Options Trading: Naked Options vs Multi-legged Strategies

April 3, 2023
Reading Time: 4 minutes

Multi-legged strategies provide traders with greater flexibility and control over their trades, as well as the potential for higher profits and defined risks. uTrade Algos offers pre-made strategy forms that can be customized to suit individual requirements, helping traders to make informed decisions and improve their chances of success in the options market.

Options trading is a sophisticated investment tool that can help traders earn significant profits in the stock market. As with any financial instrument, the success of an options trading strategy is highly dependent on the trader’s understanding of the underlying market and the options contracts they are buying or selling. A common misconception among novice traders is that options trading is simply about buying call options if the market is bullish or put options if the market is bearish. Let us discuss this with the help of an example.

Let us say that you are bullish on NIFTY and believe it will go to 21,000 this month. In an ideal world, your first thought will be to buy a NIFTY CE at an ATM strike of, say, ₹150 as an option premium and wait for the price to rise. If the price rises, you are bound to make a heavy profit, and there is no looking back. This is what we typically call a ‘naked option’, where the trader buys a call or put option with the hope of profiting from a movement in the underlying stock or index. 

However, this approach is inherently flawed, as the stock market is rarely that simple, and macroeconomic indicators are often complex and contradictory. Additionally, options sellers are mostly big institutions with the smartest people devising these contracts, so the probability of the buyer making a profit is negligible.

Therefore, instead of simply buying naked options, traders should create multi-legged options strategies that involve different options contracts with different parameters, such as type (call/put), expiration date, and strike price. 

Advantages of Multi-legged Options Strategies 

Advantages of Multi-legged Options Strategies

Multi-legged options strategies are more sophisticated and provide traders greater flexibility and control over their trades. Doing so changes your payoff curve from Figure 1 to Figure 2. It is evident in the latter that you will profit if NIFTY is in the given range and your breakeven points and maximum losses are well defined on both sides.

Figure 1


Figure 2

One of the other key advantages of using multi-legged options strategies is that the trader can receive a premium without paying a single penny of option premium. This is because the trader can use their existing financial resources, such as fixed deposits, stock portfolios, or bonds, as collateral. Furthermore, multi-legged options strategies allow traders to define their risk according to their risk tolerance and minimise the amount of premium they pay, thereby maximising their profits.

Another benefit of using options strategies is that they allow traders to make profits in a wide range of market scenarios, including volatile, sideways, or even mild-bullish or bearish markets. This is because multi-legged options strategies are designed to provide traders with a well-defined payoff curve, as was evident above. In contrast, naked options provide traders with a limited pay-out and high risk, as their success heavily depends on the market’s direction.

The only question that remains after this is how to put together a multi-legged strategy that works for you, and this is where uTrade Algos steps in. The platform has numerous pre-made strategy forms that help you deploy over 20 strategies in a matter of seconds. Most parameters are pre-set, but they can be customised to suit your requirements. 

To Summarise,

In conclusion, options trading can be complex and challenging, especially for beginners. While naked options may seem easy and straightforward, they can often lead to unprofitable results. On the other hand, options strategies can provide greater flexibility and control over risk and the potential for higher profits. By incorporating multi-legged strategies and considering the various market scenarios, traders can improve their chances of success in the options market. 

However, it is important to remember that options trading should always be approached with caution and a thorough understanding of the underlying market factors and risks involved. All decisions must be taken considering one’s risk tolerance and investment goals to make informed decisions and potentially achieve greater success in the options market.

Options trading is a sophisticated investment tool that requires a thorough understanding of the underlying market and the options contracts being traded.

Simply buying naked call or put options is flawed, as it ignores the complexity of the market and the low probability of making a profit.

Multi-legged options strategies offer greater flexibility and control over risk and potential for higher profits.

Advantages of multi-legged options strategies include receiving premium without paying option premium, defining risk tolerance, minimising premium paid, and profiting in a wide range of market scenarios.

Frequently Asked Questions

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uTrade Algo’s proprietary features – Advanced Strategy form,  fastest back testing engine,  Pre-made strategies help you Level up your Derivatives Trading experience

The dashboard is a summarized view of how well your Portfolios are doing, with fields such as Total P&L, Margin Available, actively traded underlyings, Portfolio name and respective underlyings, etc. Use it to quickly gauge your strategy performance

You can sign up with uTrade Algos and get started instantly. Please make sure to connect your ShareIndia trading account with us as it’s essential for you to be able to trade in the live markets. Watch this video to get started – Getting Started with uTrade Algos

While algo trading is in use for decades now for a variety of purposes, its presence has been mainly limited to big institutions. With uTrade Algos you get institutional grade features, at a marginal cost so that everyone can experience the power of algos and trade like a pro.

On uTrade Algos, beginners can start by subscribing to pre-built algos by industry experts – called uTrade Originals. 
While more advanced traders can create their own algo-enabled portfolios, with our no-code easy-to-use order form, equipped with tons of features such as – Robust risk management, pre-made strategy templates, payoff graph, options chain, and a lot more.

From single leg strategies to complex portfolios with upto 5 strategies, each strategy having up to 6 legs – uTrade Algos gives you enough freedom to create almost any strategy you’d like. What’s more is, there are pre-built algos by industry experts for complete beginners and premade strategy templates for those who want to try their hand at strategy creation.

An interesting feature that uTrade Algos is bringing to the table is a set of pre-built algorithms curated by top-ranking industry experts who have seen the financial markets inside out. These algorithms, called uTrade Originals, will be available for subscribers on the platform. 

Algos have the capability to fire orders to the exchange in milliseconds – which is one-thousandth of a second. A speed which is impossible in Manual Trading. Experience the power of Algos for free with uTrade Algos – Signup now.

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Knowledge Centre & Stories of Success

Options trading is a realm replete with potential rewards, offering traders various strategies to capitalise on market movements. However, the complexity inherent in options demands a cautious approach. Unlike other financial instruments, options carry specific nuances such as strike prices, expiration dates, and diverse option types. Navigating this intricate market necessitates a deep comprehension of these aspects, as miscalculations can lead to significant losses. Here are seven common pitfalls to evade for successful call and put option trading.

In algorithmic trading, the importance of risk management cannot be overstated. Algo strategies, while offering speed and precision, are inherently intertwined with risks. Understanding and effectively managing these risks is paramount as it determines the success or failure of such strategies. Here, we explore the pivotal role of risk management in shaping the fate of algo trading strategies.

In trading, the validation and optimisation of strategies are pivotal for success. Backtesting, the process of testing a trading strategy using historical data, is a crucial step in this journey. While both algorithmic and manual testing methods have their merits, algo backtesting holds several advantages over manual testing. Let's find out the specific benefits of utilising algorithmic backtesting for refining trading strategies.

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