Low Risk Options Trading Strategy - Option Spreads

Hi blackberry

ITM : What Does In The Money Mean?

1. For a call option, when the option's strike price is below the market price of the underlying asset.

2. For a put option, when the strike price is above the market price of the underlying asset.

Being in the money does not mean you will profit, it just means the option is worth exercising. This is because the option costs money to buy.

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ATM : What Does At The Money Mean?

An option is at-the-money if the strike price of the option equals the market price of the underlying security.

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OTM : What Does Out Of The Money - OTM Mean?

1. For a call, when an option's strike price is higher than the market price of the underlying asset.

2. For a put, when the strike price is below the market price of the underlying asset.

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Strike prices are one of the key determinants of the premium, which represents the market value of an options contract. Other determinants include the time until expiration, the volatility of the underlying security and prevailing interest rates. Strike prices are established when a contract is first written.

The strike you choose, depends on your strategy you want to trade.

In general you choose itm options for intra day trades, atm options for day trades and otm options for long time frames.

But us I say, this is a general guideline and we all have different ideas and experiences with the options we choose in any of our strategies.

It is a little bit like this : I have to hire a car. Do I need it only for fast driving, do I need it for a daily business or do I need it for heavy transport and heavy work.

If you get confused by reading the thread, then you may choose an other way. Start with paper trading now. It is like : Learning by doing.

Choose your options for the credit spreads, write down for your self, why you choosed this particular options, keep a copy of the chart from what you trade and paint your strategy on this chart. Decide, how much in reality you could lose and this would be your exit moment.

Now control your trade once a day and write down, what you do not understand ( may the price the option has now or the loss you made or what ever ).

Every post in this forum has the possibility for a direct link. Copy this links and keep a sheet with this links and name what is written in this posts. If you now have questions, read again and again in this posts. I am clear, that some posts are very complex. But it is the same when reading a book. Some pages are easy to understand and other ones we have to read a few times to understand the whole complexity behind it. If you then still have questions, be not shy and ask again.

Take care

DanPickUp

Thank you Sir, Thanks very much.

I made 3000 by investing 10000 in options.Now I withdraw all.I will do paper trading now onwards,otherwise it would be proved very fatal.Price movement of 50-80% are very normal on options.

One Q more sir,

In all strategies we cover our risk from aggressive to low.But low risk low gain and high risk gives us high gain.Is there any sure shot strategy in options which gives us sure positive return without losing any amount of premium ?


(Sir, sorry for my English,it is not so effective)

Hi blackberry

By the way, my English is also not the best and that is why I mostly have to edit my post. So, never mind.

Here are my personal answers to your questions which I divided in to three parts :

A : I do more specify your statement by posting this :

We also can cover to safe our profits and still keeping up the main strategy we trade. Means, I do not reduce the risk of the strategy by it self as implemented. I just safe the profits I am already running by adding and selling other derivatives.

An other way, which I can use, is to cover a profit by converting the strategy I am running in to an other one by using the same derivative. Both ways ( using the same derivative or adding or selling other derivatives ) are done, when I decide to stay in the market with out leaving it.

I also can lower my risk with the idea, to go from very aggressive to less aggressive. I then would use other strategies for that idea. It depends on your knowledge of strategies what you decide to do as next in any trade.

Here are we on a field, where you need experience and an exact understanding about options and other derivatives. It would exceed the frame we are in to go deeper in to that stuff.

B : Also this statement can be more specifide :

I can go in a trade with low risk and at the moment the strategy works for me, I can have huge gain.

Now I have the choice : I can convert the strategy in to an other strategy by using the same derivative and take a higher risk or a lower risk or I start to use other derivatives. By doing that, I am free to decide what I want, because I am on the right road. Means, my trade works and I can decide, if I let it run or what ever I like to do. Here comes the Greed and Fear emotions in part. Latest at this stage you have to know about MM and you have to know all your risks you are going to take or protect.

C : That is the holy grail question. There is no sure. I guess, that most of us traders in the begin where locking for those kind of answers which do not exist. They do not exist as any sure indicator not exist or as any sure system not exist. It is always a mix of different circumstances and decisions, which let us implement a begin in the market and then comes the next part in play, in which we have to decide, how do we handle this on going trade and as the most important and final part, when and how do we take loss or when and how do we take our profits. All the order of events mentioned can happen in minutes or in days or weeks.

As a last point : Usually people, which are afraid to lose money in trading, search like heavy for the holy grail. I don not say, you are one of them. By reading this post, some of the readers may start to realize what they do and just recognizing, that this little habit is the motor of there search.

People must find a way to handle there fear problems. At the moment they can handle that, they are no more afraid of taking a calculated risk in trading and they are free from searching for the holy grail and that will be the begin of the next level.

Take care and if this post gave you some more knowledge, it has done its job.

DanPickUp

dear,
for monday.....my view is bullish.....
i am planning to initiate this strategy(paper trading), please, comment.

buy Nifty 5400 CE @ 58.40 2 lots and
sell Nifty 5300 CE @ 114.6 1 lot.

total cost is =2.2 ( 58.4*2-114.6)

and the profit diagram is

Good one...

Hi vssoma

It looks good. It is a call back spread. You are nearly at the zero line which is not necessary, but gives a good feeling on the downside.

Maximum loss for the call back spread is limited and is taken when the underlying price at expiration is at the strike price of the long calls purchased. At this price, both the long calls expire worthless while the short call expires in the money. Maximum loss is equal to the intrinsic value of the short call plus or minus any debit or credit taken when putting on the spread.

I do not know the volatility in Nifty at those time, but any back spread works best when market makes bigger moves.

Ratio spreads are the contrariness to the back spreads and they work best when market not really moves.

What would be your next step, in case market moves in your direction ? ( Trend, swing point, pull back )

This is part of a trading plan to know in advance, what you will do when this and this happens.

Take care

DanPickUp

dear,
now 5400 CE @ 66.2 and
5300 CE @ 127.5

66.2 *2 - 127.5 = 4.9

profit = 4.9 - 2.2 = 2.7

now i am in 100 percent profit.

i am thinking to wait for few days before closing my trade. if it goes against my view....I'll find good price and close both on same day.

dan, please, suggest if i am wrong or may be you have good strategy than mine.
tnx,

AW10,

pls share your views of starting a thread to conduct a poll to predict this month expiry so that traderji members can vote and doing this on monthly basis may give some edge for us . Slowly this poll may some times represent the whole market or at least give some idea.


May I request you or some one popular here to start a thread like that to get a maximum poll?

sadiq, thanks for the idea but unfortunately, i have different views on it.
I don't think market cares of any of traderji members view about where to expire. We all have different views/fancy/ideas and we all we anticipate different expiry. Some of us may be right and some are wrong. And quite possible, next month, people who were right this time, may turn out to be wrong..

Hence, in my view, it is not very productive excercise and will not help us in trading the real money. So I would prefer to focus on something more productive, hence will not support such thread. Maybe someelse might like to start it.

Sorry to be frank with my views. please don't take it personally.

happy trading

swamy, this trade setup looks very tempting. Such a lowrisk and high reward possiblity if market remains bullish.

IMO, the points that I would like to address are - how long i am going to be in trade ? And My exit points ?
Even if mkt reverses, u might loose only 2 points but you will be blocking yr margin till expiry. To release the margin, u might like to squareoff the trade, and in the process, end up paying extra brokerage on 3 contracts.
So, we should not ignore brokerage of complete round trip while planning the trades. It is lot more important for small amount trades. even 1 points brokerage on 10 point profitis 10%..

hope this helps..
Happy trading