Divergence Secrets

1. Basic Option Trading Strategies

These are simple, beginner-friendly strategies where risks are limited and easy to understand.

1.1 Covered Call

How it Works: You own 100 shares of a stock and sell a call option against it.

Goal: Earn income (premium) while holding stock.

Best When: You expect the stock to stay flat or slightly rise.

Risk: If stock rises too much, you must sell at the strike price.

Example: You own Infosys at ₹1,500. You sell a call at strike ₹1,600 for premium ₹20. If Infosys stays below ₹1,600, you keep the premium.

1.2 Protective Put

How it Works: You buy a put option to protect a stock you own.

Goal: Hedge downside risk.

Best When: You fear a market drop but don’t want to sell.

Example: You own TCS at ₹3,500. You buy a put with strike ₹3,400. If TCS falls to ₹3,200, your stock loses ₹300, but the put gains.

1.3 Cash-Secured Put

How it Works: You sell a put option while holding enough cash to buy the stock if assigned.

Goal: Earn premium and possibly buy stock at a discount.

Best When: You’re okay owning the stock at a lower price.

2. Intermediate Strategies

Now we step into strategies combining multiple options.

2.1 Vertical Spreads

These involve buying one option and selling another of the same type (call/put) with different strikes but same expiry.

(a) Bull Call Spread

Buy lower strike call, sell higher strike call.

Limited risk, limited profit.

Best when moderately bullish.

(b) Bear Put Spread

Buy higher strike put, sell lower strike put.

Best when moderately bearish.

2.2 Calendar Spread

Buy a long-term option and sell a short-term option at the same strike.

Profits if stock stays near strike as short-term option loses value faster.

2.3 Diagonal Spread

Like a calendar, but strikes are different.

Offers flexibility in adjusting for trend + time.

3. Advanced Option Trading Strategies

These are for experienced traders who understand volatility and time decay deeply.

3.1 Straddle

Buy one call and one put at same strike, same expiry.

Profits if the stock makes a big move in either direction.

Best before major events (earnings, policy announcements).

Risk: If stock stays flat, you lose premium.

3.2 Strangle

Similar to straddle, but strike prices are different.

Cheaper, but requires larger move.

3.3 Iron Condor

Sell an out-of-the-money call spread and put spread.

Profits if stock stays within a range.

Great for low-volatility environments.

3.4 Butterfly Spread

Combination of calls (or puts) where profit peaks at a middle strike.

Limited risk, limited reward.

Best when expecting very little movement.

3.5 Ratio Spreads

Sell more options than you buy (like 2 short calls, 1 long call).

Higher potential reward, but can be risky if stock trends too far.