Low Risk Options Trading Strategy - Option Spreads

[suhas.bhayekar]

Hello KSHESHA,
what we are do now.means call/put buy or sell.

 

[vssoma]

dear,
in options, as of my knowledge, in India, we have both American and European.
but i can't find PE/CE in tata steel ( may be all stocks ??? )
some one explain....reason...

 

[trader.trends]

dear,
in options, as of my knowledge, in India, we have both American and European.
but i can't find PE/CE in tata steel ( may be all stocks ??? )
some one explain....reason...

Soma
Only Index options are PE/CE. All stock options are American CA/PA.

 

[vssoma]

Soma
Only Index options are PE/CE. All stock options are American CA/PA.

if i buy today some tata steel jul 500 ca, what if i want to sell tomorrow ....what is the process and how will it effect on mtm.

 

[trader.trends]

if i buy today some tata steel jul 500 ca, what if i want to sell tomorrow ....what is the process and how will it effect on mtm.

You can sell it anytime you want after you have bought it. When you buy an option there is no issue of MTM. That comes in only when you short sell an option.

 

[summasumma]

Option gurus please comment on the hypothetical trades I'm contemplating :

Short Straddle @ 5100 :

Sell 1 July 5100 CE @ 170
Sell 1 July 5100 PE @ 166.50

Protection for Straddle:
Buy 1 July 4800 PE @ 81.50
Buy 1 July 5400 CE @ 45.35

Net Credit - 209.65

The overall credit from selling 5100 CE and PE gives me 336.50 which gives me a range from 4763.5 on the downside to 5436.50 on the upside. To protect my straddle from huge movements on either side I buy the OTM PE @ 4800 and OTM CE @ 5400.

Can the option gurus please comment on these trades?

Thanks

Hi All,
First of all, i am not option trading expert
But still, my suggestion for sagarkapoor's trade would be,
I think rather than buying protection for the straddle now itself, he should have waited for some few days, so that instead of following protection:
"Buy 1 July 4800 PE @ 81.50
Buy 1 July 5400 CE @ 45.35"
- he may get chance to buy(juz a guess) 4900 PE @ 100 and 5300 CE @ 70? (as the days erode premium)

Idea is,
--- Anyways ur straddle one leg will protect the other leg to some extent, beyond that ur protection can be used instead of paying high premium now. This way ur trade will be more effective.

Correct me if i am wrong???

Sagar, Have you tried this strategy over a long time or started experimenting now?

Regards,
...summa

 

[sagarkapoor]

Hi All,

Sagar, Have you tried this strategy over a long time or started experimenting now?

No summa as already pointed out this was a hypothetical trade and I'm really a novice trader when it comes to option strategy trading ....

"Buy 1 July 4800 PE @ 81.50
Buy 1 July 5400 CE @ 45.35"
- he may get chance to buy(juz a guess) 4900 PE @ 100 and 5300 CE @ 70? (as the days erode premium)

I couldn't understand the rationale behind this? If I wait for some days I'm obviously going to get these options cheaper but the only reason I thought that the 4800 PE and 5400 CE should be bought is to protect any wild swings on either side ( a highly unlikely situation, but in trading nothing can be left to chance, right ).

Idea is,
--- Anyways ur straddle one leg will protect the other leg to some extent, beyond that ur protection can be used instead of paying high premium now. This way ur trade will be more effective.

Correct me if i am wrong???

Yup exactly the point why the protection was to be bought since the Straddle legs will protect each other only to *some* extent . I'm only using the money out of the premium I receive from the Straddle to actually buy these OTM CE and PE so therefore I'm willing to give up ~120 points of profit to protect my straddle from huge movements ( not sure if this is the best approach to protect a straddle but I'm glad that atleast I'm thinking of protecting the straddle as opposed to my naked option plays earlier )

Thanks for taking the time out to have a look at the strategy

 

[AW10]

Sagar, the strategy that u are looking at (short straddle with 2 long option legs on either side )is called IRON CONDOR. Advantage of this is that it takes away the unlimited risk part of short straddle and limit ur risk to defined level.. and gives u peace of mind and no sleepless night.

Whether you buy the protective legs now or later or never is individual's choice depending on their perception of risk. There is no right or wrong answer for this but the answer is - IT DEPENDS.

Depending on instrument that are trading, you can come out with different ways to
reduce the cost of hedging.

happy trading

 

[trader.trends]

IMO, protective legs should be bought as soon as you short. If you think you can buy it later at a cheaper price, that is an assumption. As the market moves in one direction or the other, one of the protective buying is going to be cheaper while the other becomes costlier. And the stress always remains as your shorts are naked. A large opening gap will be enough to trigger panic and in panic we do not make sound judgments.

Insurance is needed the moment risk comes into play for our long term existence.

 

[sagarkapoor]

Sagar, the strategy that u are looking at (short straddle with 2 long option legs on either side )is called IRON CONDOR. Advantage of this is that it takes away the unlimited risk part of short straddle and limit ur risk to defined level.. and gives u peace of mind and no sleepless night.

Whether you buy the protective legs now or later or never is individual's choice depending on their perception of risk. There is no right or wrong answer for this but the answer is - IT DEPENDS.

Depending on instrument that are trading, you can come out with different ways to
reduce the cost of hedging.

happy trading

Thanks AW10 You're absolutely right in the markets no one is right or wrong ... I was just trying to justify my reasoning and wanted all the gurus here like you to critique it since you guys have been trading options way way way longer than I have ...