The derivatives were once described as a weapon of mass destruction by Warren buffet because derivatives have been misused or used without proper knowledge about them most of the time. In order to be inclusive of some profitable options strategies as an investor, you can go beyond just futures trading. These strategies profit you in two ways by enhancing your returns and also reducing the cost. Most of the online trading platforms provide F&O strategy as a part of their offerings and use such techniques according to the needs of their clients.
Protective puts to strengthen profits on the downside.
Presume that you are holding an extremely volatile stock for a couple of months. Despite that, you are convinced of the long-term prospect of the stock and continue holding it. In such instances, you can behave like a dual wealth enhancer by using protective puts to avoid maximum loss, regardless of how low the stock steeps. A protective put is a sort of passive protection that works as a dual benefit that allows you to book profits on the put option and add to your investible surplus every time the stock corrects.
Reduced cost of holding with covered calls
Reducing one’s cost of holding is as essential as enhancing the returns to make an investment profitable. That is the very purpose of covered calls. Covered calls let you sell at a higher strike call option while holding the stock, especially when you purchase it for the long term, but the price corrects no matter what. The level to sell a call option can be the short-term resistance. You will earn the premium and reduce the cost of holding as the call expires worthless every month. Even in case of a disaster event, such as the stock price is moving up, there will be no risk as you will have the stock on hand, but you will lose money on the call you have sold. When it comes to reducing the cost of holding covered calls works like magic.
Tapping the reverse arbitrage opportunities
When it comes to arbitrage in F&O, it means buying a stock and selling equivalent futures. Even this sounds a bit intricate than buying and selling futures. The assured profit is the spread between these two because the cash and the futures position will expire at the same price on the expiry date. Whereas in a reverse arbitrage, you buy the futures of a similar quantity to the stocks you sell. But it is possible to profit from reverse arbitrage as you can do that against your holdings. But this reverse arbitrage is not too frequent.
Challenge the volatility with strangles
Almost every one of us trades or invest with utmost confidence when the market direction is clear. You buy when it is bullish and sell when the market is bearish, but what will you do when the market is heated and could not show you a specific direction? Let’s assume that you have an equity portfolio; with that, you expect the markets to be volatile due to macro factors. Still, you are not very sure about the direction. In such cases, you can buy a call of higher strike and sell of a lower strike. Your profits will be unlimited on either side whereas, your loss will be limited to the premium you paid. Hence this is a long/short strategy, and your overall exposure remains the same as it does not affect the nature of your exposure. This can also be relevant with limited loss.
The F&O strategies can be used to either reduce costs or to enhance profitability.