online. When you predict that the stock price may move downwards, you utilize the Bearish options strategies in such a scenario.
If not for making money, at least for securing them, you should accurately predict how low the price can go and by what time; that is, you also have to determine the time frame of the stock price declining.
If you have predicted the downfall of the stock price correctly, then you may use a bearish options strategy and take advantage of the declining stock price, but if your prediction goes wrong, you may suffer a loss.
Buying a put option:
You may choose to buy a put option if your goal is the same as the short seller. You may strategically reduce the risk and approach by using the options strategy.
You hold a right to sell 100 shares of a company at a predetermined price on or before the date of expiry; if there is a decline in a stock price, the put options value increases if the price of the stock declines even more. You can sell the stock at a price higher than you bought them, allowing you to make some profit in such transactions.
If the movement in the stock price is not as you predicted or simply is not declining and growing instead, then by using this strategy, there are possibilities that you lose your invested money.
Short selling of the stock:
Let us say the stock price decreases lower than when you sold the stock at a short price online. You can buy the shares you sold at the lower price to reimburse your loss incurred previously; suppose the price is rising again, you may face incremental loss here. Short selling is not advisable as there is no upper bar set for any stock price.
Example: You have a share worth Rs.100, the price decline to 80, you sold them at Rs.80 believing that the price will decline more to around Rs.60, and you thought to buy them at a lower price again, but if the price started to rise and instead of rs.60 it became steady at 70, then you incurred a loss of Rs.20 in your first short sell (100-80) and also if you want to buy the share you need to pay rs.70 (Rs.10 Extra, then expected price, Rs.20 would have nullified the loss). Because of the unlimited loss opportunity, it is not advisable.
Option strategies feel very complex in the beginning. Still, if you understand and apply one at a time and give yourself some time, you can learn them, try to research more, take the help of the advisor, read the previous case studies, and slowly one day, you will be able to manage your portfolio.