Boost Your Returns with Appropriate Option Strategies
The word ‘Option' literally means to choose an apt action from the various available alternatives. The fast growing financial instruments, Options, are no different giving its holder the right but not any obligation to undertake relevant action - either buy or sell the underlying asset. Hence, it is very crucial to have suitable Option Strategies in place to quickly act in the ever changing financial markets, as timing holds the key in maximizing your returns on investment.
Option contracts usually have positions of Call (buying option) and Put (selling option) and trading of these positions - Long (to buy) or Short (to sell). A combination of these positions in such a way that they yield maximum payout forms the option strategy.
Prior to working out your suitable option strategy, determining your financial goals, risk-return inclination, your short-term and long-term market outlook are essential. Apart from these crucial aspects, designing Option Strategies factoring your level of experience, volatility of markets also holds the key. It is always advisable to begin with simple strategies viz., long call, long put, bear put spread etc and then move on to complex ones.
Option Strategies broadly can be classified on the basis of market outlook. A financial market is considered bullish when confidence seems to be on the rise as indicated by increase in stock prices, surge in volume of financial trades, improvement in market indices and overall economic growth. On the contrary, a bearish market is when financial markets seem losing confidence displayed by fall in stock prices, stagnant volumes of trade etc. Usually option strategies differ with changing market outlooks.
Bullish strategies include call buy, bull call spread, bull put spread, writing out-of-the-money covered calls etc. Bearish strategies encompass put buy, bear call spread, bear put spread etc. In case of extreme volatile markets, strategies like Butterfly, Condor, Guts, Straddle, Strangle, Risk reversal etc are implemented.
Option strategies can be single option or a combination of options. While single option strategies like buying a call, selling a call or buying a put are quite simple, combination of options like buying and selling calls with different strike prices, buying call and put with same or different strike prices etc, are much more complex.
While determining a suitable option strategy, factoring in commissions, tax considerations, cost involved in margin accounts etc aides in arriving at most appropriate return calculations. Hence, by considering all the costs and your financial objective, arriving at an apt option strategy can not only curtail your losses but also maximize your returns.
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