Disclaimer: Options trading is considered extremely risky, 9 out of 10 traders incur a net loss, please trade responsibly. See the SEBI circular for more details
If you are just getting started with options, please read our option primer. If you have just started with options journey, there is a good chance that you may not have huge capital to deploy lots of strategies which is used by big option players. In this article we will look at some of the option strategies which can be used by people who have low capital.
Option buying strategies for low capital
Buy Call (CE)
Buying a call option is perhaps the simplest option strategy you can use if you are expecting the market to move up. Typically you can buy NIFTY or BANKNIFTY call options for less than 10000, the option premium keeps decreasing as you near the expiry. On expiry day you can buy Call options for less than 3000 or lower.
When you buy a call option, and the market moves higher, the premium of call option increases very rapidly, this in turns lead to profit for the buyer. The premium rises proportionally to the strike price closeness to the current price. The premium of a Call option which is a at the current market price (ATM) would rise much faster than a Call option which is far away from the current market price (OTM).
If your intention is to book profit as soon as the market moves, you should buy calls near the current price. This is very popular with options buyers chasing upwards momentum.
Buy Put (PE)
Similar to buying call option, buying Put options is cheapest way to capitalize on market movement, if you are expecting market to fall.
Typically you can buy NIFTY or BANKNIFTY put options for less than 10000, the option premium keeps decreasing as you near the expiry. On expiry day you can buy Put options for less than 3000 or lower.
When you buy a Put option and market moves lower, the premium of Put option increases very rapidly, this would lead to profits for option buyer. Similar to Call option, the premium of Put option nearer to current market price would increase more than the one farther away from the current market price.
If your intention is to book profit as soon as the market moves, you should buy puts near the current price. This is very popular with options buyers chasing downward momentum.
If the market makes sudden move in downward direction, it usually causes panic amongst traders which causes the volatility to spike, this makes the option premium go even higher, leading to more profits.
Option selling strategies for low capital
People usually associate option sellers with someone who has a large capital and has been in market for long time, however there are many option selling strategies which can be used by people with lower capital.
Spreads
A spread is created when you are selling a Call or Put option on one side and create a hedge by buying a Call or Put on the other side. This reduces your risk in case of huge market movement as your risk is always capped. Since your risk is limited, the amount of margin required also reduces significantly. Let us look at some of the spreads which you can use to trade any market with significantly lower capital required for margin.
Bull Call Spread
A bull call spread is created when you sell a Call option of higher strike and buy a Call option of lower strike. This strategy would be profitable when the market moves higher, if the market moves lower then the losses are capped because of the hedge you created by buying lower Call option.
Selling just a Call or Put option of higher or OTM (Out of The Money) strike typically requires a margin of nearly 1 Lakh while if you buy a hedge of lower Call option, the required margin would drop down to only 27000.
Bear call spread
A bear call spread if created when you buy a Call option of higher strike and sell a Call option of lower strike. This strategy would be profitable when the market moves lower, if the market moves higher then the losses are capped because of the hedge you create by buying a higher Call option.
Similar to Bull Call Spread, the margin required for Bear call spread is only 33000.
Bull Put Spread
A bullish Put spread is created when you sell a Put option of a higher strike and buy a Put option of a lower strike. This strategy would be profitable if the market moves higher which is why it is called a Bull Put spread, while the risk is limited with the hedge if the market were to move lower.
Selling a Put would require a margin of nearly 1Lakh, while the margin required for a bull Put spread is only 31000.
Bear Put Spread
A bear Put spread is created when you sell a Put option of a lower strike and buy a Put option of a higher strike. This strategy would be profitable when the market moves lower, if the market were to move higher the risks are limited because of the hedge.
Similar to bullish put spread the margin required for bear put spread is only 25000.
COnclusion
It is a general notion that options selling needs lots of capital but as we have seen there are a lots of option strategy which can be deployed based on your view of the market, which require relatively very low capital.
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