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7 RIL is trading at Rs. 720 levels, Mr. X is bullish in the long term, but wants to hedge himself from the fall in cash strategy goes wrong. He will buy 250 shares of RIL from the cash Rs. 720 and buy Put Rs. 10 as premium. The lot size of RIL is 250. His net investment will be Rs [(250*720) + Rs. 2500(250*10) = Rs ] Reward: The gains will be unlimited since it s a long position. His maximum loss will be Rs assuming he will hold his cash position irrespective of the price. Break-Even Point for the net position will be Rs (720+10) Case 1: If RIL dips to Rs. 690, then his net loss payoff will be Rs [{( ) + (10-10)}*250] Case 2: If RIL closes at Rs. 720, then his net loss payoff will be Rs [{( )-(10)}*250] Case 3: If RIL rises up to Rs. 750, then his net profit payoff will be Rs [{( )-(10)}*250] 5

8 Strategy 3: Short Put A trader will short put if he is bullish in nature and expects the underlying asset not to fall below a certain level. Risk: Losses will be potentially unlimited if the stock skyrockets above the strike price of put. Reward: His profits will be capped by the premium amount received. Sell 1 Put Option Suppose NIFTY is trading at 5200 level and Mr. X is bullish on the market. He expects NIFTY to stay near levels or even rise further until expiry. He will sell one NIFTY 5200 Put Option for a premium of Rs. 70. The lot size of NIFTY is 50. Mr. X s account will be credited by Rs (70*50) which is the premium received on sale of Put option. Case 1: If the NIFTY closes at 5400, then Mr. X will receive the maximum profit of Rs Case 2: If the NIFTY closes at 5000, then Mr. X will face a loss of Rs [(200-70)*50] 6

17 Strategy 12: Covered Combination This strategy involves selling OTM Call & Put Options and buying the underlying asset in either cash or futures market. It is also known as Covered Strangle as the profits are capped and risk is potentially unlimited. Risk: Unlimited Buy 250 RIL Shares Sell 1 OTM Call Option Sell 1 OTM Put Option Suppose RIL is trading at Rs. 745, and Mr. X has gone long on RIL. Now Mr. X will sell one 760 OTM Call Option for a premium of Rs. 15 and simultaneously sell one 720 OTM Put Option for a premium of Re. 1. His net investment will be Rs [( )*250] Case 1: At expiry if RIL closes at Rs. 700, then Mr. X will incur a loss of Rs [{(15) (20-1) + ( )}*250] Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will make a profit of Rs [{(15) + (1) + ( )}*250] Case 3: At expiry if RIL closes at Rs. 780, then Mr. X will make a profit of Rs [{(1) (20-15) + ( )}*250] 15

19 Strategy 14: Stock Repair Strategy This strategy is used to cover up for losses made on long stock position. After the long position suffered losses on stock price fall, a trader will implement this strategy in order to bring down the breakeven price and capping his further losses thereby increasing his probability of loss recovery. Buy 1 ATM Call Sell 2 OTM Call Options Suppose Mr. X has purchased 1 lot of NIFTY Futures at Lot size of NIFTY is 50. Assume currently NIFTY is trading at 5200 translating it into loss of Rs on his long position in future. (200*50) Now, Mr. X wants to repair his position so he implements Stock Repair Strategy by buying NIFTY ATM Call Option at a premium of Rs. 100 and selling NIFTY OTM Call Options for a premium of Rs. 110 (55*2). By implementing this strategy Mr. X s account will get credited by Rs [( )*50] Case 1: At expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs [{( ) (100) + (55*2)}*50] Case 2: At expiry if NIFTY closes at 5300, then Mr. X will make a profit of Rs [{( ) ( ) + (55*2)}*50] Case 3: At expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs [{( ) + ( ) ((200-55)*2)}*50] 17

21

25 Strategy 4: Short Strangle This strategy is similar to Short Straddle; the only difference is of the strike prices at which the positions are built. Short Strangle involves selling of one OTM Call Option and selling of one OTM Put Option, of the same expiry date and same underlying asset. Here the probability of making profits is more as there is a spread between the two strike prices, and if the markets do remain less volatile, then this strategy will start making profits for traders. The ideology behind this strategy is that the market will not be much volatile in the near future and the expected volatility will lie between the 2 strike prices. This strategy is used by expert traders who quantify the implied volatility accurately. Risk: Unlimited Sell 1 OTM Call Option Sell 1 OTM Put Option Suppose NIFTY is trading around 5200 odd points, Mr. X does not expect the market to move much in the near future. As he is neutral about the volatility of NIFTY he will enter in a Short Strangle Strategy. He will sell OTM Call Option for a premium of Rs. 55 & sell OTM Put Option for a premium of Rs. 50. The lot size of NIFTY is 50. Hence, his account will get credited by Rs [(50+50)*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will neither make profit nor loss. His net cash flow will be 0. [{(50)-(100-50)}*50] Case 2: At expiry if NIFTY closes at 5250, then Mr. X will make a profit of Rs [(50+50)*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will neither make profits nor losses. His net cash flow will be 0. [{(100-50)-(50)}*50] 22

26 Strategy 5: Long Call Butterfly A trader, who is neutral in nature and believes that there will be very low volatility i.e. expects the market to remain range bound, will implement this strategy. This strategy involves selling of 2 ATM Call Options, buying 1 ITM Call Option & buying 1 OTM Call Option of the same expiry date & same underlying asset. The difference between the strikes should be equal. If the market remains range bound then this strategy will start making profits. If the market moves out of strike range in either way, then it will start making loss. The loss generated will also be capped. Sell 2 ATM Call Options Buy 1 ITM Call Option But 1 OTM Call Option Suppose that NIFTY is trading at 5200 levels, Mr. X thinks that there is low volatility in the market and expects it to stay between a certain range, then he will implement the Long Call Butterfly Strategy. He will sell 2 NIFTY 5200 ATM Call Options for a premium of Rs. 200 (100*2), buy 1 NIFTY 5100 ITM Call Option at a premium of Rs. 165 & buy 1 NIFTY 5300 OTM Call Option at a premium of Rs. 55. The net investment will only be Rs [{(100*2)-(165)-(55)}*50] Case 1: At expiry if NIFTY closes at 4900, Mr. X will make a loss of Rs [{(100*2)-(165)-(55)}*50] Case 2: At expiry if NIFTY closes at 5200, Mr. X will make a profit of Rs [{( ) + (100*2)- (55)}*50] Case 3: At expiry if NIFTY closes at 5400, Mr. X will make a loss of Rs [{( ) - (( )*2) + (100-55)}*50] 23

27 Strategy 6: Short Call Butterfly This strategy is opposite of the Long Call Butterfly Strategy, a trader expects the market to remain range bound in Long Call Butterfly, but here he expects the market to move beyond strike boundaries in Short Call Butterfly. If the trader is bullish on the market s volatility, he will implement this strategy. Here also there should be equal distance between the strikes. Profits from this strategy are capped. Buy 2 ATM Call Options Sell 1 ITM Call Option Sell 1 OTM Call Option Suppose that NIFTY is trading at 5200, Mr. X implements the Short Call Butterfly Strategy. He buys 2 NIFTY 5200 ATM Call Options for a premium of Rs. 200 (100*2), sells 1 NIFTY 5100 ITM Call Option for a premium of Rs. 165 & sells 1 NIFTY 5300 OTM Call Option for a premium of Rs. 55. He will get a credit of Rs [{(165) + (55) (100*2)}*50] since he sold 2 Call Options. Case 1: At expiry if the NIFTY closes at 4900, then Mr. X will make a profit of Rs [{ (100*2)}*50] Case 2: At expiry if the NIFTY closes at 5200, then Mr. X will make a loss of Rs [{( ) (100*2)}*50] Case 3: At expiry if the NIFTY closes at 5500, then Mr. X will make a profit of Rs [{( ) + (( )*2) (200-55)}*50] 24

28 Strategy 7: Long Put Butterfly The Long Put Butterfly is a neutral strategy where a trader will be bearish on the volatility i.e. he thinks the market will have sideways kind of movement and will not rally sharply in either direction in the near future. This strategy involves sale of 2 ATM Put Options, buy 1 ITM and 1 OTM Put Option. The risk and reward are limited. Sell 2 ATM Put Options Buy 1 ITM Put Option Buy 1 OTM Put Option Suppose NIFTY is trading at 5200 levels. Mr. X is bearish on volatility and expects the market to move sideways. He will implement Long Put Butterfly Strategy. He will sell two 5200 ATM Put Options for a premium of Rs. 85, buys one 5100 NIFTY OTM Put Option at a premium of Rs. 50 & goes long on one 5300 NIFTY ITM Put Option at a premium of Rs His net investment will be Rs [(85*2) )*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs [{(100-50) ((200-85)*2) + ( )}*50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profit of Rs [{(85*2) - (50) + ( )}*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a loss of Rs. 750 (Investment value). [{(85*2)- (50)-(135)}*50] 25

29 Strategy 8: Short Put Butterfly In Short Put Butterfly strategy, a trader is neutral in nature and expects the market to remain range bound in the near future. A trader will buy 2 ATM Put Options; sell 1 ITM & 1 OTM Put Options. Here risk and returns both are limited. Buy 2 ATM Put Options Sell 1 ITM Put Option Sell 1 OTM Put Option Suppose NIFTY is trading at 5200 odd points. Mr. X is bearish on volatility and expects the market to move upwards gradually at a very slow pace. He will implement Short Put Butterfly Strategy. He will buy two 5200 ATM Put Options at a premium of Rs. 85, sell one 5100 NIFTY OTM Put Option for a premium of Rs. 50 & shorts one 5300 NIFTY ITM Put Option for a premium of Rs Case 1: At expiry if NIFTY closes at 5000 level, then Mr. X will make a profit of Rs [{((200-85)*2) - (100-50) - ( )}*50] Case 2: At expiry if NIFTY closes at 5200 level, then Mr. X will make a loss of Rs [{(50)-(85*2)-( )}*50] Case 3: At expiry if NIFTY closes at 5400 level, then Mr. X will make a profit of Rs [(50) - (85*2) + (135)*50] 26

31 Strategy 10: Strip Strip Strategy is the opposite of Strap Strategy. When a trader is bearish on the market and bullish on volatility then he will implement this strategy by buying two ATM Put Options & one ATM Call Option, of the same strike price, expiry date & underlying asset. If the prices move downwards then this strategy will make more profits compared to short straddle because of the (double) quantity involved. Reward: Unlimited Buy 2 ATM Put Options Buy 1 ATM Call Option Mr. X is bearish on NIFTY and enters in a Strip Strategy, buys NIFTY ATM Put Options at a premium of Rs. 85, buys ATM Call Option at a premium of Rs His net investment will be Rs [{(85*2) + (100)}*50] Case 1: At expiry if NIFTY closes at 4900, then Mr. X will make a profit of Rs [{((300-85)*2) - (100)}*50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a loss of Rs (entire investment value). [{((0-85)*2) + (0-100)}*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a loss of Rs [{( )-(85*2)}*50] 28

33 Strategy 12: Long Put Ladder Long Put Ladder can be implemented when a trader is slightly bearish on the market and volatility. It involves buying of an ITM Put Option and sale of 1 ATM & 1 OTM Put Options. However, the risk associated with this strategy is unlimited and reward is limited. Risk: Unlimited Buy 1 ITM Put Option Sell 1 ATM Put Option Sell 1 OTM Put Option Suppose NIFTY is trading at 5200 levels. Mr. X feels that the market will slightly dip and will be less volatile. He buys one 5400 ITM Put Option at a premium of Rs. 200, sells ATM Put Option for a premium of Rs. 85 & sells OTM Put Option for a premium of Rs. 50. Mr. X s net investment will be Rs [{ *50] Case 1: At expiry if Nifty closes at 5100, then Mr. X will make a profit of Rs [{( ) - (100-85) + (50)}*50] Case 2: At expiry if Nifty closes at 5300, then Mr. X will make a profit of Rs [{( ) + (85) + (50)}*50] Case 3: At expiry if Nifty closes at 5500, then Mr. X will make a loss of Rs [{(55) + (25) - (200)}*50] 30

40 Strategy 19: Short Guts This strategy is implemented by a trader when he is neutral on the movements and bearish on volatility i.e. he expects the stock to be range bound in the near future. This strategy involves sale of 1 ITM Call Option and 1 ITM Put Option. This strategy can be called as Credit Spread since his account is credited at the time of entering in the positions. Risk: Unlimited Sell 1 ITM Call Option Sell 1 ITM Put Option Suppose NIFTY is trading around 5250 odd points. Mr. X is bearish on volatility and expects the market to be range bound in the near future. Short Guts Strategy involves selling of NIFTY ITM Call Option at a premium of Rs. 100 and selling NIFTY ITM Put Option at a premium of Rs His net credit amount will be Rs [( )*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs [{(100)-( )}*50] Case 2: At expiry if NIFTY closes at 5250, then Mr. X will make a profit of Rs [{(100-50) + (135-50)}*50] Case 3: At expiry if NIFTY closes at 5500, then Mr. X will make a loss of Rs [{(135)-( )}*50] 37

41 Strategy 20: Ratio Call Spread As the name suggests, a ratio of 2:1 is followed i.e. buy 1 ITM Call and simultaneously sell OTM Calls double the number of ITM Calls (In this case 2). This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is selling two calls. Risk: Unlimited Buy 1 ITM Call Option Sell 2 OTM Call Options Suppose NIFTY is trading around 5200 odd points, Mr. X is bearish on volatility and neutral on the market. He will buy 1 NIFTY 5100 ITM Call Option at a premium of Rs. 165 and sell NIFTY OTM Call Options for a premium of Rs. 110 (55*2). His net investment will be Rs [( )*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will lose his entire investment value i.e. Rs Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profit of Rs [{(55*2) + ( )}*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a profit of Rs [{( ) ((100-55)*2)}*50] 38

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