Directional (Single Leg) - Calls and Puts
- Rohit More
- May 5
- 5 min read
The Simplest Path in Options Trading for Beginners
Options trading has recently become a fruitful market for the risk-averse trader as well as a conservative investor in the dynamic world of the stock market. However, among the different strategies offered, directional options trading is a relatively simple but efficient strategy for making money in the rise of the prices of the stocks. In particular, call and put options are used for a single leg options strategy to offer beginners a clean entry point and an experienced trader a ready-made tactic.
For those new to the world of options or for those who just want to reinforce their foundation, learning and trading directional options using single-leg call-and-get positions is a must. In this blog, we are going to provide everything you need to get started with single-leg options, identify when you should use single-leg options, and a sound covering of options risk management in directional options.
What is Directional Options Trading?
Directional options trading refers to a method whereby an investor will open a position based upon his or her view of where the price of an asset is heading, either bullish (hoping the price goes up) or bearish (expecting the price to go down). The trader is effectively betting on the change in the stock’s movement direction. Directional strategies employ price trends as opposed to the type of volatility, time decay or range-bound movement that are targets for non-directional models.
Although it is not commonly known, this is a widely used trading style of momentum traders, event traders, as well as long-term investors who seek short-term alpha.
Understanding Single Leg Options Strategy
A single leg options strategy consists of using a single-options contract (either a call option or a put option) to express a position on the market. Options trading in its simplest form can be used for those who are just starting out in derivatives.
Call Option (Bullish View)
The buyer of a call option has the right, but not an obligation, to buy a stock at a given price (strike price) before a specified date of expiry. Whereas call options are used when traders expect the stock to rise.
Put Option (Bearish View)
A put option gives its purchaser (the buyer) the right, not the obligation, to sell a stock at a strike price before the expiry of the option. Put options are used by traders when they anticipate the stock to fall.
These two instruments are the main building blocks of all option strategies. However, when considering the two options separately, they look like a neat, simple trade on market direction, which are arguably beginner options strategies call and put.
How to Trade Directional Options
Single-leg directional options trades are a relatively simple matter, although proper planning and timing are required.
1. Identify Market Direction
Before taking a position, the stock undervaluation that you should expect to see should be known. This could be done using:
Momentum indicators (stochastics, velocity, detrended price oscillators), moving averages (simple, exponential, etc.), trend lines, etc.
Earnings reports, sector performance
Budget announcements, RBI policies, etc.
2. Choose Between Call or Put
After you get a directional bias.
At the same time, use a call option if you anticipate a bullish move.
You would use a put option if you expect a bearish move.
3. Select the Right Strike Price
For beginners always go for At the Money (ATM) or slightly In the Money (ITM) options as options are more liquid and price movements are more responsive on the option trade.
4. Choose the Right Expiry
For short-term traders, weekly options can be picked up to gain in a short time, whereas positional traders can go for monthly expiries. The critical element is to allow the move to play out so you don’t blow the position away.
Best Time to Use Single Leg Options in Stock Trading
These are the conditions under which single-leg strategies will work best:
1. Strong Trend
If a stock or index is trending bullish or bearish, single-leg strategies such as buying calls or buying puts will allow you to participate in the trend, albeit with defined risk.
2. Earnings or Event Plays
Bets on direction using call or put options allow you to capture large moves ahead of important announcements, such as earnings reports, budget presentations, and central bank decisions.
3. Breakouts
A call option can be a powerful directional play in a stock that is breaking out of a long consolidation zone or resistance level. More or less the same way puts work, breakdowns support the use of put options.
4. Intraday Momentum
On the other hand, if a stock has such strong momentum and volume in intraday trading, one can take leverage buy options with near expiry and earn good returns, but with higher risk.
Risk Management in Directional Options
While both the single-leg options carry minimum risk (you can only lose what you paid as a premium), the single-leg options are not risk-free. The way to effectively handle risk management on directional options is:
1. Use Stop-Loss Triggers
Although the premium is your maximum loss, mentally or physically setting stop loss levels can preserve capital, particularly in volatile markets.
2. Avoid Illiquid Options
Invest in stocks or indices with high liquidity in order to get a better price execution and very tight bid-ask spreads.
3. Avoid Buying Far OTM Options
Often, such beginner traders are tempted to use cheap Out-of-the-Money options. Since they have a low delta, they often expire worthless. The best probability is to stick to the ATM or the ITM.
4. Position Sizing
Never invest more than a set fraction of your capital into any one trade. Most traders stick to the 2, 5% of drawdown per trade.
5. Time the Entry Wisely
The only time to buy options is when implied volatility is very high, unless you are expecting even more volatility. When you pay more than you should for a premium, you get a lower profit margin.
Beginner Options Strategies: Call and Put Simplified
Two simple beginner strategies with single-leg options.
1. Bullish Strategy, Buying a Call Option
Example: Reliance is trading at ₹2400. Within the next week, you expect it to rise to ₹2500. Buying a 2400 strike call for ₹30 makes sense, as there is just a basic possibility of it gaining ₹30 on the downside from this strike.
Max Loss: ₹30 (premium paid)
Breakeven Point: ₹2430
Unlimited Profit Potential above ₹2430
2. A Put Option (Bearish Strategy) is purchased.
Example: Infosys is trading at ₹1400. You expect a drop to ₹1350. Out of this, you buy a 1400 strike put at ₹25.
Max Loss: ₹25
Breakeven Point: ₹1375
When the price falls below ₹1375, the profit rises.
The simplest are both pure directional plays with a clear risk-reward profile, which will suit new traders wonderfully.
Pros and Cons of Single-Leg Directional Trading
Pros
Simple to understand and execute
Defined risk (premium paid)
High leverage potential
No initial margin requirement (margin has to be posted when buying options)
Cons
Time decay eats into the premium.
Needs significant movement to profit
Can be emotionally challenging
Slippage in illiquid options
Of all the options trading strategies, directional options trading with a single-leg options strategy is the simplest yet the most powerful way to express your opinion in the market. If you discover the basic call and put options, and how to trade directional options, and you drill on putting it to practice with directional options, then even an unsophisticated trader can learn the options market grounding somewhere.
Timing, strike prices, which underlying stock, and how the risk is controlled are your keys. As a novice, beginner or even trader, using a call or put option as a single-leg trade is both educational and potentially profitable.
Remember: In the stock market, preparation and discipline win. Go small, learn well, and trade with integrity.
Welcome to the world of options trading and remember, keep this strategy in your toolkit, and stay tuned for more advanced strategies as well as market psychology.
