Low Risk Options Trading Strategy - Option Spreads

[vssoma]

From his site
It profitable for brokers and not for retailers.
If any individual wants to do
this ratio trading then either he

has to work as dealer/operator
with broker's collaboration or take his own broking unit.

dear
i googled it and found here some information about ratio trading...
http://www.optiontradingpedia.com/ratio_spreads.htm

but can you pls. give me one example on nifty...looks like real time, for better understand.

 

[sanju005ind]

Hi AW10,

I am also studying your posts for a month now. It would be interesting to know your reply to Rishi's post

Regards
Sanju

 

[AW10]

Hi AW10,

I have been reading your thread from last couple of weeks (still not finished), and wanted to thank you for the excellent information that you have provided.

Based on my learning, I had entered the following position two days back:

View = Bearish; Buy 5100 PE@115, Sell 4900PE @56,
Max loss = 59, If nifty expires above 5100,
Max Profit = 141 points if nifty expires below 4900,
BEP = 5044
Stoploss = 25% = 14 points or when the combined value falls to 42.
Take profit = 85% or (141*85%) 119 points.

As of today end the position is
5100 PE @ 212.5 and 4900 PE@114, Net gain = 39 points.

As Per my strategy my take profit has still not arrived, neither my stop loss is hit.

But I want to preserve my profits, so please advice what further action could be taken to lock in the existing profits.

Thanks
Rishi.

Rishi,

Protecting profit is not straight forward in our market. Atleast till the time brokers don't start accepting orders for complete position, we will have to use work-arounds.

- If you have multiple contract, then you can book partial profit and let other position run.
- As market moves in your favour, you also move your mental stoploss order. So instead of waiting for orginal stop level to monitor, you start monitoring new level. e.g in this case, instead of monitoring combined value to fall to 42 level, monitor for combined value to fall to 70 level so that you can book some profit.
- Or use spot chart of smaller timeframe (say 30min/ 1 hr or so) to see if it is giving the signal against your position and book profit there.

My approach to trading is - Manage the risk, and collect whatever profit market gives. I do use target profit level, but I am lot more discretionary there cause market is not obliged to hit our targets. In this process, I do miss potentially higher profit, but that is fine. This is more to do with Exit management and you will find even the experienced profitable traders working on this area to improve further.

In short, my approach to trade mgmt is - 1) start with initial risk, 2) look to breakevern the trade, 3) start looking to protect the profit and if protection is not possible then collect profit and move on to next trade.

There could be possiblitiy for position size adjustement / opening position with new strike etc, but for me, that makes trading complex. That also puts constraint on my trade to work with baggage of current position. I prefer to get rid of the baggage and take new position afresh with no constraint.

I am sharing my views and my approach to trading here. There might be better solutions.

Happy Trading.

 

[sanju005ind]

Hi AW,


If I sell a call/put option. what are the various ways I can close out the position. Before expiry and at expiry.

Regards
Sanju

 

[vssoma]

dear
i googled it and found here some information about ratio trading...
http://www.optiontradingpedia.com/ratio_spreads.htm

but can you pls. give me one example on nifty...looks like real time, for better understand.

Dear,
is it possible to make money in options...even market moves in wrong direction...
pls...take a look in to this picture....

 

[DanPickUp]

Dear,
is it possible to make money in options...even market moves in wrong direction...
pls...take a look in to this picture....

Hi vssoma

One thing you always have to consider in this so called open expert option places ( As your screen shoot shows one of them ) :

They tell you only the half of the true. The other half they keep by them selfs to not let other people know, how they take the other side of the trade with a minimum risk.

Your question has to be modified : Can we make profit with options, even if we do not know where market moves.

The answer is yes.

Time and Volatility are two main points to may reach such a target in a simple way.

Other points we have to consider are :

How do we enter a trade ( Leg in or just in once a whole strategy )

under what circumstances ( High Vola - Low Vola )

and what live time has the option we trade with.

All this can be modified and fine tuned to the best.

Tc

DanPickUp

 

[AW10]

Dear,
is it possible to make money in options...even market moves in wrong direction...
pls...take a look in to this picture....

Plz don't ignore the last para of the explanation here. That is more important than the 1 line circled by you. As a trader, we need to know the risk first, profit later. In above example, above $46, your losses will run at 5 times faster than the profit so you are not going to end +ive in ALL conditions.

Like any short option trade, you can still make money when your call is wrong cause the collected premium gives u that buffer. But at some stage, that buffers runs out and then the risk starts kicking in.

This strategy is good in range bound market or in the market where trend is not strong. Ex after a big move, mkt goes for consolidation, or might continue in the same trend with less strength.
Be careful in applying them in consolidating market, cause the breakout from consolidation will most likely will catch u on wrong side.

In short - know the RISK aspect of strategy, know the suitable market conditions to use it, and know how to identify the current market condition.

Happy Trading.

 

[AW10]

Hi AW,


If I sell a call/put option. what are the various ways I can close out the position. Before expiry and at expiry.

Regards
Sanju

Before expiry, only choice u have to buy them back in open market i.e. squareoff your trade. An option buyer gets the right to buy underlying hence they are at luxury of exercising that right. Option seller gets only the Obligation which can't be exercised but can be taken off by squaring off the position.

At expiry, exchange will automatically settle ITM options, and all OTM options expire worthless. So if your short position is ending in ITM, it will be settled and you will be charged settlement fee etc for it.

I am assuming that u know the high risk that comes with short option position.

Happy trading

 

[Novice-Trader]

Hi All,

A simple query from a beginner, request your views / comments.

Based on historical data from NSE for September 2011,

Consider a short strangle @4800 PUT and 5100 CALL on 2nd Sep pocketing 147.9 as per table below:

Date 4800PE 5100CE Position Value Nifty Value
------------------------------------------------------
2-Sep-11 54.9 93 147.9 5040
5-Sep-11 62 79.6 141.6 5017.20
6-Sep-11 52.5 108 160.5 5064.30
7-Sep-11 39.2 129.6 168.8 5124.65
8-Sep-11 33.4 150 183.4 5153.25


Max Profit at expiry - 147.9 if nifty stays between 4800 - 5100
Break Even Point (BEP) - 5247.9 / 4652.1
Position will be in loss when Nifty cross the BEP on either side at expiry

Now, on 6th Sep the position is in a loss (pocketed 147.9 but current position value 160.5, continues to be in loss on 7th and 8th as well)

Would like to know how to offset this risk. Though Nifty is only at 5064 (well below the BEP), still position at a loss - why? (Guess, it is due to time decay value not working in favor yet, but how to plan to mitigate it?)

Say, if we BUY 5200 CALL on 6th Sep, @65.45, it will help mitigate the risk of Short 5100CE going OTM. But, once the Nifty starts a decline again, we will be in a loss in the Long 5200 we just bought for offsetting the risk.

Am not sure if i have explained what i am looking for properly and if my calculations above are correct, request guidance and help from experienced traders.

 

[deadbrain]

Hi

I am an option buyer most of the time and buy puts or calls on intraday only. What I have seen is losing leg often moves faster than gaining leg. So, I am wondering if I will make profits faster in shorting instead of buying them, for example, when market is trending up, I will short puts and when trending down I short calls and then later cover them intraday. Am I right?

I tried but finding it difficult to understand spreads properly.