Low Risk Options Trading Strategy - Option Spreads

[DanPickUp]

-------------------------------------------------------

 

[rkkarnani]

Gautam, you can also use Private Message feature of the forum to get in touch with SLM Uncle directly.

Hope you remember the TJ rules about sharing personal contacts etc which is not allowed on TJ.

If you won't mind, then Plz edit your post and remove personal email before TJ or moderators find it out. (my personal request).

Thanks
Happy Trading.

AW..now your post quoting Gautams post has his eMail id!!!!

 

[simple_trader]

Simple Trade. Reward to risk ratio (RRR) is one of the important factor in decision making process for selecting whether to take a trade or pass it on.
We also need to look at the probability part of it. What is the probability of
mkt hitting 4500 in remaining life of market ? Generally, I don't like buying naked options cause odds are against them. They make money only in 1 situation, when market moves in their direction. But they loose money in many situations like
- when market stays sideway
- whem mkt goes against them
- when mkt moves in their direction but not fast enough to cross the break even point
- when mkt moves in their direction but not early enough to recover the value that they have lost due to timedecay.

That means, chances are much higher the the put buyer will loose money. Fact that more then 90% options expire worthless.. i.e. there are so many 90% people who bought the option but did not get anything from it and decide to let it go in the bin..


They are just my views and the way to look at trading.

Looking forward for more of your posts..

Happy Trading

If you read first few posts of this thread, then u

Dear AW10,

It seems my previous reply lost due to some reason. I am trying put together the same words again.


I agree with you and I was meaning the same. Naked PUT would not make money even though there is 1:9 risk reward in my example.

The broader message that I am trying to convey for all, is that risk reward should not be the prime criterion for initiating a trade (I may be sounding a bit different).

Normally, when we initiate a trade, risk:reward = 1:1 always because if we have bigger reward, then it means we are taking lower probability of hitting target.

As per my understanding, risk reward plays major role once we are in a position. Like how we add trailing SL, how we adding position to winning one etc.

Mostly when we initiate a trade - risk+probability of hitting SL : reward+probability of hitting target = 1:1

Though, most naked option buyers lose money due to position sizing and time value decay than risk reward.

I took naked option buying to compare with bear spread, because both have limited loss, both are directional, but naked buy has huge risk reward, but still professionals do not prefer to buy it (as probability of failure is 9:1).

So which way price is going to move immediately, is the key whether we make money or not (most cases, not all though).

 

[DanPickUp]

---------------------------------------------------------------

 

[gautavina]

Deleted ******************
Gautam

 

[gautavina]

deleted ********************

 

[AW10]

AW, With due respect... your post will have his email id as well you missed to edit his post.

How dumb I can be ?
Thanks Vikas for pointing it out. I have edited my post now.

 

[AW10]

Dear AW10,

It seems my previous reply lost due to some reason. I am trying put together the same words again.


I agree with you and I was meaning the same. Naked PUT would not make money even though there is 1:9 risk reward in my example.

The broader message that I am trying to convey for all, is that risk reward should not be the prime criterion for initiating a trade (I may be sounding a bit different).

Normally, when we initiate a trade, risk:reward = 1:1 always because if we have bigger reward, then it means we are taking lower probability of hitting target.

As per my understanding, risk reward plays major role once we are in a position. Like how we add trailing SL, how we adding position to winning one etc.

Mostly when we initiate a trade - risk+probability of hitting SL : reward+probability of hitting target = 1:1

Though, most naked option buyers lose money due to position sizing and time value decay than risk reward.

I took naked option buying to compare with bear spread, because both have limited loss, both are directional, but naked buy has huge risk reward, but still professionals do not prefer to buy it (as probability of failure is 9:1).

So which way price is going to move immediately, is the key whether we make money or not (most cases, not all though).

Simple Trader, I don't think, we lost your post. I think, It is just that it takes some time to reflect latest post in the thread.

I agree with whatever you have said regarding RRRatio.
From usage perspective, I do use it as filter criteria of ignoring some trades like buying just below a resistance or selling just above a support level and rather wait for next entry signal.

Happy Trading

 

[prasham]

AW, Currnetly PE 4900 (April) is 76 and PE 4800 (April) is 55. Does this mean that if I buy PE 4900 and sell PE 4800, my cost shall be Rs. 21 (excluding the extra charges)?

If the market dips below 4879, I shall have profits?

 

[AW10]

AW, Currnetly PE 4900 (April) is 76 and PE 4800 (April) is 55. Does this mean that if I buy PE 4900 and sell PE 4800, my cost shall be Rs. 21 (excluding the extra charges)?

If the market dips below 4879, I shall have profits?

Yes Prasham, you are right with your calculation. Your breakeven points is 4900 - 21 = 4879.
But that is only partial trade plan. Plz look at first few posts of this threads to make it complete. You need to look at your exit conditions as well.

In this trade, you will make max profit when mkt ends below 4800. And Max loss of 21 Rs. if mkt stays above 4900.
To reach you max profit area, mkt has to break various support levels hence assess rough probablity of making max profit. How long do you want to wait to see, whether mkt is going in your direction or not (i.e. time based exit condition).

So plz extend your plan and then u just have to follow your plan.

Happy Trading