Low Risk Options Trading Strategy - Option Spreads

[DanPickUp]

Thanks a lot. I am not a very experienced traders, although i am in this market since long time. My strategy is to slowly invested in the stocks and try to hedge my portfolio position by selling nifty future as and when it seems that market is mature enough for a good correction. so instead of selling my portfolio i prefer to sell nifty future. I always try to sell my protfolio when nifty trade above market PE above 22-22.5 (nifty PE).

this is the first time i try to trade in option after going through your this thread.

thanks a lot again for this valuable guidelines.

And how did it work out on this Friday ?

 

[ajshare108]

And how did it work out on this Friday ?

Cover my (+) 5500 put and (-) 5300 put in the morning and get net 150 point.

Since I am not a day trader and cannot track full day movement due to my full time job, so at closing time again (+) 5100 put and (-) 5000 put.

hope U.S. downgrade will again give some butter this time also.

One thing I would like to ask AW10 that in opening time 5100 and 5000 put having difference of 30 where as at closing time it is 25. my humble question is that why 5000 put gain more than 5100 put.

 

[DanPickUp]

Cover my (+) 5500 put and (-) 5300 put in the morning and get net 150 point.

Since I am not a day trader and cannot track full day movement due to my full time job, so at closing time again (+) 5100 put and (-) 5000 put.

hope U.S. downgrade will again give some butter this time also.

One thing I would like to ask AW10 that in opening time 5100 and 5000 put having difference of 30 where as at closing time it is 25. my humble question is that why 5000 put gain more than 5100 put.

Closing positions in the morning and opening positions in the evening.

Any explanations, why you do so on a regular basis?

 

[AW10]

Cover my (+) 5500 put and (-) 5300 put in the morning and get net 150 point.

Since I am not a day trader and cannot track full day movement due to my full time job, so at closing time again (+) 5100 put and (-) 5000 put.

hope U.S. downgrade will again give some butter this time also.

One thing I would like to ask AW10 that in opening time 5100 and 5000 put having difference of 30 where as at closing time it is 25. my humble question is that why 5000 put gain more than 5100 put.

Pretty good observation. That's where theory fails and market rules.
Did you notice change in Open interest.. 5000 put gained OI of 29 lacs, and 5100 put dropped in OI by -18 lacs.
At this stage, 5000 put has highest OI, so most likely that is the base for current series, atleast, till some other development happens in market/world.

That should tell you that smart money, option writer have shifted their position from 5100 to 5000. I can't say for sure that it is the reason, but can't think of any other reason behind it. Higher Demand/supply of 5000 put has kept its price at premium.

Dan has raised very valid point on you opening next spread of 5100-5000 put.
Plz reply to that, and I will share my views on it later.

 

[DanPickUp]

Hi ajshare108

Your question was:

""In opening time 5100 and 5000 put having difference of 30 where as at closing time it is 25. my humble question is that why 5000 put gain more than 5100 put.""


You have to look and to analyze the option greeks. It doe's not matter what market you trade, the effect from them to the price of the option is every where the same.

VEGA: Vega tells us approximately how much an option price will increase or decrease given an increase or decrease in the level of implied volatility.


1. Vega can increase or decrease even without price changes of the underlying because implied volatility is the level of ecpected volatility.

2. Vega can inrease from quick moves of the underlying ( Big drops in stock market / or sudden upwards burst in a commodity ).

3. Vega falls as the option gets closer to expiration.


Effect from Vega on the different options :

- In the money options - High

- At the money option - Deep

- Out of the money option - Highest


The 5000 put is out of the money and the effect of Vega on the price was higher compare to the 5100 put, which was some time at the money or even in the money.

Tc

DanPickUp

 

[Placebo]

1. Vega can increase or decrease even without price changes of the underlying because implied volatility is the level of ecpected volatility.

Dan

I've just started to learn about options and how to trade them. Could you please explain the above statement ?

As per my little understanding of options if there is no price change in the underlying then the intrinsic value of the option price will remain constant but the time value portion of the option price will decrease.

What i'd like to know is how will implied volatility increase the vega if intrinsic value is constant ? In other words how does implied volatility increase time value without any price change ?

Cheers

 

[DanPickUp]

Dan

I've just started to learn about options and how to trade them. Could you please explain the above statement ?

As per my little understanding of options if there is no price change in the underlying then the intrinsic value of the option price will remain constant but the time value portion of the option price will decrease.

What i'd like to know is how will implied volatility increase the vega if intrinsic value is constant ? In other words how does implied volatility increase time value without any price change ?

Cheers

Hi Placebo

Blue is what you ask or explain and black are my answers or explanations.

As I have some time just now, I first will show for those which are very new to options, how to calculate the intrinsic value and the time value. After that I will move on with your question.

If there is no price change in the underlying

Market stays

then the intrinsic value of the option price will remain constant

Intrinsic value stays at the same price.

If the option is in the money, then the option has a real value. ( Intrinsic value )

Simple example :

Stock at: $ 52.15
Strike at: $ 50.00 call
Actual price of option: $ 3.75 (Intrinsic value and time value)


Intrinsic value: $ 52.25 - $ 50.00 = $ 2.15 or Stock price - Strike price = Intrinsic value

Time value: $ 3.75 - $ 2.15 = $ 1.60 or actual price of the option - intrinsic value = Time value

but the time value portion of the option price will decrease.

Yes. It is also called theta. Theta is the measure of the drop in an options price due to the passage of time.

How will implied volatility increase the vega if intrinsic value is constant ?

(Intrinsic value is explained above)

Vega is a measure of the change of the value of the option due to a 1% change in implied volatility.

Implied volatility is what people think, that will happen between now and expiration and not what happened in the past. So, even if markets not move, but there is some thing in the air, which may could be some thing which is not daily business, like the down grading from the USA to AA+, this will increase the Implied volatility.

In other words how does implied volatility increase time value without any price change?

Now comes the difficult part and the answer lies in the formula you use to calculate the price of an option. I have given hopefully not to complicated ideas how to understand some of this option greeks. As implied volatility is a variable, abstract part of the formula, I ask you how much you understand any of this formula?

I posted in the past here in this forum about the volatility smile and if you interested in such stuff, Google and read it. It is very theoretical stuff related to what you ask. If you only want to trade some spreads, you really do not need to think about such math.

Tc

DanPickUp

 

[praveeniitkgp2]

Hi Aw,dan and other seniors, I have a small doubt regarding ratio spread

Like on Thursday nifty was at 5332
and suppose i made a bearish put spread as following( on Thursday)

buy 1 lot of 5300pe at 82.85
sell 2 lot of 5100pe at 26.05

so total premium paid is 82.85-52.1= 30.75

and now pm Friday after fall of 120 points in NF, I got following price

1 lot of 5300pe at 160.85
2 lot of 5100pe at 75

so now my premium is 160.85-75*2= 10.85

so I am in loss despite fall of 120 point ....y so?

i am new in options..and still i am doing paper trading..so plz help my why this trade is not in profit..and when will this trade comes in profit.

regards,
Praveen

 

[ajshare108]

Dan has raised very valid point on you opening next spread of 5100-5000 put.
Plz reply to that, and I will share my views on it later.

Thanks for your comments. as far as opening new contact at the closing time, dear I am not doing this on regular bais and i have already explained that i am in full time job and cannot track full day market movement. so normaly I track market in opeing hours or between 3.00 to 3.30 pm and take any position.

regarding opening new contact (+ 5100 - 5000) : the reason behind due to increase prem on 5000 put by 5 Rs and also increse in open interest. May be i am wrong but my view at that time was that smart money was buying 5000 put (rather selling ) may be due to hedgeing or market player think that market will touch 5000 in this series.

Dear AW10 and Den give your comments.

 

[ajshare108]

AW10

Higher Demand/supply of 5000 put has kept its price at premium

as a lay man i think that Higher Demand (buyer) only can increase the premium