Low Risk Options Trading Strategy - Option Spreads

[AW10]

abigbull, TT has nicely answered your query.
My views are -
The way you have created the position, is exactly how novice trade and you have seen the result of it. In option trading, u need to keep in mind few extra parameters before understanding if you are buying overvalued or undervalued option.
The high uncertainty of event was already built into the price. Do you think, option seller will take unlimited risk without collecting higher rewards for it. So at that time options were costly. And as always happen, after the event, volatility drops and options start getting cheaper and return to their normal price level.

The mistakes that u made are
1) buying options when they are most costly
2) not knowing sufficient option plan - ie. breakeven point beyond which u will make profit, exit strategy for loosing leg or winning leg.
3) not understanding impact of high volatility on option pricing

that is sufficient for learning.. What next..
As TT has mentioned, because u have paid 220 rs for this position, your breakeven points are 4900+220 = 5120 and 4700-220 = 4480. To me that seems like wide range for market to travel before u can make any profit on it. Even if market crosses those limit by Mar expiry, it may not happen in next 1 or 2 days but will take more days.. And in that period, u will be loosing the premium due to timedecay.
So, first thing,(1) u shd decide your loss limit, i.e how much of 220 rs, u are ready to loose.
If u say 25%, then when joint premium of whole position drops to 25% or 220 = 175, u just exit the position.
(2) If you think, u made the wrong trade and not comfortable in holdign it, then close it immediately and book loss. Remember, first loss is always the smallest loss.
(3) To track your position, think in terms of Net premium rather then counting each leg.
i.e. you created position by paying, 220, which is worth 180 now. Your stoploss is at premium of 175 .. etc.

(4) You can adjust the position depending on your view on the market .. if you are bearish/bullish, then u can convert this to bearish /bullish spread using either put or call.
Say for bullish view, Close the loosing PUT leg at loss, so you are left with 4900 call.
Sell 5000 Call and collect some premium to reduce the time decay effect still keep the bullish trade on. (quite possible this willl still not make u profit at the end).

So rather then struggling to make profit from a loosing trade, you may like to close it early.

hope this gives u some idea / pointers to decide you next action.

Happy Trading

 

[adshanth]

Hi AW10

I have learnt a lot in this very useful thread here as well as other threads and i thank you for sharing so much,

i have been trying to do a trade setup wherein i can strip the time value of options (after taking into consideration volatility and vega), without too much of a risk.

one of the methods i can think of is

1) selling series of call and put options on both sides ie if nifty is 5000 then to sell call and put of strike prices 4800 - 5200.

simpler way would be ofcourse sell 500 cal and put options of only one strike price instead of all strike prices but what i have observed is that it is not so robust especially if the underlying moves too fast

2) the biggest risk here is that i would have naked positions especially if there is a large open move overnight. the mitigant being that it has to be an extremely large move which is rare on a day to day basis; but if you get caught.....

3) since very large open moves are mostly on the downside, i can buy lower priced options, (say if ihave sold till 4800, when nifty is 5000, maybe buy options at 4500 to hedge.) this will lower my returns but will allow me to sleep peacefully

hope i am clear in my explanations , is there a better risk : reward for time value stripping...... would request your comments on the same....

 

[DanPickUp]

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[adshanth]

Hy adshant

I am not clear what you ask here for free.

AW10, please stop me now. You know, we are friends and some times I get more than mad about the the way I feel, that I have to give some comments on what you do here and I step in front of you to tell what you do. If you angry me, just tell.

Why don't we first make a contract about how much you are going to pay to AW10 to give all his knowledge away for free here ?

I read in the thread of my friend and I see all of your people just ask and ask, but I see only few fellows which give just a thiny bit back. Why ?

Karma. Yes I heard about that. AW10 did enough karma to serve all students in India for the next decade !

So why don't you read and study books and threads like AW10 did for years, and then study more and then ask question ? Why can you not do that like he did ?

Are you mental disable or what is the problem with you ?

He did all his work and you try to suck him out like a vampire .

DanPickUp

Dear Danpickup

I am sorry if i am giving the impression that i am asking something for free, i am infact also sharing an idea which i have used to profit and i wanted some opinions on the risk - reward ratio and encourage a discussion on the same.

I am aware that my ideas may be of poor quality / bad idea, but the basic premise of me sharing it was to share whatever little knowledge i have

there is no doubt that you and AW10 and so many others have contributed a lot and have increased the knowledge levels of various readers including myself

i have been having thoughts on time value stripping and have actually put my ideas into actual trading using the strategy. but i am aware of the higher risk (though low probability) of massive overnight moves.

I have considered various strategies and the above was more robust (ie a 30 - 40 point variance would not affect my exepected returns much)

maybe i should have been more clear in explaining the strategy, i would appreciate that if sometimes you think back and consider that though not i am not of the calibre of yourself and AW10, either in knowledge or contribution, sometimes we would also like to share our thoughts and contribute

 

[adshanth]

Hi Danpickup

re you mentally disabled or what'"

i strongly object to you using these words, for better or worse i have posted my thoughts on a strategy which i have been using to trade and i wanted opinions on the same. i am infact sharing my little knowledge (either good or bad). for you to think that people only want and are parasites smacks of irritation and arrogance. maybe i should just not post / read.

What makes it more arrogance is thinking that all questions / thoughts are put in by beginners and that knowledge sharing can be / is being done only by a few people.

there is no question of sucking anybody like a vampire here, maybe i was mistaken that i was sharing something which i have put considerable thought to, which you are thinking as just parasitic. i would like to know if i have to contribute should i not put my thoughts open to everbody, and believe me danpickup, my calibre is not of urs or AW10 but my intentions are also not as selfish as u make me to be.

 

[pkusingh]

Hello AW10 & Linkon

I am a new to option trading and just made one trade during the Budget day and would like to know ur thoughts on it .

4700 PUT Buy at Rs 80 10.50 am Nifty at 4886
4900 CALL Buy at Rs 140 10.50 am Nifty at 4886

Now when the market started to rise at around 4965 my CALL was priced at 155
and PUT at 40 so got 50% loss in my PUT value and only 15 pt increase when my call was ITM .

and finally when the day ended the value of my positions are as follows .
BUY call 4900 at 140
Buy Put 4700 at 40 .
so i am in loss ? Is this the correct way of options working and also would like to know if my approach was right for this Budget day ?


Thanks in advance ...

Dude, the problem was volatility, when you bought the options at that time nifty vol was very high due to the budget(around 25%).....so you paid high premium compare to the normal days.

I did almost same type of thing..but more risky trade then you.
bought future @ 4880
sold call strike=5000 @98

I got lucky ,after few minutes future was 4895-97 and call was 88.

I squared off and earned 27 point.

Generally I trade covered long or short.

PS. Generally if nifty close at yesterday's closed price then all premium get discounted by 5-6% due to time vaue.

 

[pkusingh]

abigbull

On a day like today you should keep out of trading if you are still learning options. One big reason is before a big event like today unfolds, the implied volatility in options is very high as a result of which they are over priced both calls and puts. After the event unfolds the IV comes down drastically and the options drop in prices drastically for no move in the underlying. You would have witnessed it today around 1130-1230pm.

A better options would have been to wait for the trend of the day to set and then take position. 4830 was support and 4914 was the resistance. You could have waited for the break of one level and taken a directional call on that.
One more thing to keep in mind when starting to trade in options in to exit in parts. When NF touched 4980-5000 levels your Ce would have been in profits also on the charts you could see that the momentum was lacking. That would have been the point to exit in profits on the calls.

If your trade was purely a budget day trade then it should have been different meaning it should have been directional. If you are holding it a a positional call then you should calculate your break even which is at 5120 and 4480. If your view is that the mkt will break these levels by expiry then you should hold.

Sorry I missed your thread. You are absolutely correct.

 

[linkon7]

Hy adshant

I am not clear what you ask here for free.

AW10, please stop me now. You know, we are friends and some times I get more than mad about the the way I feel, that I have to give some comments on what you do here and I step in front of you to tell what you do. If you angry me, just tell.

Why don't we first make a contract about how much you are going to pay to AW10 to give all his knowledge away for free here ?

I read in the thread of my friend and I see all of your people just ask and ask, but I see only few fellows which give just a thiny bit back. Why ?

Karma. Yes I heard about that. AW10 did enough karma to serve all students in India for the next decade !

So why don't you read and study books and threads like AW10 did for years, and then study more and then ask question ? Why can you not do that like he did ?

Are you mental disable or what is the problem with you ?

He did all his work and you try to suck him out like a vampire .

DanPickUp

Dan,
Come on, this is not right...

I'll give u one example. Abe Lincoln used to call over his friend for dinner and discuss a topic with him. Abe would argue and debate both for and against the motion. The friend just sat there and nodded his head and didnt contribute anything constructive in the discussion. End of the dinner Abe would thank his guest for the wonderful debate. The logic was that, by debating with a novice, he was able to clear his thoughts and have more conviction for his next action.

Only way a trader can grow is by discussing his beliefs... Benefit of discussion is clarity of thought... Clarity of thought gives confidence to act.....

AW10 is very knowledgeable and what ever i know of options / money management is mostly thanks to him. He is self less by nature and is helping others by choice. Others are not sucking the blood out of him.

A candle looses nothing by lighting another candle...

 

[DanPickUp]

Hy

As you know me, I am some times quite provocative.

If I have gone to far, I really apologize for that. I really do, because I know you are all ok.

Ask question, but be fair and please think, that what AW10 just gives for free is worth a fortune. I do not know many people which give away so much information in trading for free. I mean, I am also not to short with information I give away for free, but there is a limit.

I some times feel, that I have to remember you about that.

I may have the wrong look at this. In other forums in the world where I am, there are usually two parts.

There is the paid one and there is the free one.

In the paid one, I know that I payed and so I get better information than in the free part. That is for me normal.

Here it seems, that every body just expect that everything has to go out for free. And this kind of thinking, is what I some times criticize.

Like I say, it is my mentality to think like that, even I lived for six years in Asia.

Correct me in a correct way or show a compromise.

DanPickUp

 

[abigbull]

Thank u Linkon , TT , AW10 (Awesome Ten and others .

for clearing my doubt . just on that front would like to know . when buying a option how or what are the ways to know if the volatility is more and the prices are infalted ?
Also how do i know if the momentum for the particular position has diminished say the momentum is gone for 4900 call when the nifty reached 4960 value .

Adshanth.
Yes u r right . i have read many thereads in Traderji and still learning and have concluded or rather read about the approach u suggested .

CALL / PUT Sell + a CALL / PUT Buy to hedge a big up move and eventuallt lose the CALL / PUT buy position at the end of the month . Ghosh sir recommends that kind of a move sometimes .

Danpickup : I think u r not from india . where everybody gives , everyone takes and everything is available for free in some cases for some time ..
This is called sharing . Even a cigarette is smoked by two persons on sharing basis .

and to clarify i am not a parasite who intends to suck blood ( knowledge**) but i am a student sitting on the last bench staring bewildered as to what is going on in the lecture and just putting out the questions that are in my head in this forum . Its not only for AW10 its for everybody if some one want s to answer they can , if not then my question will die a natural death ..
By the way even u can answer any question without a loss of single drop of blood from ur body

See u all and thanks fro reading my post .