Low Risk Options Trading Strategy - Option Spreads

[AW10]

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

Nayarock,
Answer of your question is in my post.

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.

I took the prices as of 9/July - friday. The Spot Nifty was 4080 on that day.

Happy Trading

 

[AW10]

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

Tarang, your analysis is correct, these positions run into risk once nifty moves beyond the strike prices of selected option. As they are far away from current SPOT, we have the advantage of time. These strategies have time value component in each of them
290, 190 and 117 respectively. So until we have some extra-ordinary event that makes the nifty move by 300 points in 1 day (2 standard deviation situation), almost 99% of the time the move will be gradual. So you can continue to enjoy the time decay till that time without loosing the sleep. And whenever such wide moves take place, there will be bounce.. or side way move. That gives us few extra days of time decay.

And drop in volatility post budget event could bring added advantage to these positions.

As a thumb rule, if you divide the Time Value by remaining life (say 25 days) to get TV per day, then u are sitting on free profit flow of approx 290/25 = 12 rs, 190/25 = 8 rs, 117/25 = 5 rs per day.

So as long as market is within "no-action zone for your strategy" , enjoy the ride.. and do something else.

And while planning such trade, as a trader, when I am collecting 290 rs as profit on 1st trade, I am also willing to loose some money on it. So say even if I am ready to loose 60rs for potential profit of 290, my actual action points i.e. BEP to take action starts shifting wider now (approx 50 points on either side of 4600/ 5100 ).

Hope my views on these strategies helps.

@TT, could u plz update yr main post with 3 strategies and point that there is correction 2 posts below that. I think, that will help people reacting immediately to the strategies..

Happy Trading

 

[trader.trends]

@TT, could u plz update yr main post with 3 strategies and point that there is correction 2 posts below that. I think, that will help people reacting immediately to the strategies..

Happy Trading

AW10

I have added the note at the end of the first post.

 

[irfanmansuri]

Dear AW10,


I am looking at shorting straddles equidistant from the current spot price. Spot now at 4850. Suppose I short a 250 pts distant straddle then I will short 5100 and 4600 straddle.

5100 CE: 60
5100 PE: 322
Total: 382

4600CE: 322
4600PE: 86
Total: 408

I collect 790 pts for one lot. My max profit is premium collected less the difference between the strike prices, 790-500=290. My risk free range is 800 pts from each strike price that is 4300-5400 ( I am ignoring the 10pts difference). I have to start worrying only when NF crosses 4300 or 5400. Max profit if Nifty expires between the strike prices.

When I do the same exercise for a straddle of 350 and 450 pts away from the spot of 4850 I get the following result

350pts away straddle
5200CE: 37
5200PE: 390
Total: 427

4500 Straddle
4500CE: 63
4500PE: 400
Total: 463

350 pts straddle on both sides yields: 890 pts. Max profit: 190. Risk free range 900 pts 4300-5400

450pt straddle

4400Ce: 470
4400PE: 46
Total: 516

5300CE: 24
5300PE: 477
Total: 501

450 pt straddle on both sides yields 1017 pts. Max profits of 117. Risk free range 1000 pts 4300-5400.

In each of the cases the risk free range remains the same but the maximum profit varies from 290 to 117. In all three cases if you notice, if the mkt ends at the outer perimeter of 4400 or 5300 the profit remains same 90-117 range. In all cases the margins required to short strangle also more or less remains same.

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

PS: There was an error in calculating the BE level. Please see the post below for clarifications.

Hi

If you short 4400 put and 5300 call you will get little better result with much less margin requirements. both side breakeven will be same and easy to manage.

 

[mtarang]

Tarang, your analysis is correct, these positions run into risk once nifty moves beyond the strike prices of selected option. As they are far away from current SPOT, we have the advantage of time. These strategies have time value component in each of them
290, 190 and 117 respectively. So until we have some extra-ordinary event that makes the nifty move by 300 points in 1 day (2 standard deviation situation), almost 99% of the time the move will be gradual. So you can continue to enjoy the time decay till that time without loosing the sleep. And whenever such wide moves take place, there will be bounce.. or side way move. That gives us few extra days of time decay.

And drop in volatility post budget event could bring added advantage to these positions.

As a thumb rule, if you divide the Time Value by remaining life (say 25 days) to get TV per day, then u are sitting on free profit flow of approx 290/25 = 12 rs, 190/25 = 8 rs, 117/25 = 5 rs per day.

So as long as market is within "no-action zone for your strategy" , enjoy the ride.. and do something else.

And while planning such trade, as a trader, when I am collecting 290 rs as profit on 1st trade, I am also willing to loose some money on it. So say even if I am ready to loose 60rs for potential profit of 290, my actual action points i.e. BEP to take action starts shifting wider now (approx 50 points on either side of 4600/ 5100 ).

Hope my views on these strategies helps.

@TT, could u plz update yr main post with 3 strategies and point that there is correction 2 posts below that. I think, that will help people reacting immediately to the strategies..

Happy Trading

Dear AW10,

Thanks a lot for your valuable guidance. After your explanation I am now more clear on this strategy and the trade management after entry .

 

[nayarock]

Nayarock,
Answer of your question is in my post.


I took the prices as of 9/July - friday. The Spot Nifty was 4080 on that day.

Happy Trading

Thank you AW10, now I got idea

 

[vssoma]

Dear, greetings of the day...

please check this pic...

if i buy the tatasteel options, with strick price 580. at the time of buying underlying is trading @568 and now the buy price of option is 3.50

if tatasteel keep on growing....how can i calcutate my profit. if the pirce dropes, at what stage starts my loosing.

as of my knowledge...until it reach(the price of tatasteel) 580 there is no profit for me.after 580, how can i calculate.

please, explain this.

 

[linkon7]

sold 4900 put for 51
bot 5100 put for 230

profit : 21 points if we close the feb series below 4900

BEP is 4921

 

[karin_jack]

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

hello AW10 sir sorry for late rply...

1>for profit more then 30 points or target of 100....
2> sir m asking ur comment for that only... which strategy would b good for what??? and there effect on position
3> yes march contract m was talking of.....

asked for learning low risk option strategy as in any case max i would loss was 30 points .......

regards

 

[jaywings007]

sold 4900 put for 51
bot 5100 put for 230

profit : 21 points if we close the feb series below 4900

BEP is 4921

is this not unreasonable bet.???
out of 21 points both the ITM put will be charged for STT + brokge..
pls correct me if I am wrong.