Low Risk Options Trading Strategy - Option Spreads
- Thread starter AW10
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Hi All,
A simple query from a beginner, please share your views.
How do we select a directional spread strategy based on volatility.
When there is low volatility and the spread moves in the expected direction, the spread may not make much of a profit or may actually end up losing.
However, when the spread moves in the expected direction and also has higher volatility, the chances of the spread making profit is higher.
How do we select a spread based on volatility? Are they specific indicators we can follow to identify volatility (differentiate low, medium, high) and can you suggest when to buy / sell a spread based on volatility.
A simple query from a beginner, please share your views.
How do we select a directional spread strategy based on volatility.
When there is low volatility and the spread moves in the expected direction, the spread may not make much of a profit or may actually end up losing.
However, when the spread moves in the expected direction and also has higher volatility, the chances of the spread making profit is higher.
How do we select a spread based on volatility? Are they specific indicators we can follow to identify volatility (differentiate low, medium, high) and can you suggest when to buy / sell a spread based on volatility.
novice-trader, as far as I know, at very high level of understanding, the spreads are not affected by volatility. When volatility is high, you pay more for long leg. At the same time, you get more money for short leg too. So effect is nullified to large extent, if strikes are not very wide. Effect of volatility is just marginal different between 1 or 2 neighboring strikes.
Same happens when volatility is low. You pay less for long leg, and you also collect less for short leg. You profitability is dependent on whether market makes a directional move and your strikes delta changes in your favour.
If you expect market to remain in low volatility, side way range, then credit spreads are better. Or look for short strangle (with an extra protective option leg depending on market mood at the time) type of strategy are useful.
hope this helps
happy trading
Same happens when volatility is low. You pay less for long leg, and you also collect less for short leg. You profitability is dependent on whether market makes a directional move and your strikes delta changes in your favour.
If you expect market to remain in low volatility, side way range, then credit spreads are better. Or look for short strangle (with an extra protective option leg depending on market mood at the time) type of strategy are useful.
hope this helps
happy trading
Dear AW10,
i am a new member of TJ. I am also new to derivative trading (about 6 months).
I find your posts very informative. Could you please let me know how I can access your old threads especially on straddles, strangles and spread strategies?
Your style of explaining a topic is very lucid for a person like me with some experience.
Please accept my complements .
Thanks and regards,
gmt 900
i am a new member of TJ. I am also new to derivative trading (about 6 months).
I find your posts very informative. Could you please let me know how I can access your old threads especially on straddles, strangles and spread strategies?
Your style of explaining a topic is very lucid for a person like me with some experience.
Please accept my complements .
Thanks and regards,
gmt 900
thanks gmt900 for compliment.
Sorry, I don't have any dedicated thread on strangle etc. but have made many posts on those topic. My threads that are worth referencing are given in my signature.
You can always use advance search in TJ with userid+search text + post combination.
Feel free to raise any dobut/questions that is bothering you.
Happy trading
Sorry, I don't have any dedicated thread on strangle etc. but have made many posts on those topic. My threads that are worth referencing are given in my signature.
You can always use advance search in TJ with userid+search text + post combination.
Feel free to raise any dobut/questions that is bothering you.
Happy trading
Thanks AW10 !
I have gone thr' some of your earlier posts and will go thr' the rest later. I will regularly
follow your posts from now on. BTW I have retired as a senior coprporate executive and discovered that trading is a very stimulating activity which gives you celebral exercise and also helps you practice spirituality which is another subject I am trying to study. If you trade with the sole objective of making money, you are less likely to succeed.
Looking forward to a long friendship with you,
gmt900
I have gone thr' some of your earlier posts and will go thr' the rest later. I will regularly
follow your posts from now on. BTW I have retired as a senior coprporate executive and discovered that trading is a very stimulating activity which gives you celebral exercise and also helps you practice spirituality which is another subject I am trying to study. If you trade with the sole objective of making money, you are less likely to succeed.
Looking forward to a long friendship with you,
gmt900
AW10,
Let me take your offer and ask one of the doubts bothering me since the August crash of stock markets around the world. For about four months prior to that, the market was rangebound and I was making 4 to 5 % returns by simply writing nifty short strangle with 1000 point difference .. It worked fine but at the begining of August, I didn't know how to hedge my position and had to square up with a loss. In fact that is when I stumbled upon TJ site to know something about delta neutral strategy. I did not follow it, because it would have meant commiting additional funds for margin. Another alternative was to sell NF at the lower break even. In the absence of any experience about this hedging method, I did not do this either. I have learnt that while short strangle is a very good strategy during rangebound market, it can be disasterous when the market moves violently in either direction. I also made good money by selling nifty straddles during those calm times. I was happy to learn the lesson early on my learning curve ,so I can avoid major losses in future.
I have gone thr' one of your earlier posts on the subject. I would be glad if you could give me further guidance on this.
Thanks again,
gmt900
Let me take your offer and ask one of the doubts bothering me since the August crash of stock markets around the world. For about four months prior to that, the market was rangebound and I was making 4 to 5 % returns by simply writing nifty short strangle with 1000 point difference .. It worked fine but at the begining of August, I didn't know how to hedge my position and had to square up with a loss. In fact that is when I stumbled upon TJ site to know something about delta neutral strategy. I did not follow it, because it would have meant commiting additional funds for margin. Another alternative was to sell NF at the lower break even. In the absence of any experience about this hedging method, I did not do this either. I have learnt that while short strangle is a very good strategy during rangebound market, it can be disasterous when the market moves violently in either direction. I also made good money by selling nifty straddles during those calm times. I was happy to learn the lesson early on my learning curve ,so I can avoid major losses in future.
I have gone thr' one of your earlier posts on the subject. I would be glad if you could give me further guidance on this.
Thanks again,
gmt900
Hi
AW10 has already given some hints about the subject. I will add some ideas you may not or you may can trade in your home market. Test it
Depending on your tools, you will see how high the volatility is. If you have a situation, where you see that the volatility is on a monthly or half year top, sell the first leg as premium is high. Now set your stop loss on this leg and take your time until volatility comes down a bit.
As volatility has come down, the premium of the options have come down. Your sold leg is in profit and you now buy the second leg and finish the spread.
In that way, you squeezed the market by selling your first leg with high vola and get a lot of premium and when vola has come down a bit, you buy your second leg with a cheaper price as it would be in case you would have implemented the whole strategy at once by high vola
Tc
DanPickUp
AW10 has already given some hints about the subject. I will add some ideas you may not or you may can trade in your home market. Test it
Depending on your tools, you will see how high the volatility is. If you have a situation, where you see that the volatility is on a monthly or half year top, sell the first leg as premium is high. Now set your stop loss on this leg and take your time until volatility comes down a bit.
As volatility has come down, the premium of the options have come down. Your sold leg is in profit and you now buy the second leg and finish the spread.
In that way, you squeezed the market by selling your first leg with high vola and get a lot of premium and when vola has come down a bit, you buy your second leg with a cheaper price as it would be in case you would have implemented the whole strategy at once by high vola
Tc
DanPickUp
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