Low Risk Options Trading Strategy - Option Spreads

Status
Not open for further replies.
#11
Dear gsap,

a) On 13th, if nifty closes 3900 for example your 4000 put willbe approximately at 180 rupees and 3900 put willbe approximately at 120 rupees. So your gain in 4000 put willbe 36 rupees and your loss in 3900 put will be 23 rupees and your net gain will be 13 rupees.

b) On 20th, if nifty closes 3900 for example your 4000 put willbe approximately at 150 rupees and 3900 put willbe approximately at 70 rupees. So your gain in 4000 put willbe 6 rupees and your gain in 3900 put will be 27 rupees and your net gain will be 33 rupees.

Now this answer matches with AW10. Am i correct AW10 ?
 
Last edited:

AW10

Well-Known Member
#13
Dear gsap,

a) On 13th, if nifty closes 3900 for example your 4000 put willbe approximately at 180 rupees and 3900 put willbe approximately at 120 rupees. So your gain in 4000 put willbe 36 rupees and your loss in 3800 put willbe 73 rupees and your net loss willbe 37 rupees.

b) On 20th, if nifty closes 3900 for example your 4000 put willbe approximately at 150 rupees and 3900 put willbe approximately at 70 rupees. So your gain in 4000 put willbe 6 rupees and your loss in 3800 put willbe 23 rupees and your net loss willbe 17 rupees.

Am I correct AW 10.
Thanks for answering to gsap's query.. I am assuming that premium that u have mentioned is correct for future dates..
While evaluating the real worth of such position, we need to focus on net premium at any time which is nothing but the difference of the premium of both legs..

a) the net premium on 13th will be - difference of 180 (for 4000 put) and 120 (for 3900 put)... So if u decide to squareoff the position - you will get net 60rs for this. i.e for investment of 47, you are getting back 60.
It is not loss but profit..

b) Again net premium will be net of 150 rs and 70rs. = 80 rs.
again for investment of 47,u are getting back 80rs. it is profit..

As long as market goes down, the premium of higher strike put will always be more then premium of lower strike put. We see it on friday and also in both the example above as given by murajichandra. (just chk out the option chain of nifty and observe the premium of PUTs of higher strike and lower strikes. You can see it yourself.

if market falls to say 3700.. real value /intrinsic value of your 4000 put will be 300rs at that time. and real value of your 3900 put will be worth 200 rs. At expiry day, time value becomes ZERO so as long as market remains below 3900, you get the complete difference of real value which is difference between two strikes.

Before expiry, time value will be added to intrinsic value.
Higher value put will always be deeper in-the-money and hence will carry higher premium then lower value puts. Common sense logic is that if mkt is at 3800, then 3900 put has higher probability of going out of money and expiring worthless compared to 4000 put. So obviously, 4000 put will carry higher premium.

In short, with this bear spread, you right (long option 4000 ) will always be worth more then you obligation (short option 3900) making u winner as long as market stays down..

Hope this helps.

Happy Trading.
 
#14
Re: Low risk options trading strategy - Option Spreads
Dear gsap,

a) On 13th, if nifty closes 3900 for example your 4000 put willbe approximately at 180 rupees and 3900 put willbe approximately at 120 rupees. So your gain in 4000 put willbe 36 rupees and your loss in 3900 put will be 23 rupees and your net gain will be 13 rupees.

b) On 20th, if nifty closes 3900 for example your 4000 put willbe approximately at 150 rupees and 3900 put willbe approximately at 70 rupees. So your gain in 4000 put willbe 6 rupees and your gain in 3900 put will be 27 rupees and your net gain will be 33 rupees.

Now this answer matches with AW10. Am i correct AW10 ?
Last edited by murajichandra; Today at 06:49 PM. Reason: (actually we sold 3900 put for 97 but i assumed as 47 )
 

bandlab2

Well-Known Member
#16
great explanation AW10 .

on a side note, we need to pay the premium amount for 4000 put and maintain margin for selling 3900 put. so u need some margin money here. although in theory yr sell is protected by a buy of same instrument, our lazy brokers will treat each leg as a indepenant transaction. but i heard icici allow 2L, 3L orders which means you can place 2 orders together and both will executed together. TTAdvance has 'hedged orders' , although i never tried

why i am bringing up this margin issue is we need to have enough money to cover the brokers requiements. for options they dont do mark2market on daily basis (icici) but they have a trigger price base on that if enuf margin is not there they will square off the sell position and yr spread is broken !!!

fo example, nifty crashes to 3600 in next 3-4 days, 3900 put would be around 350 rs and you need 350x50=17500 rs a extra magin in yr account -- you may argue yr 4000 put woul have yeilded 20000 rs profit but as i said they dont do M2M on options , they are lazy. now they will square off yr 3900 put and if market goes up to 3800, then yr 4000 put would have earne less to cover the 3900 put sell

so be aware of this situation and discuss with yr broker

most risk management guys wont listen to your explanation or logic, they just square off positions blindly. maintain proper margin and keep watching yr positions

theoitically , spreads are used only when market is expected to go up/down only slightly. however you can have more spread if u expect more swing. you can sell 3800 put and buy 400 put if you feel market can go down to 3600 or 3700. but again yr total risk amount increases as well as yr expected profit.

there are ratio spreads as well (may be another thread on this). you can buy TWO 4000 puts and sell ONE 3900 puts....
 
#17
AW10. Murajichandra and bandlab2,
thanks for responding to my query. so, as long as the market is going down, my net premium will be yielding profits. I also find from your analysis that the market will reward me more on this Put Spread (in net premium) if the event that i am betting on (market shrinking to 3900) happens at a later date. This is probably because there will be less chance of the market getting back up and killing the real value of my Puts.
bandlab2's information about margin is very crucial. this seems rather stupid on the part of the brokers to ask such a large margin when my overall position is very safe when market crashes.:confused: It is something i have to be careful of then. By the way, what are average brokerage charges involved in buying Options?

I also have a new query: If instead of a 4000-3900 Put Spread I buy a 4000-3900 Call Bear Spread at this time, is it more risky or less?
 

heeemz

Active Member
#18
great explanation AW10 .

on a side note, we need to pay the premium amount for 4000 put and maintain margin for selling 3900 put. so u need some margin money here. although in theory yr sell is protected by a buy of same instrument, our lazy brokers will treat each leg as a indepenant transaction. but i heard icici allow 2L, 3L orders which means you can place 2 orders together and both will executed together. TTAdvance has 'hedged orders' , although i never tried

why i am bringing up this margin issue is we need to have enough money to cover the brokers requiements. for options they dont do mark2market on daily basis (icici) but they have a trigger price base on that if enuf margin is not there they will square off the sell position and yr spread is broken !!!

fo example, nifty crashes to 3600 in next 3-4 days, 3900 put would be around 350 rs and you need 350x50=17500 rs a extra magin in yr account -- you may argue yr 4000 put woul have yeilded 20000 rs profit but as i said they dont do M2M on options , they are lazy. now they will square off yr 3900 put and if market goes up to 3800, then yr 4000 put would have earne less to cover the 3900 put sell

so be aware of this situation and discuss with yr broker

most risk management guys wont listen to your explanation or logic, they just square off positions blindly. maintain proper margin and keep watching yr positions

theoitically , spreads are used only when market is expected to go up/down only slightly. however you can have more spread if u expect more swing. you can sell 3800 put and buy 400 put if you feel market can go down to 3600 or 3700. but again yr total risk amount increases as well as yr expected profit.

there are ratio spreads as well (may be another thread on this). you can buy TWO 4000 puts and sell ONE 3900 puts....

AW10 and Bandlab2: Great stuff, this is a good learning for us.

Cheers,

Heems
 

bandlab2

Well-Known Member
#19
AW10. Murajichandra and bandlab2,
thanks for responding to my query. so, as long as the market is going down, my net premium will be yielding profits. I also find from your analysis that the market will reward me more on this Put Spread (in net premium) if the event that i am betting on (market shrinking to 3900) happens at a later date. This is probably because there will be less chance of the market getting back up and killing the real value of my Puts.
bandlab2's information about margin is very crucial. this seems rather stupid on the part of the brokers to ask such a large margin when my overall position is very safe when market crashes.:confused: It is something i have to be careful of then. By the way, what are average brokerage charges involved in buying Options?

I also have a new query: If instead of a 4000-3900 Put Spread I buy a 4000-3900 Call Bear Spread at this time, is it more risky or less?
there is no call bear spread, its call bull spread. u will do this when u expect a slightly bullish market. in such case you need to build 4000 and 4100 call spread
 
#20
there is no call bear spread, its call bull spread. u will do this when u expect a slightly bullish market. in such case you need to build 4000 and 4100 call spread
Well, the 4000 Call is ATM and 3900 Call is ITM. So by selling a 3900 Call and buying a 4000 Call I will book some net premium and it will stay that way if Nifty ends below 3900 on 30 July.

However am I taking more risk for small gain by doing this compared to Put Bear Spread?
 
Status
Not open for further replies.

Similar threads