Option trading can be done in many different ways as there is a call and put contract for every strike, multiple strikes, many expiry to select and one can either buy or sell. Using one or many of these combinations, one can come up with a strategy involving more than one leg.

In this article, we will discuss about simple, one leg option strategies. This will be helpful for beginners. Those who are trading in options already, can skip it.

Buy Call

Buying or “Going Long” on a Call is a strategy that must be devised when the trader is bullish on the market direction moving up in the short term.

A Long Call Option is the simplest way to benefit if the trader believes that the market will make an upward move. It is the most common choice among first-time traders. “Being Long” on a Call Option means the trader will benefit if the underlying Stock/Index rallies. However, the risk is limited on the downside if the underlying Stock/Index makes a correction.

Trader View: Bullish
Risk: Limited to the premium paid
Reward: Unlimited (theoretically)
Breakeven: Strike Price + premium paid



Buy Put

Buying or “Going Long” on a Put is a strategy that must be devised when the trader is Bearish on the market direction going down in the short-term.

A Put Option gives the buyer of the Put a right to sell the Stock (to the Put Seller) at a pre-specified price and thereby limit his risk. “Being Long” on a Put Option means the trader will benefit if the underlying Stock/Index falls down. However, the risk is limited on the upside if the underlying Stock/Index rallies.

Trader View: Bearish
Risk: Limited to the premium paid
Reward: Unlimited (theoretically)
Breakeven: Strike Price – premium paid



Sell Call

Selling or “Going Short” on a Call is a strategy that must be devised when the trader is not so bullish on the market. On selling a Call, the trader earns a Premium (from the buyer of the Call).

This position offers limited profit potential and the possibility of large losses on big advances in underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is exposed to unlimited risk.

Trader View: Mildly Bearish
Risk: Unlimited (theoretically)
Reward: Limited to the premium received
Breakeven: Strike Price + premium received



Sell Put

Selling or “Going Short” on a Put is a strategy that must be devised when the trader is Bullish on the market direction and expects the stock price to rise or stay sideways at the minimum.

When trader sells a Put, he/she earns a Premium (from the buyer of the Put).If the underlying price increases beyond the Strike price, the short Put position will make a profit for the seller by the amount of the premium. But, if the price decreases below the Strike price, by more than the amount of the premium, the Put seller will lose money.

Trader View: Mildly Bullish
Risk: Unlimited (theoretically)
Reward: Limited to the premium received
Breakeven: Strike Price – premium received



Conclusion

It may seem very simple to trade options, but it is NOT. There are many factors that can influence option premium. Also, there is lot of difference between option buying and selling. Understand the risks involved in options trading and then trade.

To know more about options, watch these videos.