Nifty Options Vertical Spread Trading

[ananths]

don't you think you would have made more money with naked puts instead of spread (with no. of lots adjusted to make same capital at risk).

Regards

It depends on how much risk you want to take..i don't need to think, i know i would have made more money than spread but i don't want to take that risk of losing entire capital..
If I get 4-5 good spread trades, i will make 40 -50 points per lot per month.. isn't it good enough? 40 points means 10% per month per lot. Anyway this thread is to track how it works and I don't have any proven track record..
If you are a risk taker and wants to earn more then naked option or future is the best...:thumb:

 

[ananths]

How can I learn more on option trading.
Can someone please help me.
Thanks

Dear Kaydee,
You seems to be a beginner in options..go through some of the options related threads in this forum and also google it...you will find lot of material and do visit this forum regularly to get more ideas..
cheers.:clapping:
Ananth

 

[timepass]

don't you think you would have made more money with naked puts instead of spread (with no. of lots adjusted to make same capital at risk).

Regards

Obviously yes, but the primary purpose of hedging is to protect your capital. In this case, he has made Rs. 650 in a day on a capital of about 40-45k (considering full margins). That's a decent return.

 

[abcpankaj]

all options aug 2013 series
all price date 2nd august 2013
Nifty = 5677

Please consider call spread "Buy 5700 call @ 119.7(delta 0.53) & sell 5800 [email protected] (delta 0.39)" VS buy "naked 5700 call"

delta of spread = 0.14
delta of 5700 call = 0.53
Stoploss :5600

Nifty at 5600
loss in call = 40 points
loss in spread= 10 points

So if one buys 4 spreads OR 1 call ,both positions have equal loss at 5600 ( equally hedged )

Nifty at 5750
profit in call (1 lot) = 38.7 points
profit in spread (4 lot) = 41 points

Nifty at 5800
profit in call (1 lot) = 66.2 points
profit in spread (4 lot) = 70 points

-These calculations do not consider brokerage/slippage
-After taking into account brokerage/slippage the difference in gains of spread vs call, narrows/evaporates.
-Total investment for call is premium Vs Margin for sold calls in Spread
-For near equal returns, Yield( % return on the amount invested) of naked call should be higher than that of spread


Advantage spread:
These calculations are valid 1-2 days trade only ,for 10-15 days holding ,theta ( time value) of naked call will
decline faster than that of spread

Advantage Naked call:
Trader gets profit from nifty move above 5800 which is forfeited by selling 5800 call in spread

Regards

 

[ananths]

Nifty at 5600
loss in call = 40 points
loss in spread= 10 points

So if one buys 4 spreads OR 1 call ,both positions have equal loss at 5600 ( equally hedged )

Dear Pankaj,
Thanks a lot for the detailed explanation and your contribution to the thread. Expect more from you in future.:clapping:
This explains the argument over spread over naked options.
Now the question arises..if a trader doesn't want to take risk, in a naked option bought he will keep a SL at the most 10 - 20 points..in above example if market is at 5677, trader will place a SL at around ~5650...so in a market whipsaw..most of the times it gets executed(for ameture traders) because of lack of knowledge on market direction even if the direction of the market is in your favor. At the same time spread will not have 10-20 points loss...it will have maximum 5 points loss and it gives the freedom to hold it for some more time to achieve your target. So I believe its ideal for beginners and low risk traders. Still a SL is required for spread because market can do whatever it wants.
Cheers,
Ananth

 

[DanPickUp]

@Ananths and @Abcpankaj

Good thread :clapping:

and also the discussion going on: Spread strategies against naked option trading.

There is a lot to argue about that. Will watch and see what you post. From my point of view I would keep an eye on how the stop losses are done and interpreted when those two kind of trading are compared. Ananths has already posted some about it. The risk point is given and mentioned, but depending how the stop losses are organized, the risk point will be equaled.

Take care / DanPickUp

 

[ananths]

@Ananths and @Abcpankaj

Good thread :clapping:

and also the discussion going on: Spread strategies against naked option trading.

There is a lot to argue about that. Will watch and see what you post. From my point of view I would keep an eye on how the stop losses are done and interpreted when those two kind of trading are compared. Ananths has already posted some about it. The risk point is given and mentioned, but depending how the stop losses are organized, the risk point will be equaled.

Take care / DanPickUp

Thanks Dan...As I mentioned in the begining of the thread, I took this idea of spread trading from your thread and AW10 thread. Thanks a ton for your valuable guidance. I'm happy that you will keep an eye on this and looking forward for your guidance. :clap:
Cheers,
Ananth

 

[abcpankaj]

For stoploss at 5650 the ratio changes from original 1:4 to 1(naked call) : 3.78 (spread)

The original question remains which is how to hedge a naked option position
-by selling option & converting it into a spread.
-by position sizing , reducing money at risk

the "limited" research tilted towards second option for short 1-2 days trades.
any suggestions/refutations are most welcome.

I also asked similar question in this forum here
http://www.traderji.com/options/86454-option-spreads-penalty-being-right-too-early.html



@DanPickUp I followed many of your posts here & must may they go a long way in improving the quality on discussions
in this forum.Thanks for that , your presence here is deeply appreciated.

Regards,

 

[ananths]

Dear Pankaj,

Re post #18
I used to be naked options trader and could not survive because of SL..I always had loss in this category. It could be fear or greed causing this or my placement of SL was not correct.
So I started with Spreads. As you said i also agree that Naked option is better than spread when you compare the margin required and the potential returns.

For stoploss at 5650 the ratio changes from original 1:4 to 1(naked call) : 3.78 (spread)

I agree that risk ratio changes. Suppose you are in loss in the spread but you are still confident that market will recover after few days...then you will not lose much in spread because its locked in both sides w.r.t time value but in naked option you will lose time value and vola and there is no chance that you will hold until market recovers. However in spread(debit) you know that the maximum loss is the difference between the two options. So you may still take the risk. Here instead of comparing the risk ratio between naked and spread we should see what is the return we want from market..I always feel that naked option trader is entirely different from spread trader. Naked option trader wants more money for less investment but spread trader is one who wants risk less money with more investment.
If a spread is in loss we can always repair it..but if naked option is in loss I don't think its easy to repair it instead we should exit the trade. If in profit why we need to hedge it? Option trader should know and have plan to exit w.r.t time and price.
I would track a naked option also in this thread just to see how it works against a spread.But i think keeping a 20 points SL for naked options makes sense. Will compare both at the end of the month..fair enough? you may provide your views time to time as trade goes :thumb:

Let us wait for Dan or some seniors to respond to your query....i just wrote my opinion.
Cheers, Ananth

 

[sanjeev258380]

can anyone plz tell me how to see the delta of any options in nifty.