Low Risk Options Trading Strategy - Option Spreads

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tvrssvk

Active Member
2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.

Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 = 100 rs.
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max reward of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)

Happy Trading

Would you please explain the probabilities in layman english.

Also please explain what happens when only
Buy 1 - PUT option strike 4000 with same premium
so that we get an idea what happens with buying 1 put option strike compared to buying 1 put option as well as selling 1 put option.

Kindly explain the same with only
Sell 1 - PUT option strike 3900.


I hope the newbiees like me will get a clear idea and the difference between going for Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900 wrt the individual buy and sell put.

If you have time kindly explain the same for bullish direction---call.

I sincerely apologize for burdening you.

Thank you for your time and patience.
 

lazytrader

Well-Known Member
Would you please explain the probabilities in layman english.

Also please explain what happens when only
Buy 1 - PUT option strike 4000 with same premium
so that we get an idea what happens with buying 1 put option strike compared to buying 1 put option as well as selling 1 put option.

Kindly explain the same with only
Sell 1 - PUT option strike 3900.


I hope the newbiees like me will get a clear idea and the difference between going for Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900 wrt the individual buy and sell put.

If you have time kindly explain the same for bullish direction---call.

I sincerely apologize for burdening you.

Thank you for your time and patience.
There is detailed explanation here: http://www.optiontradingpedia.com/call_options.htm

It's not in terms of nifty strikes but it's again the same thing since options are the same everywhere. I suggest you get some reading material for options. For basic idea on option strategies read this: http://www.optionseducation.org/resources/literature/files/equity_options_strategy_guide.pdf

everyone was a newbie once upon a time. nothing wrong in asking questions but I feel option are too complicated to be explained on a thread if you start from the basics.
 

AW10

Well-Known Member
Hold it till expiry-----Low risk options trading strategy - Option Spreads-----will it be one of the best strategy to hold till expiry.

The reason is I will not be able to watch the market on market hours, hence I would like to swing trade options or hold it till expiry----your views will be highly appreciated.

One more thing, do we need paid softwares like amibroker of Fcharts to excell in options or is it enough having a look at icharts.in. Kindly excuse if my question sounds stupid!!!!
With obvious advantages of spread position (like protection against time decay, volatility, lower and well defined risk etc) there is no harm in holding it till expiry.
Atleast, it gives u sufficient time to think and act.. without worrying too much about what is currently happening in mkt.

Though, exiting strategy depends from person to person. So if position is in profit you might decide to close the spread after it gives u x% of max profit possible.. rather then waiting till expiry
to get remaining small part of profit.
Similarly, if it is getting into loss, then u can decide to cut the loss.. and close the position early..

As mentioned earlier, spreads are directional strategy. And one can use whatever method that suits them to find the direction. Job of TA software, icharts, ami etc stops at that place for option trading.
Specially if you are not into fast daytrading with 5min charts, then and free charting package even with delayed quotes would suffice. Most of the time u will be looking at daily /weekly chart.

Happy Trading
 

AW10

Well-Known Member
Hy AW10

Are you a professional scalper ?

Regards and good trading
No. DanPickUp.
I have other things to do in life.. so can't afford to be scalper. I am day and swing trader. Obviously, into positional trading for my retirement account.

Happy Trading
 

AW10

Well-Known Member
Hy AW10
-------------------------------------------------------------------------------------
You wrote :

Bhuppi, this could happen due to inefficincies in the mkt prices. I don't know whether u would have really got an order filled at 127 to buy 4700 call today at mkt open..
Cause 4700 strike is ATM strike and generally they are very liquid. And if you had got the order filled then u were getting a bargain with 100% probabilty of success there.

Here is the reason -

Friday = 4700 call = at 130 rs. Real value of 0 (cause it was OTM) Time value = 130 approx decay in remaining 20days (4 to 24th) = 130/20 = 6rs per day.
With this simple logic on monday when spot was at 4727
4700 call had Real value of =27 rs. (= 4727 - 4700) Due to time decay, it should have lost 12 rs in 2 days of weekend.. So price at that moment shd be = 130 - 12 + 27 = 145 atleast.

You were getting bargain at 127 for something which is worth 145. By the what happened to the premium at 10.15 am or so today ?
-------------------------------------------------------------------------------------

What about the volatility? You forgot that.

If I buy an option, I have to check the Implied Volatility, which permanently changes. The IV has an impact of the price of an option.

If I buy now an option and the IV is high, the price of the option is expensive.

If I buy the same option with low Implied Volatility, the price is cheaper.

In the case of Bhuppi, he not only lost money with time decay. He also lost money because the Implied Volatility has changed.

In option trading, you can be right with the direction, but you still can lose money, not only because of time decay. You also can lose money because of the volatility change in the market.

This is a typical beginners trap and all beginners in option trading have to be aware of that.

So, for all the new ones in option trading. YOU MUST STUDY THE GREEKS and AW10 and lazytrader gave beautiful links to start with that now.

Regards and good trading
You are right DanPickUp. but IV in this case has not changed much cause there was no major change in sentiment. IVs generally show their color when news, events, fear etc are around. In absence of them, it remains in pretty normal range.

In indian Market, 1% change in IV brings about 3 Rs. of change in premium.
So, to keep the things simple, I did not bring IVs dimension here.
Generally, in my trading, I have defined the range of IV value to call them Normal, Low, and High. Based on that range, I decide to us IV to select proper strategy.

Happy Trading
 

AW10

Well-Known Member
Would you please explain the probabilities in layman english.

Also please explain what happens when only
Buy 1 - PUT option strike 4000 with same premium
so that we get an idea what happens with buying 1 put option strike compared to buying 1 put option as well as selling 1 put option.

Kindly explain the same with only
Sell 1 - PUT option strike 3900.


I hope the newbiees like me will get a clear idea and the difference between going for Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900 wrt the individual buy and sell put.

If you have time kindly explain the same for bullish direction---call.

I sincerely apologize for burdening you.

Thank you for your time and patience.
I think I did address this point in the past ..but lets compare the two case (I have changed the strike to 4500 and 4400 PUT to make it more resonable for today's mkt condition)

Case 1 = Buy 4500 PUT @ 28 Rs (as of 8/Sept closing price)
Risk = 28 Rs. .when mkt remains above 4500 level
Breakeven point = Spot below 4472 level
Reward = depends on your view about the market about how far it can go down

Case 2 = Buy 4500 PUT @ 28 Rs and Sell 4400 PUT @18 rs (as of 8/Sept closing price)
Risk = 10 Rs.when mkt remians above 4500 level
Breakeven point = Spot below 4490 level
Reward = Max 100 Rs. if market is below 4400 level,

So the main difference comes in Lower Risk (from 28 to 10 rs), and Favourable breakeven point that u get into profit early (4490 from 4472 level).
As a professional, trading is all about Lowering the Risk and Increasing the odds/probablity of our success. That's what the spread gives agianst simple Long position.

On the flip side, though the rewards seems limited to max 100 Rs... But lets look at this a bit more closely..
Lets say, if you have 5000 rs to take a trade, then u can take 3 contract in case 1. (3*~30*50 = 4500 rs)
But in case 2, u can go for 9 contracts(9*~10*50 = 4500 rs), So u are still risking the same 5000 Rs money but now your profit potential goes up by 3 times i.e. max u can make is 9*50*(100-10) = 45000.
To make same money in case 1, mkt has to go below 4172 level = 3*50*(4500 - 4172-28).

Now what is more likely, mkt falling to 4399 level and giving u 45k profit or 4172 level ?

Question of margin comes in here. But that is different topic.

Hope you get clearer picture now.. As suggested by LT and DanPickUp. plz go thru basic material on other sites and ask an doubt here..

Happy Trading
 

mkbsiva

Well-Known Member
Hello AW10, Seniors...

I am new to this thread. i just need a suggestion. I have bought 10 lots of nifty 4600 put at a premium of 65. kindly give an idea of what should be done for avoiding a loss.

Thanks in advance for your thoughts on this.
 

tvrssvk

Active Member
I think I did address this point in the past ..but lets compare the two case (I have changed the strike to 4500 and 4400 PUT to make it more resonable for today's mkt condition)

Case 1 = Buy 4500 PUT @ 28 Rs (as of 8/Sept closing price)
Risk = 28 Rs. .when mkt remains above 4500 level
Breakeven point = Spot below 4472 level
Reward = depends on your view about the market about how far it can go down

Case 2 = Buy 4500 PUT @ 28 Rs and Sell 4400 PUT @18 rs (as of 8/Sept closing price)
Risk = 10 Rs.when mkt remians above 4500 level
Breakeven point = Spot below 4490 level
Reward = Max 100 Rs. if market is below 4400 level,

So the main difference comes in Lower Risk (from 28 to 10 rs), and Favourable breakeven point that u get into profit early (4490 from 4472 level).
As a professional, trading is all about Lowering the Risk and Increasing the odds/probablity of our success. That's what the spread gives agianst simple Long position.

On the flip side, though the rewards seems limited to max 100 Rs... But lets look at this a bit more closely..
Lets say, if you have 5000 rs to take a trade, then u can take 3 contract in case 1. (3*~30*50 = 4500 rs)
But in case 2, u can go for 9 contracts(9*~10*50 = 4500 rs), So u are still risking the same 5000 Rs money but now your profit potential goes up by 3 times i.e. max u can make is 9*50*(100-10) = 45000.
To make same money in case 1, mkt has to go below 4172 level = 3*50*(4500 - 4172-28).

Now what is more likely, mkt falling to 4399 level and giving u 45k profit or 4172 level ?

Question of margin comes in here. But that is different topic.

Hope you get clearer picture now.. As suggested by LT and DanPickUp. plz go thru basic material on other sites and ask an doubt here..

Happy Trading

Hi AW10,

Is it 4172 or 4472?:confused::confused:
 
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