Low Risk Options Trading Strategy - Option Spreads

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Hello evrybody,

I Sold the box spread of Unitech today with the stike price of 80 and 85. and received the net premium of 5.60 and underlying value is 75.
My trade:

Sell 80 Call @ 5.35
Buy 80 Put @ 8.05
Buy 85 Call @ 3.15
Sell 85 Put @ 11.45

So net credit is 5.60 and strike difference 5 so net income is 0.60.

I have a query here, I have sold the out of the money call at a strike price of 80 and also sold the deep into the money put with the strike price of 85. It is a european option so if any one exeresice the put then how can I earn money and in this situation, what should I do? Is there any risk involve? or should I wait till expiry.


How any one can exersice the option? please explain.

I request the expert to throw some light on this.

Thanks
 

AW10

Well-Known Member
You carry the risk of assignment whenever dealing with Stock option on our market.
Actually more then the assignment, it is matter of procedural ineffeciencies that will hurt you.

If 85 put is assigned to you, then you will know it only on next day. By that time, yr broker would have already settled it with the cash balance in your account. If not, then very next day, you can excercise your 80 Put and get back the money from some other seller of 80 Put. As these 2 txn of execercise/assignment will be on 2 different dates, you carry the risk that settlment price will change on those 2 dates and hence you might get the net amount other then 5 (which is difference of strike).

To excercise your long option position, chk with yr broker what is the process. ICICIDirect accepts online excercise order.. whereas for other like sharekhan u have call them after mkt close and place request for assignment beforr 3.45 or 4.00 pm.

As Unitech has travelled from 110 to 75 in last 10 days, there might many OTM put players holding 85 puts. At 75 spot, the put is already worth 10 rs. whereas it is traded at 7.5 in market (buy bid is at 7.5).. so any sensible person will exercise the option and let it settle at 10 rs. rather then accept 7.5 from mkt.

This all is due to low liquidity of far strike option on stocks in our market.

By the way, have u considered brokerage on 4 contracts.. to see whether u really make money in this trade. Or maybe the return is not worth the uncertaintity/ risk that u might face. If all goes well, and u are not assigned, then u can keep 0.6*4500 = 2700 with u on expiry.

Happy Trading
(Note - I don't trade in Stock option hence my views are more conceptual)
 

aditya14

Well-Known Member
Hello evrybody,

I Sold the box spread of Unitech today with the stike price of 80 and 85. and received the net premium of 5.60 and underlying value is 75.
My trade:

Sell 80 Call @ 5.35
Buy 80 Put @ 8.05
Buy 85 Call @ 3.15
Sell 85 Put @ 11.45

So net credit is 5.60 and strike difference 5 so net income is 0.60.

I have a query here, I have sold the out of the money call at a strike price of 80 and also sold the deep into the money put with the strike price of 85. It is a european option so if any one exeresice the put then how can I earn money and in this situation, what should I do? Is there any risk involve? or should I wait till expiry.


How any one can exersice the option? please explain.

I request the expert to throw some light on this.

Thanks
Why would you go that route with the BAAP of unpredictability UNITECH.
 

VJAY

Well-Known Member
Dear AW sir,
Am wrongly sold 5100 PE nov at 200 before market tumbled... just came to know about it by debit of huge margin amount from my a/c....so what can i do now ..can i hold it or square it with 200+ loss!!!!awaiting for your guidance......
 

AW10

Well-Known Member
Vijay, Please tell me how to overcome this problem of placing wrong orders. I also suffer from it many times. Latest has been yesterday where instead of placing trigger + sell limit order, I ended up placing buy order and realised at the end of day that instead of being stopped out, I am holding double long quantities.

Coming to your trade of short 5100 Put. I think, it has already seen the worst price of 600 or so when market touched the low yesterday. It seems, that short term trend is up for now.

you can adopt many complex approaches to cut the loss.
1) and easiest of all is keep trailing stoploss.. as mkt moves up, keep moving SL to next higher point .. and if mkt reverses, then your stop will take u out.

2) Covert this into a spread by buying say 5000/4900 put.. but in that case you will be blocking some extra cash, big marging for this short position and extra brokerage.
You will not be able to turn it into a profitable position.

3) Sell call at 4600 and convert this into a short 4600 - 5100 reverse strangle with committed value of 5100-4600 = 500 pts. you gain will be the premium that u will collect from put and call - 500 pts..It is unlikely that you will be able to cover the complete loss of 500 with this approach. Maybe you will be able to minimise the loss.

Of all the above, if I were you, I would go for 1st simple option. As you are active trader and u know when mkt has changed the direction to down again, then u can cut the position. Depending on your platform, you can draw the chart of option price and use the pivot levels on option price that chart for rough guidence to cut the position.

Though option price don't follow charts (and I have been against using option chart to make tradind decision).. but off late I am spending time on short term price behaviour based on option price chart.. and think that for intraday to 2 day timeframe, it can work with fair approximation (specailly when expiry is far away).

And as a stock chart reader, it might make our job easy to trade option using option chart. Just follow PH/PL / Trend line etc and decide to entry/exit points.

Hope this helps.

happy trading.
 

VJAY

Well-Known Member
Dear AW10 sir,
Thanks for your valuable timely reply....will also go for 1st option ....am not get option chart from my provider....so do it with nf chart...in option trading this order mistakes happen if we not view our orders/positions in intervels....its an lesson to me....how I not noticed it....i think too much trading caused this.
 
Hi, Many thanks for your view.
I am a jobber and arbitrager so I do not pay the brokrage charges.

only thing i pay is the taxes. Do you know how much is one contract going to cost me?

I am first time doing a arbitrage in the option so a bit confuse about the procedure.

Today I square off my position for 4.85 total cost.

Thanks for all your suggetions.
 
Dear AW sir,
Am wrongly sold 5100 PE nov at 200 before market tumbled... just came to know about it by debit of huge margin amount from my a/c....so what can i do now ..can i hold it or square it with 200+ loss!!!!awaiting for your guidance......
I guess unless u want to hold a naked position and monitor as AW10 said, you wont be able to recover ur loss. Any spread position will lockin a part/all of your loss.
 

AW10

Well-Known Member
I guess unless u want to hold a naked position and monitor as AW10 said, you wont be able to recover ur loss. Any spread position will lockin a part/all of your loss.
Thanks Terminator for bringing in new dimension of naked short position..

Vijay - that gives me another idea.. if you are planning to trail with SL, and lets say tomorrow yr SL is not hit.. then at 3.15 pm u might be wondering what to do.
Generally, I hedge my open position between 3.15 / 3.30 by selling options. Assuming u have sufficient margin, u can near 3.15 u can sell say 4700 Call.
Currently u are holding bullish position with Short Put.. so to hedge u need to create bearish position which u can do by selling calls.
Advantage is that the time decay works for you. If mkt gaps down.. then whatever extra that you might loose on Put position by this sudden drop, will be recovered (atleast partially) by gain in short call position.

Once market stabilises, then u can decide on next action i.e. close call position, and trail put SL. Atleast with this approach you will lock your loss till the limit of premium that u get for short call position. I call this as hedging with market's money.
For me hedging is important to manage my risk.. but I hate to pay the price for hedging so try to minimise with this approach. Max hit will be the brokerage and few points.
Infact on many days, I manage to close my hedging position with partial profit on next day and then start trailing the SL.

Happy Trading
 
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