Low Risk Options Trading Strategy - Option Spreads

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AW10

Well-Known Member
Wishing you all the visitors and regulars of this thread a happy & prosperous new year ahead.
May your options trades take your account to new heights.

happy trading

(Dan - I am very much alive, just lending back to reality after loonnnnggg holiday break).
 
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Dear Seniors,

Am new to options trading. Need all your help to get intiated in to options. Have been reading a lot on this subject from Feb 2010, including this thread in toto. Coming Monday, would like to enter the market with a short strangle. Excel work sheet pasted here for your info. Kindly let me know how this strangle looks.
SHORT STRANGLE
BE BE
UPPER SHORT CALL + NET PR RECD 6382 6300 30 6330
LOWER SHORT PUT - NET PR RECD 5418 5500 52 5448
PUT CALL
5000 -448 30 -418
5100 -348 30 -318
5200 -248 30 -218
5300 -148 30 -118
5400 -48 30 -18
5418 -30 30 0
5500 52 30 82
5600 52 30 82
5700 52 30 82
5800 52 30 82
5900 52 30 82
5979 52 30 82
6000 52 30 82
6100 52 30 82
6200 52 30 82
6260 52 30 82
6300 52 30 82
6382 52 -52 0
6400 52 -70 -18
6500 52 -170 -118

At nifty 5500 would short nifty & at 6300 long for safety. This Feb series. Will hold till expiry.

Thanks,
Sriram
 

AW10

Well-Known Member
If your view for NIFTY is to remain in 5500-6300 range till feb end, then this short strangle seems to be quite safe as of today's mkt.

Do think of various alternative scenario when u would like to adjust or close the position. Feb will have budget and that can pull the market up putting 6300 call at risk. And if global market cracks or fii decide to take away their money, then 5500 put will be at risk. Your breakeven is about 10% from current market, and market can move more
then 10% in 7 weeks period.

Maybe you would like to cut position when premium reaches 120 (i.e. u r 50% in loss), or market crosses and stays above/below a particular level.

Happy Trading
 
If your view for NIFTY is to remain in 5500-6300 range till feb end, then this short strangle seems to be quite safe as of today's mkt.

Do think of various alternative scenario when u would like to adjust or close the position. Feb will have budget and that can pull the market up putting 6300 call at risk. And if global market cracks or fii decide to take away their money, then 5500 put will be at risk. Your breakeven is about 10% from current market, and market can move more
then 10% in 7 weeks period.

Maybe you would like to cut position when premium reaches 120 (i.e. u r 50% in loss), or market crosses and stays above/below a particular level.

Happy Trading
Dear AW10,

Thanks for the prompt reply. Won't going long on nifty when it approaches 6300 & short when nearing 5500 help?

Thanks & Regards,
Sriram
 

AW10

Well-Known Member
Ofcourse, u can make that choice i.e. to adjust when mkt reaches those strikes.

But you need to understand that by that time, premium would have gone up a lot.. and hence any adjustment or booking loss will be costly. eg. current month (3 weeks life) atm strike is commanding a premium of 105 rs on friday. Number is appox 160 rs for atm contract of next month (7 weeks life).
So your 5500/6300 option will be worth lot more when mkt reaches there (ofcourse, it will depend on the remaining life of option at that time).

So, if you leave mkt to reach that stage, then you might end up taking bigger loss then what your money managment rules might allow. In my trading I decide the exit point, before opening the position and know when I am going to cut the loss or book the profit.

Question that u need to answer is How big a hit you are ready to take for making 80 points. Is it 40 point, 80point, 200 points, or no limit. Remember, you are holding a position which has no cap on risk i.e. this bomb can have big impact on your account.

Happy trading
 
Hi all,

What is your reading on deep in the money covered call. Say if we go long on nifty Feb series at around 5900 and sell call of strike say 5300. Time value is around 70 & delta is around .70 odd. (if delta is around near to one time value is very meagre).

Experts opinion solicited.

Regards,
Sriram
 

AW10

Well-Known Member
This is the extract of feb series option chain from nse site..when market is around 5804.

Code:
Volume	Bid	Bid	Offer	Offer	Strike Price
	Qty	Price	Price	Qty	

-	50	759	1,141   100	*5000.00*
-	50	670	1,101   100	*5100.00*
4	50	640.85	719.95	500	*5200.00*
[B]10	50	552.75	724.95	500	*5300.00*
11	50	426.05	624.95	500	*5400.00*[/B]
215	200	400	419.4	500	*5500.00*
40	1,800	317.5	338.35	1,650	*5600.00*
173	50	256.55	265.4	500	*5700.00*
3,477	500	194.2	196.7	50	*5800.00*
8,725	150	141.3	142.25	100	*5900.00*
12,355	50	97.25	98.35	50	*6000.00*
notice the wide bid-ask spread and thin volume for those deep ITM contracts.
For some reason if you have to squareoff your position in the market, then you will be able to buy it back almost 200+ rs above mkt price (eg - 5300 contract which is worth 400 is selling at 724 rs).

Moreover, ITM contracts will have higher margin requirement too.

Observe the ask price of 5200/5300/5400 contract. Qty is 500, quote is ending in 95 paise, and price is x19 or x24 slightly below the round number of x20 and x25. And the price is rediculously high.
To me that looks like a shrewed option player's order ready to trap newbie or someone's typo mistake. So beware of it.

So IMO, just because of low liquidity, these deep ITM contracts are not worth trading in our market.

But if you can find good price and strikes, then trading ITM spread is nice low risk income generating strategy. eg - Jan 6000-6100 put spread (buy 6100 put, sell 6000 put) would cost (307 -223 = 84) for eventual value of 100 points. I.e. if market remains below 6k, then your investment of 84, is going to fetch u 100 points i.e. profit of 16 points in next 20 days. That is 800 rs return on 30k of margin investment giving 2.5% in 20 days (ofcourse this needs to be adjusted for stt/brokerage etc).

Happy Trading
 
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