There are lot of option strategies. I got confused. Can any body suggest me good strategy to workout on monthly basis for 4 % profit with limited risk.
All option strategies are designed specific to the market conditions. You need to have a sense of either market direction or volatility to implement a particular strategy in your trades. For ex: Bull spread works when you are slightly bullish on market and Long Strangle works when you are expecting volatility to rise. I think there is no no strategy which works in all market conditions.
If you are a beginner I would suggest you to paper trade below three strategies:
- Bull/Bear Spread
- Short Straddle
- Diagonal Calendar Spreads
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Options are tricky instrument & it is very important to understand fully before one trades them, but having said that, yes, they can be a source of consistent income.One of the not so favored strategy among retail traders is Shorting options. A simple example to show how it works and how it can be used to achieve 5-10% return monthly:
Let say, You are bullish on Wipro and it was trading at 650 odd levels on 5th Mar’,2015. Now, you can harness your bullish view by shorting a lower put of the same stock. A 4% lower put, 620 PE was trading at 3.20 on 5th Mar’, 2015. Shorting a 620 PE at 3.20 would give a credit of = 3.20*500 (Lot size)=1600/Lot
Margin Required =40,000 (Approx)
Return on Margin=1600/40000*100= 4%
By employing this strategy, you are giving a cushion of 4% downside on a stock you expect to move up in coming days.The probability of success in shorting options is very high as 80% of the options expire worthless & only 20% expire In-the-money. If this probability can be mixed in a right way with technical of stocks, it can surely be a way to consistent returns.
The downside is that it is an unlimited risk strategy, but that is where you have to be smarter. You can always exit the counter at a minimal loss, if the strategy goes wrong. i,e if you shorted at 3.20, you can place a stop at 5.00. However, the success rate will always be more in shorting options.
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