Intraday trading, otherwise called day trading by most, is the buying and selling of financial instruments within one trading day. This investment strategy is primarily taken to gain profit from the movement of small prices.
A trader needs to have nimble decision-making skills, with an in-depth understanding of market trends for intraday trading. All the tools used by traders are versatile, and an option lets a trader earn money in both rising and falling markets.
Here, we are going to discuss five important intraday option trading strategies every trader should know.
1. Momentum Strategy
The Momentum Strategy emanates from exploiting the momentum available in the market. This involves watching out with regard to stocks in preparation for huge price movements. This might be precipitated by the latest news, company earnings, or major events.
Example:
Suppose a company declares a big takeover and its stock, which quote at ₹ 500, is bound to appreciate. You can:
Buy a Call Option: Buy one week call option with the strike price ₹ 520 for a premium of ₹ 10 per share.
Sell at Peak Momentum: If the stock goes up to ₹550, the value of your call option rises, and you can sell at a higher premium compared to your buying premium; say ₹40 per share.
Capturing this momentum brings you a profit of ₹30 per share (₹40- ₹10).
2. Breakout Strategy
This is a strategy of recognizing stocks that break out of their normal trading range. Inevitably, this is very time-factor-dependent and hence quite rewarding if done at the right time.
Example:
The usual trading range for a stock could be ₹100 – ₹110. Now, suppose due to its comparatively impressive earnings report, it has been trading at ₹120, which is breaking out from the normal trading range.
Enter a Long Position: Buy a call option having an exercise price of ₹ 115 that is due for expiry in a week for a premium cost of ₹ 5 per share.
Watch Breakout: The stock further rises up to ₹ 130. Your call option becomes very valuable, say ₹ 20 per share.
Profit from breakout: ₹ 15 per share (₹ 20 – ₹ 5).
3. Reversal Strategy
The Reversal Strategy is when one is betting against the current trend of the market in the present times. It requires an awful lot of market analysis and understanding of the technical indicators for its execution. It is a high-risk strategy and rewarding if done correctly.
Example:
The stock has been on a downtrend, trading at ₹ 200. Based on your technical analysis, you expect a reversal.
Buy Call Option: Pay a premium of ₹8 per share to buy a call option whose strike price is ₹210 and one week expiry.
Sell at Reversal: In case the stock reverses and leads to ₹230, the value of the call option may go up to ₹25 per share.
So, your profit would be ₹17 per share. ₹25 minus ₹8.
4. Scalping Strategy
Scalping It involves making several small profits during a trading day. This, too, requires high-frequency trading and Script awareness of market movements.
Example:
You identify a highly liquid stock trading at ₹ 150. You notice the small price fluctuations that occur during a day.
Buy and Sell Quickly: Buy a call option with a strike price of ₹ 152 expiring in one day for a premium of ₹2 per share.
Exercise Multiple Trades: Sell the option for ₹5 per share if the stock price fluctuates to ₹155. Run this exercise repeatedly to keep raking in a profit of ₹3 per share per trade.
5. Moving Average Crossover Strategy
In the Moving Average Crossover Strategy, moving averages are used to determine a shift in market trend. This technique allows traders to take a position or exit a position on, based on signals provided by moving average indicators.
Example:
A stock is trading at ₹300. The 50-day moving average cuts above the 200-day moving average, signaling an uptrend.
Enter a Long Position: Buy a call option with a strike price of ₹310, expiring in one month, for a premium of ₹15 per share.
Monitor the Trend: Since the uptrend prevails on the stock touching ₹350, a call option value surges to ₹45 per share.
You get a profit of ₹30 per share (₹45 – ₹15).
Conclusion
If executed precisely and with complete discipline, intraday option trading strategies can be very profitable. Of all the strategies, the Momentum Strategy, Breakout Strategy, Reversal Strategy, Scalping Strategy, and Moving Average Crossover Strategy have their unique advantages for the trader.
Getting to know these concepts enables a trader to develop skills for making prompt decisions in responding to the short-term market movements. In-depth research and learning are equally necessary for success in intraday trading.
