Your suggestion on my trades

I shall regularly post my trading plans here in this thread for your valuable inputs.

Today April PE 5000 closed at 105 and April PE 4900 closed at 76. Tomorrow I am planning to buy PE 5000 and sell PE 4900. I expect market to dip in the coming days and hence this move.

105-76=29

So my trade would break into profit when nifty falls below 4971. What's your suggestion?

Prasham

It is not necessary that Nifty should go below 4971 for you to be in profit. That is a calculation based on expiry level. Your spread will be in profit anytime it is worth more than the 29 that you have paid. As Nifty approaches your upper strike price you will start coming into profits as the 5000PE will accelerate faster than the 4900PE. You can check this if Nifty hits 5050 levels.

The beauty of such spreads is that they cost less than the naked put buying and are less risky. For you now a 50pt drop in Nifty is enough to be in the positive. And you do not have to wait till expiry to cash out. Anytime you feel the mkt is reversing the trend, you can come out of the spread.

Good luck with your first spread trade.

Prasham

Forgot to add one more important thing. When will you get out of the trade? It is true that the trade cost you 20 odd rupees, but still you have to define at what loss will you exit the trade?

Exit at what price: Price Stop Loss
Exit at what time: Time Stop Loss

Unlike a stock or a future, an option is a decaying asset. Hence it is important to have a time stop for all option trade. Even if you can recoup 1K from it when it is decaying you should do it and not think "it is only one thousand, may be the mkt will reverse, what is the point in taking back one thousand." That is the way most people lose small amounts of money in the market.

Well said TT. Each penny saved is penny earned in any business and it is equally true for trading business as well.
But many people come here with a mindset to focus only on making lacs and don't care for little drops.. At the end, finally all small drops add up to big number.

@Prasham, I might be wrong, but it seems that you have not looked at the exits - profit, stop, trailing stop, market level and time exit. You can very well ignore them for now and what TT and I have been telling and execute the trade. Nobody stops you from that.
But I am sure, come next week, you will go thru all sorts of doubts/ questions/ what to do now ? kind of situation and then your emotional attachment to trade will start influencing your decision making approach.


Anyay, All the best with your trade.
Happy Trading

Bought PE 5000 @ 108 & Sold PE 4900 @ 78... Now lets see what the future holds for me.

I understand that here there is a chance of loss of around 3k and max profit of 7k. If wrong please correct me.

Thanks for the feedback AW & TT. Yes I hadn't thought about exit, profit and other stuff that you've mentioned above. But now I have thought a bit about it and have my targets on almost each of them. Thanks once again.

@ AW10 - I have more or less followed the strategy you've posted in the other popular thread. I think the idea of buying a Near ITM/OTM calls is good and is less risky. But I also remember you have mentioned that the first step towards deciding on working on your technique is judging the market direction.

How do you do it? Is there a simple & effective system that helps you judge the market direction?

10.3.10
PE 5000 - 98
PE 4900 - 69
Difference - 29
Result - No Change in the equation.

11.3.10
PE 5000 - 87.5
PE 4900 - 61.1
Difference - 26.4
Result - 10% Loss on investment as of now.

22.3.10
PE 5000 - 50
PE 4900 - 33
Difference - 17
Result - 40% Loss on investment as of now.



Shall keep it updated till the expiry or till I square it off.