In the previous module, we mentioned about call option and put option, however, the tendency of option traders is to buy options, expiry after expiry, with the hope of doubling their money. But we all are aware that it’s not always sunshine, at times there is a dark cloud cover and at times it could be cold and stormy.
Just like the weather, stock markets/financial markets are in different market regimes at different points in time. In order to take advantage of various market regimes, like bull trend, bear trend, oscillating and volatile markets, the need is to combine one or more options may be of the same type or different types, using varied strike prices. This enables option traders to participate in different market trends/regimes/types, with either hedged or unhedged positions via deploying option trading strategies, with the intention to maximise profits and minimise risk. These option strategies are generally traded as a combination, meaning all legs are traded at the same time. They can be traded over time to best suit your view about the market regime.
It is important to understand the characteristics of these different market regimes, so as to take benefit of the finer points and find a best fit option trading strategy for a particular forecasted market regime for an option trader. This will help him in scalping the stock market for profits and minimising his losses.
Option trading strategies formulated by the option traders may involve buying or selling of options and in case of spreads, involve both (buying and selling) of the same option type. We shall study in detail about option trading strategies and how suitable tools in Quantsapp can act as trade enablers for formulating sound option strategies.