Low Risk Options Trading Strategy - Option Spreads

[AW10]

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

praveen, simple answer is with this position, your obligation is more then your rights. You own 1 lot, but you owe 2 lots.
When mkt dropped, your long 5300 put gained in value from 82 to 160 i.e. approx 100%.
During this fall, the 5100 strike hit you strongly cause you were short 2 lots here and the price changed from 26 to 75 i.e. 200%.

To calculate breakeven, profit loss etc, I will suggest you to start using option oracle software. You can check out the risk graphs in that which will clearly show you the profit/loss levels for various underlying value.

Try to look at your position as 1 put 5300-5100 bearish put spread + 1 naked 5100 short put.
Your cost of this position is 30 rs. So as long as market is between 5100 and 5270, you will be in profit. Above 5270, your max loss is limited to 30. If mkt stays below 5100, your spread will be worth 200 giving you profit of 170 rs, so atleast till 5100-170 = 4930 level you will still not loose any money. Losses will start coming up only below 4930.
This calculation assumes the situation at expiry when there is no timevalue left. Before expiry, this calculation doesn't hold good as you have already seen on friday. That's where the use of software will help you cause it can show you risk graph as of any date, not just expiry.

Hope this helps. Happy trading.

 

[AW10]

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.

While your first spread made good sense, for this new spread to make money, market has to go below 5000. As 5000 put OI is so high, and market has already dropped a lot in this month, chances of sideway move or bounce are higher then further fall. Even if it falls, dropping below 5000 will be difficult as huge number of put sellers there will try to save their obligation.

For me, one of the important factor to select an option trade is the distance of breakeven point from current mkt price. I want to see my position getting into green with minimum move of spot. Second criteria I use is that my max profit point is within achievable limit from spot.

As you mentioned that you can't track mkt like a daytrader, which is fine. Infact option trading is best for your situation where your risk is precisely defined and you know it upfront. But that doesn't mean that you take wrong trading decision, or take trading decision making process lightly.

Hope this gives you very different perspective on your trade.
Happy trading

 

[AW10]

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

You are right, higher demand means high price. But in trading demand and supply are equal.
We will never know with certainty, whether smart money was buying or selling there. Quite possible, some smart money is buying whereas other smart money is selling. (DII and FII fund flow direction is in opposite direction most of the time).
That is what is most tricky part of interpreting OI.

But higher OI clearly tells us that biggies are interested in this strike. This increased interest kept the implied vol high there hence price movement of 5000 put is higher then 5100 put.

Just my views.
Happy trading

 

[ajshare108]

You are right, higher demand means high price. But in trading demand and supply are equal.
We will never know with certainty, whether smart money was buying or selling there. Quite possible, some smart money is buying whereas other smart money is selling. (DII and FII fund flow direction is in opposite direction most of the time).
That is what is most tricky part of interpreting OI.

But higher OI clearly tells us that biggies are interested in this strike. This increased interest kept the implied vol high there hence price movement of 5000 put is higher then 5100 put.

Just my views.
Happy trading

I agree your view, but in economics when ever demad high price high. this time also when i entered in trade, at opeing timing 5000 put was quoting around 36-39 (nifty at that time around 5200) and in evening around 5000 put quoting around 48-50 (again nifty around 5200) and as you said open interest was also incress very high. as i think buyers are more powerful than seller.

any way, this time dow is down more than 500 points, hope this trade may be fruitful this time also.

 

[DanPickUp]

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

Hi Praveen

You have to fine tune your strategy. AW10 showed you the math you have to over think when trading this strategy.

Some words from my side:

1. You also can trade that strategy with 1 long and 3 short or 2 long and 5 short. Be careful here with the theta.

2. Always check the size of the spread you choose. As bigger your spread, as bigger the whole you have to fill. (Break even to break even, which you can see on the matrix)

3. Be sure and understand the volatility when implementing such strategies at once.

4. Try to give a spread order to your broker with such trades or try to leg in with different orders or on different spot prices.

It is a great strategy to trade, but you have to make some efforts to improve the way you trade it. Most think: Aha, one strategy and one way to trade. That is never true. Play around with the possibilities the strategy gives. There is much more behind it and hopefully only this few little ideas from AW10 and me help you to improve this great strategy on the knowledge level you are at the moment. Take your time and move on with this strategy.

Tc

DanPickUp

 

[AW10]

I agree your view, but in economics when ever demad high price high. this time also when i entered in trade, at opeing timing 5000 put was quoting around 36-39 (nifty at that time around 5200) and in evening around 5000 put quoting around 48-50 (again nifty around 5200) and as you said open interest was also incress very high. as i think buyers are more powerful than seller.

any way, this time dow is down more than 500 points, hope this trade may be fruitful this time also.

As per my understanding on economics.
- when demand is high, sooner or later, supply with catch up.
- till the time supply doesn't catch, high demand will result in higher price,
- as supply comes in place, and demand gets saturated, we end up in excess supply zone which drives the prices down.

to a large extent, this basic economics 101 also works in market too.

happy trading

 

[ajshare108]

As per my understanding on economics.
- when demand is high, sooner or later, supply with catch up.
- till the time supply doesn't catch, high demand will result in higher price,
- as supply comes in place, and demand gets saturated, we end up in excess supply zone which drives the prices down.

to a large extent, this basic economics 101 also works in market too.

happy trading

discussion on economics is very wide. any way today in morning i squre off my trade and get gain of 15 point nifty.

thanks and always looking forward for your valuable suggestion / views

 

[meenamarthandam]

Hi Sir,

I am new to options, i have a quick question on executing orders.
I have opened zerodha account recently. I need to know how to execute the following strategy

sell put
Sell put different price
buy call

NSE now trading terminal allow me to perform indiduval order for reach. Is there any option, i can execute as one trade.

Please guide me on margin requirement

Meena

 

[AW10]

Hi Sir,

I am new to options, i have a quick question on executing orders.
I have opened zerodha account recently. I need to know how to execute the following strategy

sell put
Sell put different price
buy call

NSE now trading terminal allow me to perform indiduval order for reach. Is there any option, i can execute as one trade.

Please guide me on margin requirement

Meena

Meena, I have not used Zerodha's platform so can't give you experience based answer. Maybe some one else help on it.

Regarding multiple orders, you will have to place them separately as 3 different order. I don't think any borker in India is providing the facility of quoting price for a strategy and hence taking/ executing orders for strategy with 1 click.

In US / other markets it is possible to place multiple legs as a part of one order but not in India, atleast so far.
Regarding Margin - you will have to keep margin for both short positions. Better to chk with the broker about the margin requirement as it varies.

Happy trading

 

[ajshare108]

I think kotak is giving facility for multipal order in one click. may be it will help u