Low Risk Options Trading Strategy - Option Spreads

[abhiwhy]

Abhi, Thanks for sharing the input. Could u plz let me know

1) how much margin would it need to Short a Call say 5000 call and buy 4900 Call. It is bullish call spread.
Generally borkers charge same margin for this and for a simple 5000 Short call trade.
Is it two different amount at india Infoline or the same amt.


2)It might be a surprise, if I tell u that this position is same as NAKED SHORT PUT position ? The risk profile of this is exactly same as that of a short put i.e. you are protected for downfall only
till the limit of premium u have recieved by selling call.. Beyond that.. the risk is open..

Happy Trading

1)in such case , u will need to pay (5000*50*10%) =25000+ premium of 4900 put

2) i have never said that bullish call spread is same as NAKED SHORT PUT position,

i was talking about margin problem only , if u make or take any futures position to safeguard your shorted call or put open position u need to pay one side margin only .

for e.g., if i short or write 5000 ce @ 50 when market is at 5,000 and market moves to 5,050 ( my break even ) , now for safeguarding my position i decide to buy a nifty future when mkt is 5050, yet my position is protected in upside only and i would be in loss if nifty falls below 5000(my new break-even) but still i need to pay one side margin only , and the daily mtm payoff .

but if i would be huge losses , broker may demand extra margin .

 

[AW10]

Thanks Abhi for clarification on Margin.

1)[/B

]in such case , u will need to pay (5000*50*10%) =25000+ premium of 4900 put

So if I go ahead and write 5k call, I still pay the same margin. of 5000*50*10%. Though the risk is far less when I also have supporting 4900 call in my hand but brokers don't consider that. In western market my margin requirement for 4900 Long +5000 short position would be almost 1/3rd of naked short 5k call position.
Anyway, that is our mkt..and we need to live with it.

2) i have never said that bullish call spread is same as NAKED SHORT PUT position.

Abhi, the position that u mentioned short Call, and buy Future.. is nothign but covered call position.. Here instead of covering a stock.. you are covering the futures position. Sequence of creation of legs might be different.. but eventually at the end, we have long future + short call position which is nothing but covered call .. In Synthetic options domain, it is equivalent to Short Put position.

Bullish call spread is not in this category.. cause your lower leg created by long call is limited. It is different from lower leg created by long stock or long futures where downside risk in unlimited.

Hope this clarifies.

Thanks again for your input on margin requirement.
Happy trading

 

[prashyrao]

ICICIDirect has option of placing Strategy order.. where u can mention 2 legs of 2 rows of order form. But it is pathetic interface. U also need to give the limit price of each leg.

My suggestion will be to keep spread trade planning and trade execution as two seperate task. Plan you trade, and then to put two independent trades, one for each leg. And once in the trade, manage the position as per your plan.

This is a bit painful process (no different with any other Indian broker too).. but workable solution. Just keep 1 or 2 points margin for slippage due to this approch of order execution.

Happy Trading

AW10,

But then you need a huge margin money blocked (though you will not lose it), don't you? It gets tricky when you get to 4 legs (2 long, 2 short either side) - I evaluated a neutral position with risk reward of flat 85 / 42; and the margin required was mind-boggling: 700+. Then, I dropped it off - I dont make a lot with the money I have in my account ;-)
God! Any remedy for this?

 

[prashyrao]

One more question AW10,

Have you evaluated the box-efficiency of NIFTY anytime? I saw one position (Feb series) with 500 / 470!! That's huge, but again, you need atleast 8-10 lakhs blocked for two months to make 30k (ofcourse, a low FnO brokerage helps here) -> 3%+ not bad when compared to interest rates, but not much if we have to pay 30% tax on it later

Only question is the availability of far month in-the-money options.

 

[AW10]

AW10,

But then you need a huge margin money blocked (though you will not lose it), don't you? It gets tricky when you get to 4 legs (2 long, 2 short either side) - I evaluated a neutral position with risk reward of flat 85 / 42; and the margin required was mind-boggling: 700+. Then, I dropped it off - I dont make a lot with the money I have in my account ;-)
God! Any remedy for this?

For 1 strike OTM writing, you pay approximately 30 to 32k per contract. For ITM strike option writing you pay more.. So it depends on how u construct yr trade and selection of strikes. I generally don't trade in 2 strike away from spot on and most of the trades are in near month or next month at the most. I prefer constructing just simple spread with 2 legs to limit the risk.

If you are looking at paying less margin, then all the best for your seach for broker who offers this facility.

Happy Trading

 

[AW10]

One more question AW10,

Have you evaluated the box-efficiency of NIFTY anytime? I saw one position (Feb series) with 500 / 470!! That's huge, but again, you need atleast 8-10 lakhs blocked for two months to make 30k (ofcourse, a low FnO brokerage helps here) -> 3%+ not bad when compared to interest rates, but not much if we have to pay 30% tax on it later

Only question is the availability of far month in-the-money options.

3% return, even after 30% tax that is 2.1%.. i.e. 25% a year.. and with box strategy, you are trading risk free. So Post tax risk free annual reutrn of 25% - What else u want? People will die to get that kind of risk free return.

If you are still not happy with this then take the risk and go for strategies that are not Delta neutral.

Personally, I don't trade risk free but always have position as per current trend of market. i.e. always have +/-ive delta on my portfolio. Depending on mkt conditional, net delta keeps changing. I have also defined my risk appetite in terms of portfolio delta..
I don't use great tool to calculate delta precisely but it is done on approximation basis.

Happy Trading

 

[ppmatkari]

Hello Aw10, need your help. My younger bro has made a mess. He sold 3 great offshore calls at rs 10 yest. He hasnt hedged the position.Today the stock has zoomed 13%, plz suggest way by which i could minimise losses & get out. I have margin for 1, at the most 2 options how do i go about it?

 

[AW10]

ppmatkari, sorry to hear about this disastrous trade.
Anyway, we can't do anything of what/who/how it happened, lets look forward and findout what can be done now..
First thing is to look at the chart and see what the stock is doing. You need to take your decision here.. To me it looks that the stock has bounced from 460 level and hit the resistance zone of 600 today. It was not able to cross 600 in last 4 attempts and every time it came here, it got sold. so Chances are high that it may not go above 600 but we can't say that for sure.. cause nifty also reversed from 5180 but today it crossed that level.

Possible actions -
1) if you get margin call, at current price. then let broker close the position. And you have to accept the loss. unfortunately.
2) If you don't get margin call, then plz monitor the call premium.. not and keep a stoploss at Pivot highs on option premium chart (not sure if you have access to that thru yr broker's trading platform or not). Otherwise, just take today's highest premium level and keep stop loss there.. and then keep moving it down as market develops.
This will ensure that u get out if the stock moves higher.
3) If you are lucky and stock trades lower tomorrow.. and yr stop is not hit, then by end of the day, either close whole position or atleast reduce size from 3 contract to 2 or 1 contract.
4) Looking at the current sentiments and the time of the year, chances are high that market will be going up, so your position will get worse.
Unfortunately, u can't do much with a loosing position that has gone so much against you (atleast I don't know it). You can to limit losses by buying higher strike call, but
that doesn't save u from margin call. If stock goes higher, to say 650, your margin requirement will go up and broker will squareoff the position. They don't consider your call position to reduce your margin. Moreover, u will have to throw money to buy new Calls..ie. throwing good money to save bad money.
So only painful choice I can think of is to take the pain and accept the loss.
Ensure that your brother learns his lessons from this costly trade.
1) read the charts, and don't trade based on some tips
2) focus on risk mgmt, profit will take care of themselves if he can just control the losses
3) stay away from stock options.. cause these type of crazy move can hurt your account badly

All the best.

 

[ppmatkari]

Thanks for the response. My bro is new at trading so he got caught in the greed factor plus he made his decision only by looking at news & futures price which was at steep discount & so he kept on adding positions in last few days when stock went from 513 to 470 odd levels.

Today he did get a margin call in the morning but he added margin to save the calls from being terminated at high, dont know whether that thing was wise or not.

I will have to cut down half the positions (atleast 1) in next session which hopefully should be less painful than what it currently is, what i m worried about is nifty which has given a breakout, there will be buying across the board.

How much do you think is the time value left in this call ? Secondly volatility is very high (52.36) which i think should come down substantially till expiry. Open interest is down in 520 call but only marginally (-5%) means there are quite a few people stuck in there, maybe there will be some kind of dip which may provide an exit. Any ideas about how i can use these factors optimally.

 

[AW10]

Thanks for the response. My bro is new at trading so he got caught in the greed factor plus he made his decision only by looking at news & futures price which was at steep discount & so he kept on adding positions in last few days when stock went from 513 to 470 odd levels.

Today he did get a margin call in the morning but he added margin to save the calls from being terminated at high, dont know whether that thing was wise or not.

I will have to cut down half the positions (atleast 1) in next session which hopefully should be less painful than what it currently is, what i m worried about is nifty which has given a breakout, there will be buying across the board.

How much do you think is the time value left in this call ? Secondly volatility is very high (52.36) which i think should come down substantially till expiry. Open interest is down in 520 call but only marginally (-5%) means there are quite a few people stuck in there, maybe there will be some kind of dip which may provide an exit. Any ideas about how i can use these factors optimally.

One of my fundamental rule regarding margin is - if I get margin call, then don't entertain it and let broker close the position. Cause of following reasons
1) I am not trading correctly, either mkt has gone against me, or I have taken too big a position ..
2) Maybe I am getting emotional with my position and hoping that mkt will come back. Thinking that I can't be worng..
3) by putting more funds, I am throwing good money in a bad trade.
4) I am missing out on other profitable opportunities cause my funds are locked in a bad trade.

For all above reason, sensible trading action to close the position and cut emotions from the trade.

Regarding time value - At this stage, 4 days before expiry, in any option there is very minimum time value left. So writing options starts getting risky cause rewards are not worth the big risk that u take. Now when yr sold item is so much deep in the money, then it will have anyway have more of intrinsic value then time value.
Option pricing is not very straight forward and near expiry, it starts becoming more difficult.
And for such stock that shows irratic moves, In my opinion, the reading of OI etc does not remain reliable..

by the way, what strike you are short on ?

If it is deep in the money, u also run the risk of assignment. In stock option, deep ITM strike also go out of flavour and looses the liquidity.. So at that stage, people just go ahead and excercise the option to book their profit.

Anyway, all the best.