2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.
Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 = 100 rs.
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max reward of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)
Happy Trading
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.
Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 = 100 rs.
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max reward of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)
Happy Trading
Would you please explain the probabilities in layman english.
Also please explain what happens when only
Buy 1 - PUT option strike 4000 with same premium
so that we get an idea what happens with buying 1 put option strike compared to buying 1 put option as well as selling 1 put option.
Kindly explain the same with only
Sell 1 - PUT option strike 3900.
I hope the newbiees like me will get a clear idea and the difference between going for Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900 wrt the individual buy and sell put.
If you have time kindly explain the same for bullish direction---call.
I sincerely apologize for burdening you.
Thank you for your time and patience.