Help me formulating this option strategy ?

[tanmayagrawal]

I want to formulate an option strategy which has atleast 1:1 risk reward and I would like to sell the option so that I get the benefit of time decay. Also, I would want to have profit in case the market moves in range or in my direction. Thus, losses should only be there when the stock moves against my direction.

Please help me with brain storming such option strategy. I have been thinking about it for so long now but now have finally posted it here so that experienced traders can help me out.

Thanks guys

 

[SarangSood]

I want to formulate an option strategy which has atleast 1:1 risk reward and I would like to sell the option so that I get the benefit of time decay. Also, I would want to have profit in case the market moves in range or in my direction. Thus, losses should only be there when the stock moves against my direction.

Please help me with brain storming such option strategy. I have been thinking about it for so long now but now have finally posted it here so that experienced traders can help me out.

Thanks guys

If your expecting the stock to go up, a simple bull cal spread can do the trick. You will buy an ITM cal and sell ATM cal, therefore pocketing decent premium. If stock goes up you will make good profit and if it doesn't go anywhere you will earn whatever premium was pocketed.

The same goes with put option if you are expecting the stock to go down.

 

[Andy1981]

Play the game of using spreads on option strategies . Always be on sell side and book your profit when it come. Never book your losses and move in the direction of market . Play small so that you will have psychological edge .

 

[tanmayagrawal]

Thanks for replying.
Don't you think that time decay will be against me, since I am buying the spread instead of selling it?

 

[tanmayagrawal]

We generally have bad risk reward ratio in selling spreads so that is why finding a selling strategy where we have good risk to reward ratio.

 

[SarangSood]

Thanks for replying.
Don't you think that time decay will be against me, since I am buying the spread instead of selling it?

Not when the bought option is ITM and sold ATM.

 

[gsurendra]

I will advice Covered Call strategy in which you sell call at ITM strike. You cover the sale by buying shares of same lot size as the call or by buy ing futures. That way you earn premium whether the price goes up, stays sideways or goes down upto the strike price at which you sell the call. I do this every month and earn more than 4% monthly RoI

 

[tanmayagrawal]

I will advice Covered Call strategy in which you sell call at ITM strike. You cover the sale by buying shares of same lot size as the call or by buy ing futures. That way you earn premium whether the price goes up, stays sideways or goes down upto the strike price at which you sell the call. I do this every month and earn more than 4% monthly RoI

How do you handle if the stocks gaps down the other day, since this side is not hedged if the stocks moves below the call strike price?
Here we have a fixed profit but unlimited loss potential, so one loss can eat all your profits.

Kindly let me know how do you manage it ?

 

[gsurendra]

First I reduce the probability of such a possibility buy selling call at deep ITM, choosing a stock in modest uptrend, and avoiding those which are in news. Next I hedge with positions in Covered Puts. And if such possibility does arise then I square off my call position and sell lower strike call to forgo the margin I was going to earn. Further downside can be protected by buying Put.

 

[tanmayagrawal]

First I reduce the probability of such a possibility buy selling call at deep ITM, choosing a stock in modest uptrend, and avoiding those which are in news. Next I hedge with positions in Covered Puts. And if such possibility does arise then I square off my call position and sell lower strike call to forgo the margin I was going to earn. Further downside can be protected by buying Put.

It seems nice. So right now If i believe reliance is bullish (spot price = 1095) (futures price = 1098), I would sell 1080 reliance call and would buy reliance fut too. if the stock goes below 1080, I would again sell 1060 call. Is that what you are saying ?