Low Risk Options Trading Strategy - Option Spreads

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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 AW,
I see the point and it looks fantastic. What happens on sept closing the market remains above 4500 level.
<1> the 4400/4500 put difference not necessarily be 10 till such time
<2> and to square off.. we may have to shell some more(or gain).
may I request to elaborate the possibilities.
 

AW10

Well-Known Member
Hi AW10,

Is it 4172 or 4472?:confused::confused:
I think u haven't got the background calculations about profit calculation..
Plz spend time to learn this basic of option trading.

At 4172 rs, 4500 put will be worth 4500 - 4172 = 328 rs. You paid 28 rs to enter into this so take out 28 as cost.. that gives u net profit of 300 rs.
So 300 rs of profit on 3 contract = 3*50*300 = 45k.

Clear now ?

Happy Trading
 

AW10

Well-Known Member
Hi AW,
I see the point and it looks fantastic. What happens on sept closing the market remains above 4500 level.
<1> the 4400/4500 put difference not necessarily be 10 till such time
<2> and to square off.. we may have to shell some more(or gain).
may I request to elaborate the possibilities.
If mkt remains above 4500 .. both put expires worthless and we loose complete 10 Rs.
1)If market falls from here, both PUTs will start increasing in value. 4500 PUT will rise faster then 4400 PUT. The net difference will tend toward 100 as the fall continues.
So as market is falling, the Net value of this spread will tend from current 10 towards final maximum value of 100. We will get its value of 100 only when mkt goes below 4400 level.
till that time it is somewhere between 10 to 100. if market goes up or falls but not fast enough then the net premium will tend towards 0 from current 10.

2) Yes, if you want to take control and book profit or loss before expiry, then it involves brokerage/commission/stt etc.. which is no different from any other trade.
Brokerage varies for each trader, broker so we need to see if squareoff transaction makes sense or not.. At some stage, if u have to pay 12 points on brokerage cost etc.. then
probably u may decide no to squareoff the trade. Atleast u will save 2 points.. IMO, it doesn't make sense to pay 12 points to broker to gain 10 points in our trade.

To keep the analysis simple, I did not bring those points here. but u are right. We should consider those costs as well in our analysis.

Happy Trading
 

AW10

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.
This is not how u trade 10 contracts options, siva. You need to
1) Form your mind about the market direction (right or wrong, but take your own decision)
2) Decide the points, at which your view about mkt will change
3) Based on point 1, above, take the trade
4) Decide on your exit points, specially the stoploss level.. You can also decide on profit exits, trailing stops etc
----- this is the planning part of your trade. Next is execution ----
5) Now open the trade
6) manage the trade as per your plan

----- Trade is over now. Analyse this trade about what u did right and what u did wrong. Learn from this and move on to Next trade.

Sorry about preaching above stuff .. but I hope this helps you and others and they don't come back for help after taking the risk i.e. opening the trade..

Coming back to your trade - 4600 Put bought at 65 Rs. = (cost of trade = 65*50*10 = 32500)

1) Are u still bearish about the market or your view has changed ? If you are no more bearish, then you have the reason to close your PUT position.
If you are still bearish.. then continue to hold the position.

2) How much money u are ready to loose on this trade - complete 32500, 5000, 10000 .. ? say if you don't want to loose more then 10k on this then ur Stoploss price comes to
= 65 - (10000 / (50*10)) = 45 rs. That means if price goes below 45, you are loosing 20 rs on 10 contracts i.e. = 10k Rs. So you should either close your position when
premium falls below 45.. or live the regular pain of seeing the loss getting bigger..(and if u are lucky, then reducing).
Option is time decaying asset.. so if market doesn't move in your direction i.e DOWN then u are going to loose part of your premium everyday.

Based on above 2 points, u should be able to take decision about your money. Please don't risk your money on my or someone elses decision. I or they don't have anything to loose or gain. But you are certainly going to loose/gain from your decision.

So start taking your own decision. Doesn't matter even if it is wrong. Everybody is proven wrong in the market and we have to accept that as part of the game. But with this loss you will learn and in next few days, weeks you will be more right then wrong.

Happy Trading.
 

tvrssvk

Active Member
I think u haven't got the background calculations about profit calculation..
Plz spend time to learn this basic of option trading.

At 4172 rs, 4500 put will be worth 4500 - 4172 = 328 rs. You paid 28 rs to enter into this so take out 28 as cost.. that gives u net profit of 300 rs.
So 300 rs of profit on 3 contract = 3*50*300 = 45k.

Clear now ?

Happy Trading
Hi AW10,

I am really sorry to disturb you, would you please suggest me the best book to learn OPTIONS----from very basic----a,b c........

any other threads in traderji to learn the basics of options---link provided will be appreciated.

Thank you for your time and patience.
 

mkbsiva

Well-Known Member
Thank you sir for the valuable advice.
I thought nifty will not be breaking the previous high trend-line of 4760. But it went the other way. thats why i was asking you for any hedge position i can take from here. Any way... this teaches me a good lesson.

Thanks again.

This is not how u trade 10 contracts options, siva. You need to
1) Form your mind about the market direction (right or wrong, but take your own decision)
2) Decide the points, at which your view about mkt will change
3) Based on point 1, above, take the trade
4) Decide on your exit points, specially the stoploss level.. You can also decide on profit exits, trailing stops etc
----- this is the planning part of your trade. Next is execution ----
5) Now open the trade
6) manage the trade as per your plan

----- Trade is over now. Analyse this trade about what u did right and what u did wrong. Learn from this and move on to Next trade.

Sorry about preaching above stuff .. but I hope this helps you and others and they don't come back for help after taking the risk i.e. opening the trade..

Coming back to your trade - 4600 Put bought at 65 Rs. = (cost of trade = 65*50*10 = 32500)

1) Are u still bearish about the market or your view has changed ? If you are no more bearish, then you have the reason to close your PUT position.
If you are still bearish.. then continue to hold the position.

2) How much money u are ready to loose on this trade - complete 32500, 5000, 10000 .. ? say if you don't want to loose more then 10k on this then ur Stoploss price comes to
= 65 - (10000 / (50*10)) = 45 rs. That means if price goes below 45, you are loosing 20 rs on 10 contracts i.e. = 10k Rs. So you should either close your position when
premium falls below 45.. or live the regular pain of seeing the loss getting bigger..(and if u are lucky, then reducing).
Option is time decaying asset.. so if market doesn't move in your direction i.e DOWN then u are going to loose part of your premium everyday.

Based on above 2 points, u should be able to take decision about your money. Please don't risk your money on my or someone elses decision. I or they don't have anything to loose or gain. But you are certainly going to loose/gain from your decision.

So start taking your own decision. Doesn't matter even if it is wrong. Everybody is proven wrong in the market and we have to accept that as part of the game. But with this loss you will learn and in next few days, weeks you will be more right then wrong.

Happy Trading.
 

tvrssvk

Active Member
Hy AW10

I really appreciate your patient and I am really surprise about your relaxed mentality to handle all this questions, with who ever and I wonder, how you can be so cool all the time.

You could be a teacher in an university for beginners in the lowest and highest level of option trading.

I had to learn all the stuff in the really hard way and I think, you should keep the people to make reading and study it the way the reality is. They all think, that they know now all about option trading. They will take bigger positions and they all will not understand, why they still will lose money !!

Then they come back to you, cry for answers and you did your best, but, like lazytrader told so many times, IT IS NOT POSSIBLE TO TEACH SUCH A BIG UNIVERSE IN A THREAD LIKE THIS. You give with all your effort, part time answers, and they still not will make money like you, because they do not really study and read about options and option strategies. If they do, the questions would be different.

This is my opinion and I always will think in my way about any other meanings.

Regards and good trading
"They all think, that they know now all about option trading"----a bit harsh i guess......
 

tvrssvk

Active Member
Hy tvrssvk

Option trading is a harsh business. And if you do not get used to it, you do not make it in the real trading business. You will go against the best from the best in the business, and what do you think, they will do with you as a newby.

It is like, if you go to the next boxing champion ship. You will fight only against the best ones. What do you think, they are going to do against you ???????????????????

If you are not prepared in an adequate level, they just will PUNCH YOU OUT.

That means, you will lose all your money and if you lose all your money, to who are you going to say : This I guess is a little bit harsh????????????

That is reality and you have to be over that. You speak about teaching in your post, that means you are not a pro . No problem, but do not lose money against those professional market markers or brokers. DO NOT. Never. Study and do not trade if you are not sure.

Take care

Regards and good trading
Thanks for your suggestions. Will try hard to learn options. However, that's what I was doing posting my questions.

I do respect your suggestions, since my brother used to say, no money is easy money in this world and never think of entering stock market thinking of easy money. DO NOT. Never. Very much similar to that you are the other person to guide me accordingly.
:thumb:
Thanks for your suggestions.
 
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