Low Risk Options Trading Strategy - Option Spreads
- Thread starter AW10
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Thanks DanPickUp.
University teacher is not something that I want to be.. Rather prefer to real life teacher i.e. Mentor.. someday..
Currently happy to do it to some extent on TJ by sharing my knowledge, experience here.
I know it is really hard profession to succeed.. and most of the time we don't get right guidence to get started. Books also have their own limitation. It can give u good info about a particular piece of jigsaw.. but that doesn't help in completing the picture. Hence trader needs to know - What trading is all about ? And then master each and every piece of this big jigsaw puzzle.
I take the effort to help those serious learners but can't find it out in one or two questions whether person is serious or not. Hence prefer to start with helping everyone.. and then figure out who is serious and who is not.
I agree with you, that at the end, it is individual's own effort in Learning and then applying those learning in market makes the difference.
Otherwise, knowledge without any action is of no use (may be sufficient to teach in university or open a consulting service).
Happy Trading
University teacher is not something that I want to be.. Rather prefer to real life teacher i.e. Mentor.. someday..
Currently happy to do it to some extent on TJ by sharing my knowledge, experience here.
I know it is really hard profession to succeed.. and most of the time we don't get right guidence to get started. Books also have their own limitation. It can give u good info about a particular piece of jigsaw.. but that doesn't help in completing the picture. Hence trader needs to know - What trading is all about ? And then master each and every piece of this big jigsaw puzzle.
I take the effort to help those serious learners but can't find it out in one or two questions whether person is serious or not. Hence prefer to start with helping everyone.. and then figure out who is serious and who is not.
I agree with you, that at the end, it is individual's own effort in Learning and then applying those learning in market makes the difference.
Otherwise, knowledge without any action is of no use (may be sufficient to teach in university or open a consulting service).
Happy Trading
LT, After knowing in spreads, u might have other choice as well..i.e buy 2 atm spreads or 5 OTM spreads.
It is the topic of position sizing (many call it money mgmt, risk mgmt etc), which answers "how much ?" part of trading jigsaw. And many successful traders agree that they got the breakout in their trading results only after getting this piece right.
If I can put it in simple terms,
(a) Size of account = 100000
(b) You decide to put 5% of account size as a Max risk on 1 trade so Risk per trade = 5000.
(c) You also decide to not put more the 20% of your account in one single trade = 20000. That means u can 5 trades of 10k each.. but your stops will ensure that u don't loose more then 5k in each of them giving u max loss of 25k if all 4 go against you. (I am using these absurd ratio of 5 and 20 here as example. In real life, I will reduce to more reasonable limit)
Depending on trade you are selecting, you know your risk of that particular trade which is (entry price - stoploss price). In case of spread, or option trade, it can be the net premium that u pay but u
can decide on your stoploss limit and decide to take lower risk.
Say Your entry price 85, and stop as suggested by charts or your strategy is 65. So you are taking 20 pts risk.
Divide 5000/20 to get the position size = 250.. i.e.5 contracts (as 1 contract = 50 underlying of NIFTY). So as per point (b) above, you can buy 5 contracts.
As per point (c) above, in 20000, you can buy 20000/85 = 235 i.e. 4 contracts.
So you just go ahead with minimum of 5 or 4.. and stay within sensible trading boundries as you have defined for yourself.
If your risk turns out to be 80 rs.. then your position size will be = 5000/80 = 60 i.e 1 contract.as per point (b)
This is as simple as I can explain about Position sizing at level 0. As position moves in your favour, you risk starts turning into profit, and u might decide to add extra contract and still keep the
risk within 5k limit but enhance the profit potential..
Whether u buy ATM/ ITM/ OTM / Spreads has nothing to do with HOW MUCH part. Factors that decide selection of OTM /ATM depends on your view about the trend, trend strength so that OTM
has chance to become ITM, time left till expiry, distance of OTM from current spot level etc..
Once u have decided that you want to buy OTM or ITM, then come back to above calculation to decide on HOW MUCH.
Not the other way, where u decide to buy OTM cause they cost less and you can afford to buy more contracts there. Those OTM will loose fast and hit the 5k risk limit on very comparatively smaller adverse move.
Hope this helps.. (maybe you already know all this but atleast it can help others)
Happy Trading
It is the topic of position sizing (many call it money mgmt, risk mgmt etc), which answers "how much ?" part of trading jigsaw. And many successful traders agree that they got the breakout in their trading results only after getting this piece right.
If I can put it in simple terms,
(a) Size of account = 100000
(b) You decide to put 5% of account size as a Max risk on 1 trade so Risk per trade = 5000.
(c) You also decide to not put more the 20% of your account in one single trade = 20000. That means u can 5 trades of 10k each.. but your stops will ensure that u don't loose more then 5k in each of them giving u max loss of 25k if all 4 go against you. (I am using these absurd ratio of 5 and 20 here as example. In real life, I will reduce to more reasonable limit)
Depending on trade you are selecting, you know your risk of that particular trade which is (entry price - stoploss price). In case of spread, or option trade, it can be the net premium that u pay but u
can decide on your stoploss limit and decide to take lower risk.
Say Your entry price 85, and stop as suggested by charts or your strategy is 65. So you are taking 20 pts risk.
Divide 5000/20 to get the position size = 250.. i.e.5 contracts (as 1 contract = 50 underlying of NIFTY). So as per point (b) above, you can buy 5 contracts.
As per point (c) above, in 20000, you can buy 20000/85 = 235 i.e. 4 contracts.
So you just go ahead with minimum of 5 or 4.. and stay within sensible trading boundries as you have defined for yourself.
If your risk turns out to be 80 rs.. then your position size will be = 5000/80 = 60 i.e 1 contract.as per point (b)
This is as simple as I can explain about Position sizing at level 0. As position moves in your favour, you risk starts turning into profit, and u might decide to add extra contract and still keep the
risk within 5k limit but enhance the profit potential..
Whether u buy ATM/ ITM/ OTM / Spreads has nothing to do with HOW MUCH part. Factors that decide selection of OTM /ATM depends on your view about the trend, trend strength so that OTM
has chance to become ITM, time left till expiry, distance of OTM from current spot level etc..
Once u have decided that you want to buy OTM or ITM, then come back to above calculation to decide on HOW MUCH.
Not the other way, where u decide to buy OTM cause they cost less and you can afford to buy more contracts there. Those OTM will loose fast and hit the 5k risk limit on very comparatively smaller adverse move.
Hope this helps.. (maybe you already know all this but atleast it can help others)
Happy Trading
DanPickUp,
One of your question was due from last week (where u asked about adjust Put Backspread to Collar).. so let me address that here..
Put Backspread = Sell 1 ITM PUT and Buy 2 OTM PUT. say sell 1 Put of 4800 and Buy 2 Put of 4600 strike when mkt is at 4700,,
When mkt comes down to 4550, you sell 1 4600 put and book the profit. You are still left with 1 short 4800 Put + 1 Long 4600 put resulting in Bullish Put Spread which is a credit spread.
At this stage, as you are selling Bearish Call spread, say Sell 1 4400 Call and buy 1 4500 Call giving u additional credit..
Now you hold 1 Credit call spread, and 1 Credit put spread.. after adjustment.. This is noting but Collar position. Collar are best when market expires between both the long legs. (in above example between 4500 to 4600.
If this is what your new analysis say that market will remain in this range then above adjustment to a resulting Collar position makes sense.
Certainly Credit Bearish Call spread position is smart way to collect premium with limited risk and always advised over naked short call position.
In short, I am with you about this adjustment to Collar.. Personally, before making any adjustment to existing position, I try to ask following question
1) Am I locking profit with this adjustment
2) Is my new risk coming down or not..
3) What if I collect the whole profit i.e. close the trade and search for next trade, independent of constraint free other leg.
(when turning into collar, u were restricting your put leg to 4700-4800 strikes which may not give u best collar at that time. By not closing this leg you are just saving on brokerage of 1 round spread trade)
4) Am I going to make new position complicate to handle or not.
5) Is my ego in control or I am getting overconfident with my previous winning trade
Personally, I prefer to Collect profit when about 80% of max profit potential is reached. And think about new trade without any constraint. If I am adjusting then it is locking the profit and reducing the risk in new market condition (trend, volatility etc).
Hope this helps..
One of your question was due from last week (where u asked about adjust Put Backspread to Collar).. so let me address that here..
Put Backspread = Sell 1 ITM PUT and Buy 2 OTM PUT. say sell 1 Put of 4800 and Buy 2 Put of 4600 strike when mkt is at 4700,,
When mkt comes down to 4550, you sell 1 4600 put and book the profit. You are still left with 1 short 4800 Put + 1 Long 4600 put resulting in Bullish Put Spread which is a credit spread.
At this stage, as you are selling Bearish Call spread, say Sell 1 4400 Call and buy 1 4500 Call giving u additional credit..
Now you hold 1 Credit call spread, and 1 Credit put spread.. after adjustment.. This is noting but Collar position. Collar are best when market expires between both the long legs. (in above example between 4500 to 4600.
If this is what your new analysis say that market will remain in this range then above adjustment to a resulting Collar position makes sense.
Certainly Credit Bearish Call spread position is smart way to collect premium with limited risk and always advised over naked short call position.
In short, I am with you about this adjustment to Collar.. Personally, before making any adjustment to existing position, I try to ask following question
1) Am I locking profit with this adjustment
2) Is my new risk coming down or not..
3) What if I collect the whole profit i.e. close the trade and search for next trade, independent of constraint free other leg.
(when turning into collar, u were restricting your put leg to 4700-4800 strikes which may not give u best collar at that time. By not closing this leg you are just saving on brokerage of 1 round spread trade)
4) Am I going to make new position complicate to handle or not.
5) Is my ego in control or I am getting overconfident with my previous winning trade
Personally, I prefer to Collect profit when about 80% of max profit potential is reached. And think about new trade without any constraint. If I am adjusting then it is locking the profit and reducing the risk in new market condition (trend, volatility etc).
Hope this helps..
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