Low Risk Options Trading Strategy - Option Spreads

[ppandya]

ppandya,
You have missed that I have used PUT to create the spread.
A 4000 PUT will be ITM only when market is below 4000 i.e. it will have some value else it is of no value.
A 4000 CALL will be ITM only when market is above 4000.

So when market is 4001, both the PUTs will expire worthless. i.e you will loose the max that is possible. As your net investment was 47 (= cost of trade), that is what you will loose.

If you have taken CALL for this spread then as per basics of option price, 3900 call will always be costlier than 4000 call. Hence the prices given in example will be different.

Appreciate that you asked the question and did not sit on it.
How about making a spread (or few spreads) in current market with more realistic prices and track them for 2 or 3 days along with the movement of NIFTY?

Happy Trading.

Thanks AW10 for clarification. Still little confuse, let me give you an example so you can guide me better.

Date: May 22'2012
NIFTY @ 4926.
Strategy: Berish Call Spread: Sell 5000 CE May & Buy 5200 CE May.
Sold 5000 CE May @ 32
Bought 5200 CE May @ 3
Max Profit (if NIFTY closes below 5000 on 31st May) = Money I received = 32-3 = 29
Max Loss (if NIFTY closes above 5250 (above 5200)) =

For Long position - Excrise Value = (5250 - 5200) = 50. We paid 3 initially and now value is 50. So, Profit = 50 - 3 = 47
For short position - Assigned Value = -(5250 - 5000) = -250. We received 32 initially. So, Loss = -250 +32 = -218

Total Loss = -218+47 = -171.

Please let me know if my calculation is correct or not.
Thanks in advance.

 

[bkb]

Hi AW10/All,

I am looking at inputs on two strategies - Collar & Long Call Condor.

I have read ~ 35 initial pages of this thread, but did not find post(s) related to above. If the above two strategies were covered earlier in this thread or any other thread, then request you to guide me to the same.

Thanks.

 

[bkb]

Hi,

To fine tune my understanding of Long Call Condor strategy, I was just trying to understand basic(s) with the help of an example.

Assuming if one has bullish view on the ICICI bank (CMP 791.45 as of EOD 23-May-2012):

Script: ICICI Bank
Expiry: 31MAY2012

Buy 800 CE @ 8.60
Sell 820 CE @ 4.30
Sell 840 CE @ 2.25
Buy 860 CE @ 1.15

(Premium amount taken as per LTP)

Upper BE: 856.80
Lower BE: 803.20

Max profit = 20 - 3.20 = 16.80 (between strikes 820 & 840)
Max. Loss = 3.20 (Net premium paid for creating the strategy)

Is my understanding and calculations correct?

 

[AW10]

Thanks AW10 for clarification. Still little confuse, let me give you an example so you can guide me better.

Date: May 22'2012
NIFTY @ 4926.
Strategy: Berish Call Spread: Sell 5000 CE May & Buy 5200 CE May.
Sold 5000 CE May @ 32
Bought 5200 CE May @ 3
Max Profit (if NIFTY closes below 5000 on 31st May) = Money I received = 32-3 = 29
Max Loss (if NIFTY closes above 5250 (above 5200)) =

For Long position - Excrise Value = (5250 - 5200) = 50. We paid 3 initially and now value is 50. So, Profit = 50 - 3 = 47
For short position - Assigned Value = -(5250 - 5000) = -250. We received 32 initially. So, Loss = -250 +32 = -218

Total Loss = -218+47 = -171.

Please let me know if my calculation is correct or not.
Thanks in advance.

You are right in calculation.
A spread of 5000 -- 5200 strike can have max value of 200. In this case, as the market has gone against your bearish position, you take the max hit of 200.
After adjustment of initial collection of 29 Rs., your net loss will be 171 Rs.

From learning perspective, you are doing great and getting better in analysing the spread. From trading perspective, you will have to take a decision "if 29 rs of profit for risk of 171" makes sense or not. When probability of hitting profit of 29 is high, then one can still go for this trade provided we upfront decide the point of max acceptable loss. Certainly, one doesn't have to wait for 200 points move to be proven wrong by market. The position can be closed early when loss reaches to predefined acceptable loss amount.

Happy Trading.

 

[jamit_05]

You might be in for some surprises here by knowing

- that you can execute trades with very high probability on your side and generate regular income

Happy Trading.

Hello AW10,

Found the link to this thread in one of mine. Have been dolling over the idea of low risk "regular income" myself.

Pls provide the recent trade used under the concept "for generating regular income". If someone could present the idea first (or its link) it would be super.

I too am running a thread which deals with risk free (well, almost) trades each week. With minimum brokerage, no risk about direction etc. Fairly headache free. Would be more than glad to give anyone a headstart.

Thank you.

 

[jamit_05]

You are right in calculation.
A spread of 5000 -- 5200 strike can have max value of 200. In this case, as the market has gone against your bearish position, you take the max hit of 200.
After adjustment of initial collection of 29 Rs., your net loss will be 171 Rs.

From learning perspective, you are doing great and getting better in analysing the spread. From trading perspective, you will have to take a decision "if 29 rs of profit for risk of 171" makes sense or not. When probability of hitting profit of 29 is high, then one can still go for this trade provided we upfront decide the point of max acceptable loss. Certainly, one doesn't have to wait for 200 points move to be proven wrong by market. The position can be closed early when loss reaches to predefined acceptable loss amount.

Happy Trading.

Basically, what you are saying is that we should

1) Select high probability trades.
2) And plan exits such that the RR is about 1:1;

wouldn't that be very hard to find? If we planned 1:1 for exits, then wouldn't the probability of success be drastically reduced?

 

[jamit_05]

AW10,

Could you publish, so that one can practically follow, one such "regular income" type trade. One that is currently running... thank you.

 

[jamit_05]

Is nobody actively trading Options for "regular income" or weekly income.... ?

 

[Ulaanxuu]

Hi Jamit-05. I am trading credit spreads actively, for a weekly or monthly income. Nice safe strategy!

 

[mmca2006]

Hi Jamit-05. I am trading credit spreads actively, for a weekly or monthly income. Nice safe strategy!

me too , follow credit spread, I prefer it because it gives me adequate time to think and act. Thanks to AW10 again !