Low Risk Options Trading Strategy - Option Spreads

[sameer999]

I am creating 2 limited risk paper trades here which needs no monitoring till expiry. Lets see what we get by then.

Trade 1 - Bullish call spread using 4200 / 4400 calls.
Buy 4200 call - 277 rs
Sell 4400 call - 129 rs.
Net cost = 148 Rs. (=277- 129)

Trade 2 - Bullish call spread using 4200 / 4400 calls.
Buy 4200 call - 277 rs
Sell 4300 call - 194 rs.
Net cost = 83 Rs. (=277- 194)




Happy low risk, stressfree trading

Thnkz AW10, is that 2nd trade a 4200/ 4300 call spread.

maybe a typing error.


Thnkz AW10

 

[sangpr]

What about margin on sale of Put? Would that be an investment also?

 

[AW10]

Thanks for pointing out the typo, Sameer. I have correct my post.

 

[Minterest]

I am starting this thread to discuss low risk options trading using a strategy called Spreads.
We have threads in TJ discussing other strategies that in my view both are risky strategies (short straddle, buy naked call put etc) and should be avoided at early state of options trading.
I also started with Buying Naked call options but later I realised that there are better low risk strategies available - which are Spreads.
So starting this thread to discuss SPREADS.. Now I advise any new option trader to start with this till they gain real experience with options and ready to take more riskier trades.

You might be in for some surprises here by knowing
- that you can use PUTs to take bullish position and can use CALLs to take bearish position.
- that time decay can't hurt u
- that market can pay you partially for taking a trade and reduce your risk
- that you can execute trades with very high probability on your side and generate regular income
- that you can play go against market (contrarian ) with very limited risk
- that you can have a position in the market which has leg is 100% winner.

Looking forward for experience from others to answer the doubts raised.

Happy Trading.

Can you please give me your Email ID or IM ID?

 

[AW10]

I remember you mentioned somwhere that stop may not get triggered so spreads are better for limited risk. Can't the strategy be designed in such a way so that we don't need to place the sl.

LT, Yes, Spreads have limited risk.. i.e. whatever may happen tomorrow, we will not be loosing more the the max risk which is for Trade 1 - 148 pt and for Trade 2 - 83 points. That is worst case scenario to protect us against any exceptional event. I don't have to worry about mkt not opening for trading, slippage in fill of stoploss order etc.

But in normal market condition, the question is, shall we wait to take that max risk or would like to cut the loss before it goes to maximum.

I am not placing any SL order for them in advance. but as a part of trade planning, I am paying attention to my Loss exits and defining them upfront.

Ofcourse, it depends on trader's personal preference.

Happy Trading

 

[sangpr]

Thanks for all the information.

 

[DanPickUp]

How dangerous is it to use the future as the stop loss ?

My idea, for a short time trade : sell itm put and make the stop loss with selling the future at a certain point. This point is calculated in advance and this is the amount I am willing to risk.

My concern : If the market makes a quick deep drop, would my stop loss with the future ( or stock ) be filled ? Otherwise I am really in ds.

Regards and good trading

 

[AW10]

How dangerous is it to use the future as the stop loss ?

My idea, for a short time trade : sell itm put and make the stop loss with selling the future at a certain point. This point is calculated in advance and this is the amount I am willing to risk.

My concern : If the market makes a quick deep drop, would my stop loss with the future ( or stock ) be filled ? Otherwise I am really in ds.

Regards and good trading

DanPickUp, In my view, u can easily use Futures position as Stoploss during intraday trade.
Specially if you option position has multiple legs, it is difficult to get precise stoploss exit points. This is mainly because our brokers don't allow the bid/ask quotes for a complete strategy and hence we need to execute each leg seperately. Say in my paper trade 1, I do not get Net cost bid so it is not possible to close both legs when Net cost comes down to 99 until I manually monitor the trade through-out the day. In such case, it is possible to put sell NF limit order with trigger price of 4299. This strategy will be worth 100 Rs when Spot comes to 4300 level. So as soon as mkt falls below that, I can take NF short position and that will effectively manage any further loss.

This may not work for overnight trades.. cause the opening gaps make it difficult to ensure that NF limit order will gets triggered at right moment.
For such cases, it is better to protect option position with another option position.
Say Short ITM put can be protected with Long ATM put near the mkt close. Basically this will convert the position to a spread position with precisely defined max risk.
After market opens, you may decide to remove the protective Long ATM put and manage the risk with limit order on NF. At the end of the day, again buy another ATM put to manage overnight risk.

Flip-side of this approach is that u might end up paying extra brokerage everyday to buy ATM Put.

Happy Trading.

 

[spiritunit]

AW10,

Bit confused here in this post... http://www.traderji.com/options/305...ading-strategy-option-spreads.html#post333543

Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900

I am newbie in options, I am using sharekhan, for ex. I can place the buy order PUT option strike 4000, but cannot place the sell order for PUT option strike 3900! as it says I can only squareoff the trade and cannot place a sell order. i.e. I can place only buy order and squareoff, never can place a sell order! Are you telling like shortselling in stocks?

 

[DanPickUp]

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