Low Risk Options Trading Strategy - Option Spreads

[boldinvestor]

Monitoring Spread trade -If we are comfortable with risking 47 to make 100 rs. We are not worried about loosing 47 rs then we can very well forget about this trade till expiry.
But most of us may not fall in this category and we want to see what is going to happen from now till expiry.

As market falls, price of Long put will increase, and price of Short put will also increase.
But rate at which our 4000 Put will gain value will be faster then what 3900 Put will loose.
If market goes to say 3950 (currently at 4003), then net premium of this position will be more then what we paid (i.e > 47).
Similarly if it goes to say 4100 level, then we may still be able to close the position and gain less then 47 rs. say 20 rs. and reduce our loss from 47 to 20.

At anytime, to monitor this position we have to take the current net premium that we will receive from market.
i.e. for 4000 option take the current Bid price (price on the left side of price table/order book) and for 3900 option, take the Ask price (i.e. price on right side of price table /ordre book).
If confused, then follow the simple logic -
- We always get the worst price from market (cause we are not FII).
- Take the Lowest price for strike that u want to sell back.
- Take the highest price for strike that u want to buy back.
- Calculate the difference and you will know what is the current worth of your position.

Max reward of 100 will be achieved when market expires on 30-July expiration day below 3900. Similarly Max risk of 47 also comes when market closes above 4000 on expiry day.
We can very well close this position for less then 100 rs of reward.. or less then 47 rs of loss before the expiry at any time.

My strong advice will be to close both legs at the same time.. (you might be tempted to close only the loosing leg and but that action will increase the risk of reaming open leg.
If you share my belief then as a trader we should be looking at reducing risk, not increasing it).

Happy Trading

I'm a newbee to option. I couldn't understand how Max reward of 100 will be achieved when market expires on 30-July expiration day below 3900. As per my calculation -
If market goes bellow 3900 say 3850 then I'll gain 6 from buy put (150-144) and gain 47 (97-50) from the sell put. So total is 53. I tried with multiple values but never crossed 53. Am I doing something wrong? Please explain. Thanks a lot in advance.

 

[AW10]

Boldinvestor, your absolutely right. The max reward (=difference of 2 strikes minus the price that we paid for the position) will be 53 (=4000-3900 - 47).
In other words, we risked 47 to make profit of 53.

Max value of spread, which is difference of both strike will be 100.
In other words, we bought something at 47 which has become worth 100. Much easier for stock trader who is moving into options trading to think on this line.

Thanks for bringing up this point to my notice, I will get that post updated for more clarity.

Happy options trading

 

[superdbad]

Dear AW10,

I have started trading in options recently, i have read this thread & yet to start using the spreads way.

So far i have traded one sided & incured huge loss. first IB guy gave a tips & made huge loss. then i tried myself using ZERODHA (less brokerage) acc & still made huge loss.

In Zerodha the way i traded was keep on buying & selling for 1 or 2 rs profit, but still made some profits as BE is 20 pasie.
But some trades went in the wrong direction & made losses , i waited to get that in the profits to sell but unfortunately it didn't come into profits.
the blunders i made - bought 5800 call day before the expiry... the next day it expired worthless.
bought call option again yesterday (mon) both 5900 call and 6000 call thinking that the mkt will reverse from 5700 levels to upside. but it went down like anything...


pls let me know what you suggest based on my details above.

i have read this thread , but still need to read again & again to understand in details. probably i will concentrate more on 1 or 2 methods you recomend as i am not good at identifying the mkt direction etc. ALSO - not able to spend complete time monitoring the setups.

one more imp - have 1.5 lks remaining out of 3lks for options trading...
appreciate if you can suggest methods with in this budget.


Thanks in advance

 

[ashwani chadha]

Dear AW10,

I have started trading in options recently, i have read this thread & yet to start using the spreads way.

So far i have traded one sided & incured huge loss. first IB guy gave a tips & made huge loss. then i tried myself using ZERODHA (less brokerage) acc & still made huge loss.

In Zerodha the way i traded was keep on buying & selling for 1 or 2 rs profit, but still made some profits as BE is 20 pasie.
But some trades went in the wrong direction & made losses , i waited to get that in the profits to sell but unfortunately it didn't come into profits.
the blunders i made - bought 5800 call day before the expiry... the next day it expired worthless.
bought call option again yesterday (mon) both 5900 call and 6000 call thinking that the mkt will reverse from 5700 levels to upside. but it went down like anything...


pls let me know what you suggest based on my details above.

i have read this thread , but still need to read again & again to understand in details. probably i will concentrate more on 1 or 2 methods you recomend as i am not good at identifying the mkt direction etc. ALSO - not able to spend complete time monitoring the setups.

one more imp - have 1.5 lks remaining out of 3lks for options trading...
appreciate if you can suggest methods with in this budget.


Thanks in advance

stock market is a place ,where if you have 3 lakh ,just invest 10000/- if you can not handle 10000/- how will you handle 3 lakh,for get about 1.5 lakh,just remember you have 10000/-withdraw balance your 1.4 lakh,till dont convert 10000/-to 20000/- dont invest extra singal penny,sincer advice if you under stand

 

[ashwani chadha]

stock market is a place ,where if you have 3 lakh ,just invest 10000/- if you can not handle 10000/- how will you handle 3 lakh,for get about 1.5 lakh,just remember you have 10000/-withdraw balance your 1.4 lakh,till dont convert 10000/-to 20000/- dont invest extra singal penny,sincer advice if you under stand

try to learn basic rules of trading by learning from my thread,if you dont want to loose furthur

 

[AW10]

Dear AW10,

I have started trading in options recently, i have read this thread & yet to start using the spreads way.

So far i have traded one sided & incured huge loss. first IB guy gave a tips & made huge loss. then i tried myself using ZERODHA (less brokerage) acc & still made huge loss.

In Zerodha the way i traded was keep on buying & selling for 1 or 2 rs profit, but still made some profits as BE is 20 pasie.
But some trades went in the wrong direction & made losses , i waited to get that in the profits to sell but unfortunately it didn't come into profits.
the blunders i made - bought 5800 call day before the expiry... the next day it expired worthless.
bought call option again yesterday (mon) both 5900 call and 6000 call thinking that the mkt will reverse from 5700 levels to upside. but it went down like anything...


pls let me know what you suggest based on my details above.

i have read this thread , but still need to read again & again to understand in details. probably i will concentrate more on 1 or 2 methods you recomend as i am not good at identifying the mkt direction etc. ALSO - not able to spend complete time monitoring the setups.

one more imp - have 1.5 lks remaining out of 3lks for options trading...
appreciate if you can suggest methods with in this budget.


Thanks in advance

superdbad, I have highlighted some parts in your text that makes me feel that you are not yet ready to trade profitably (sorry to be blunt on the face). let me give u some fundament rules of profitable traders..
- Cut your losses, and let your profit run
- Hope and fear is not a trading strategy
- Take personal responsibility of all your action (and hence your result too). Ie don't take credit for winners but blame someone else for loosers.
- Survival first, winning later (hence risk management comes first in trading)
- Plan the trade and trade the plan. Have your battle plan ready cause you are up against some of the best brains on the other side of your trade.
- Get solid foundation else the building is going to collapse, sooner or later.

Looking at your post, you are breaking all these fundamental rules and hence getting the unwanted result. If you want result to change, then you need to change the action that you are taking.
plz don't be in hurry to make money. Work on the basic knowledge of option (if that is what u want to trade - read one of the first few post of this thread where I have give draft plan for learning), do some planning and then comeback to market. Market has been there for long time, and it will remain there for long.. we need to make sure that our account remains there to trade the market.

Happy Trading

 

[superdbad]

superdbad, I have highlighted some parts in your text that makes me feel that you are not yet ready to trade profitably (sorry to be blunt on the face). let me give u some fundament rules of profitable traders..
- Cut your losses, and let your profit run
- Hope and fear is not a trading strategy
- Take personal responsibility of all your action (and hence your result too). Ie don't take credit for winners but blame someone else for loosers.
- Survival first, winning later (hence risk management comes first in trading)
- Plan the trade and trade the plan. Have your battle plan ready cause you are up against some of the best brains on the other side of your trade.
- Get solid foundation else the building is going to collapse, sooner or later.

Looking at your post, you are breaking all these fundamental rules and hence getting the unwanted result. If you want result to change, then you need to change the action that you are taking.
plz don't be in hurry to make money. Work on the basic knowledge of option (if that is what u want to trade - read one of the first few post of this thread where I have give draft plan for learning), do some planning and then comeback to market. Market has been there for long time, and it will remain there for long.. we need to make sure that our account remains there to trade the market.

Happy Trading

Thanks Dear Ashwani and Dear AW10 for spending your valuable time to read my post & giving your honest comments.
will definately go back to read the thread from the begining again & will stop the trading for sometime until i am confident. Also i will do the paper trading until i see the consistent profits, even if it is small.


You are right Dear AW10, i was trying to make quick money, .... biggest blunder not acepting the losses.

 

[comm4300]

Planning an Option Trade

2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.

Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 47 = 53. (max value of spread = 4000 - 3900 = 100 rs.)
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max value of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)

----------------------
This part is for addressing the most important components of trade planning - EXITs

Stoploss point - Price = When value of spread falls below 25 (i.e. out of initial investment of 47, we are not ready to loose more then 47-25 = 22 rs)
Stoploss point - Time = When 4 days are remaining for expiry and position is still in loss

Profit taking - Direction = When my view about market's direction has changed from bearish to bullish or sideway.
Profit taking - Price = When atleast 80% of potential max profit is achieved. Better to move on to next opportunity rather then waiting for last bit of profit.

EXITs is something that depends from trader to trader hence there is no single correct solution for it. But above points will help you in preparing in advance for eventuality. Once we are in trade, emotions start impacting our decision making capability hence it is better to think about them right now when there is nothing is at stake.

Happy Trading

AW10 and senior members:

one question.

could i use this spread strategy to bring down my Strangle cost?

for ex NIFTY is at a situation where it can either go up or down. So i believe that strangle would be good. Now i buy Call and Put for strangle.

And at the same time i use the AW10's spread strategy, i'e sell call 2 strikes above the strangle call AND sell put 2 strikes below strangle put.

This will reduce my overall strangle cost and overall strangle profit. BUT will make it a little cheaper?

Please post your comments.

 

[DanPickUp]

Hi Comm4300

What you finally have are : Short put, long put, long call, short call. This is called : Short Iron Condor. ( A net debit trade )

Your maximum risk is your net debit you pay. Your maximum reward is the difference between adjacent strike prices less the net debit.

So, first you spent money for the long strangle ( long call and long put ) and now you get money for the sold strangle ( short call and short put ). With other words :

Yes, it will make it cheaper.

Hope this helps

DanPickUp

 

[ranger123]

Dan Sir Hello,

I visit your other thread on strugal on the trading plan today and I has shock to see that the thread is close. You has writtan and start it very nicely and I am learn that skill of write a trading plan also. I think I will learn very much good from your postings. Because I do not trading on trading plan writtne but in my mind only. It is a very good and important subject in trading whose I have not master. Sir you has hole knowladge and you can put your thinging in me and other fellow also for all of us benifit. I tell you to start that thread one again so we all fellow can benefit from that thing.

Thank you and best of luck.