Low Risk Options Trading Strategy - Option Spreads
- Thread starter AW10
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Hi Mietesh
This thread is about low risk option strategies. If you think, it is only an effort to post very informative information, you may post some more effective ways to trade option spreads !!
This then would prove, that this thread is really only an effort to post very informative information about option spread trading.
As long as you not can provide more information about what AW10 and others have posted in this thread, you may not use such derogatory words to describe the immense work, which is behind this thread.
An other thing, I recognized in the past few weeks in this forum is, that the people think, they have to demand.
Words like : "I want you to do" or "I want to know more from your knowledge" are just not acceptable.
If senior traders post here, it is of there free will and we do not get any payment for it. So, calling for any demand is not an acceptable habit from many of you. Please keep in mind, that you change your way of asking and be more polite in the future, when you try to get information from guys like AW10 and others.
DanPickUp
This thread is about low risk option strategies. If you think, it is only an effort to post very informative information, you may post some more effective ways to trade option spreads !!
This then would prove, that this thread is really only an effort to post very informative information about option spread trading.
As long as you not can provide more information about what AW10 and others have posted in this thread, you may not use such derogatory words to describe the immense work, which is behind this thread.
An other thing, I recognized in the past few weeks in this forum is, that the people think, they have to demand.
Words like : "I want you to do" or "I want to know more from your knowledge" are just not acceptable.
If senior traders post here, it is of there free will and we do not get any payment for it. So, calling for any demand is not an acceptable habit from many of you. Please keep in mind, that you change your way of asking and be more polite in the future, when you try to get information from guys like AW10 and others.
DanPickUp
Last edited:
Aditya, Appreciate your effort in identifying the setup. Personally I am also left brain person and love data crunching like this. Good to see someone else putting effort on similar line.
This analysis give you some insight into what happens in general. Is it sufficient to make a system out of it, that is entirely different topic. In my view, each option strategy has its own suitable time. Long Strangle (buy call + buy put), needs a period of fast expansion in market to give good result else in sideway market, this strategy will fail. If you notice the monthly range, then roughly when a months range has been in 5 to 6%, next month gave fairly good range of 9 to 10%. It is true also April/May2011 as well. That makes suitable situation for employing long strangle. Similarly you will be able to find narrow months based on high range of prev months. That is the time for Short strangle. If you apply some basic technical analysis, then it is not that difficult to identify direction of the market.
Backtesting option startegy is lot more difficult. You can find historical data from NSE site. Please look at first few posts of my NR7 thread. I have given a sample strategy plan there. You can very well use that as template to define your option strategy. There is also a link to an excel sheet for recording the sample trades. You need to enter entry price /exit price for each trade. It is not for option but it can be adjusted if you take combined price of the strangle as entry price. That sheet will give you basic backtesting summary like %win/%win/average profit/avrg loss/ expectancy of system etc.
Hope that will help you to take next step.
All the best and happy trading.
This analysis give you some insight into what happens in general. Is it sufficient to make a system out of it, that is entirely different topic. In my view, each option strategy has its own suitable time. Long Strangle (buy call + buy put), needs a period of fast expansion in market to give good result else in sideway market, this strategy will fail. If you notice the monthly range, then roughly when a months range has been in 5 to 6%, next month gave fairly good range of 9 to 10%. It is true also April/May2011 as well. That makes suitable situation for employing long strangle. Similarly you will be able to find narrow months based on high range of prev months. That is the time for Short strangle. If you apply some basic technical analysis, then it is not that difficult to identify direction of the market.
Backtesting option startegy is lot more difficult. You can find historical data from NSE site. Please look at first few posts of my NR7 thread. I have given a sample strategy plan there. You can very well use that as template to define your option strategy. There is also a link to an excel sheet for recording the sample trades. You need to enter entry price /exit price for each trade. It is not for option but it can be adjusted if you take combined price of the strangle as entry price. That sheet will give you basic backtesting summary like %win/%win/average profit/avrg loss/ expectancy of system etc.
Hope that will help you to take next step.
All the best and happy trading.
Thank you AW Sir for your inputs. I actually got confused between Setup and System. After reading your initial posts in NR7 Thread got to know about the difference between them. Your inputs have given a new dimension to look forward......... and would come back to you after some more data crunching and with more proper setup.
Would surely go through the NR7 thread in detail as recently I also observed the power of NR4/NR7 in conjunction with IB (Inside Bar). Had a visual back-testing with OHLC Data of Nifty for past 3 years and found that SETUP to be immensely powerful. Visual results had given an accuracy of more than 80% on a conservative estimate. Would discuss that later after I do some more research on it.
Thank you once again.
Aditya
Would surely go through the NR7 thread in detail as recently I also observed the power of NR4/NR7 in conjunction with IB (Inside Bar). Had a visual back-testing with OHLC Data of Nifty for past 3 years and found that SETUP to be immensely powerful. Visual results had given an accuracy of more than 80% on a conservative estimate. Would discuss that later after I do some more research on it.
Thank you once again.
Aditya
Hi
For all option trading lovers : An other way of low risk option trading beside many other ways, even it is probably not makable in India. Any way, it will expand your knowledge about option trading and you will see, what is possible in other markets out side India :
http://www.traderji.com/equities/54528-my-option-trading-strategy-feedback-needed-6.html#post553138
DanPickUp
For all option trading lovers : An other way of low risk option trading beside many other ways, even it is probably not makable in India. Any way, it will expand your knowledge about option trading and you will see, what is possible in other markets out side India :
http://www.traderji.com/equities/54528-my-option-trading-strategy-feedback-needed-6.html#post553138
DanPickUp
Dear Options expert pl help:
In today's TV show "vayde se fayda" one expert suggested the following strategy
BUY JUN 5400CE 1lot
SELL JUN 5700CE 2lots
max loss Rs.3600
profit Rs.11800
Obviously the strategy is ratio spread. But, in Option oracle iam unable to come up with the max loss part or profit part.
a) Could you please elaborate how these numbers were arrived at?
b) Could i initiate a put ratio spread like this and create a band for nifty? i.e
BUY JUN 5300PE 1 lot
SELL JUN 5000PE 2 lots.
c) is this strategy IV dependent? meaning will rise/fall in IV affect performance?
d) the profit target is 100/200 points from long strike....so how does this look?
thank you for your time.
In today's TV show "vayde se fayda" one expert suggested the following strategy
BUY JUN 5400CE 1lot
SELL JUN 5700CE 2lots
max loss Rs.3600
profit Rs.11800
Obviously the strategy is ratio spread. But, in Option oracle iam unable to come up with the max loss part or profit part.
a) Could you please elaborate how these numbers were arrived at?
b) Could i initiate a put ratio spread like this and create a band for nifty? i.e
BUY JUN 5300PE 1 lot
SELL JUN 5000PE 2 lots.
c) is this strategy IV dependent? meaning will rise/fall in IV affect performance?
d) the profit target is 100/200 points from long strike....so how does this look?
thank you for your time.
Hi comm4300
The first example you give here is a "Ratio Call Spread". A few facts to this strategy :
Direction : Slightly bearish / Risk : Uncapped / Max. Reward : Capped / Volatility : Low
Calculation : Long call you have to give money from your pocket and short calls you get money in your pocket. Idea behind that : Only little money should be on the risk floor from your side with this strategy.
Danger with such trades : Wrong direction choose d and volatility increases immense.
If you have a ratio call spread and market moves up, your short calls are going to kick you in your face. On the other side, if you not get enough money to pay for your long call, you are under the zero line on the left side in your risk picture.
That means, that market has to stay in an exact range that you not get hurt. On the downside, your risk is fixed. If market falls under 5400, you only can lose a fixed amount of money. If market moves up ( over 5700), your risk is unlimited. If market at expiration stays some where in between, you make profit.
With other words : The guy in the show did not get enough money with the sold calls to pay his long call. So he can loose 3600 Rupee, in case the market moves under 5400 or where ever his exact break even in his calculation is on the downside.
Now he makes the people hot by telling them, that they can make a profit of 11'800 Rupee. If he can make this money, he only can make it, when market at expiration is in the middle of his range.
But what he not says : If market moves further up, people start to get in danger with unlimited risk of loss, in case the 5700 or upper break even is broken. People should know that, even it is not very likely at the moment. But how knows so exactly ?
The second strategy you show is a "Ratio Put Spread". It is traded in slightly bullish market with low volatility. Unlimited risk on the downside and limited risk on the upper side. If market closes in the middle of the range, biggest profit.
Hope it helps and have a nice evening
DanPickUp
The first example you give here is a "Ratio Call Spread". A few facts to this strategy :
Direction : Slightly bearish / Risk : Uncapped / Max. Reward : Capped / Volatility : Low
Calculation : Long call you have to give money from your pocket and short calls you get money in your pocket. Idea behind that : Only little money should be on the risk floor from your side with this strategy.
Danger with such trades : Wrong direction choose d and volatility increases immense.
If you have a ratio call spread and market moves up, your short calls are going to kick you in your face. On the other side, if you not get enough money to pay for your long call, you are under the zero line on the left side in your risk picture.
That means, that market has to stay in an exact range that you not get hurt. On the downside, your risk is fixed. If market falls under 5400, you only can lose a fixed amount of money. If market moves up ( over 5700), your risk is unlimited. If market at expiration stays some where in between, you make profit.
With other words : The guy in the show did not get enough money with the sold calls to pay his long call. So he can loose 3600 Rupee, in case the market moves under 5400 or where ever his exact break even in his calculation is on the downside.
Now he makes the people hot by telling them, that they can make a profit of 11'800 Rupee. If he can make this money, he only can make it, when market at expiration is in the middle of his range.
But what he not says : If market moves further up, people start to get in danger with unlimited risk of loss, in case the 5700 or upper break even is broken. People should know that, even it is not very likely at the moment. But how knows so exactly ?
The second strategy you show is a "Ratio Put Spread". It is traded in slightly bullish market with low volatility. Unlimited risk on the downside and limited risk on the upper side. If market closes in the middle of the range, biggest profit.
Hope it helps and have a nice evening
DanPickUp
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