Low Risk Options Trading Strategy - Option Spreads

[pumajay]

Hi AW,

I have been trying to understand the impact of the low risk spread by backtesting from 2007, and slowly getting the feel of it.

I observed that it looks like serious option trading picked up somewhere in 2008 (not sure but in 2007 i do not get to go more than 100 to 150 max spread difference, from the spot price) and I preferred to go for a scenario like below

NIFTY is at 4000, then take a spread of 4200 and 4300/4400 when my view is bearish, but there were no such strikes available in 2007

Anyways,
My doubt arises from the point that I have seen you mentioning in this thread and other threads too, to go for ITM strikes

- So my query is that in the above scenario would you have gone for bearish debit put spread instead of bearish credit call spread?

- If so why, because as long as the NIFTY is below 5200, taking the credit call spread would mean a bit lesser margin (as we get the premium)?

- Or Would the debit spread move slowly when it is -ve (in risk) compared to credit spread?

During my initial testing I did observe that when the nifty moves against our view, futures react violently and plunge way down(>120 - 140 points), meanwhile even if I have say 4 lots of spreads, still the total risk does not move as much as future (around 90 - 100 max), similarly on gap days

Saving 30 - 50 points might not be much for many here, but I feel it is still a big difference, I can live for next day ;-)

Will continue the testing till 2011 and see if I can live with this low risk and low reward strategy

 

[AW10]

hello aw10 sir,
For a successful option trader wht the qualification we need to develop ? i mean when we land in option trade, not tracking abt volatility and without knowing different option strategy can we be success... only knowing technical analysis a bit...

Cheers,
pvs

pvs, Answer of your question is hidden in your own question.
Option trader is a TRADER. So one has to have the skills, mindset, system, tools, etc whatever is required to be a successful trader.

Next, option trader is using the vehicle of OPTION to trade. Better one knows about the vehicle (animal you are dealing with), higher are the chances of success.

Having said that, it is not that one needs to do PhD in those 2 topics. It is important to get the foundation right, and then selectively choose approach that fits trader's trading personality and implement the knowledge.

IMO, Many people who gets in into options are fascinated by intellectual satisfaction and false feeling of mastery over market that it gives. You start believing that I can make money in all markets cause options gives me strategy for all. But if they lacks the basic understanding of market behavior, basics of money mgmt, position sizing, ability to cut losses and let profit run etc (basics trading stuff),.. their result will only be suboptimal.

Volatility is just one of the factor in options world. Their are ways to read it roughly in simpler terms (without getting into IV, HV, volatility smile etc). IMO, even if you miss out in this, but use right trader's approach (i.e. stoploss to cut your position, reviewing your trades and analysing your performance) then you will still come out as winner.

You can make money by just using 1 strategy, at right time. A smart trader spends most of their time waiting for right opportunity. And when it comes, they know how to get the maximum from it.
If you have more strategies, it will give u more opportunities. But that means nothing. If you can't make money with 1 strategy than what makes you feel that u can money with 5 strategies in your toolbox. So, I will suggest to master 1 or max 2 strategies first..and when u have track record of consistency in that, then go out and collect more strategies.
This was one of the main reason that I started this thread cause spread helps option trader learn options trading without loosing much. They might have reward risk ratio of 3:1 or 2:1, but they will get exposure to buying a selling options, getting the direction right, etc. Once they are good in it, then probably they will like to go for other more aggressive strategies like buying Naked option (IMO, that is one of the riskiest strategy with only 33% odds in buyers favor).

That is my view on options trading. Would like to hear other's view (I know many people will not agree with it). Hope this helps.

Happy Trading

 

[AW10]

Hi AW,

I have been trying to understand the impact of the low risk spread by backtesting from 2007, and slowly getting the feel of it.

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Pumajay, good to see someone putting in effort in right direction and trying to do proper options trading. Keep it up.
Regarding the issue with data, I would prefer to give more weightage to recent past then to old past. That is why in backtesting, I suggest to cover recent past first and then move backward. Anyway, all the best with your testing.

Anyways,
My doubt arises from the point that I have seen you mentioning in this thread and other threads too, to go for ITM strikes

- So my query is that in the above scenario would you have gone for bearish debit put spread instead of bearish credit call spread?

Few post back, I mentioned that my selection criteria is lower breakeven point. When u use ITM or ATM strike for debit spread, you get into green quickly. Then it is matter of managing your profit, not about waiting to come into green forever (which happens with OTM strikes).
(note - credit spread = you sold the spread, debit spread = you bought the spread)

For credit spread, i.e. when I have sold the spread and collected the premium, rules are different. Here I want the BEP to be away from me, so that I retain the premium for long time,and maybe till expiry. So selling OTM spread is good idea, but a lot depends on market conditions, time left till expiry, momentum in trend etc in picking up the strikes. Otherwise, you may not get enough premium for the risk. Worst case in credit spread is when your sold strike becomes ITM and long strike to cover the risk expires worthless.

Besides this credit spread has time working in your favour. So I am inclined towards them when trend is slow. When trend has the momentum, then I won't mind going for debit spread. If you recall the ratios then Debit spread has higher reward to risk ratio. Credit spread generally comes with less reward and more risk.

- If so why, because as long as the NIFTY is below 5200, taking the credit call spread would mean a bit lesser margin (as we get the premium)?

- Or Would the debit spread move slowly when it is -ve (in risk) compared to credit spread?

I think, my answer above address these points too.

During my initial testing I did observe that when the nifty moves against our view, futures react violently and plunge way down(>120 - 140 points), meanwhile even if I have say 4 lots of spreads, still the total risk does not move as much as future (around 90 - 100 max), similarly on gap days

Saving 30 - 50 points might not be much for many here, but I feel it is still a big difference, I can live for next day ;-)

Will continue the testing till 2011 and see if I can live with this low risk and low reward strategy

Future has delta of almost 1 i.e. it moves in synch with spot. The spread has delta of much less then 1 (generally comes with delta of 0.3 or 0.4 or even less ). I.e. for 1 point move in spot, spread will move by 30/40 paisa. So your observation is correct. Your losses, or profit will not move as fast as they are with futures.
As the spread position is hedged, so gap will not have much impact on the spread's value. One of the leg will always be winner, while other is loosing (provided there are sufficient premium left for such move.). That is what gives spread trader peaceful sleep, isn't it.

Hope my post helps. Happy Trading

 

[ranger123]

Hello AW10 sir,

Sorry to posting this here.

I am writing this posting to want the options guide. My friend has tell me that there is a very good pdf file make by HDFC security Ltd for option startegy. It is know as 'Derviatives startegy guide'. This file was ther on hdfcsec web side but now it is remove.

On the google serach, I see it on the web side of :

http://www.scribd.com/doc/4594929/de...strategy-guide

But is is not avalabel free. It is paid to download.

If any you frends has it, please give to me for my and every fellows benefit also.

Thank you.

 

[pumajay]

You can always upload something into scribd, download your content and then delete what you uploaded. Hardly takes sometime ...

Hello AW10 sir,

Sorry to posting this here.

I am writing this posting to want the options guide. My friend has tell me that there is a very good pdf file make by HDFC security Ltd for option startegy. It is know as 'Derviatives startegy guide'. This file was ther on hdfcsec web side but now it is remove.

On the google serach, I see it on the web side of :

http://www.scribd.com/doc/4594929/de...strategy-guide

But is is not avalabel free. It is paid to download.

If any you frends has it, please give to me for my and every fellows benefit also.

Thank you.

 

[comm4300]

Did not want to open a separate thread...Please see the attached screenshot of Minifty Option 6000CE July series....look at the prev. close column.

how is this possible?

Agreed that volumes are low...but someone made money.

[/URL][/IMG]

 

[munde_77]

Did not want to open a separate thread...Please see the attached screenshot of Minifty Option 6000CE July series....look at the prev. close column.

how is this possible?

Agreed that volumes are low...but someone made money.

[/URL][/IMG]

Indian Markets are not matured for Options trading just like in US and other countries. There will be always low voumes and huge difference in ask and bid rate . Fiis use Nifty options mainly to hedge their portfolios. So those who want to trade in options , they should trade only in nifty option as there will be huge liquidy and less disparity in rates

 

[AW10]

Just wanted to share a news clip that I across today

DBS Partners, one of the biggest
market makers in S&P 500 Index options, was shut after failing to meet
a margin call from Goldman Sachs, according to people familiar with
the situation
Goldman, DBS's clearing firm at the Chicago Board Options Exchange, auctioned off part of DBS' position last Friday
The underlying value of the position was in the hundreds of millions of
dollars, the sources said

Some Smart money/biggies also make the dumb mistakes like novice traders and blow their account.

Happy and safe trading.

 

[AW10]

Hello AW10 sir,

Sorry to posting this here.

I am writing this posting to want the options guide. My friend has tell me that there is a very good pdf file make by HDFC security Ltd for option startegy. It is know as 'Derviatives startegy guide'. This file was ther on hdfcsec web side but now it is remove.

On the google serach, I see it on the web side of :

http://www.scribd.com/doc/4594929/de...strategy-guide

But is is not avalabel free. It is paid to download.

If any you frends has it, please give to me for my and every fellows benefit also.

Thank you.

ranger123, Thanks for sharing the link to hdfc's options guide.
Have quickly browsed thru it, and IMO, it is reproduction of info that is already available everywhere. It has strategy, their risk graphs, when to use them and impact of various variables on their pricing.
Someone (maybe few people) has done nice job of collecting the info and presenting it in nice format. It can certainly act as good ready reckoner /reference book on option strategy. (maybe I should copy some of the relevant pages related to spreads from there and put them in this thread).

But, will it help you in better option trader ? I seriously doubt cause it doesn't address the trading part. The trader still needs to pickup a strategy and build a trading system around it.

anyway, thanks a lot for sharing.

Happy trading

 

[AW10]

You can always upload something into scribd, download your content and then delete what you uploaded. Hardly takes sometime ...

thanks for smart tip. I uploaded a blank file on my scribd account and have been downloading material from there.