Categories of Options Strategy

Welcome to yet another article regarding the options trading strategy. This is you can say a kind of the last article on option trading and after that, I will start putting strategies, the normal basic strategy of future and options for your reference, for your learning. So, in this article I’m going to tell you types of strategies, what are the different types of strategies? How they are classified or categorized and what you should understand by the category? So, let's go ahead and understand the various type of strategies as per the categorization.

In this article, I will say this the last article of the course but not the last article on this strategy after that I will start putting basic and some simple options strategies for reference, for your practice, for your understanding and this is the last article on you can say kind of description I am giving you. So, in this article, I will tell you different types of options strategies. So, let's go ahead and understand.

So, if I talk about the option strategies are categorized on different you can say criteria, different type of criteria is there like you can talk about their expiry, you can talk about the market view. So, I want to classify a different kind of options strategy on a different basis okay. So, the first thing is direction. I can classify strategies based on direction, what is the market whether they have any direction or they don't have.

So, there are two types of strategy. We can classify in two categories of all the option strategies. So, one type of option strategy is called you can say directional options strategy, and another type is called non-directional option strategies or it is also called neutral options strategy. Why it is important to know because once you know it is a directional or neutral strategy then you can apply this strategy according to market view.

Sometimes what happens you are using the strategy without understanding. What is the nature of this strategy? When the market is bullish, then you should use a bullish strategy, not a good bearish tradition then otherwise you are going against the market and there are good chances you will make losses.

So, I want to give an example of directional strategy so you can understand. Spreads are like buying a call and buying a put buying one you can say either call or put. It's not a strategy but you can say it's a one-like strategy. So, all those strategies which have clear market direction in the mind before we apply them are called directional strategy.

So, once we are bullish, we use bullish strategies like we buy the call, we buy bullish spread or we can buy put also. The support is also a bullish strategy. How I will tell you? Simply if I say if you're very curious how you can say selling a put can be bullish because see, we are bullish. We know the market will not come down that's why we sold the put and we'll put the premium in our pocket. So, we know the market will go up that's why we are selling put so that's how it will become selling and it would also become a bullish strategy and the same way selling a call become a bearish strategy. So, all the strategy which has a direction either bullish or bearish are called directional strategy.

The second is a non-directional strategy where either we are not very sure about the market where the market will go or we see the market is in a range-bound. If it's not moving anywhere then we use non-directional strategies. For example, we use straddle and strangles, we use iron condor.

These are all non-directional strategies where you know you are trying to earn from both sides and with a non-direction strategy, we have to sell the options. Now, there is one strategy which you can say straddle. So, it is a bullish straddle. Now, you understand what straddle means? You buy the call, you buy to put on at the money.

So, if you buy, you are bullish, you can say bullish in one direction. You don't know the direction but you know either market will go one time one way or another way or otherwise I will say if you use the bullish or you can say buy straddle that means you are expecting the market will go one way that means the market will be volatile.

So, in simple words first thing, I told you it's directional and non-directional, then we can classify based on the number of legs used. Now, the number of legs means several positions taken okay. So, for example, I have bought a call and I covered this call by selling uh you can say by selling a put or by buying a put.

So, I have created two positions, one buying a call another selling you can say call or selling a put. Now, suppose if I buy a call and I sold two puts just understand buy a call sold two puts it's two legs like strategy, not a three-leg strategy. You're going to say two lots we have sold but both two lots we have sold on one position.

So, several positions there are four positions also just like the iron condor. There are four positions and four legs are involved so this way we can say the number of legs involved, we can say how many lags are involved, how many positions we have taken and, on that basis, also we can classify the strategy. So, I hope you understand the article.