Low Risk Options Trading Strategy - Option Spreads

[simple_trader]

If anyone is really bearish 4800-4900 PUT spread is available for just 15 rs and 4900-5000 PUT at 22 rs (this is not my view that market is bearish). Even we do not have to lose all 15 rs.

May be it is worth looking at if anyone is bearish.

These two are generating return now almost 1:1 risk to return as of now. I do not know if anyone tracks these. When I gave them NF was around 5080 around. Next day NIFTY went to 5140 in closing. Still these two did not have loss. So it was not giving loss when market went against.

 

[SwingKing]

I have a query regarding adjusting options according to Market scenario.

Now lets say I am bearish for the next 2-3 months. What strategy can I use?

The Nifty PE of July 2010 are trading at,
5000PE @156.8
4900PE @124
4800PE@101

Now, If I am expecting levels of 4800 minimum in July, how do I use this information to position myself in the market. Also, how do I figure out whether the PE are expensive or not. I know about option pricing, calculations hence i am expecting a more practical answer.

Tc

 

[AW10]

Now lets say I am bearish for the next 2-3 months. What strategy can I use?

The Nifty PE of July 2010 are trading at,
5000PE @156.8
4900PE @124
4800PE@101

Now, If I am expecting levels of 4800 minimum in July, how do I use this information to position myself in the market. Also, how do I figure out whether the PE are expensive or not. I know about option pricing, calculations hence i am expecting a more practical answer.

Tc

There are many options Strategies that can be used to trader our bearish view. But I am taking Bearish Put Spread to trade the bearish view with an example.

It is possible to create 3 spreads with this. Following table list their comparison. (apologies for poor formatting. Will repost later. Plz read ! as column separator)

<quote>
Seq # ! Cost or Max Risk ! Max Profit ! Breakeven Point ! Reward Risk Ratio ! Probability of gaining Max profit
1 Buy 1 Put 5000 + Sell 1 Put 4900 ! 32.8 ! 67.2 ! 4967.2 ! 2.05 ! Higher. Market should reach below 4900.
2 Buy 1 Put 4900 + Sell 1 Put 4800 ! 23 ! 77 ! 4877 ! 3.35 ! Low. Market should reach below 4800.
3 Buy 1 Put 5000 + Sell 1 Put 4800 ! 55.8 ! 144.2 ! 4944.2 ! 2.58 ! Low. Market should reach below 4800.

</quote>

Though last 2 spreads look attractive due to higher reward to risk ratio, but they need market to fall below 4800. With our view of drop till 4800 level, we have less chance of gaining maximum profit on them. First spread, though carries low reward to risk ratio, it carries higher probability of giving us maximum profit. Moreover it has highest breakeven point of all, i.e. it will come into profit below 4967 level. Hence it is a trade-off decision based on our view about
- Are we strongly bearish or mild bearish
- Do we want higher probability of small profit or Low probability of bigger profit.

Of-course, we should also plan to cut our losses. Check out the link to post on complete option trade plan at the start of this thread.

Regarding finding overpriced/underpriced options One of the way, people use is to compare the theoretical price of a particular option contract with its mkt price to figure out whether it is cheap or costly. Practically, theoretical price is never traded in mkt. Most of the time, market price is dynamic and many factors affect it. Some guideline or thumb rules u can follow
- How is vix with respect to prev few days of VIX ? High VIX, higher option premium hence costly options.
- How is volatility ? You can use any approach to form the view about volatility. (ATR, Width of Bollinger band, Days range, statistical analysis etc). Higher the volatility,costlier the options.
- If you use multi-legged strategies involving buying and selling like spreads, this question of cheap/costly becomes less relevant, cause if you are buying higher priced option, u are also selling a overpriced option.
- Keep in mind that it is possible to have some puts/calls traded at discount while other puts/calls are going at premium due to demand supply conditions in the market.

So, lots of stuff and confused on how to solve it..
In my view, Solution is somewhere else - rather then being pound foolish, penny wise.. focus on pounds i.e select the right strategy which nullifies this effect and focus on right trade /strike/breakeven points /probability etc. In trading we can make money by buying high and selling higher.. We dont have to always buy cheap to make money. We are here to make money, not to buy cheap (i.e. catch the bottom). If something is going cheap then there is reason behind it. Let other figure out the reason - WHY?

Hope this helps.
Happy Trading

 

[simple_trader]

I have a query regarding adjusting options according to Market scenario.

Now lets say I am bearish for the next 2-3 months. What strategy can I use?

The Nifty PE of July 2010 are trading at,
5000PE @156.8
4900PE @124
4800PE@101

Now, If I am expecting levels of 4800 minimum in July, how do I use this information to position myself in the market. Also, how do I figure out whether the PE are expensive or not. I know about option pricing, calculations hence i am expecting a more practical answer.

Tc

My idea is very simple. In case I am bearish and expecting a bigger fall, then I decide how much I can lose for that trade. Say I can take a risk of 10K. I would look for at the money, and closet possible out of money PUT I would buy with the risk money 10K. Also to choose the series, I would like to give 20-25 trading days for that trade. However that said, I mostly try to avoid option buy. MOSTLY option buy gives loss and also make us bias on market. It makes very difficult to go with the market. Its kind of disturbance in mind

Feel free to correct me if my thinking is wrong!

 

[vssoma]

There are many options Strategies that can be used to trader our bearish view. But I am taking Bearish Put Spread to trade the bearish view with an example.

It is possible to create 3 spreads with this. Following table list their comparison. (apologies for poor formatting. Will repost later. Plz read ! as column separator)

<quote>
Seq # ! Cost or Max Risk ! Max Profit ! Breakeven Point ! Reward Risk Ratio ! Probability of gaining Max profit
1 Buy 1 Put 5000 + Sell 1 Put 4900 ! 32.8 ! 67.2 ! 4967.2 ! 2.05 ! Higher. Market should reach below 4900.
2 Buy 1 Put 4900 + Sell 1 Put 4800 ! 23 ! 77 ! 4877 ! 3.35 ! Low. Market should reach below 4800.
3 Buy 1 Put 5000 + Sell 1 Put 4800 ! 55.8 ! 144.2 ! 4944.2 ! 2.58 ! Low. Market should reach below 4800.

</quote>

Though last 2 spreads look attractive due to higher reward to risk ratio, but they need market to fall below 4800. With our view of drop till 4800 level, we have less chance of gaining maximum profit on them. First spread, though carries low reward to risk ratio, it carries higher probability of giving us maximum profit. Moreover it has highest breakeven point of all, i.e. it will come into profit below 4967 level. Hence it is a trade-off decision based on our view about
- Are we strongly bearish or mild bearish
- Do we want higher probability of small profit or Low probability of bigger profit.

Of-course, we should also plan to cut our losses. Check out the link to post on complete option trade plan at the start of this thread.

Regarding finding overpriced/underpriced options One of the way, people use is to compare the theoretical price of a particular option contract with its mkt price to figure out whether it is cheap or costly. Practically, theoretical price is never traded in mkt. Most of the time, market price is dynamic and many factors affect it. Some guideline or thumb rules u can follow
- How is vix with respect to prev few days of VIX ? High VIX, higher option premium hence costly options.
- How is volatility ? You can use any approach to form the view about volatility. (ATR, Width of Bollinger band, Days range, statistical analysis etc). Higher the volatility,costlier the options.
- If you use multi-legged strategies involving buying and selling like spreads, this question of cheap/costly becomes less relevant, cause if you are buying higher priced option, u are also selling a overpriced option.
- Keep in mind that it is possible to have some puts/calls traded at discount while other puts/calls are going at premium due to demand supply conditions in the market.

So, lots of stuff and confused on how to solve it..
In my view, Solution is somewhere else - rather then being pound foolish, penny wise.. focus on pounds i.e select the right strategy which nullifies this effect and focus on right trade /strike/breakeven points /probability etc. In trading we can make money by buying high and selling higher.. We dont have to always buy cheap to make money. We are here to make money, not to buy cheap (i.e. catch the bottom). If something is going cheap then there is reason behind it. Let other figure out the reason - WHY?

Hope this helps.
Happy Trading

dear aw10,
these are purely options strategies.
what if we mix with futures.
can you please, explain some strategies with this point.
tnx,

 

[nayarock]

Dear AW10,

This question is not purely related Options, but I dont know where to post so decided to ask you.

My question is regarding Company Quarter Results.

1) How to know before in hand, that particular company will post results on that particular date .
2) On the day of results- How to get the first hand information about the good / bad numbers, in sites (If site then please mention) or only TV ?

Thank you

 

[rrmhatre72]

There are many options Strategies that can be used to trader our bearish view. But I am taking Bearish Put Spread to trade the bearish view with an example.

It is possible to create 3 spreads with this. Following table list their comparison. (apologies for poor formatting. Will repost later. Plz read ! as column separator)

<quote>
Seq # ! Cost or Max Risk ! Max Profit ! Breakeven Point ! Reward Risk Ratio ! Probability of gaining Max profit
1 Buy 1 Put 5000 + Sell 1 Put 4900 ! 32.8 ! 67.2 ! 4967.2 ! 2.05 ! Higher. Market should reach below 4900.
2 Buy 1 Put 4900 + Sell 1 Put 4800 ! 23 ! 77 ! 4877 ! 3.35 ! Low. Market should reach below 4800.
3 Buy 1 Put 5000 + Sell 1 Put 4800 ! 55.8 ! 144.2 ! 4944.2 ! 2.58 ! Low. Market should reach below 4800.

</quote>
Happy Trading

Hi AW10,

Just another thought.
Raunak is thinking that he will see 4800level in July.
We are in June & approximatle we will have to wait for one month to get 4800 level.
in this case If one short 4800CE @380 & 4800PE@80 then net net inflow will be 460points which will cover him till 5260 at higher side & 4340 at lower side.
As his expectation is 4800 level after one month, He can enjoy reduction in option value due to timedekay get profit accumulated for one month.
If July expiry is at 4800 then he will have max profit of 460points.

Anyway you are expert in this field. Appreciate your advice.

 

[AW10]

What u have mentioned (short straddle below current mkt price) is certainly another option strategy for bearish market.

What I have mentioned is just one of the many strategies.. That is the fun of options. You have multiple choices to trade a market condition.

Each strategy come with its own variables and thats what one needs to understand and ensure that they can live with that.

Happy Trading

 

[AW10]

Dear AW10,

This question is not purely related Options, but I dont know where to post so decided to ask you.

My question is regarding Company Quarter Results.

1) How to know before in hand, that particular company will post results on that particular date .
2) On the day of results- How to get the first hand information about the good / bad numbers, in sites (If site then please mention) or only TV ?

Thank you

Nayarock, there are media/mags/exchange site, that publish this info about the date of quarterly result announcement but I don't know the exact site. I do remember seeing corporate announcement section on BSE/NSE site.
To get the result, if cnbc is not mentioning it, then u can chk the BSE/NSE site, where they will be publishing the info.

It is listing requirement for all companies to share their quarterly results with BSE/NSE and make it public.. else they may get delisted.

Personally, I don't use this info so never bothered to get into the details. In my view, sell the news is quite profitable strategy. Novice takes their trading decision based on the quarterly result, whreas smart money already knows what is going to come and they take opposite position. Price might bounce for one of two days based on the news, but eventually it starts following the path that it was to follow.

Happy Trading

 

[linkon7]

I have a query regarding adjusting options according to Market scenario.

Now lets say I am bearish for the next 2-3 months. What strategy can I use?

The Nifty PE of July 2010 are trading at,
5000PE @156.8
4900PE @124
4800PE@101

Now, If I am expecting levels of 4800 minimum in July, how do I use this information to position myself in the market. Also, how do I figure out whether the PE are expensive or not. I know about option pricing, calculations hence i am expecting a more practical answer.

Tc

go for a ratio bullish spread... buy 5000 pe at 156 and sell 2 lots of 4800 pe. The moment 4920 is breached on nifty on closing basis, exit 1 lot of 4800 put and convert it to a bear spread...