Low Risk Options Trading Strategy - Option Spreads

[AW10]

Dear AW10,

My question is since the risk in all cases remains same but the rewards can vary significantly, have I missed something?

TT, your calculation is perfectly correct. And the observation as well

Let me bring another dimension to it.. and then you will see the reason behind why is it so.

trade 1 - Max profit = 290. Range of Max profit between 4600 to 5100
trade 2 - Max profit = 190. Range of Max profit between 4500 to 5200
trade 1 - Max profit = 117. Range of Max profit between 4400 to 5300

So, if you rank them as per probablity of hitting max profit then
Trade 1 = Lower probablity of hitting max profit
Trade 2 = Higher probablity of hitting max profit
Trade 3 = Highest probablity of hitting max profit

and hence my conclusion will be ==> higher the probability of success, lower the return.

Though breakpoint remains the same, your return profile has changed in each of the case.

Trade 1 might seem to give u more profit of 290.. but chances are high that it will cross the limit and u might end up gaining less then 290.

And if you bring in the other factor related to change in option greeks, then farther the strikes, less sensitive they are to the change in Greeks and move of underlying. From that perspective, trade 1, might have rougher ride compared to other 2 trades.. and hence the returns are also less.

So, if you are planning to go on world tour, then put trade 3 and go, and if u are going to home and will be back to see the market next day, then u can take trade 1 and adjust it as market unfolds.

Happy Trading.

 

[AW10]

Ok. I figured out my mistake. below the extremes of the strikes, I lose two points for every point move of NF. If it moves below 4600 for instance, I lose a point on 5100pe as well as 4600 pe whereas I have calculated as a one point loss.

Option strategies are not what they seem at first. Leaning against the refrigerator will illuminate the bulb in your head. Alfie used to call it the 'refrigerator moment' for movies. I will delete the post if you wish.

TT, let the post be there..no problem with it.
Hope someone will learn from it.. and also learn from your second observation.

I replied to your post.. without cross checking the calculations on option analysis software.

Happy Trading.

 

[DanPickUp]

So, if you are planning to go on world tour, then put trade 3 and go, and if u are going to home and will be back to see the market next day, then u can take trade 1 and adjust it as market unfolds.

Hy AW10

I like it the way you explain that.:lol: Will keep that in my mind for my next trade decision.

DanPickUp

 

[DanPickUp]

TT, let the post be there..no problem with it.
Hope someone will learn from it.. and also learn from your second observation.

Hy trader.trends

I second the view about that. Nobody perfect include me. Do not worry.

Take care

DanPickUp

 

[J_D]

Option Trading Strategies.. Tool ?

Hello AW10,

Is there any tool for strategy selection for options.. Started reading again all your posts from beginning.. As you have provided some direction on strategy selection from the previous reply,

on a given day what approach should be followed for identifying various combinations of option strategies and choose the one.. that suits the days setup..

JD

 

[DanPickUp]

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[nayarock]

2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.

Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 = 100 rs.
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max reward of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)

Happy Trading

AW10, What is the NIFTY level when you posted this message? Thank you

 

[mtarang]

dear Trader.Trends,
Good strategy as it seems:clapping:. BTW If I understand correctly u are shorting 2 calls and 2 puts of nifty at a time. How much margin your broker will collect from u and based on that what will be your maximum Return on Investment for each of these three strategies ? How the margins are calculated as it is a spread trade? thanks.

tarang

 

[trader.trends]

dear Trader.Trends,
Good strategy as it seems:clapping:. BTW If I understand correctly u are shorting 2 calls and 2 puts of nifty at a time. How much margin your broker will collect from u and based on that what will be your maximum Return on Investment for each of these three strategies ? How the margins are calculated as it is a spread trade? thanks.

tarang

Tarang

The strategy has a flaw mentioned in my subsequent post. Pl check that before taking it up.

Yes it was shorting two calls and two puts at equivalent distance from the spot. As for margin requirements most brokers in India treat each buying and selling as different. Hence the margin needed for shorting each call/put has to be calculated on the contract value. For Nifty if the margin charged by the broker is 10%, then the actual money blocked for each leg of the short is

(Strike Price+Premium)*lot size*10%. Hence as an example if you want to short say the 4600 call at 315
(4600+315)*50*10%=24575

 

[mtarang]

Tarang

The strategy has a flaw mentioned in my subsequent post. Pl check that before taking it up.

Yes it was shorting two calls and two puts at equivalent distance from the spot. As for margin requirements most brokers in India treat each buying and selling as different. Hence the margin needed for shorting each call/put has to be calculated on the contract value. For Nifty if the margin charged by the broker is 10%, then the actual money blocked for each leg of the short is

(Strike Price+Premium)*lot size*10%. Hence as an example if you want to short say the 4600 call at 315
(4600+315)*50*10%=24575

Dear TT,
There is no free meal in market, I think your strategy is perfectly ok.Only there is a problem when the underlying moves beyond the extremes. Even then if sufficiant time is there for expiry you lose less than 1.5 point for 1 point move in NF as the two options in danger will be one ATM( delta near 0.5) and other is deep ITM option(delta near 1).

Also by that time since u would have pocketed a major chunk of profit from two options in other side, u will not have any problem in making some adjustments. Adjustments may be in the form of taking a future position or squaring off the two loss making options. Lastly not every month we have a 500 to 800 kind of movement in NF.

Dear AW10,
I need your intervention,please guide me if I have gone anywhere wrong.Thanks

Tarang