Low Risk Options Trading Strategy - Option Spreads

[comm4300]

Hi Comm4300

What you finally have are : Short put, long put, long call, short call. This is called : Short Iron Condor. ( A net debit trade )

Your maximum risk is your net debit you pay. Your maximum reward is the difference between adjacent strike prices less the net debit.

So, first you spent money for the long strangle ( long call and long put ) and now you get money for the sold strangle ( short call and short put ). With other words :

Yes, it will make it cheaper.

Hope this helps

DanPickUp

thank You Dan for the clear explanation....:thumb::clapping:

i just wish NSE recognizes such strategies and allows margin benefit....

 

[arun147]

hi guys i have some doubts in my mind
in debit spread suppose when we buy 5900 put at 97 and sell 5800 at 60 on 20 days before expiry(nifty at 5885) so we pay ultimately 97-60=37. at expiry (nifty at 5785) 5900 is at 113 and 5800 is at 15. so we get 113-15=98.now people in general terms call it profit against the investment of 37.

BUT we actually get profit of only 98-37=61.
so why people used to say profit of 100 rupees against the investment of only 37 when we get profit of 61 rupees only.
can anyone clarify my doubt please?

 

[DanPickUp]

Hi arun147

They did not make the right calculation, as you did in your example, and so they made a wrong statements.

End of post.

DanPickUp

 

[munde_77]

hi guys i have some doubts in my mind
in debit spread suppose when we buy 5900 put at 97 and sell 5800 at 60 on 20 days before expiry(nifty at 5885) so we pay ultimately 97-60=37. at expiry (nifty at 5785) 5900 is at 113 and 5800 is at 15. so we get 113-15=98.now people in general terms call it profit against the investment of 37.

BUT we actually get profit of only 98-37=61.
so why people used to say profit of 100 rupees against the investment of only 37 when we get profit of 61 rupees only.
can anyone clarify my doubt please?

If nifty closes at 5785, the value of 5900 pe will be 115(5900-5785 =115) and 5800 pe will be(5800-5785=15) 15

you have paid 97 for pe of 5900 so profit in pe 5900 is 115-97 = 18
you have sold at 60 for pe 5800 so profit 60-15 = 45

So the total profit will be 18+45= 63. I don`t know who and how some one has calulated and said the profit is 100. The net profit will be 63.

 

[arun147]

If nifty closes at 5785, the value of 5900 pe will be 115(5900-5785 =115) and 5800 pe will be(5800-5785=15) 15

you have paid 97 for pe of 5900 so profit in pe 5900 is 115-97 = 18
you have sold at 60 for pe 5800 so profit 60-15 = 45

So the total profit will be 18+45= 63. I don`t know who and how some one has calulated and said the profit is 100. The net profit will be 63.

well, thank you munde and dan for your response. I appreciate it.
now for my example i have used original data.
I bought 5900 put at the cost of 97 and sell 5800 put at 60 while nifty on 5885. this are the closing data on 7th April 2011.
so net trade price would be 97-60=37.

here let me take some theoretical statistics
max lost=> 37
max profit=> 5900-5800-37=63 (max value of spread 5900-5800=100)
breakeven point=> 5900-37=5863.

now at the expiry which is 28th April 2011, closing price of
nifty=> 5785
5900 put=> 113
5800 put=> 15.

so profit would be on 5900 put 113-97=16 and on 5800 put 60-15=45
which makes 16+45 = 61 rupees profit. (113-15 = 98-37 = 61)

anyway thanks it was because of some misunderstandings which is cleared now.

 

[AW10]

....
now at the expiry which is 28th April 2011, closing price of
nifty=> 5785
5900 put=> 113
5800 put=> 15.

so profit would be on 5900 put 113-97=16 and on 5800 put 60-15=45
which makes 16+45 = 61 rupees profit. (113-15 = 98-37 = 61)

anyway thanks it was because of some miss understandings which is cleared now.

Arun, on final expiry day, the settlement happens at strike price and settlement price of nifty. Last traded price doesn't matter.. So 5900 put, when nifty is at 5785, will settled at 115 not 113 as you have mentioned.

My view on value of 100 or net profit of 63 was shared earlier (in last month) when someone raised same doubt. 100 is net value of spread, whereas 63 is net profit as you clearly calculated.

If you map it to stock trading, then it is like u bought something in 37, which has reached the price of 100.

Hope this helps.
Happy Trading

 

[arun147]

Arun, on final expiry day, the settlement happens at strike price and settlement price of nifty. Last traded price doesn't matter.. So 5900 put, when nifty is at 5785, will settled at 115 not 113 as you have mentioned.

My view on value of 100 or net profit of 63 was shared earlier (in last month) when someone raised same doubt. 100 is net value of spread, whereas 63 is net profit as you clearly calculated.

If you map it to stock trading, then it is like u bought something in 37, which has reached the price of 100.

Hope this helps.
Happy Trading

yes! it is clear now thank you.

 

[munde_77]

arun you download option oracle and analyse, it is free software and compatible with nse

http://www.samoasky.com/19/

 

[TraderRavi]

arun you download option oracle and analyse, it is free software and compatible with nse

http://www.samoasky.com/19/

can we check the different values of strangle @ diffenet values of nifty......in a graph in options oracle....
for example.....if i bot 5500 pe @ 62 , 5600 ce @ 56, nifty @ 5545......cost = 118....
now can i check what will be strangle value @ nifty 5500, 5570 etc......

 

[msa5678]

can we check the different values of strangle @ diffenet values of nifty......in a graph in options oracle....
for example.....if i bot 5500 pe @ 62 , 5600 ce @ 56, nifty @ 5545......cost = 118....
now can i check what will be strangle value @ nifty 5500, 5570 etc......

Hi TR,

OptionsOracle gives many types and
combinations of values, But the
question remains, how far , in terms
of percentage, these values are
valuable. In the past I had saved
the Graphs obtained from the Options
Oracle. And later when I checked the
actual values in the market to those
given by Options Oracle, I found a
difference, Could be problem from my
PC , or Could be the Graphs given by OO
are to be taken for reference only.

With Regards,
MSA