Divergence Secrets

Long Straddle

Setup: Buy 1 Call + Buy 1 Put (same strike & expiry).

When to Use: Expect huge volatility but uncertain direction.

Logic: Profit if stock makes big move either way.

Example: Stock at ₹100. Buy Call 100 for ₹4 + Put 100 for ₹4 (total ₹8). If stock goes to ₹115, Call worth ₹15 (profit ₹7). If stock goes to ₹85, Put worth ₹15 (profit ₹7). Loss if stock stays near ₹100.

Long Strangle

Setup: Buy Out-of-the-Money Call + Buy Out-of-the-Money Put.

When to Use: Expect big move but cheaper than Straddle.

Logic: Profitable in strong moves but needs bigger movement than Straddle.

Example: Stock at ₹100. Buy Call 105 for ₹3 + Put 95 for ₹3. Total cost ₹6. Profit only if stock moves above 111 or below 89.

Bull Call Spread

Setup: Buy Call at lower strike + Sell Call at higher strike.

When to Use: Moderately bullish.

Logic: Reduces cost compared to naked Call.

Example: Stock ₹100. Buy Call 100 for ₹5, Sell Call 110 for ₹2. Net cost ₹3. Max profit = ₹7 (if stock > ₹110).

Bear Put Spread

Setup: Buy Put at higher strike + Sell Put at lower strike.

When to Use: Moderately bearish.

Logic: Cheaper than long Put.

Example: Stock ₹100. Buy Put 100 for ₹5, Sell Put 90 for ₹2. Net cost ₹3. Max profit = ₹7 (if stock < ₹90).

Iron Condor

Setup: Sell Out-of-the-Money Call Spread + Sell Out-of-the-Money Put Spread.

When to Use: Expect sideways movement with low volatility.

Logic: Earn premium as long as stock stays in range.

Example: Stock ₹100. Sell 90 Put, Buy 85 Put, Sell 110 Call, Buy 115 Call. Net premium collected ₹4. Profit if stock stays between 90–110.

Butterfly Spread

Setup: Buy 1 Call (low strike) + Sell 2 Calls (middle strike) + Buy 1 Call (high strike).

When to Use: Expect very low volatility, price near middle strike.

Logic: Profits if stock stays near center strike.

Example: Stock ₹100. Buy Call 95 for ₹7, Sell 2 Calls 100 for ₹4 each, Buy Call 105 for ₹2. Net cost = ₹1. Max profit at ₹100 = ₹4.

Collar Strategy

Setup: Buy stock + Buy Put + Sell Call.

When to Use: Want to protect downside while capping upside.

Logic: Provides range-bound protection.

Example: Stock ₹100. Buy Put 95 for ₹3, Sell Call 110 for ₹3. Net zero cost. Loss limited below ₹95, profit capped above ₹110.

Calendar Spread

Setup: Sell short-term option + Buy long-term option (same strike).

When to Use: Expect stock to remain stable short-term but move long-term.

Logic: Benefit from time decay in near-term option.

Example: Stock ₹100. Sell 1-month Call 100 for ₹3, Buy 3-month Call 100 for ₹6. Net cost ₹3.