Low Risk Options Trading Strategy - Option Spreads

[sibumajumdar]

simu2004, the examples that u have given are correct bull/bear spreads.
By Definition,
Bear spread = buy HIGHER strike, sell LOWERstrike.
Bull spread = buy LOWER strike, sell HIGHER strike.

If yr view is that mkt will be above 4900, then many bull spreads can be created like - 4500/4600, 4500/4700, 4500/4800, 4600/4700, etc.. There is no limit to the combinations.

Similarly, you can create many bear spreads.. of 100 pts, 200 pts, 300 pts ranges.

Happy Trading

Mr AW10,

With the purpose of option learning i read this thread very thoroughly & reached upto here. Learned many things about opt trading because of your easy way of teaching & lot of thanks for the same. U have stated that unlimited combinations can be formed. But my query is what is the best combination & what are their implecations & how should i decide it. Please note my grasping power, remembrance, retention/recollection is not that high. May be because of my age (59+). Therefore, i made a note in my diary of useful points from your thread. One thing u can be assured of is that i am not lacking in energy & enthusiasm for learning because enough time i can devote for this. But iam not sure ultimately how much i will be able to learn & put to actual trading. Iam a full time day trader with mini nifty & stocks but with small capital. If iam silly plz take it in good spirit. I appreciate your cool way of selfless teaching. Thanking U again. God Bless U & All.....SLM uncle.

 

[AW10]

Thank you AW10 for the detailed reply.. It was really an eyeopener..

Need one suggestion... from you..

With the mindset of market going down, I have closed my 4800 call the next day... Now I am left with the Feb 4700 PUT, which is in loss. Since we have two weeks more.. what stratedy should I follow to minimise my loss.

JD

JD

JD by closing 4800 CALL, you have converted market neutral position to market direction sensitive position. Please calculate your Breakeven point for Long PUT position.. i.e 4700 minus the premium u paid for this PUT. Market has to reach that level before expiry for you to make any money on it..else it is going to be just a loosing trade in your hand. Even if market falls from 4820 level, your 4700 PUT may not come into profit cause due to limited remaining life, mkt may not be able to go far enough for your position to make profit..

To reduce the loss, only possible choice is to sell options and collect money from market. By spending more in buying new option, u are not going to profit. Following are some of the choice that I can think of..

- sell 4600 PUT and convert the position to a SPREAD. This will recover some of your premium from mkt i.e. reduce loss.
- If u are little bit risk taker then u can sell 2 , 4600 PUT and recover bit more of your premium. Please remember, this action might turn out be risky if mkt has to crash to 4500 level in 1 days time.
- if you are turning into bullish and feel that mkt may remain above 4800, then u can sell 4800 PUT and convert your position into 4700-4800 Credit Bullish Put Spread.
- Or simplest of all, just close the position and accept the loss. My suggestion will be to keep some type of trailing stoploss order so that you can get best price in closing the trade.

There is huge built up of puts at 4800/4700/4600 levels..so I don't see chance that mkt may be able to crack these levels easily (until some trend changing events take place globally).

Hope this helps..
Happy Trading

 

[AW10]

Mr AW10,

With the purpose of option learning i read this thread very thoroughly & reached upto here. Learned many things about opt trading because of your easy way of teaching & lot of thanks for the same. U have stated that unlimited combinations can be formed. But my query is what is the best combination & what are their implecations & how should i decide it. Please note my grasping power, remembrance, retention/recollection is not that high. May be because of my age (59+). Therefore, i made a note in my diary of useful points from your thread. One thing u can be assured of is that i am not lacking in energy & enthusiasm for learning because enough time i can devote for this. But iam not sure ultimately how much i will be able to learn & put to actual trading. Iam a full time day trader with mini nifty & stocks but with small capital. If iam silly plz take it in good spirit. I appreciate your cool way of selfless teaching. Thanking U again. God Bless U & All.....SLM uncle.

Thanks for compliments SLM Uncle. I sincerely appreciate your zeal and committment to learn about options trading. You beat many other traders on this forum of half of your age who are more bothered about getting tips from some one then learning and generating their own tips. Your age, experience and on top of it, the Open Mindset, are few big EDGEs in the market for you.

Regarding plethora of options trading strategy, In my view, there is no ONE single strategy that can be called as best and fits all market conditions. It depends on your view on market and then finding the suitable strategy for that condition.
I divide my market reading in 2 parts
Trend - Bullish, Sideway, Bearish
Volatility - High, Average, Low

That itself, gives us 9 types of market condition and if u decide to play all of them then u need atleast 9 option strategies for it. Seems a lot of choice, nah ? That is problem with Options trading, it is like getting in a Buffet Dinner where we are spoilt for choice. So we take our pick, and select only few items that we like.. So do exactly same here as well and Pick up 1 market condition and 1 or 2 strategies to start with.
Once u get the grip of the subject, then picking up new mkt conidtions and new strategies will be lot easier..

As u are already into MiniNF trading, so I am sure, directional strategy will be easiest for you. And with various Spread that I have mentioned in here, u can easily learn about the various aspects of option price movement at reduced risk.
Personally, after lossing lot of money in like any other option trader, I started with SPREADs and then learnt other stuff. Hence my recommendation will be to go for them.
With spreads, u can very well afford to skip Volatilty part of mkt conditions as the legs of Spread give u almost 80 to 90% protection against any change in volatility. So just focus on Directional aspect.
Only disadvantage is that spreads don't move too fast hence it needs time to show you result and hence extra patience is needed.

Hope this helps, SLM Uncle. Feel free to bounce off any other doubt here and I will try my best to answer that.

Happy Trading.

 

[AVINDADA]

Dear AW Sir,
I have following holdings with me. In total loss of 54% for the invested amt of around 70K. I have attached the excel file herewith of my holdings.
Please suggest me.

Lot Qty Buy Rate Total Buy Tot with Brok Current Price Current Tot Prof % Prof
FEB 5200 CE 4800 50 104 5200 5270 81 4050 -1220 -23.5
FEB 5100 CE 4900 150 52.13 7819.5 8119.5 40 6000 -2119.5 -27.1
FEB 5200 CE 5000 700 32.57 22799 24799 18 12600 -12199 -53.5
FEB 5100 CE 5100 500 25.48 12740 14340 7.5 3750 -10590 -83.1
FEB 5100 CE 5200 650 13.17 8560.5 10560.5 3.3 2145 -8415.5 -98.31
FEB 5100 PE 4800 50 124 6200 6400 88 4400 -2000 -32.26

2100 63319 69489 32945 -36544 -53.0

 

[AW10]

Dear AW Sir,
I have following holdings with me. In total loss of 54% for the invested amt of around 70K. I have attached the excel file herewith of my holdings.
Please suggest me.

Lot Qty Buy Rate Total Buy Tot with Brok Current Price Current Tot Prof % Prof
FEB 5200 CE 4800 50 104 5200 5270 81 4050 -1220 -23.5
FEB 5100 CE 4900 150 52.13 7819.5 8119.5 40 6000 -2119.5 -27.1
FEB 5200 CE 5000 700 32.57 22799 24799 18 12600 -12199 -53.5
FEB 5100 CE 5100 500 25.48 12740 14340 7.5 3750 -10590 -83.1
FEB 5100 CE 5200 650 13.17 8560.5 10560.5 3.3 2145 -8415.5 -98.31
FEB 5100 PE 4800 50 124 6200 6400 88 4400 -2000 -32.26

2100 63319 69489 32945 -36544 -53.0

Avin Dada, You are currently holding all Bullish position of 2250 and Bearish of just 50. Don't know what is your reading of current trend of market in short term cause with Options Trading, u have to be realistic about the TIME Part.,
Do you think market can goto 5100 / 5200 level in next 8 trading sessions ? If not then those options are going to be worthless very soon.

With these types of option position portfolio, you will win, only when market is going up.. If market Stays in a range or goes down, or even if it move up but not big enough, you are going to loose.
Option trading needs correct assessment of Latest trend.. and accordingly we need to be ruthless in adjust /closing our positions.

My suggestion will be to
1) Introduce a column in your excel tracker just after "Buy Rate", for "Stoploss Rate" put it in pink or red colour. This will keep reminding you about being realistic in trading.
2) Current Total Column, plz adjust that by including the brokerage of sell leg as well. Your losses will be even bigger then what it looks to you now.
3) You are paying almost 10% of your transaction value as Brokerage.. and if u have to square-off these options, again u will be paying few % on it.
In my view, that is extra cost that is hitting your profitability so got to manage it. If you are primarily options trader, then plz move on to other broker.. Or atleast for options trading,
get better bargain.. I guess RK Global gives unlimited trading with 1000 rs of monthly brokerage.. Even if u include their other monthly charge, it might still make sense for you.
4) Assess your view on current market trend and check your current open positions (like currently you have bullish 2250 v/s bearish 50). Based on that, decide your next action.
5) Include option Selling as part of your strategy, that will save your from various Buy positions from Volatility and time decay.

Hope this helps.
(sorry, I give u recommendation to sell this and buy this.. But will prefer to guide u to take those decision and improve your trading. So that next month, u know what to do ? what corrective action to take ? and Why ?)

Happy Trading.

 

[J_D]

JD by closing 4800 CALL, you have converted market neutral position to market direction sensitive position. Please calculate your Breakeven point for Long PUT position.. i.e 4700 minus the premium u paid for this PUT. Market has to reach that level before expiry for you to make any money on it..else it is going to be just a loosing trade in your hand. Even if market falls from 4820 level, your 4700 PUT may not come into profit cause due to limited remaining life, mkt may not be able to go far enough for your position to make profit..

To reduce the loss, only possible choice is to sell options and collect money from market. By spending more in buying new option, u are not going to profit. Following are some of the choice that I can think of..

- sell 4600 PUT and convert the position to a SPREAD. This will recover some of your premium from mkt i.e. reduce loss.
- If u are little bit risk taker then u can sell 2 , 4600 PUT and recover bit more of your premium. Please remember, this action might turn out be risky if mkt has to crash to 4500 level in 1 days time.
- if you are turning into bullish and feel that mkt may remain above 4800, then u can sell 4800 PUT and convert your position into 4700-4800 Credit Bullish Put Spread.
- Or simplest of all, just close the position and accept the loss. My suggestion will be to keep some type of trailing stoploss order so that you can get best price in closing the trade.

There is huge built up of puts at 4800/4700/4600 levels..so I don't see chance that mkt may be able to crack these levels easily (until some trend changing events take place globally).

Hope this helps..
Happy Trading

Sincere Thanks for your suggestion.. I still hold the same position.. It remains at the same loss level.. Didnt add any new positions.. By EOD the market slant seems towards bullish side..

Tomorrow, I will check the rate of change towards Bullishness, and decide based on your suggestions.

As you have mentioned.. 4800/4700/4600 Put levels OI has increased.. Hence I assume, the Rate of bullishness should also be subsided one.. Hope so..

so, tomorrow I will decide to close the position.. Once again thanks ..

JD

 

[AW10]

Sincere Thanks for your suggestion.. I still hold the same position.. It remains at the same loss level.. Didnt add any new positions.. By EOD the market slant seems towards bullish side..

Tomorrow, I will check the rate of change towards Bullishness, and decide based on your suggestions.

As you have mentioned.. 4800/4700/4600 Put levels OI has increased.. Hence I assume, the Rate of bullishness should also be subsided one.. Hope so..

so, tomorrow I will decide to close the position.. Once again thanks ..

JD

JD, standard interpretation of OI is = it represents position of smart option players who sell options to novice option buyers.. (though I have doubt that it is not always correct cause smart money knows it well how to hedge their risk hence they do buy options as well).

So if 4600/4700/4800 Put OI has gone up, that means, smart money thinks that market will remain above these levels and those puts will expire worthless.
Similarly, the OI of Calls show us that market may face resietance at those levels. Specially where huge numbers of OI are created.

I was looking at OIs. After a long time, I am observing so many > 1 lakhs OIs in 6 to 7 strike from ATM. I think lots of spreads are created on both the sides of 4800.

Lets see what market unfolds in next 2 weeks.
happy trading
I think it is going to be

 

[AVINDADA]

Dear AW Sir,
We all new options Traders must be thankful to you for all the informative, calculative and guiding posts and replies by you.

You are very correct and will follow you. I shall try to close my postions today itself and be ruthless while taking profit and loss.

Thank You.

Best Regards,

AvinDada

 

[karin_jack]

hello sir....kindly comment on this.... which would b good???? selling 4700 call and buying 4800 call..... or selling 4900 put and buying 4800 put....

also ur view and reading on above strategy

regards

 

[AW10]

hello sir....kindly comment on this.... which would b good???? selling 4700 call and buying 4800 call..... or selling 4900 put and buying 4800 put....

also ur view and reading on above strategy

regards

Karin, Plz answer following points so that I can share my views within given constraints.

1) What is time frame of the trade you are looking at ? i.e. how many days you are willing to hold the position ?
2) What is your view on the direction of market for that duration ? Bullish, bearish, sideway rangbound ?
3) Are u looking at using Feb contract or March contract ? (effect of time will be very different on both contracts)

Happy Trading