Low Risk Options Trading Strategy - Option Spreads

[trader.trends]

Another question is how to develop strategy?. I mean what kind of information is required to do so?. What kind of parameter i need to take care of before hand?

Gautam

A strategy comes later. First comes the observation. You need to observe the market movements. From observation comes the idea of a strategy.

Decide the time frame which you want to trade. This is the first step in formulating a strategy. Do you want to trade intraday, weekly, swing, monthly, positional? The time frame you are comfortable with will lead you to the strategy. The strategy that you think of in one TF may or may not apply in another TF. If your strategy is based on EOD then don't look at intraday charts. That will only confuse you and lead you to make mistakes. For EOD trader intraday movements is noise. Corollary: All lesser TF than the one you are trading is noise.

After deciding the TF that you want to trade, choose the security you are comfortable with. Futures, Options or Cash? Each one needs a different personality to trade. Understand how FNO works if you want to trade FNO.

Then decide which will you be more comfortable with: Only Price based systems? Only volume as an indicator? Only few technical indicators? A combination of all? There are simple systems as well as complex systems. How much complexity can you handle?

Once you decide all the three: TF, Security, Indicators, then you can narrow down the kind of systems you will be comfortable with. There are ready made systems in each of the areas (Price, Volume and Technical Indicators). Choose a couple of them and then back test them with the data available. Back test them in all kinds of mkts. If that gives you a positive expectancy then you can tweak is to suit your personality. No ready made system will suit everyone. Essentially we have to tweak the system to suit us. Corollary: All systems are personal.

Your final system should tell you clearly: Entry criteria, Position sizing, Initial Stop loss, Trailing stop loss, Scale in, Scale out and Final exit. Once the back test gives you positive result get your feet wet by trading the smallest unit possible on the system. Live trading will show up fault lines that you never thought existed. Once you iron out the fault lines, develop the all important psychology to trade the system and have immense faith and confidence in the system, you can start using it to generate the results you want.

The journey to find the system is in a way the journey to find the trader in you. Arduous but rewarding in the end.

 

[DanPickUp]

Gautam

A strategy comes later. First comes the observation. You need to observe the market movements. From observation comes the idea of a strategy.

Decide the time frame which you want to trade. This is the first step in formulating a strategy. Do you want to trade intraday, weekly, swing, monthly, positional? The time frame you are comfortable with will lead you to the strategy. The strategy that you think of in one TF may or may not apply in another TF. If your strategy is based on EOD then don't look at intraday charts. That will only confuse you and lead you to make mistakes. For EOD trader intraday movements is noise. Corollary: All lesser TF than the one you are trading is noise.

After deciding the TF that you want to trade, choose the security you are comfortable with. Futures, Options or Cash? Each one needs a different personality to trade. Understand how FNO works if you want to trade FNO.

Then decide which will you be more comfortable with: Only Price based systems? Only volume as an indicator? Only few technical indicators? A combination of all? There are simple systems as well as complex systems. How much complexity can you handle?

Once you decide all the three: TF, Security, Indicators, then you can narrow down the kind of systems you will be comfortable with. There are ready made systems in each of the areas (Price, Volume and Technical Indicators). Choose a couple of them and then back test them with the data available. Back test them in all kinds of mkts. If that gives you a positive expectancy then you can tweak is to suit your personality. No ready made system will suit everyone. Essentially we have to tweak the system to suit us. Corollary: All systems are personal.

Your final system should tell you clearly: Entry criteria, Position sizing, Initial Stop loss, Trailing stop loss, Scale in, Scale out and Final exit. Once the back test gives you positive result get your feet wet by trading the smallest unit possible on the system. Live trading will show up fault lines that you never thought existed. Once you iron out the fault lines, develop the all important psychology to trade the system and have immense faith and confidence in the system, you can start using it to generate the results you want.

The journey to find the system is in a way the journey to find the trader in you. Arduous but rewarding in the end.

Thanks to write it down is such clear and easy words.:thumb::clapping:

 

[AW10]

Gautam

A strategy comes later. First comes the observation. You need to observe the market movements. From observation comes the idea of a strategy.

Decide the time frame which you want to trade. This is the first step in formulating a strategy. Do you want to trade intraday, weekly, swing, monthly, positional? The time frame you are comfortable with will lead you to the strategy. The strategy that you think of in one TF may or may not apply in another TF. If your strategy is based on EOD then don't look at intraday charts. That will only confuse you and lead you to make mistakes. For EOD trader intraday movements is noise. Corollary: All lesser TF than the one you are trading is noise.

After deciding the TF that you want to trade, choose the security you are comfortable with. Futures, Options or Cash? Each one needs a different personality to trade. Understand how FNO works if you want to trade FNO.

Then decide which will you be more comfortable with: Only Price based systems? Only volume as an indicator? Only few technical indicators? A combination of all? There are simple systems as well as complex systems. How much complexity can you handle?

Once you decide all the three: TF, Security, Indicators, then you can narrow down the kind of systems you will be comfortable with. There are ready made systems in each of the areas (Price, Volume and Technical Indicators). Choose a couple of them and then back test them with the data available. Back test them in all kinds of mkts. If that gives you a positive expectancy then you can tweak is to suit your personality. No ready made system will suit everyone. Essentially we have to tweak the system to suit us. Corollary: All systems are personal.

Your final system should tell you clearly: Entry criteria, Position sizing, Initial Stop loss, Trailing stop loss, Scale in, Scale out and Final exit. Once the back test gives you positive result get your feet wet by trading the smallest unit possible on the system. Live trading will show up fault lines that you never thought existed. Once you iron out the fault lines, develop the all important psychology to trade the system and have immense faith and confidence in the system, you can start using it to generate the results you want.

The journey to find the system is in a way the journey to find the trader in you. Arduous but rewarding in the end.

Thanks TT, for putting the msg - to the point and in concise form.
I wouldn't have written that so well..
Thanks again.

Happy Trading

 

[AW10]

Thanks you very much AW10 and Trader-Trends for this useful posts .Sir you are are requested to starts ( If possible ) a new thread regarding various technicals studies and there use specially in option trading as there are large study materials available here in TJ for each and ever one except that of technical studies and there use in option trading
with regards
Gurpreet singh

Gurupreet, There are so much of stuff available on TA (in TJ and on Net) that I don't think I will be able to add anything significant there which is not already available. Rather I prefer to discuss - how to use them effectively in market conditions.

In my first few post, I have mentioned about the role of TA in options trading. As options trader, we need to know the few basic stuff
- What is trend (Up/down/sideway)
- How is volatility ( high/low/normal)
- Pay special attention to TIME aspect i.e. When
- How is momentum/ strength of trend.

As I mentioned earlier, it is better to trade market conditions rather then indicator. IMO, market conditions can be classified in 9 groups using 3 trends, and 3 volatility as given above. i..e High Volatility, up trend, Low volatitliy up trend etc.

Then as option trader, we have use TA to find the current conditions and once that is done, job of TA is over. Then we just need to find appropriate option strategy to benefit from it..

One can use whatever approach from TA to assess such mkt condition.
Hope this helps and addresses your query. (or you have something else in mind)

Happy Trading

 

[gautamparmar]

Hi

Thanks very much TT,AW10.

lesson learnt. What a nice explanation in plain simple words!!!!!

GREAT!!!!

Will try my best to follow your guidence.

gautam

 

[agnia123]

I have one query.. It may not be related to the thread but please try to solve... I have sold reliance march 1000 call 2 days ago and I also have 300 shares of reliance as I tried to adopt covered call selling. Now the market is up and rel march 1000 call is ITM. Do I need to cover the sold call in the case buyer of the call does not exercise the call option and reliance remains above 1000 for the whole month.

 

[simple_trader]

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 profit is 100 if market goes below 4800. i.e. 100 rs of reward for 44 rs of risk. giving u almost reward risk ratio of 2.3 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 = 2.8 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 100*50 = 5k. 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

Hello Mr AW10,

I am wondering how you have calculated 100 points profit in this 4800-4900 spread. I am even more surprised that no one is having any query on this.

As per my calculation profit will be max 56 points.

And risk reward of the strategy is almost 1:1 (with brokerage).

It does not look that encouraging!!

Please correct me if my calculation is wrong.

regards

thank you for wonderful threads though

 

[sibumajumdar]

Gautam

A strategy comes later. First comes the observation. You need to observe the market movements. From observation comes the idea of a strategy.

Decide the time frame which you want to trade. This is the first step in formulating a strategy. Do you want to trade intraday, weekly, swing, monthly, positional? The time frame you are comfortable with will lead you to the strategy. The strategy that you think of in one TF may or may not apply in another TF. If your strategy is based on EOD then don't look at intraday charts. That will only confuse you and lead you to make mistakes. For EOD trader intraday movements is noise. Corollary: All lesser TF than the one you are trading is noise.

After deciding the TF that you want to trade, choose the security you are comfortable with. Futures, Options or Cash? Each one needs a different personality to trade. Understand how FNO works if you want to trade FNO.

Then decide which will you be more comfortable with: Only Price based systems? Only volume as an indicator? Only few technical indicators? A combination of all? There are simple systems as well as complex systems. How much complexity can you handle?

Once you decide all the three: TF, Security, Indicators, then you can narrow down the kind of systems you will be comfortable with. There are ready made systems in each of the areas (Price, Volume and Technical Indicators). Choose a couple of them and then back test them with the data available. Back test them in all kinds of mkts. If that gives you a positive expectancy then you can tweak is to suit your personality. No ready made system will suit everyone. Essentially we have to tweak the system to suit us. Corollary: All systems are personal.

Your final system should tell you clearly: Entry criteria, Position sizing, Initial Stop loss, Trailing stop loss, Scale in, Scale out and Final exit. Once the back test gives you positive result get your feet wet by trading the smallest unit possible on the system. Live trading will show up fault lines that you never thought existed. Once you iron out the fault lines, develop the all important psychology to trade the system and have immense faith and confidence in the system, you can start using it to generate the results you want.

The journey to find the system is in a way the journey to find the trader in you. Arduous but rewarding in the end.

Dear TT, Many things to learn for a trader like me from this post. Thanks for the same. I developed a day trd strategy for MNF after going through TJ threads & also from Linkon. Making little profit regularly. But i wish to share my recent experience to state that its not only strategy/system/entry or exit but our attitude which makes all the difference. Last week i vetured to trade against the market trend without SL hoping & hoping that mkt will move in my way which we all know it never happens. Rode the loss adamently, neither sq off nor put sl. As a result lost few thousand. So i mean its upto trader on which all depends . Not on strategy or system only. Learned a lesson hard way. Thanks to ALL...SLM uncle

 

[DanPickUp]

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[AW10]

Hello Mr AW10,
I am wondering how you have calculated 100 points profit in this 4800-4900 spread. I am even more surprised that no one is having any query on this.

As per my calculation profit will be max 56 points.

Hi Simple trader, Thanks a lot for highlighting my mistake (using word PROFIT where I shd have used MAX VALUE OF 100 GIVING PROFIT OF 56). I accept my mistake there and hence updated my original post.. Thanks again.

Originally Posted by AW10
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 profit is 100 if market goes below 4800. i.e. 100 rs of reward for 44 rs of risk. giving u almost reward risk ratio of 2.3 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 = 2.8 to 1.

---- updated text starts here----
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.
---- updated text ends here----

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 = 2880. 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

And risk reward of the strategy is almost 1:1 (with brokerage).

It does not look that encouraging!!

I think, that is individual's perception. There are traders, who would go for far lower RRR ratio eg. stock trader buying a stock of 500 rs to make 50 rs on this giving RRR of 50/500 = 0.1 to 1.
Atleast in this case you have the RRR of 56/44 = 1.27 to 1.
Similarly, brokerage cost vary from trader to trader, Some people just pay 1 point in brokerage, whereas others pay 5 points.
Just sharing my views.

Hey, am I looking for some more posts for correcting my prev posts ? If that comes, then I will be very happy to recieve them and update the content wherever required so that it doesn't not pass wrong msg to any reader in future. So keep writing.

Happy Trading