Low Risk Options Trading Strategy - Option Spreads

[gunsho]

Thanks vssoma for such query , I also wanted to initiate same trade today , however I have another query regarding repair of such strategy , suppose on 27th march we find nifty hovering around 5000 ( for this strategy lower protection on 27th is 5002 ) and market is bearish , possibility of nifty touching 4900 is extremely high and there is high probability of facing loss relating to such trade.
Now what should we do to save/ repair the trade, should we cover 5000 pe and initiate a fresh short 4900 pe ? What to do ? Hope AW10 or any seasoned option trader like DAN can help us.

I can share what I keep as exit strategy normally when I do short strangle/straddle.

During my initial days, I will watch and close the positions when nearing our exit points. As you might guess, this has its own disadvantage, as on a big swing, we can hit considerable loss.

Best way that is working for me is to add protective wings around the exit points. This works well when the month begins. With current Nifty positions, an example is,

Short 5400 Call, Short 5200 Put, Long 5100 Put, Long 5500 Call => considering margin (30K per lot), max loss and profit will be around 4%
(or)
Short 5300 Call&Put, Long 5100 Put, Long 5500 Call => max loss is 6% and gain is 12%

By adding protective options, the range of gain is reduced (5150 <-> 5450 apprx.).​

Idea is, choose the strike prices according to ones risk/reward appetite. By doing this, we know what is the max loss and max profit :thumb:

Similar things have been discussed in past and I remember most of our senior guys (Dan/AW10/Linkon....) suggesting to start with the strategy, and add the protective options as the market moves (when they are cheap). IMHO we should be little proficient with directional strategy to do this. May be experience will give the same

One another interesting approach that linkon discussed sometime back was to start with a short strangle and then trade with futures if market moves towards one side. In a month, he mentioned it went very choppy. We have to be prepared!

 

[comm4300]

I can share what I keep as exit strategy normally when I do short strangle/straddle.

During my initial days, I will watch and close the positions when nearing our exit points. As you might guess, this has its own disadvantage, as on a big swing, we can hit considerable loss.

Best way that is working for me is to add protective wings around the exit points. This works well when the month begins. With current Nifty positions, an example is,

Short 5400 Call, Short 5200 Put, Long 5100 Put, Long 5500 Call => considering margin (30K per lot), max loss and profit will be around 4%
(or)
Short 5300 Call&Put, Long 5100 Put, Long 5500 Call => max loss is 6% and gain is 12%

By adding protective options, the range of gain is reduced (5150 <-> 5450 apprx.).​

Idea is, choose the strike prices according to ones risk/reward appetite. By doing this, we know what is the max loss and max profit :thumb:

Similar things have been discussed in past and I remember most of our senior guys (Dan/AW10/Linkon....) suggesting to start with the strategy, and add the protective options as the market moves (when they are cheap). IMHO we should be little proficient with directional strategy to do this. May be experience will give the same

One another interesting approach that linkon discussed sometime back was to start with a short strangle and then trade with futures if market moves towards one side. In a month, he mentioned it went very choppy. We have to be prepared!

thanks.

your strategy looks like Iron Condor.

the other way to handle the possible loss is to keep stop loss to the extent of combined premium collected. [suggested in the thread "picking nickles in front of steam roller"...]

meaning if your 5500CE and 5100PE at rs.31 and 23 will give rs. 54.00; and then using this 54 as SL on either side. We are still exposed to the risk of gap ups and downs.

however, the original thread starter used far OTM to collect very small premium and would exit at the SL level. This way, he seems to have collected premium each month and protected his capital.

I personally use TA to predict where nifty WILL NOT GO [much easier than where nifty WILL go!]
then use strikes 5% away [extra safety, although low premium]
then use spread 2 strikes difference. [risk containment]

risk : reward does not look good. but, probability of success is enhanced. And moreover, i'll be monitoring the spread, not like " set and forget".



useful video here:thumb:

 

[gunsho]

thanks.

your strategy looks like Iron Condor.

It is

meaning if your 5500CE and 5100PE at rs.31 and 23 will give rs. 54.00; and then using this 54 as SL on either side. We are still exposed to the risk of gap ups and downs.

As I told, that is the reason I stopped doing it without protection.

however, the original thread starter used far OTM to collect very small premium and would exit at the SL level. This way, he seems to have collected premium each month and protected his capital.

The question raised above is, what if market reach OTM level. How to repair/exit. Iron condor doesn't give attractive risk/reward far OTM, though it will give fixed loss. SL has the risk of gap up/down.

I personally use TA to predict where nifty WILL NOT GO [much easier than where nifty WILL go!]

Like that :thumb:

 

[jain.er]

Sell 2 strikes away from current Nifty spot price (Both put and call) collect around 100 points ass a premium on this strangle. Use NF to hedge once your option is 50 points in the money.

In this way you take NF position in the trend direction, so profit from NF .

More risk but better profit then condors, in condors you profit is too less.

But the risk in above strategy is the if any movement like after 2009 election result were out then your many months income would be wiped out.

 

[DanPickUp]

Sell 2 strikes away from current Nifty spot price (Both put and call) collect around 100 points ass a premium on this strangle. Use NF to hedge once your option is 50 points in the money.

In this way you take NF position in the trend direction, so profit from NF .

More risk but better profit then condors, in condors you profit is too less.

But the risk in above strategy is the if any movement like after 2009 election result were out then your many months income would be wiped out.

Hi

http://www.nseindia.com/live_market...-&segmentLink=17&symbolCount=2&segmentLink=17

Fix screenshot at the time you posted it:

http://i41.tinypic.com/30if9kg.png

Dear Jain.er

With my limited English: Sell 5000 put and sell 5400 call or sell 5400 put and sell 5000 call now? ( Nifty at 5261 )

You tell to collect around 100 Nifty points as premium with this short strangle. Which one did you mean, as I collect much more or much less?

You also tell, that if the options are in the money 50 points we would have to Hedge with the Nifty future.

Is it possible for you to give an idea, at what level Nifty is when our options are 50 points in the money.

DanPickUp

 

[gunsho]

But the risk in above strategy is the if any movement like after 2009 election result were out then your many months income would be wiped out.

IMHO, managing risk properly is the most important point to sustain long term in trading. Otherwise what you said is true, one loosing trade will take away many winning trades. It should be the other way for us to sleep well

 

[comm4300]

Agree.

however, i feel that we consider "risk" only from an expiry-day point of view.

what looks like an "nlimited" risk in option oracle may not be true for a swing trader who hardly wants to keep his spread for less than a week.

remember, option trade starts with VIEW on index/stock movement;
the good thing with option trade is you need not be 100% accurate with index, just fairly accurate. trouble starts when you are 100% wrong.

and then if you are in a position which covers you for a couple of strikes against you, you are relatively safe.

and finally, if things do go against you in a big way, you either close your spread/position or add in a leg that'd control damage.


rgds

 

[DanPickUp]

I eagerly waiting for the answers of my question as I may missed the point.

 

[gunsho]

and finally, if things do go against you in a big way, you either close your spread/position or add in a leg that'd control damage.

Agree. That is what is the exit we will be usually having. I keep the legs in the beginning, if I may not be able to look into it on daily basis (my job requires sometimes to travel a lot, and I still hope, sometime I will be a full time trader).

Point which I am trying to say is, one way or other way, we have to have a risk mitigation plan where we can come out. We cannot live with the fact of unlimited risk. Good amount of times nifty has changed more than 8% in a month and we have to take some action.

 

[gunsho]

I eagerly waiting for the answers of my question as I may missed the point.

My guess would be he implies to start this in month beginning (where we can get ~100 from the strangle).