Low Risk Options Trading Strategy - Option Spreads
- Thread starter AW10
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Hi DanPickUp,
Though a deep ITM put/call behaves like a future, it still has some theta left. It will be low, but still has some time value. Since at the expiry, the current month's futures and options will have intrinsic value equal to index, we can short a call/put and take exactly opposite value in future.
Example: Current month ce4400 has price of 267.8. So it has a time value of around Rs 55. Since 4400 is a huge support level (looking at all those puts), we can buy current month's future (which unfortunately is at some premium) to offset the position.
If at expiry:
If the index is >= 4400 (that's what we want) say 4560:
Option will lose equal intrinsic value as future.
Option would loose its time value (55)
Future would loose its premium (-9)
So our total profit will be 46.
If the index moves down before expiry, the position can be closed at 4450 to prevent any further losses.
There could be lots of holes in this strategy or I could be missing something very obvious but right now the only problem I can see is that the increase in volatility of the option would become our loss if we close before expiry.
Just wondering if there are any similar strategies out there and hence my query
Though a deep ITM put/call behaves like a future, it still has some theta left. It will be low, but still has some time value. Since at the expiry, the current month's futures and options will have intrinsic value equal to index, we can short a call/put and take exactly opposite value in future.
Example: Current month ce4400 has price of 267.8. So it has a time value of around Rs 55. Since 4400 is a huge support level (looking at all those puts), we can buy current month's future (which unfortunately is at some premium) to offset the position.
If at expiry:
If the index is >= 4400 (that's what we want) say 4560:
Option will lose equal intrinsic value as future.
Option would loose its time value (55)
Future would loose its premium (-9)
So our total profit will be 46.
If the index moves down before expiry, the position can be closed at 4450 to prevent any further losses.
There could be lots of holes in this strategy or I could be missing something very obvious but right now the only problem I can see is that the increase in volatility of the option would become our loss if we close before expiry.
Just wondering if there are any similar strategies out there and hence my query
Last edited:
Pavan, There is strategy call “Synthetic Short Call” which has short put, short stock legs.
You can replace stock by Future and use the same name. Let me split the name in two parts
1) Short Call = i.e. selling a call option. This position following characteristics – limited profit (equal to premium received), unlimited loss if market goes up (covered to some extent by the premium received but beyond that there is no cover),
The position that u are talking about say Short NF, will make loss when market goes up. If market goes down, then max you can gain is the difference between futures short price and strike of sold put. Hence it is limited profit.
Plz chk out www. Optiontradingpedia . com/ synthetic_options_strategies.htm site for more details and risk graphs.
2) Synthetic = because they are created using different instruments then the following name suggest. Here you are creating short call position without using Call options.
When you buy future and sell Call. You are basically creating a covered call position. Again, profit is limited to the difference between the strike price and purchase price of future. And loss is unlimited beyond the premium received amount.
Telling u frankly, my opinion the name of strategy – WHO CARES ? Why bother about the name. As long as u understand what u are trying to do, what will happen in different market conditions and the pieces used in constructing the position meets the purpose, then go for it. Whether it is called A or B makes no difference.
Happy Trading.
You can replace stock by Future and use the same name. Let me split the name in two parts
1) Short Call = i.e. selling a call option. This position following characteristics – limited profit (equal to premium received), unlimited loss if market goes up (covered to some extent by the premium received but beyond that there is no cover),
The position that u are talking about say Short NF, will make loss when market goes up. If market goes down, then max you can gain is the difference between futures short price and strike of sold put. Hence it is limited profit.
Plz chk out www. Optiontradingpedia . com/ synthetic_options_strategies.htm site for more details and risk graphs.
2) Synthetic = because they are created using different instruments then the following name suggest. Here you are creating short call position without using Call options.
When you buy future and sell Call. You are basically creating a covered call position. Again, profit is limited to the difference between the strike price and purchase price of future. And loss is unlimited beyond the premium received amount.
Telling u frankly, my opinion the name of strategy – WHO CARES ? Why bother about the name. As long as u understand what u are trying to do, what will happen in different market conditions and the pieces used in constructing the position meets the purpose, then go for it. Whether it is called A or B makes no difference.
Happy Trading.
hi DanPickUp. Here are my views on the points that u have raised.
Sorry I couldn't pose a chart here.. but feel free to post the chart if you have something specific in mind and we can discuss it. So read on..
SPREADs are directional strategy. But they are extremely flexible. It in can be created for all type of market condition. It all depends on
- What is your directional call (bullish or bearish)
- which option type (CALL or PUT) you selects
- Which strike price is sold and which one is bought.
If you are bullish, buy lower strike, and sell higher strike. CALL or PUT - doesnt matter at all. The bullish spread with CALL will be a debit spread (where u need to pay the net difference to open the position). A bullish spread created with PUTs will be a credit spread (where u receive the net premium today)
I have given an example of bearish spread in the initial post of this thread.
What about you creating a bullish spread with 4300 /4400 PUT if you have bullish view on the market, and posting here for discussion?
Or creating a bearish spread with 4700 / 4600 CALLs ?
Charts job in option trading is limited to the extent of giving the view on market and possible support / resistance levels. After that it is upto the selection of right strategy, right strike prices and creating a profitable trade which has acceptable reward/risk ratio for trader.
Strategys risk graph will be more useful then chart in analysing the spread.
The preparation for strategy is everything. When I was just beginning with this, I used to plan the strategy as mentioned in my initial post about planning Spread trade. One needs to look at all those factors like Breakeven, max profit, max loss, Stoploss points etc. With experience it gets easier and now I can do the calculation on the fly and evaluate multiple spreads against each other. With practice, it starts getting easier.
Nobody stops you from doing this. You can very well do this i.e. create 1 leg of spread now and another leg later / tomorrow etc. (Called legging-in option position) You need to keep in mind that till the time second leg is not created, u carry all the risk (time decay, getting direction wrong, volatility drop etc) and reward (no loosing leg if market moves in your favour) that comes with Simple Buy/Sell option strategy.
This approach can be good as well as bad ,depending on how u are approaching it. If you know what u are doing and have planed your approach in advance then it is great. Else if u have just bought the option and when it goes against u then trying to safeguard it by converting it in spread.. then it is wrong approach.
My suggestion to beginners is that leave legging-in for later stage. Start with proper approach and take limited risk right from start.
Please refer to this post
http://www.traderji.com/options/31874-linkons-breakout-system.html#post348923
where I have described about selecting ITM/OTM options to create spread.
Options trading spoils us by giving so many choices.. If we know what we want then more choices you have better it is, but if we dont know what we want, then we feel uncomfortable with too choices.
If you have done proper trade planning, then this question is irrelevant. You already know your game plan if this trade goes in loss. You would have already planned your Loss exits in advance. If not then, my suggestion is close the trade and take loss. It is easier to finding new profitable opportunity rather then putting constraints around you (2 options strike, 1 loosing trade ) and trying to save a loosing trade. Options trading does give u many choice but it is not worth the effort. It is easier to accept the loss as loosing trade and move on.
In my view, adjustments should be done to
1) reduce the risk of a trade or
2) to protect profit
Not to turn a loss into profit.
Happy Trading.
Sorry I couldn't pose a chart here.. but feel free to post the chart if you have something specific in mind and we can discuss it. So read on..
SPREADs are directional strategy. But they are extremely flexible. It in can be created for all type of market condition. It all depends on
- What is your directional call (bullish or bearish)
- which option type (CALL or PUT) you selects
- Which strike price is sold and which one is bought.
If you are bullish, buy lower strike, and sell higher strike. CALL or PUT - doesnt matter at all. The bullish spread with CALL will be a debit spread (where u need to pay the net difference to open the position). A bullish spread created with PUTs will be a credit spread (where u receive the net premium today)
I have given an example of bearish spread in the initial post of this thread.
What about you creating a bullish spread with 4300 /4400 PUT if you have bullish view on the market, and posting here for discussion?
Or creating a bearish spread with 4700 / 4600 CALLs ?
Charts job in option trading is limited to the extent of giving the view on market and possible support / resistance levels. After that it is upto the selection of right strategy, right strike prices and creating a profitable trade which has acceptable reward/risk ratio for trader.
Strategys risk graph will be more useful then chart in analysing the spread.
The preparation for strategy is everything. When I was just beginning with this, I used to plan the strategy as mentioned in my initial post about planning Spread trade. One needs to look at all those factors like Breakeven, max profit, max loss, Stoploss points etc. With experience it gets easier and now I can do the calculation on the fly and evaluate multiple spreads against each other. With practice, it starts getting easier.
Nobody stops you from doing this. You can very well do this i.e. create 1 leg of spread now and another leg later / tomorrow etc. (Called legging-in option position) You need to keep in mind that till the time second leg is not created, u carry all the risk (time decay, getting direction wrong, volatility drop etc) and reward (no loosing leg if market moves in your favour) that comes with Simple Buy/Sell option strategy.
This approach can be good as well as bad ,depending on how u are approaching it. If you know what u are doing and have planed your approach in advance then it is great. Else if u have just bought the option and when it goes against u then trying to safeguard it by converting it in spread.. then it is wrong approach.
My suggestion to beginners is that leave legging-in for later stage. Start with proper approach and take limited risk right from start.
Please refer to this post
http://www.traderji.com/options/31874-linkons-breakout-system.html#post348923
where I have described about selecting ITM/OTM options to create spread.
Options trading spoils us by giving so many choices.. If we know what we want then more choices you have better it is, but if we dont know what we want, then we feel uncomfortable with too choices.
If you have done proper trade planning, then this question is irrelevant. You already know your game plan if this trade goes in loss. You would have already planned your Loss exits in advance. If not then, my suggestion is close the trade and take loss. It is easier to finding new profitable opportunity rather then putting constraints around you (2 options strike, 1 loosing trade ) and trying to save a loosing trade. Options trading does give u many choice but it is not worth the effort. It is easier to accept the loss as loosing trade and move on.
In my view, adjustments should be done to
1) reduce the risk of a trade or
2) to protect profit
Not to turn a loss into profit.
Happy Trading.
Dear AW10,
Thanks for starting a nice thread...
Would you Please tell me about this strategy looks lucrative........
http://www.ehow.com/how_4503883_covered-calls-generate-monthly-income.html
Have you tried it Please share you exerience........
Many need lots of money but looks Simple & secure....
Warm Regards...
Milind
Thanks for starting a nice thread...
Would you Please tell me about this strategy looks lucrative........
http://www.ehow.com/how_4503883_covered-calls-generate-monthly-income.html
Have you tried it Please share you exerience........
Many need lots of money but looks Simple & secure....
Warm Regards...
Milind
Milind, by nature, Coverd call (buy stock and sell call at higher strike price) is a bullish strategy..so it works fine in bullish market.
In bearish market, it will loose money if stock falls below the amount that u gained by selling call.
Say if u buy stock at 100, and sell 110 call at 5 rs. and collect premium of 5 rs.
If stock stays below 110, u keep the whole premium. Good. But if it goes below 95 say at 93, then u might keep 5 Rs of premium but have lost 7 rs on stock position..
Hence, if person know the strategy well..and keeps stoploss on stock position at 95..then it is fine.
Otherwise, he might end up holding loosing stock position and colloecting small premium
by selling call premium.
In bullish market, this is great way of getting rent on your stock asset. Important point is to select the right strike price to sell the call. If strike price should be the one where stock will not reach by expiry.
Happy Trading.
In bearish market, it will loose money if stock falls below the amount that u gained by selling call.
Say if u buy stock at 100, and sell 110 call at 5 rs. and collect premium of 5 rs.
If stock stays below 110, u keep the whole premium. Good. But if it goes below 95 say at 93, then u might keep 5 Rs of premium but have lost 7 rs on stock position..
Hence, if person know the strategy well..and keeps stoploss on stock position at 95..then it is fine.
Otherwise, he might end up holding loosing stock position and colloecting small premium
by selling call premium.
In bullish market, this is great way of getting rent on your stock asset. Important point is to select the right strike price to sell the call. If strike price should be the one where stock will not reach by expiry.
Happy Trading.
I am creating 2 limited risk paper trades here which needs no monitoring till expiry. Lets see what we get by then.
My view on market - It will remain above 4400. Or worst case it might be above 4300 by expiry.
Trade 1 - Bullish call spread using 4200 / 4400 calls.
Buy 4200 call - 277 rs
Sell 4400 call - 129 rs.
Net cost = 148 Rs. (=277- 129)
Max loss 148 rs when market expires below 4200.. But we will not sleep while we are getting into loss. So lets put a stoploss of 50 Rs i.e. when net cost falls below 100, we will squareoff the trade.
Max value of strategy = 200, if market stays above 4400.. Giving us profit potential of 52 Rs on investment of 148 rs today.
Trade 2 - Bullish call spread using 4200 / 4300 calls.
Buy 4200 call - 277 rs
Sell 4300 call - 194 rs.
Net cost = 83 Rs. (=277- 194)
Max loss 83 rs when market expires below 4200.. But we will not sleep while we are getting into loss. So lets put a stoploss of 43 Rs i.e. when net cost falls below 40, we will squareoff the trade and take the loss.
Max value of strategy = 100, if market stays above 4300.. Giving us profit potential of 17 Rs on investment of 83 rs today.
There is 9 calender days to expiry or 7 trading days.
I have taken the mid price of strike to open the trade. This is just to showcase that how easy it can be to develop a limited risk, high probablity trade for swing trading. Some has asked on other thread about selling OTM Call option to pocket the premium. As of close today, 4800 OTM call option will fetch only 10 rs. whereas above trades have higher profit potential
We don't have to worry about timedecay, volatility drop or anything.
We know upfront, whatever may happen (even if nifty goes to 3800 level) we are not going to loose more then 148 or 83 Rs. Probablity is high that it will stay above 4400. It is still higher probablity that
it will stay above 4300. i.e Trade 2 has better chance of success then Trade 1.
Lets see what happens
Happy low risk, stressfree trading
My view on market - It will remain above 4400. Or worst case it might be above 4300 by expiry.
Trade 1 - Bullish call spread using 4200 / 4400 calls.
Buy 4200 call - 277 rs
Sell 4400 call - 129 rs.
Net cost = 148 Rs. (=277- 129)
Max loss 148 rs when market expires below 4200.. But we will not sleep while we are getting into loss. So lets put a stoploss of 50 Rs i.e. when net cost falls below 100, we will squareoff the trade.
Max value of strategy = 200, if market stays above 4400.. Giving us profit potential of 52 Rs on investment of 148 rs today.
Trade 2 - Bullish call spread using 4200 / 4300 calls.
Buy 4200 call - 277 rs
Sell 4300 call - 194 rs.
Net cost = 83 Rs. (=277- 194)
Max loss 83 rs when market expires below 4200.. But we will not sleep while we are getting into loss. So lets put a stoploss of 43 Rs i.e. when net cost falls below 40, we will squareoff the trade and take the loss.
Max value of strategy = 100, if market stays above 4300.. Giving us profit potential of 17 Rs on investment of 83 rs today.
There is 9 calender days to expiry or 7 trading days.
I have taken the mid price of strike to open the trade. This is just to showcase that how easy it can be to develop a limited risk, high probablity trade for swing trading. Some has asked on other thread about selling OTM Call option to pocket the premium. As of close today, 4800 OTM call option will fetch only 10 rs. whereas above trades have higher profit potential
We don't have to worry about timedecay, volatility drop or anything.
We know upfront, whatever may happen (even if nifty goes to 3800 level) we are not going to loose more then 148 or 83 Rs. Probablity is high that it will stay above 4400. It is still higher probablity that
it will stay above 4300. i.e Trade 2 has better chance of success then Trade 1.
Lets see what happens
Happy low risk, stressfree trading
Last edited:
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