Low Risk Options Trading Strategy - Option Spreads

[sreperu]

This bullish strategy IMO , shd be taken after a bullish reversal indication ,e.g. Morning Star , Hammer, Bolinger Band Support .
Although there seems to be an Andrew's PF support. But as Pring says let the price show the action.
Trading is more of waiting game than trading.

Hi Shiree,
Thanks for your reply. I am also waiting for the pullback to over and resume the trend in the main direction. I have checked the weekly charts and it is witnessing the bullishness in Nifty in the coming days.

 

[msri]

Today I constructed bear put spread with 5200 put and 5100 put with 66 and 34 Rs premiums. i.e with initial cost of 1600 rupees. Pl. suggest fate of the spread by this week end.

 

[AW10]

Hi AW,
Here I want to go for Bull Put spread (Credit Spread). Currently Nifty is closed at 5244 and I am bit bullish on Nifty.

Trade details: (Planning for Monday)
-------------------------
1 . Short 5200 Put @ 77.4
2. Long 5100 Put @ 46.10

Credit received = 77.4 - 46.10 = 31.30 (Max Profit and my Investment)

Max Loss = (5200-5100)-31.30 = 68.7

BE Point = 5200-31.30 = 5168

If the Option closes below BE point then I start to loose my option trade.

AW, whether the above analysis is proper plz correct me or suggest me if it is better than this....

Sreeny, You analysis of this Credit spread looks fine to me. If mkt closes above 5168, then u can keep the premium.

Maybe you would like to define the point at which u would like to cut your losses. You don't have to wait to get max loss. When market has proven that it is going down i.e. broken from 5150 level and stayed there decisively.

my suggestion will be not to break this spread and book profit on winning leg while leaving loosing leg open. (I have done this in past, and many people do it frequently. As human being we are tempted to book profit and be optimist about our looses.

Juiciest part of Credit spread is time value. If you have created say 5300-5200 put credit spread, you would have collected more premium. Flip side is your probability of success would come down cause ur breakeven would have been around 5250. Depending on your degree of bullishness, you could have evaluated that choice as well.

chk out the prev post by Smart_Trader here who has created beautiful Ratio Spread with Reward Risk ratio of 10:1. That trade has great combination of collecting time value while playing on the increase of intrinsic value.

Happy Trading

 

[AW10]

Hi AW/ST da,
I read it in an Option Book, we should buy only Low Implied Volatility option and sell only High Implied Volatility options.

Can I get the Historical volatility to calculate the Implied volatility of Nifty Index?

Do I really take IV and other factors (risk free interest rate, Greeks...) to establish a Spread?

Sreperu, In my opinion, theoratically, options books are right. Yes, you should buy options when IV is low. but we need to understand why are they saysing so.
That doesn't mean that you can't buy when IV is high.
Main reason is during Low IV environment, collected premium is low which does not justify the big risk which might come when IV increases. Having said that, it is also possible that
IV can remain low for months (NIFTY VIX running in Low zone for more then last 2 months) and by that time option would have expired already.

With spread, you neutralise this effect to some extent cause on one leg, u more to buy the option, but on other leg, u end up collecting more for selling that option in High IV envt.
You reward/risk profile is well known before the entry. So it doesn't matter so much. Atleast I don't look for detailed theoratical calcuation in my spread trading. I consider the factors like
max risk/ max reward/Breakeven point / probablity of breaking even/ probablity of max reward in my decision making.

Implied volatility is different from HV. IV is forward looking till option expiry whreas HV is histroy. IV depends on what is going to come in remaining option life.
Closest indicator u can find for this is NIFTY VIX. If you want to go down to the levels of IV for each strike price then better to use some software.
HV can't be used to calculate IV but their comparision gives good idea about how far from average is current IV.

Hope this helps. We got to discount lot of theory into practical trading and devise our own tricks of trade.

Happy Trading

 

[AW10]

Today I constructed bear put spread with 5200 put and 5100 put with 66 and 34 Rs premiums. i.e with initial cost of 1600 rupees. Pl. suggest fate of the spread by this week end.

Paying 32 Rs.. for potential profit of 100 is certainly attractive trade.
For this trade to work, mkt needs to go down..So if that happens, better to protect your profit by placing some stoploss order for each leg and let it run.

But if mkt breakout of zone and starts going up, then u might like to cut your losses and collect some part of your initial investment. As mkt goes up, probablity of it falling below 5100 before expiry, starts reducing. i..e there are less and less chance that you trade will get max profit / or will cross breakeven point.
So decide your own decision making points and trade accordingly.
In my view, don't put your trade at the mercy of others view about mkt.

Happy Trading

 

[hiteshsjoshi]

Googled a strategy on some site and found it worth discussing. Would be great if we can discuss the pros and cons of it. Thanks..

Here is the Link.

The strategy is:  
“Buy current or next month future, 
sell the Next month Call option having higher time value and greater volatility
and buy the put option of the current month having strike greater than or equal to (future strike – call premium received.) ” 

1. On November 3rd I have bought Nifty future December at 4560, sold the 4600ce December at 188, bought 4400 pe November at 80.
On 9th November 2009 I close the strategy future at 4900, 4600 ce at 390 and 4400 pe at 12.50. 
Profit Rs340/- in future, loss Rs202 in 4600ce short and loss Rs67.50 in 4400 pe short. 
Net profit realized was Rs3525 in the strategy.

2. On 10th November bought Nifty future at 4880, sold 5000 ce December at Rs145 and bought 4800 pe at Rs75.  
On 17th November 2009 I close the strategy future at 5070, 5000ce at 200 and 4800 pe at 11. 
Profit Rs 190 in future, loss 55 in 5000ce short and loss Rs65 in 4800 pe short. 
Net profit realized was Rs3500 in the strategy.

3. On 18th November 2009  bought nifty future December at 5055 , sold 5100 ce at 209 , bought 4900 pe December at 102.
On 27th November 2009 I close the strategy future at 4965, 5100ce at 145 and 4900 pe at 135. 
Loss Rs 90 in future, profit 55 in 5100ce short and profit Rs33 in 4900 pe long. 
Net loss incurred Rs250 in the strategy.

Hence the total gain in this rise and fall tide I have made Rs7025-Rs250=Rs6775 profit.

[B]Must read this very carefully[/B]:
The trick is too simple. I have 3 months contract (current, near and far) open at a time.  
For 1st 2 week of the current settlement cycle I will initiate the strategy as follows

1.  current or near month future long(i.e. 1st or 2nd month future long )
2.  Near month option strike having higher volatility or time value sell (i.e.2nd month option)
3.  Current month option having strike greater then equal to (future strike – option premium received) buy.
 
For the last 2 weeks of the settlement month I will initiate this same strategy with near and far month contact. This is because to avoid the unnecessary time value decay in the long options.

 This position also has one more benefit. Since this is a spread position it attract less margin and you can have a better bargain with your broker regarding the margin and brokerage issue.

 The positions discussed by me in the above section may required Rs60000 investment if you consider 12% margin on the nifty future long and options short. 
Out of which you will be getting 10% (i.e. Rs6000) capital in the way of net credit by selling the option and buying the option.  
Three to five speculations in a month with average positive return of Rs2000 will make you to earn Rs6000 to Rs10000 per month.  This approximate estimate may yield Rs72000 in a year. 
Provide 30% of estimated gain for exceptional losses, brokerage, and tax. Now Your tradable capital of Rs60000/- can generate Rs40, 000 to Rs50000 by following this strategy.  
This is a rough estimation based on the performance seen by us in the month of November 2009 by following this strategy. 
However the actual figure may vary based on your implementation and market condition.

If you are a good speculator then each 100 point move in nifty you can close the profitable position and reenter again with 20 to 30 point fall. 
Provided your brokerage must be low enough. 
You too can form 3 such strategies with covered call with put long and 1 covered put with call long. 
This will increase your profit realization by 50% and reduce the loss risk by 80%

 

[DanPickUp]

Hy

Is it possible to post the link. It is a little bit easy er to read.

Thank you and good trading.

DanPickUp

 

[Smart_trade]

Hy

Is it possible to post the link. It is a little bit easy er to read.

Thank you and good trading.

DanPickUp

You may post the link....as long as it is not in the form of advertisement or solicitation from other website...no issues...

Best wishes,

Smart_trade

 

[DanPickUp]

Hy Smart_trade

It is maybe a miss understanding.

It is not me which is going to post the link. I was asking hiteshsjoshi to post the link and he already updated the post by including the link. ( Last edited by hiteshsjoshi; Today at 03:36 PM. Reason: Updated the Link based on Dan's post. )

Regards and good trading

DanPickUp

 

[AW10]

Googled a strategy on some site and found it worth discussing. Would be great if we can discuss the pros and cons of it. Thanks..

Here is the Link.

Hitesh,
This strategy is variation of COLLAR strategy.
Standard Collar is mkt neutral strategy and includes - Long Stock + Short OTM Call + Long OTM Put. Generally, call and puts are of the same months.
It is best suited when intention is to protect the profit or hedge the position. So there are suitable time for this strategy. It is not something that will work always.
If you get trending market or huge gap down, then loss on Long stock (delta = 1) will not be protected sufficiently by Long Put (delta < 1). Short call will give buffer only till
the level of premium collected, beyond that, it is not completely hedged as well. Solution will be to have double the qty of put and call that of long Stock position.

In my view, blind hedging is great excuse for traders ignorance of trading and risk mgmt or capacity of taking sound trading decision. There are time, when one needs hedging to manage the risk
and there are times when it is hedging will just reduce the profitability. It is like driving a car with hand break applied. You are not going to get acceleration.

But certainly it is great strategy when the time is right for it to protect the profits or hedge the position. This allows you to Hedge the position with market's money. You don't have to pay the premium from
your pocket to hedge. Isn't it great when someone else pays for your protection ?
I use this strategy in times when mkt is overheated and correction could happen at any time (like the situation we are in now). Mkt PE is 23+ which was 2007 end, 2008 Jan levels. Indicators on higher TF (monthly /weekly) are in OB areas // Mkt is showing lack of conviction to go further up and struggling at higher levels// VIX is at bottom level. So there are enough of warning signs and as a smart trader, we got to watch our position and protect them. This is when u need hedging and Collar is the strategy for it.

When mkt falls, you would make profit with the PUT position and use that profit to build up your portfolio further. Due to lack of liquidity in stock options, I protect my stock portfolio with Nifty options.
If market doesn't come down then I run the risk of my short call getting ITM.. but that is not problem.. cause u can book partial profit and pay for that shortfall. Anyway, this pushes us to take our profit out which otherwise, we would be hesitant to do.

Certainly, this strategy is worth exploring further. And then come out with your tweaks and test them.
These are my views on it. Waiting for others comment on it..

Happy Trading