Low Risk Options Trading Strategy - Option Spreads

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AW10

Well-Known Member
#21
Thanks a lot Bandlab2 for bringing in this perspective of Margin to the discussion.
At the moment, yes may be a limitation. In all other advance market, exchanges charge margin based on net risk (which is the difference of two strikes) but I think that is not the case in our market. Hope our brokerage house also implement risk based on margin strategy.

Regarding, huge margin requirement when mkt falls to 3600 - if that happens, then the spread will already be deep in the money and will be worth almost 95 or so. In such case, the question is shall we wait till expiry and put huge margin to squeez last 5 rs from the spread or .. close the position and move on to next opportunity. I will certainly go for closing the position and releasing the margin.

Happy Trading.
 

AW10

Well-Known Member
#22
there is no call bear spread, its call bull spread. u will do this when u expect a slightly bullish market. in such case you need to build 4000 and 4100 call spread
Sorry Bandlab2, I disagree with u that there is no bear call spread. It is not very well explained in books but in my view it exists. U can also view them as being the seller of call spread.

Easiest way to remember bullish/bearish spreads is

Bear spread = buy high strike, sell low strike
Bullish spread = buy low strike, sell high strike.

just keep this in mind and you can create the spread.
so Bear put spread will have buy 4k strike, sell 3900 strike. In this case, it will be debit spread and u will pay the net price for it. Position wins if market falls.

You can create bear call spread by buying 4000 call, and selling 3900 call. On fridays price, u will pay 110 for 4000 long call, and get back 165 for 3900 short call.
This is credit spread position and putting 65 rs in your pocket now.
When mkt falls, both the call will loose value. If mkt expires say at 3800, both call expire worthless and u can keep whole premium of 65. The max gain in this position is only 65, and max risk (if mkt stays above 4k) is 100.

So we do have bear call spreads. It might not make sense with 4000-3900 bear call.
But lets take a case of 4300 - 4400 bear call spread. On fridays price, this spread will put about 12 rs in pocket. so if our analysis says that mkt will expire below 4300 then it is worth taking the spread as pocketing 12 rs. Max risk is 100 (not like short naked call where max risk can be high) .

These types of credit spreads are great strategy for income generation. They benefit from high probability in the favour of spread seller.

Happy Trading
 
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AW10

Well-Known Member
#23
AW10. Murajichandra and bandlab2,
thanks for responding to my query. so, as long as the market is going down, my net premium will be yielding profits. I also find from your analysis that the market will reward me more on this Put Spread (in net premium) if the event that i am betting on (market shrinking to 3900) happens at a later date. This is probably because there will be less chance of the market getting back up and killing the real value of my Puts.
bandlab2's information about margin is very crucial. this seems rather stupid on the part of the brokers to ask such a large margin when my overall position is very safe when market crashes.:confused: It is something i have to be careful of then. By the way, what are average brokerage charges involved in buying Options?

I also have a new query: If instead of a 4000-3900 Put Spread I buy a 4000-3900 Call Bear Spread at this time, is it more risky or less?
Which spread to select
4000-3900 bear put spread = risk 47 rs / reward 100 rs. /max profit 100-47 = 53/ you pay the money now / BE point - above 3953 we are in loss
4000-3900 bear call spread = risk 100 rs/ max reward 65 rs /max profit 65-0 = 65/ you get paid now by market./ BE point - above 3965 we are in loss

Hope above factors make your decision making a bit easy. There is no one single answer but it is traders own choice. If your market reading is saying that it will go below 3900 then certainly call spread gives you more profit.

Happy Trading
 
#24
I am new to this site. I have a question if we buy option call 4100 expiry on 30 july 2009 if on the expiry date if nifty is on 4100 is there any other use other than profit which we have to book? I dont have any idea if you think it is a silly question still please answer me
 

djsinha

Active Member
#26
I am new to this site. I have a question if we buy option call 4100 expiry on 30 july 2009 if on the expiry date if nifty is on 4100 is there any other use other than profit which we have to book? I dont have any idea if you think it is a silly question still please answer me
Hi Krishdwi

As of today you can buy 4100 call by paying a premium of around 54. So if on the expiry date, NIFTY closed at 4100, still you can't book profit. This is because, your break-even point has become = 4100 + 54 = 4154.You can only make profit if NIFTY goes above 4154 on expiry.
Hope this helps.

Regards
DJ
 

djsinha

Active Member
#27
Hi AW10

It's wonderful to see you start this thread for beginners in option trading like us. Really I'm learning a lot from the posts of yours.

What we get to learn from the books (which are mostly written by US authors) may clear our basics, but, Indian options market differs from the US options market in terms of volatility, liquidity and number of strikes traded at any point of time thus reducing the number of options we have in our hand.
It's good that you are clearing our doubts and giving us a perspective of Indian options market.

Looking forward to learn a lot from you.

Regards
DJ
 

AW10

Well-Known Member
#29
Hi Krishdwi

As of today you can buy 4100 call by paying a premium of around 54. So if on the expiry date, NIFTY closed at 4100, still you can't book profit. This is because, your break-even point has become = 4100 + 54 = 4154.You can only make profit if NIFTY goes above 4154 on expiry.
Hope this helps.

Regards
DJ
krishdwi, DJ has answered to you question. My 2 cents of addition of this
1)On expiry day, All In the money options are forcefully excercised by Exchange after market close. So even if you have not placed order to close your trade, at the end of the day settlment, it will be closed for you.

2) If settlment price is < 4100, then yr option is Out of money and worth ZERO.
If settlement price is >4100 then there are 2 cases, a) if <4154, then say 4135, then exchange will credit your acct with 35 rs but u still loose on trade because u paid 54 for this.
b) if settlment is say 4180, exchange will credit 80rs to yr acct. that means you made profit of 80-57 = 23 rs. on this.

Hope this clarifies your doubt.

Happy Trading
 
#30
Which spread to select
4000-3900 bear put spread = risk 47 rs / reward 100 rs. /max profit 100-47 = 53/ you pay the money now / BE point - above 3953 we are in loss
4000-3900 bear call spread = risk 100 rs/ max reward 65 rs /max profit 65-0 = 65/ you get paid now by market./ BE point - above 3965 we are in loss

Hope above factors make your decision making a bit easy. There is no one single answer but it is traders own choice. If your market reading is saying that it will go below 3900 then certainly call spread gives you more profit.

Happy Trading
Thanks AW10.

Today I bought a Bear Put Spread for the first time to try it out. I bought 4000 Put @ Rs. 142 and sold 3900 Put @ Rs. 92.
The brokerage is 2.5%. If market is below 3950 on 30 July I will be in profit.

In case the market goes against my expectation, and say, on 22 July I find the NIFTY trading at 4400 level (though unlikely) how should I protect some chunk of investment? The net premium won't be worth much then. Is there any strategy to protect a large part of the investment if such a situation arises?

 
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