Low Risk Options Trading Strategy - Option Spreads

[AW10]

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?

theoratically you are right. Long call position is same as Short put. Similarly, Long put = short call.

As a intraday trader, maybe spread is not a good strategy cause it will be like pressing accelerator as well as break at the same time.

only issue IMO will be, the margin. On a short position, you will have to bring in the margin whereas in long position, u just pay the premium. That means your position size will be smaller with short options.

At the same time, do make sure that you don't compromise on the use of stops cause one new item somewhere in the world can trigger a big 5 min bar and take away double digit % of your account if you are caught on the wrong side.

Happy trading.

 

[AW10]

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?)

It is not just time decay, but combined effect of delta, gaama and vega too.
During this period, market was bouncing after nice drop. The calls were getting more in demand hence were moving faster then Puts.
eg - from 2sept to 6th sept, for 25 points differece in spot, put premium dropped by 3 rs. whereas Calls premium moved by 12 rs.

To mitigate this risk, my suggestion will be to use stoploss based on money management rules (i.e. what % of loss is acceptable to you before you decide to cut the trade). Don't use BEP cause by the time spot goes to BEP, your losses will be lot higher.

Another idea could be to use the price levels from the spot chart to help you decide on whether to hold the trade or close 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.

You have to make a choice - limited risk, sound sleep v/s lower rewards, or higher rewards v/s sleepless nights and higher risk.

Your analysis is correct on using 5200 call to manage the risk. If market falls then you can always take decision on whether you still need the protection or not. Accordingly you can close loosing 5200 call leg.

My preference (and my suggestion) as a trader is always to manage the risk first and profits later.

happy trading

 

[deadbrain]

theoratically you are right. Long call position is same as Short put. Similarly, Long put = short call.

As a intraday trader, maybe spread is not a good strategy cause it will be like pressing accelerator as well as break at the same time.

only issue IMO will be, the margin. On a short position, you will have to bring in the margin whereas in long position, u just pay the premium. That means your position size will be smaller with short options.

At the same time, do make sure that you don't compromise on the use of stops cause one new item somewhere in the world can trigger a big 5 min bar and take away double digit % of your account if you are caught on the wrong side.

Happy trading.

Thanks, but for me making a position and squaring off is a matter of minutes and accuracy is over 90%, so i close position in minutes. However could you suggest me a short spread for october if market breaks 4880, i expect market to go down to 4500 levels, or a long spread if market goes above 5030? What would be max loss and/or profit in both cases?

 

[TradeRaid]

Is jobbing possible with Options strategies? I mean, if one trades options as just a scrip, then jobbing is possible. However, my question is can we actually have a real short-term strategy with Options?

 

[DanPickUp]

Is jobbing possible with Options strategies? I mean, if one trades options as just a scrip, then jobbing is possible. However, my question is can we actually have a real short-term strategy with Options?

Yes,

If you trade deep in the money options with a high delta, each market move will be quit good reflected. If you want to reduce the theta, use options short before expiration to trade short term strategies.

I do not know, if you have a deeper knowledge and much experience in option trading, but be very sure how you protect your self if the market goes against you. Setting a stop loss with an option price can become quit tricky and expensive. So be very clear what you do.

DanPickUp

 

[AW10]

Is jobbing possible with Options strategies? I mean, if one trades options as just a scrip, then jobbing is possible. However, my question is can we actually have a real short-term strategy with Options?

Do you what at are the factors to look for, while selecting an instrument/ stock for jobbing i.e. scalping ?
If you know those factors, and you find a particular option strike meets the criteria then you can very well scalp it.

I have not done jobbing, but have some idea about what it means. I also know people who trade options based on orderflow /tick chart/demand supply etc. For them options is just another instrument or stock. When you are trading in seconds and minutes timeframe then most of the option pricing related concepts will not be applicable here. Infact, orderflow, market makers tricks, time and sales etc will be lot more relevant.
Certainly OTM options may not help you much here, but it should be possible with ATM or near ATM strikes.

Hope this helps.
happy trading

 

[AW10]

Thanks, but for me making a position and squaring off is a matter of minutes and accuracy is over 90%, so i close position in minutes. However could you suggest me a short spread for october if market breaks 4880, i expect market to go down to 4500 levels, or a long spread if market goes above 5030? What would be max loss and/or profit in both cases?

You can make bullish or bearish spreads with many combinations of strikes e.g. 4800-4700 put spread/ 5000-4900 / 5000-4800 / 4700-4600 and so on. For each of this set, risk reward and probability of making profit will vary. Please refer to first few posts and calculate your max loss/max profit etc.

happy trading.

 

[deadbrain]

OK my spread masters, on dussehra holiday, i plan to learn on this. Now as i'm besrish on market as of now in october series, i'll sell 5000 call and buy 5200 call. Could you please tell me if that will be correct and if yes, what could be max loss/profit? I'd really appreciate if you do that once again as i'm still in two minds at places on this topic. Thanks in advance.

 

[vssoma]

OK my spread masters, on dussehra holiday, i plan to learn on this. Now as i'm besrish on market as of now in october series, i'll sell 5000 call and buy 5200 call. Could you please tell me if that will be correct and if yes, what could be max loss/profit? I'd really appreciate if you do that once again as i'm still in two minds at places on this topic. Thanks in advance.

dear,
as per your trade find the P/L picture below, i used options oracle

 

[vssoma]

dear,
as per my understanding, if you are bearish...instead of selling 5000 call, buy a put, it could be more better, pls. gurus comment on this.