Low Risk Options Trading Strategy - Option Spreads

[nayarock]

SeniorsJi’s

I am new to Options. I have a doubt.

1) If we short sell Put/Call at prem Rs.10 at starting of month and if it becomes 0 or <Rs 1 before last day of expiry then should I buy it to squareoff? Will it do automatically? will I get Rs10-Rs1 profit into my account same as equity?
2) If I shortsell Nifty 1 Lot for Rs.10, then how much money in my account will be blocked (Till I buy the same lot).

Please clarify. Thank you

NR - You look to be as novice as me in field of Options. Hence I suggest you first of all checkout basics of Option Trading on Investopedia.com. It has a huge pool of articles from experts all over the world. Once you are through with the basics come over and our inhouse experts like AW10, Dan and others shall help you out.

Prasham you are right I am new to Options. I will get Theoretical Idea by going through sites, but My doubt is Practical.
I have a doubt with some number (Rs.10) in it, by such example I will understand easily how it works at the end of month.

I have already started trading in options with Long Strangle, till now I am in 25% profit. But My doubt is with Selling of Call / Put.
Thanks

 

[AW10]

Re: Doubt

SeniorsJis
1) If we short sell Put/Call at prem Rs.10 at starting of month and if it becomes 0 or <Rs 1 before last day of expiry then should I buy it to squareoff? Will it do automatically? will I get Rs10-Rs1 profit into my account same as equity?

You don't have to buy it back on expiry day. Rather leave it to expire worthless.. (atleast you will save brokerage in this cause when u buy it back, it is transaction and hence u need to pay brokerage, stt etc).

you will get 10 - 0 = 10( if left to expire worthless) , or 10- 1-brokerage (if you buy it back)

2) If I shortsell Nifty 1 Lot for Rs.10, then how much money in my account will be blocked (Till I buy the same lot).

Please clarify. Thank you

At current rate, ur margin might be in the range of 25 to 30k for each leg. so if you are selling 1 call + 1 put, then you are looking at marging of 50 to 60k.
In my view, 20 points return on 60k of capital is not worth it.

Specially if u take the huge risk that u are carrying. Cause if market moves during these 20 days and your short position comes in-the-money then u
might end up loosing a lot.

So be aware of RISK part while looking at selling options. If you are new, then try out the spreads that I have explained in this thread. This will give u exposure to selling options at the same time will limit your risks..

Happy Trading

 

[nayarock]

Re: Doubt

You don't have to buy it back on expiry day. Rather leave it to expire worthless.. (atleast you will save brokerage in this cause when u buy it back, it is transaction and hence u need to pay brokerage, stt etc).

you will get 10 - 0 = 10( if left to expire worthless) , or 10- 1-brokerage (if you buy it back)


At current rate, ur margin might be in the range of 25 to 30k for each leg. so if you are selling 1 call + 1 put, then you are looking at marging of 50 to 60k.
In my view, 20 points return on 60k of capital is not worth it.

Specially if u take the huge risk that u are carrying. Cause if market moves during these 20 days and your short position comes in-the-money then u
might end up loosing a lot.

So be aware of RISK part while looking at selling options. If you are new, then try out the spreads that I have explained in this thread. This will give u exposure to selling options at the same time will limit your risks..

Happy Trading

Thanks a Lot AW10 :thanx:

 

[rkkarnani]

RKK, depends if you want to throw more money to reduce the risk ..
if yes, then buying 160 or 170 call could be an alternative.
If not, then u can sell 140 put, and collect some money back. When stock goes down 130, u will get whole almost 8/9 rs as value of the spread so close the trade.

My only concern is, due to low liquidity and wider spreads, u might end up loosing almost 1 rs in just slippage to close spread trade. While trading spreads, u are actually doing 2 transactions.. hence slippage hits you 4 times, twice while opening the trade and twice while closing it.. and that is fairly big % of profit. Hence I am bit reluctant to suggest spreads on stock options.

Or reduce the contarct size and keep whole investment as your stoploss. So even if you loose all, it is just another stop got hit.

Hope this helps.

Thanks AW, for this insight!! Yes , I am reluctant too to do spreads in stock options for the reason spelled out by you!! But thought of seeking views as I am still very new in Options!!
I exited my 150 PUT at 5.55 , got scared when price after touching 151.20 went upto almost 153, Nifty was also rising, but bought 140 PUT at 1.55, so I gained 2.25 in 150 PUT and used 1.55 to but 140 PUT which is "Free" (actually a few hundred rupees gain in hand) and would carry it with SL on underlying at Rs.170.00

 

[rkkarnani]

Exited my 140 PUT at 2.55!!! May reenter again at lower levels in 140 or 150 PUT!!

 

[simple_trader]

Dear AW10,

First of all, sorry for putting this query in the wrong thread.

How do you find write of APRIL 5300 CALL at 73 and 5100 PUT 127? Position is covered between 4900-5500 range.

I do understand the risk of writing option in contracting market. Plz let me know your view in terms of pros and cons.

regards

 

[AW10]

Simple_trader, I am no one to say if it is good trade or not. It depends on person to person. So if your reading is till april end, i.e. next 45 days, market is going to remain in 4900 - 5500 days then you might take this trade. This trade will give max profit when mkt stays between 5100 and 5300.

As a option trader, it is not attractive for the fact that you are getting timevalue of 200 rs for next 45 days. which is even less then 5 rs per day. Which is not attractive to me. Generally I look for around 8 to 10 rs of time decay per day. As volatility is low now and any increase in volatility will result in option price going up..and hence ur losses will also be due to increase in volatilty.

I would rather search for better opportunity then this. There are some great oppotunities available there if you know what to search.

You can read more about this strategy called short strangle strategy in TJ /or net.

Happy Trading

 

[simple_trader]

Thank You AW10 for your valuable comments. Let me go through other thread.

By the way, I just wanted to get your view on this. Not the decision whether I should take the trade or not. That remains with me.

regards

 

[AW10]

I am answer a question asked on other thread regarding difference between debit and credit spreads,
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Spreads are classified using
1) Bullish Spread - (eg - buy lower strike option, Sell higher strike option)
2) Bearish Spread - (eg - buy higher strike option, Sell lower strike option)

btw- forget itm/otm/atm stuff.. just keep the lower/higher based relationship in mind and you will not get confused. When u buy stock, you are bullish.. so u buy at low and sell at high.

Nature of initial cash flow
1) Debit - where your acct is debited while opening the position (eg - for bullish spread, Buy lower Strike CALL and Sell higher strike CALL, or for bearish spread, Buy higher strike PUT and sell Lower strike PUT )
2) Credit - where your acct is credited while opening the position (eg - for bullish spread, Buy lower Strike PUT and Sell higher strike PUT, or for bearish spread, Buy higher strike CALL and sell Lower strike CALL)

Now basics of call pricing and put pricing
1) Lower strike CALLs are always costlier then higher strike
2) Lower strike PUTs are always Cheaper then higher strike

So when you buy lower call, and sell higher call (bullish call spread), you will end up paying money (hence debit). ==> Debit Bullish Call spread

So when buy lower PUT, and sell higher PUT (bullish put spread), you will end up recieving money (hence credit). ==> Credit Bullish PUT spread

To limit the confusion, I am not explaining the bearish credit/debit spread here. But, if you can digest what I have posted here, then you can easily extend it to bearish spreads as well.

Happy Trading

 

[DanPickUp]

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