Low Risk Options Trading Strategy - Option Spreads

[molthi]

Dan has already explained that is it is not limited risk strategy as mentioned. Any strategy which is net short (i.e. more short position than long position can't be limited risk). Just simulate the P&L if nifty is at 6100 /6200 etc. Practically, this strategy has wide range..and atleast till 6000 level, the losses will be in limit. Moreover, getting such high movement on upside is less likely. It is more likely to see such huge move on downside hence put ration spreads are more dangerous.

IV will certainly impact the pricing. The impact will depend on level of ATM/OTM from current spot level and the volatility at that time.

coming to calculation - say 5400 CE was at 113 and 5700 CE was at 20.
Net debit to open the strategy = 113 - 2*20 = 73. For one contract = 73*50 = 3650.
Minimum Breakeven to see any profit on it, 5400+73 = 5473.
Below this level is only loss, which is limited to max of net debit = 3650
Max profit, expiry at 5700 when sold calls are worth 0, and bought call has max value. The profit will be = (5700-5400-73)*50 = 11350.

You can also calculate the value of position when spot is above 5700. To understand it easily, break it as 1 5400-5700 call spread + 1 naked 5700 short call. Max value of call spread can be 300 giving max profit of 227. Above 5700 when second short position starts loosing, you have the buffer of profit earned on spread to protect till nifty reaches 5700+227 = 5927. Beyond then it is at the mercy of market.

My sincere suggestion - you have been good tv viewer and listened to the partial truth from expert. Now become good trader and evaluate it. Believe in your method of analysis cause other people might give approximate numbers.

All the best and happy trading

Dear AW10 how can I send personal message to you?

 

[AW10]

Molthi, my Private Message is open hence you shd be able to send me PM.
You will have to goto our user control panel and enable Private Msg feature..(setting and options --> mesaages and notifications --> 3rd chk box to enable pm).

 

[comm4300]

Thank you Dan, AW10, Munde_77 for your inputs and helping people iike me learn.

Another question:

Is options trading mainly [if not purely] dependent on IV?

Low IV = cheap options; consider buying options.
High IV = high premiums; consider selling options.

Of course, it is difficult to estimate how low is low IV and how high is high IV?

How do experts [you guys] incorporate IV while formulating option strategy? meaning:
before you write options....do you say...step 1) indiavix is at xx; good time to write
step 2) look at charts to select strike ...so on....

your inputs please.

 

[DanPickUp]

Thank you Dan, AW10, Munde_77 for your inputs and helping people iike me learn.

Another question:

Is options trading mainly [if not purely] dependent on IV?

Low IV = cheap options; consider buying options.
High IV = high premiums; consider selling options.

Of course, it is difficult to estimate how low is low IV and how high is high IV?

How do experts [you guys] incorporate IV while formulating option strategy? meaning:
before you write options....do you say...step 1) indiavix is at xx; good time to write
step 2) look at charts to select strike ...so on....

your inputs please.

Hi Comm4300

Volatility is a very important indicator in option trading. As options are getting more expensive when IV is high, we have to be aware about it.

If you plan to trade with different option strategies, you must divide in low vola strategies and high vola strategies. Make this list by your self. Why ? I can give you such a list, but this will not help you to understand, why this one is for this vola and that one is for that vola. If you do it by your self, you already start to learn on what facts you have to look at.

If you have this list, you divide your markets you trade in low vola markets and high vola markets. That list you have to check from time to time, as markets are changing there behaviors.

Now you choose your market and check the chart. The rest is again a lot of math. Calculate your option prices. As far as I know, also option oracle has a tool to play different volatilities. In Opvue it opens with the risk analyzes. Take your time and play through different volatilities and you see the changes in the option prices and on your risk analyses. Concentrate on the break evens on each side of the picture. This are the cornerstones for your trade and there you get in danger with your trade. Work out, what you will do when, market touches this cornerstones. If you start to prepare each trade like I mentioned here, you will be very well prepared for the real market. I am clear, that this takes time and work. As often as you do it, as easier it will become.

Now you have your market and you have your strategy, you want to start with. So far it is only on the paper and not real. But you are prepared and you have a plan. Next step is implementing your idea in to the market conditions. Here the real trading starts and here you must be very flexible. You have a trading plan, but this plan is not black and white. The plan is a guideline, which gives you certain cornerstones.

If you are now in a trade and IV changes, this will have an impact of your whole risk picture. You not can avoid that. That is part of trading and you have to live with that. I could go further here, but I already shot over your question.

If you consider your self as a beginner or one with little experience in the world of options, trade only with two strategies. One for high IV and one for low IV. Become a master with that once and then you may start building up your strategy arsenal.

Tc

DanPickUp

Edit : What I mentioned above is used mostly, when trading complexer strategies. I am used to that and so my argumentations and explanations are build on that work and trading experience. Not every bodies world. But it also helps, even you trade plain credit spreads. A good analyzes of the given market situation is always a good way to get in any strategies. By the way : I do make such analyzes for every single option trade, no matter what it is.

An other way you can do is the following. It is build on other thoughts and ideas. If you can program your software to find over prices and under priced options and you not want to get in strategies, you only can trade such options. Directional naked trades only on the fact : Overpriced / Under priced. Set your stop loss on each one of them and that's it. If you not can program your software for that, you must search by your self for that kind of options or you buy a software, which includes such tools. Good software will even have tools, which give you ideas about what other traders for strategy trade. A good indicator. Why ? If most of them at at certain time trade a certain strategy, you will mostly not trade the exact same strategy. But that is an other subject.

 

[columbus]

Why profits in Nifty and Bank Nifty are given either in POINTS or in ABSOLUTE
values but profit in Options are given in % terms?

 

[AW10]

columbus.. I think it is purely advertising strategy. They are talking the language that their customer want to see.. If they give nifty/bnf in % terms, it will be <20%, and if they count options in points it might be 2 3 points (if they are buying otm calls in 0.7 or 1 rs which becomes 2 to 3 rs)..

happy trading

 

[AW10]

Thank you Dan, AW10, Munde_77 for your inputs and helping people iike me learn.

Another question:

Is options trading mainly [if not purely] dependent on IV?

Low IV = cheap options; consider buying options.
High IV = high premiums; consider selling options.

Of course, it is difficult to estimate how low is low IV and how high is high IV?

How do experts [you guys] incorporate IV while formulating option strategy? meaning:
before you write options....do you say...step 1) indiavix is at xx; good time to write
step 2) look at charts to select strike ...so on....

your inputs please.

Dan has beautifully answered your question. I can't add anything more to it.
But would like to share my views on IV.

Not sure if you have seen this post from me where I wrote about Greeks in layman's term.

http://www.traderji.com/options/28384-beginners-way-trade-options-13.html#post344172

I must accept that I don't use IV calculator on daily basis or on each option trade to make decision. I do track volatility thru my favourite NR7, ATR, daily Range pattern etc which gives me fair idea about volatility. I have selection of strategies for high vol / average vol / low vol periods but that is just a guideline, not strict rule. for example - in high vol period when IV is high, I use net short strategies, that doesn't mean in low or average vol period they can't be used. We don't stay in high vol period for long time (it is just human nature that we can't remain in uncomfortable state for long time) hence those strategies are also used at other times but with slight modfication.

I give highest priority to delta and theta in my strategy selection and then pass that thru volatility filter.

And once in a trade, my exits and trade mgmt is already planned based on price levels. I don't care whether those price level is reached due to IV, or delta. I don't want to keep trade mgmt subjected to variables (that is my preference) hence only price is something that I monitor after opening the trade. There are people who monitor the trade regularly and perform adjustments but somehow trade adjustment has not been my strong area so I prefer to take each trade as fresh trade and don't carry the constraint of previous position in my decision making.

Hope this helps.
Happy Trading

 

[niftyoptionstrader]

Why profits in Nifty and Bank Nifty are given either in POINTS or in ABSOLUTE
values but profit in Options are given in % terms?

if you apply your mind a little bit you can see the logic behind it......for nifty or bank nifty your cost per lot is fixed and the return you get can be expressed in absolute number of nifty/bn points earned per
contract......in case of options there is no fixed cost per contract.....you can do a long trade by purchasing 5400ce or 5300 ce etc....with different number of nifty points earned in each case for the same movement in nifty index.....a true measure of profit/loss can be indicated only as a percentage of the cost involved in each trade ......though the veracity of the claim may be open to question, the method of expressing performance in not at flaw, imho....

 

[comm4300]

Dear AW10, Dan and other options expert:

kindly let me know which of these strategies would you prefer IF you are bullish on the underlying.

a) Short Call ladder
b) Call backspread
c) Bull Put spread

a) limited downside with "unlimited" upside potential. move above all the strikes profitable.
b) good upside potential.
c) you get to keep credit if your judgement about positive upmove happens.


Concerns:
the said UP move may not come. [direction proven wrong]
the said UP move may not happen fast enough [time value being eaten on long calls]

kindly share your views.

 

[DanPickUp]

Dear AW10, Dan and other options expert:

kindly let me know which of these strategies would you prefer IF you are bullish on the underlying.

a) Short Call ladder
b) Call backspread
c) Bull Put spread


a) limited downside with "unlimited" upside potential. move above all the strikes profitable.
b) good part about this one is there is little credit/debit with good upside potential.
c) again you get to keep credit if your judgement about positive upmove happens.


kindly share your views.

Brum brum, let us start the motor for the begin.

How would you start to trade each one of this strategies ?