Low Risk Options Trading Strategy - Option Spreads

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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,

I clearly understood the case 1. However, in case 2 understood the first part. Would you please elaborate only "Sell 4400 PUT @18 rs (as of 8/Sept closing price)" as you explained in case 1. I will be getting a clear picture then what happens when "Buy 4500 PUT @ 28 Rs" (already understood), then what happens when ""Sell 4400 PUT @18 rs"---(awaiting ur explanation). Then I can surely figure out the case 2.

Thanks a lot!!!!
 

tvrssvk

Active Member
Hy tvrssvk

May I aske you, what kind of software you use to trade option.

It seems to me, how longer I stay in this thread, that here is a general problem with adequate option analyzing software.

If you have the right analyzing option software, you could test all your questions with that software.

And that is finally, how you would do your home work, before you go in a trade.

So, do you have any software for that ?

Regards and good trading
Hi Dan,

I am not using any software as of now. I am just trying to learn the basics. However, went through some of the websites recommended earlier.

I would like to inform you that some might be very brilliant in grasping things while others like me have less knowledge grasping power and would take some time to grasp thing.

In India we do follow this helping nature and almost every member knows about traderji forums helping members.

People who are willing to help will not have any problem while other's do.

4-5 months back I was complete nil with the knowledge of share market. After continuously going through traderji, have learnt a bit.

Everyone who are pro here where once a newbie.

I agree that I am jumping into options very soon. However I do have the determination to learn.

I would like to ask you whether my questions are distracting you in any manner. We all in traderji are here to learn something between ourselves.
 

AW10

Well-Known Member
Hi AW10,

I clearly understood the case 1. However, in case 2 understood the first part. Would you please elaborate only "Sell 4400 PUT @18 rs (as of 8/Sept closing price)" as you explained in case 1. I will be getting a clear picture then what happens when "Buy 4500 PUT @ 28 Rs" (already understood), then what happens when ""Sell 4400 PUT @18 rs"---(awaiting ur explanation). Then I can surely figure out the case 2.

Thanks a lot!!!!
tvrssvk,
Case 1 is simple LONG PUT .. i.e. just go ahead and buy PUT.. like one used to buy stocks.

Case 2 is Spread Strategy - where u buy something and at the same time sell something else.

As an example, Case 1 is go ahead and buy a Car. Pay 3,00,000 Rs for this
Case 2 is Buy Car but at the same sell your bike. Pay 3 Lac for car and get back 25k for your bike ..so your net cost is 275000.

So in case 2, you are buying 4500 put @28 rs and selling 4400 Put @18 rs.. that means collecting money from market.

Plz revisit the first 4/5 posts of this thread.. where I have gone in lot more details to explain case 2.. which is exactly the spread strategy.

Hope it is clear now.

Happy Trading
 

AW10

Well-Known Member
Hi DanPickUp, Tvrssvk,

My views on the chain of posts between you..
You both are correct at your position. But lets accept that there are different type of people in this world and they can have different approach to learning.
On one extreme, there are some who are independent and they can jump into books and don't need any help to master new subject.. On the other extreme there
are people who need regular instruction, handholding, to build the confidence and after sometime they are ready to go on their own..
It is nothing but individuals personality and we got to accept this diversity. Probably, you both share contrasting learning approach. So please respect the diversity.

And do forget, that we are in public forum, and we all have the "Right to Ignore". So feel free to use when required.

Tvrssvk, Dan is mentioning about software which certainly helps a lot.

www DOT samoasky DOT com site has a option analysis software.. It is free to download and install. And it has connectivity to NSE server so u can get NSE data and analyse it.
Plz search TJ forum for more details on how to configure etc.. But please go thru proper material first that was shared by Lazytrader, DanPickUp in previous posts..
At the minimum, you shd understand
1) Breakeven point
2) Risk Graph of a strategy
3) Basics of option pricing, components that affect option price
4) Strategy and their suitable market conditions for them.
5) Know the risk graph of = Long Call, Long Put, Short Call and Short Put as best as possible. If you know them, then u can draw the risk graphs of most of other strategies with this much info.
6) After that move on to spread strategies (which is the focus of this thread)

I can't recall any other point right now but will add more points in future.

Happy Trading
 
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