Low Risk Options Trading Strategy - Option Spreads

[VJAY]

abigbull, the strategy that you are thinking is called SHORT STRANGLE, so plz read about them on net/books to understand their usage.

This strategy will win from time decay and drop in volatility.
Currently we are in low volatility situation (VIX is at lower end), i.e. option premium is low.Such low VIX days are not suitable for option writing. As volatility increases in days ahead, the premium will increase and it will go against your position.

Stay away from creating short position without any protective log position. Or atleast understand the risk that u are taking. In your defensive strategy, you are collecting 71 rs of premium. If any surprise news comes anywhere in the world and market falls by 100 pts (which is quite possible), the premiums will increase by atleast 100 points
and then u get into intermediate paper loss. If market falls further, your paper loss will start going up..
So think about what will u do in such scenario. There is another thread where short straddle / strangle strategies were discussed so plz chk that out.
If u seriuos about learning this, then why don't paper trade it.
In an excel sheet, keep recording following

Strategy 1
Date - Call prem - put prem total prem Spot Nifty VIX



Track this for a month and keep recording your observations probably this excercise itself will teach you lot more then what a book can teach on this topic. And best thing it costs you no money and no psychological tension ( as it is a paper trade).

To get the best form oct series, As you are bearish with limit at 5000, you can also create bearish Short call spread by buying 5100 and selling 5000 call..(this way u will get some amt credited).. You can also create 5100/5000 bearish put spread by buying 5100 put and sell 5000 call..

And see how they develop in days to come.

Happy Trading

Dear AW,
In bolded part any typo/is not 5000put?am trying to learn .....only my doubt.please

 

[AW10]

Dear AW,
In bolded part any typo/is not 5000put?am trying to learn .....only my doubt.please

Thanks Vijay. corrected the typo. Yes it shd be 5000 PUT.

 

[kkeskar92]

Hi,
I am new to option trading and have put the following spread on nifty for oct 29 and would like to have your views. I have bearish bias on nifty in october so have a bear put spread.
Long nifty 5000 put at Rs 141
Short nifty 4900 put at Rs 125
Both limit orders were filled on 25/9/09.
Debit paid= 16 x 50=Rs 800
Max. reward= 100 x 50=5000
Exit point
1. If market falls and goes below 4900, then wait till expiration
2. If market trades above 5000, sell the long put and minimise the loss
3. If market trades between 4900 and 5000 till 15-20 oct. sell long put and let short put expire to keep the premium.
Would like to have your comments.

 

[AW10]

Great planning.. of the trade. You reward risk ratio is great 100/16 = 6+..

With this strike combination, your breakeven point is 5000-16 = 4984. So as long market remains below 4984, u are in profit.

My view on your exits are

1. If market falls and goes below 4900, then wait till expiration

Good. But if you see sign that market is reversing and it might come above 4900 then u can decide to close the position. Anyway, belore 4984, u are in profit, so you can decide to take profit at any time.

2. If market trades above 5000, sell the long put and minimise the loss

Plz don't get tempted to break the leg. This will leave u with naked short put position which can hurt at any moment.
I have broken my spreads many time, like u are planning here and most of the cases I was hurt by naked position. Market doesn't go in one direction indefinitely so eventually it reverses and naked leg becomes problematic then.

3. If market trades between 4900 and 5000 till 15-20 oct. sell long put and let short put expire to keep the premium.

My comments above are valid here too. From now on, do keep an eye on your breakeven level to take any action. Also pay attention to your brokerage to close this position and adjust your cashflow after brokerage payment to consider your P&L and then decide on action..

You don't seem to be new to option trading. Still commendable job of meticulous planning. Well done and keep it up...

Now relax and just stick to your plan..


Happy Trading.

 

[VJAY]

Dear AW ,
please give advices on my following positions.

1.4900 PE short @179 &4900 CE short @ 210

2.4900PE Short @78 & 5100 CE short @ 114(yday)

 

[AW10]

Vijay, both position (1st short straddle, and 2nd short strangle) suits current market condition where market is either moving sideway or not showing strong trend.
As long as mkt is within breakeven points, enjoy the time decay.
You get best from these two strategies, by sitting on it and letting time do its work (ofcourse monitor the spot v/s breakeven points)

Only point I can suggest is to protect them by buying OTM PUT.. Spcially near long weekend, when anything can happen. If not completely then atleast you can cover partially position. Probability of big gapdown in higher then big gap up.

Happy Trading

 

[lazytrader]

Hi,
I am new to option trading and have put the following spread on nifty for oct 29 and would like to have your views. I have bearish bias on nifty in october so have a bear put spread.
Long nifty 5000 put at Rs 141
Short nifty 4900 put at Rs 125
Both limit orders were filled on 25/9/09.
Debit paid= 16 x 50=Rs 800
Max. reward= 100 x 50=5000
Exit point
1. If market falls and goes below 4900, then wait till expiration
2. If market trades above 5000, sell the long put and minimise the loss
3. If market trades between 4900 and 5000 till 15-20 oct. sell long put and let short put expire to keep the premium.
Would like to have your comments.

problem with options is where risk to reward is too high the chances of making a pofit are too low.

 

[AW10]

LT, you are right but in this case, BE point of 4984 and even 4900 that gives max reward, is within 1 std dev zone. Not in those 2std dev/ 3std dev range which has hardly 5% chance of winning. So it has pretty high probabity, 70 to 80% odds.

As of todays price, the spread is going at =102-70 = 32 Rs. i.e. it is already in profit due to timedecay on 4900 short position.
( I am making an assumption that the person has got it in 16 rs.)

Happy Trading

 

[kkeskar92]

Hi...Thanks AW for your comments.

 

[humble]

Hi AW10,

I have a question regarding Options.

I understand what is "in-the-money"[ITM] and "out-of-the-money"[OTM] options.

What is "at-the-money"[ATM] Call and Put option?

Can you please give an example like below?

For example:
For the current Nifty Spot value 5083.
5100 Call is OTM.
5000 Call in ITM.

Regards,
-Sri