Problem of Plenty

Options come with a phenomenal advantage, one can create strategy which comes in handy in terms of capital commitment, risk appetite, view, reason of the trade, probability of success and so on. The interesting thing here, is that it creates a problem of plenty. With multiple parameters on one’s mind it becomes difficult at times to zero down on a strategy.

Also, there are opportunities which are for very short time and it does not give enough time to scan through multiple strategies to decide which is the best. So, let’s try and ease this issue by creating some rule of thumb strategies which come in handy during such opportunities. The three main parameters basis which we have devised these list is: View, Risk Appetite and Reason.

View can be: Very Bullish, Bullish, Neutral, Bearish and Very Bearish. Risk appetite levels are generally: High, Moderate and Low. Reason of the Trade can be: Speculative, Momentum Based and Portfolio Rebalancing. So, this creates a matrix of multiple scenarios and based on them a strategy can be applied. Let’s try and understand this matrix., initially we shall go with simple strategies, restricted to two or maximum three positions.

Scenario 1: Speculative Reason; Low/Medium Risk Appetite and Different Views

For speculative trades, generally the strategies of low and medium risk appetite are very close. So, can be used interchangeably, it’s the view which needs to be clearly defined.

• Very Bullish : Buy Out of the Money Calls
• Bullish                           : Buy Calls
• Moderately Bullish : Bull Call Spread
• Neutral with Bullish bent : Bull Put Spread
• Neutral with Bearish bent : Bear Call Spread
• Moderately Bearish : Bear Put Spread
• Bearish : Buy Puts
• Very Bearish : Buy Out of the Money Puts

Scenario 2: Speculative Reason; High Risk Appetite and Different Views

• Neutral with Bullish Bent to Bullish (all views) : Write Puts
• Neutral with Bearish Bent to Bearish (all views) : Write Calls

Scenario 3: Portfolio Rebalance; Low Risk Appetite and Different Views

Generally, in such situation the risk appetite is low, because the main aim is to gain on the portfolio while options add value in terms of improved pricing, reduced costing or hedging. So, here the only risk appetite matrix is based on Low risk appetite.

• Neutral with Bullish Bent : Buy Calls to Lock in Purchase Price
• Neutral to Bullish : Buy and Sell OTM Calls to Reduce Price
• Neutral to Bearish : Initiate Collars to Lock the gains
• Bearish : Buy OTM Puts
• Bullish : Buy Puts

Scenario 4: Momentum; Different Risk Appetite and Different Views

For momentum there are basically two views, bullish or bearish.

Low Risk Appetite

• Bullish :  Buy Call Spreads
• Bearish :  Buy Put Spreads

Moderate Risk Appetite

• Bullish :  Buy Calls
• Bearish :  Buy Puts

High Risk Appetite

• Bullish :  Sell Puts
• Bearish :  Sell Calls

Now, that we have a base prepared for the strategy selection, you can build further on this. To know more about these strategies, live payoffs and more, you can visit our strategy building website, optionstracker.

Happy Trading!!!

Cheers.