Option Trading and Strategies

Last Updated on September 3, 2025 by Muskan Sinha

With Option Trading, traders get the right to purchase or sell the assets at a predetermined price and time frame. Option trading is often seen as providing flexibility to the traders where they can customize their investment strategies and decide when not to purchase a security. In this article, we will thoroughly discuss what is option trading and strategies involved in it. 

Option trading also provides leverage which allows investors to control large positions with small investment. It comes with limited downside risk and also protects the existing investments. Option trading helps you earn profit even when the price of a stock moves as you will be able to sell the contract before the expiry date. 

What is Option Trading?

Option Trading is a technique where a user can buy and sell financial contracts known as options. In this process, the user has the advantage of holding a security and selling it later when the market situation seems favourable. Option trading is slightly more risky than normal stock trading and requires a person to have great understanding of the financial market.

Types of Option Trading 

There are mainly two types of option trading and they are as follows:

1. Call Option 

Call option gives the traders a right to buy a stock at the strike price. This usually happens when traders anticipate that the price of the stock will go up and so purchase call options to benefit from that increase in price. 

For example, the stock currently trades at Rs 100. You buy a call option with a strike price of Rs 105 which expires in a month. If the stock price rises up to Rs 120 before expiry, you can exercise the option and buy it at Rs 105. This way you gain a profit of Rs 15. 

If the stock stays below Rs 105, then you will not exercise your option and thus would not be subjected to the loss. 

2. Put option 

The put option gives the trader a right to sell a stock later at the strike price. This usually happens when traders anticipate that the price of stock will go down and so they sell the stocks to avoid the loss. You get the profit if the value of stock goes down lower than the price you agreed upon. 

For example, the stock currently trades at Rs 100. You buy a put option with a strike price of Rs 95. If the stock falls to Rs 80, you can sell it at Rs 95 and make a profit of Rs 15. 

If the stock stays above Rs 95, then you will not use the option and will also not be subjected to the loss. 

Benefits of Option Trading 

There are many benefits of option trading and they are discussed below:

• Cost Efficiency – Options have great leveraging power and buying them requires less capital than buying the underlying asset. So option trading helps you hold more positions with minimum investment. 
• Risk Management – Options are often used as hedging instruments to protect against adverse market conditions. 
• Higher Returns – Option trading is generally seen as providing much higher returns as compared to other forms of trading. This is because traders can benefit from both upward and downward price movements of the assets. 
• Flexibility – Looking at the adverse market conditions, option trading provides various strategies that can be tailored to these conditions. Traders can make use of these strategies based on risk appetite, investment goals and market conditions. 

Strategies of Option Trading 

There are several option trading strategies and they are as follows:

1. Bullish Strategy 

Under this strategy there are three main strategies: 

• Long call strategy – This involves buying a call option when traders expect the price of stock to rise significantly. The risk involved in this is limited to premium paid and the rewards are unlimited. 
• Bull call spread – In this, the trader buys the call option at a lower strike price and sells the call option at a higher strike price. The aim of the trader remains to earn profit from the moderate price change. The risk is limited to net premium and the reward is also limited. 
• Bull put spread – Traders buy a put option at a higher strike price and buy a put option at a lower strike price. The risk and reward both here are limited. 

2. Bearish Strategy 

In bearish strategies there are mainly three types of strategies:

• Long put strategy – A trader will generally use the long put strategy when he believes that the price of an asset will decline. The risk involved is limited to the premium and the reward you get is high if the price falls significantly. 
• Bear put spread – Using this strategy, a trader will buy a put option at a higher strike price and sell the put option at a lower strike price. The aim of this strategy is to gain profit from the moderate decline in prices. 
• Bear call spread – Traders will sell call options at higher strike price and buy a call option at a lower strike price to benefit from the moderate decline in price of assets. 

3. Neutral Strategies 

There are five main strategies under neutral strategies and they are as follows:

• Covered call – In this, traders can sell a call option on an underlying asset that they already own. This is a popular strategy which helps to generate income and also protect them against a potential decline in the stock’s value. 
• Iron condor – This strategy is a little complex which is used when there is low volatility. This strategy involves selling both a call option and put option at different strike prices. Traders are also required to buy call options and put options at higher and lower strike prices to benefit from the limited price movement. The risk here is limited but the reward is a premium received. 
• Long Straddle – This strategy requires you to buy both a call option and a put option on the same underlying asset with the same strike price and expiration date. Traders benefit from this strategy when there is a significant shift in the price of stocks. The risk here is high but the reward is profitable is the stock moves significantly up or down. 
• Long Strangle – In this strategy, traders are required to buy both a call option and a put option but at different strike prices. Traders generally use this strategy when they believe that asset’s price will show significant change but are unaware of the direction of the shift. 
• Butterfly Spread – This strategy aims to gain profit from the limited price movement. In this strategy, a trader buys a call option at lower strike price, sells two call options at middle strike price and buys a call option at higher strike price. 

Some other strategies 

Some other common strategies involve the following:

• Married Put –This strategy requires the trader to buy the stock and also a put option on the same stock. This strategy is useful to limit your losses if the stock value goes down while still allowing upside potential. 

Using these strategies, investors can manage risk, generate income and speculate the price movement. These strategies can be used after accessing the market conditions properly.

Muskan Sinha

Muskan Sinha is a creative and passionate content writer, skilled at delivering high quality , engaging and SEO friendly content across diverse niches. With a zeal for storytelling and great critical thinking, she delivers clear, informative and impactful content that boosts audience engagement.