Low Risk Options Trading Strategy - Option Spreads
- Thread starter AW10
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Linkon, jaywings007 is correct. If mkt stays below both put will be settled ITM and hence brokerage, and other charges will hit you. So your profit may be 2/3 points lower then 21.
Only OTM options goes in dustbin on expiry date and have no settlement.
Of is there a different way your broker charge for assignments on expiry day ?
btw - by squaring off 75% of position, u have broken your plan (until, this exit was also part of plan which was not put in your post here).
Happy Trading.
Only OTM options goes in dustbin on expiry date and have no settlement.
Of is there a different way your broker charge for assignments on expiry day ?
btw - by squaring off 75% of position, u have broken your plan (until, this exit was also part of plan which was not put in your post here).
Happy Trading.
YEs check with your broker .. NSE charges Taxes on TOTAL VALUE on assignment, so for your 5100PE total value will be calculated on expiry value (say expiry at 4850) 4850*50=242500, now calculate taxes, stt on 242500. Cream of profit is milked by NSE!!!!
Now mkt below 4900 and you have to pay to your option buyer and assignment will charge you taxes and stt all over again on the same 242500/- for the 4900..
double whammy
check n confirm wid your broker and take necessary action ...
Now mkt below 4900 and you have to pay to your option buyer and assignment will charge you taxes and stt all over again on the same 242500/- for the 4900..
double whammy
check n confirm wid your broker and take necessary action ...
Gurpreet, (correction, you are not in Mr.Ghosh's thread but in AW10's thread).
Coming to your question - if we don't understand a particular market condition and have no proven strategy to play it,, then best way is to stand on the side.
Let others do what they want to do. Market will open 2nr/3rd March. And it will be less volatile to play then.
Prudent traders know this very well and Patience is one of most desired attribute for successful trading. So better to demonstrate that.
If you still want to participate the roller coaster ride without understanding the tricks of smart market players then you can keep shuffling buy call/ buy put as per your strategy.
I generally don't recommend that type of trading.
If your trade duration is > few days then 4800-4900 bearish put spread (buy 4900 put, sell 4800 put ) is available at 172 - 128 = 44 rs. cost. Potential max value is 100 giving you max profit of =100 - 44 = 56 when market goes below 4800. i.e. 56 rs of reward for 44 rs of risk. giving u almost reward risk ratio of 1.3 to 1. If you are aggressively bearish on the market, then 4700-4800 put spread is avaiable at 129 -94 = 35 rs. giving you RRR of (100-35)/35 = 65/35= 1.85 to 1.
These speads will not give u roller coaster ride but probablity is of more then doubling your risk amount is lot higher. If you take one contract, you will be risking 44*50 = 2200 rs to make the max profit of 56*50 = 2800. If you have bigger risk appetite, take more contracts. My suggestion is never to put more then 2 to 3% of your account size on one trade. i.e. if you have acct of 1Lac, then 3% is 3k. i.e. u should take max 1 to 2 contract. That wil still give u possible return of 5 to 10%
Hope you are able to see the opportunities as per my trading relaxed style. Think in terms of reward/risk, think in terms of probability.. and let others do what they want to do.
Happy Trading
Coming to your question - if we don't understand a particular market condition and have no proven strategy to play it,, then best way is to stand on the side.
Let others do what they want to do. Market will open 2nr/3rd March. And it will be less volatile to play then.
Prudent traders know this very well and Patience is one of most desired attribute for successful trading. So better to demonstrate that.
If you still want to participate the roller coaster ride without understanding the tricks of smart market players then you can keep shuffling buy call/ buy put as per your strategy.
I generally don't recommend that type of trading.
If your trade duration is > few days then 4800-4900 bearish put spread (buy 4900 put, sell 4800 put ) is available at 172 - 128 = 44 rs. cost. Potential max value is 100 giving you max profit of =100 - 44 = 56 when market goes below 4800. i.e. 56 rs of reward for 44 rs of risk. giving u almost reward risk ratio of 1.3 to 1. If you are aggressively bearish on the market, then 4700-4800 put spread is avaiable at 129 -94 = 35 rs. giving you RRR of (100-35)/35 = 65/35= 1.85 to 1.
These speads will not give u roller coaster ride but probablity is of more then doubling your risk amount is lot higher. If you take one contract, you will be risking 44*50 = 2200 rs to make the max profit of 56*50 = 2800. If you have bigger risk appetite, take more contracts. My suggestion is never to put more then 2 to 3% of your account size on one trade. i.e. if you have acct of 1Lac, then 3% is 3k. i.e. u should take max 1 to 2 contract. That wil still give u possible return of 5 to 10%
Hope you are able to see the opportunities as per my trading relaxed style. Think in terms of reward/risk, think in terms of probability.. and let others do what they want to do.
Happy Trading
Last edited:
Thanks SM for clarification. Then in that case, it might make sense to create Credit Spreads and collect the premium now.. and let options expire worthless.
Unfortunately, near the expiry, credit spreads are difficult to find cause they put money in our pocket thru time value of both option leg.. and by now, almost all the timevalue has evaporated.
Happy Trading
Unfortunately, near the expiry, credit spreads are difficult to find cause they put money in our pocket thru time value of both option leg.. and by now, almost all the timevalue has evaporated.
Happy Trading
Swamy, what you are asking is fundamental question of option pricing, and how the price change as the price of underlying changes.
That is a big topic and I will not be able to do justice in this reply... So please read about option pricing at sources that I have given in one of the first few post)
In short, option price at any stage has two part - Real Value and Time value. Real Value of Call is strike price - spot price. Ofcourse, this real value shd be +ive number. Time value, is anything that u pay above real value.
So when spot is at 568, 580 CALL has no real value. it is OTM. So whatever u pay i.e. 3.5 is time value. (infact, the price is not 3.5, but 3.75. Cause when u go to buy this option, next seller is asking for 3.75 to sell.. so plz look at right column for price. In low value stock option, it makes lot of difference. by paying 25 paise more on 3.5, u are already 8% behind in the game).
This TVal represents the probability of market reaching above the strik price + premium ie.. 3.5 for 580 call represents the chances of stock reaching above 583.5.
This probability depends on where the spot is now. and how many days are remaining before option expiry.
So if stock at 568, then it has to travel 16 rs in next 20 trading days..
a) With each passing day, assuming stock remains at 568, this probability will start dropping and hence the premium will also start falling.
b) If stocks moves to 572, tomorrow, then in next 19 days, it has to travel 12 rs.. hence probability of this happening is higher then 16rs in 20 days. So the premium will go up.
So though the stock has not reached 580, but the premium will increase tomorrow and you will see profit.
In reality, part (a) and (b) work simultaneously. That makes a bit complicated to know the price change in option. Better to use some option pricing calculator/ excel sheet/ tool
for this purpose.
Tricky part is if not many days left, then even if stock moves up, your call premium may fall. Cause 1 days has passed and in remaining days, it is less probable that option will be able to give profit
to the option buyer. So why would they pay 3.5 then. They might just pay 1 rs when there are 5 days left and still stock is around 575.
Hope this give u some idea about option pricing. Plz read more on this.
Happy Trading.
That is a big topic and I will not be able to do justice in this reply... So please read about option pricing at sources that I have given in one of the first few post)
In short, option price at any stage has two part - Real Value and Time value. Real Value of Call is strike price - spot price. Ofcourse, this real value shd be +ive number. Time value, is anything that u pay above real value.
So when spot is at 568, 580 CALL has no real value. it is OTM. So whatever u pay i.e. 3.5 is time value. (infact, the price is not 3.5, but 3.75. Cause when u go to buy this option, next seller is asking for 3.75 to sell.. so plz look at right column for price. In low value stock option, it makes lot of difference. by paying 25 paise more on 3.5, u are already 8% behind in the game).
This TVal represents the probability of market reaching above the strik price + premium ie.. 3.5 for 580 call represents the chances of stock reaching above 583.5.
This probability depends on where the spot is now. and how many days are remaining before option expiry.
So if stock at 568, then it has to travel 16 rs in next 20 trading days..
a) With each passing day, assuming stock remains at 568, this probability will start dropping and hence the premium will also start falling.
b) If stocks moves to 572, tomorrow, then in next 19 days, it has to travel 12 rs.. hence probability of this happening is higher then 16rs in 20 days. So the premium will go up.
So though the stock has not reached 580, but the premium will increase tomorrow and you will see profit.
In reality, part (a) and (b) work simultaneously. That makes a bit complicated to know the price change in option. Better to use some option pricing calculator/ excel sheet/ tool
for this purpose.
Tricky part is if not many days left, then even if stock moves up, your call premium may fall. Cause 1 days has passed and in remaining days, it is less probable that option will be able to give profit
to the option buyer. So why would they pay 3.5 then. They might just pay 1 rs when there are 5 days left and still stock is around 575.
Hope this give u some idea about option pricing. Plz read more on this.
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
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
For sideway market, spreads will not give u profit but just limit your loss due to timedecay., i.e. will limit your loss.
You can virtually make unlimited number of spreads 4700-4800, 4800-4900, 4700-4900 etc. You can make then with both Calls or both puts, you can also use same quantity of contracts or use some type of ratio (ratio spreads),
you can use different expiry (calender spreads).. So choice is virtually unlimited.
To identify them use Reward to Risk ratio along with probabilty of market reaching your max breakeven point, and max profit point.
Hope this helps.
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