Low Risk Options Trading Strategy - Option Spreads

[AW10]

DearAW10
Could you please reflect on the following trades of mine and suggest.
On 25-03 I sold a straddle of 5200 put and 5200 call @227x10 while nifty was at about 5220. At the end of that day about 3.20 pm I bought back the straddle at about 220.
The next day being Friday with the week end coming up and expecting premium to decline a little faster and nifty being again at about round figure (5290) I sold 5300 put and 5300 call at about 202.30.but had to buy back the straddle at 208 at about closing. Intriguing. This straddle had closed at about 199 on Thursday with nifty futures at 5272 and on Friday with weekend coming up the straddle closed higher. The decline in the put premium was insignificant compared to the rise in call premium. Obviously the demand for the put was higher than the call. Now how does one reckon how the straddle will behave during the course of the day
Do we know of any option calculator or software that will help us on this.

Thanks

nano16,

Very first question that u need to address is - What is your timeframe for trade ?
If you are looking at intraday trading, then straddle/strangle type of strategy will always restict the gain cause one of the leg is always going to be looser while other leg is winning. To get benefit from such short straddle/strangle position, you need timedecay to work for you. Effect of timedecay is very low from morning to evening (except near expiry).. maybe about 50 - 80 paise since morning till evening.

So if you are planning to intraday, then it is better to go ahead with directional approach to trade i.e. use NF, Buy Call or Put, Buy or Sell Spreads etc.

It is not just the time decay, but volatility and perception of risk also drives the option price. In normal case, option should get cheaper by evening and their fair price should accoomodate the time decay of weekend. But if risk perception has changed then this drop might get nullified by rise in premium due to volatility. So if you had rise and fall in the market during intraday, you might see option price changing at faster rate during the fall cause people run to buy protection and hence premium goes up.

On friday, if you sold straddle at 202 in the morning and bought back at 208 .. then there is something really wrong with the approach. In short, You sold at lower rate i.e. sold below fair value or sold at wrong time when volatility was low.

Hope this gives u some idea about option pricing. It is not straight forward so please spend time in understading price dynamics well.

Currently we are in so low vix environment that options are really cheap.
Even the May series is going cheap. So my current approach is to create net Long option positions and wait for volatility to rise.

Happy Trading

 

[AW10]

Trade for this month : To be initiated on Monday

Long : 5200 put April @ 70
Short : 5400 call April @ 54
Short : 5300 put April @ 108
Short : 5300 Call April @ 99

Upper Protection : 5445
Profit Target : 6%

Exit plan : Long NF at 5450 if 5445 is broken

Comments welcome...

Linkon, nicely planned position.. but not sure if you have addressed following points in your planning or not..
1) what is the life of this trade ?
2) what is your expectation of market during that period ?

You need to ensure that your max profit point, coincides with above two answers. Say if your view is bearish (that is when u will make money with it),
then you will never get max profit of 190. Most likely you will get something >100 but <190 rs.

Another dimension to it is rise in volatility. If mkt falls, then volatility is going to go up, and that will have -ive impact on the 4 legs of this position. With 3 short legs and 1 long leg, you are holding 2 short legs net.In option greek terms you are 2 option short vega (greek that measures volatility). So as volatiliy rises (vega increases), it will have -ive impact on your short vega positions.

Hope it doesn't confuse you much and you can follow my points.

In current mkt conditions I am creating effectively long positions. Say 5400 short 1 put and 5200 long 2 put. Or 5300 short april, 5300 long may or naked long options.

Happy Trading

 

[prasham]

Trade for this month : To be initiated on Monday

Long : 5200 put April @ 70
Short : 5400 call April @ 54
Short : 5300 put April @ 108
Short : 5300 Call April @ 99

...Raking in lots of money :clap:

 

[SwingKing]

We are currently trading in a low volatility scenario. In a low volatility scenario options are cheap and which means we would be giving out less amount of money from our accounts. Since we are going to see expansion of volatility in coming sessions, it would not be a bad idea to initiate a straddle strategy. The reason I am mentioning straddle here is because of the 5th quarter effect where market's tend to retrace. There is no clear direction on the market till 5330 gets taken off. And hence I feel we may either explode on the upside or on the downside. Low volatility scenarios are ideal to execute this strategy. So let's see how things shape up.

Tc.

 

[trader.trends]

I would look at the following spreads available as of now

5200-5100PE (68-42) Rs. 26/-. Max profit of 74/- if mkt goes to/below 5100. RR1:3.

The same RR can be constructed with 2lots long 5300PE(106*2=212), 3 lots short 5200PE(68*3=204) and one lot long of 5100PE(42). Net cost 50/- Max reward of 150/-. The BE is at 5275 on NF which is where we almost are. Min reward of 50 if we tank below 5100.

 

[abigbull]

We are currently trading in a low volatility scenario. In a low volatility scenario options are cheap and which means we would be giving out less amount of money from our accounts. Since we are going to see expansion of volatility in coming sessions, it would not be a bad idea to initiate a straddle strategy. The reason I am mentioning straddle here is because of the 5th quarter effect where market's tend to retrace. There is no clear direction on the market till 5330 gets taken off. And hence I feel we may either explode on the upside or on the downside. Low volatility scenarios are ideal to execute this strategy. So let's see how things shape up.
-----------
Would u recommend any position raunak for this situation then . I have a open Call for 5400 bought when nifty was 5235 but still facing a Rs 10 loss in it even when the nifty is now at 5280.

 

[AW10]

abigbull, in option trading, TIME and VOLATILITY are important component of pricing.
Since the time you opened the trade, due to timedecay you are in loss. so even if market goes to 5350 by 3rd week of april, this call may still not gain value.

Hope u have decided your stoploss level to cut this position.
If your mkt view has changed (which I doubt cause your name suggest that u are always bullish), then you can sell 5300 call..and collect 94 points. As a result of this, u would create a BEARISH CREDIT SPREAD.. giving u 94-56 = 38 points in pocket. If mkt falls, below 5300, u can keep this premium of 38. If market goes above 5400 Max you will loose is 100-38 = 62 rs. Though this doesn't look attractive at first glance..but if you add the "probablity of success" dimension to it you might see that probablity is higher of making 38 rs.. then loosing 62 rs.

Mkt is still struggling to cross 5300 level mark so it needs to make another attempt to for this and during this process time is working against option buyers.

Happy Trading

 

[SwingKing]

Would u recommend any position raunak for this situation then . I have a open Call for 5400 bought when nifty was 5235 but still facing a Rs 10 loss in it even when the nifty is now at 5280.

abigbull, I think AW10 has answered your query. I suppose you have 5400 Call option on your side. I think Aw10 is right when he says that even if market's move to 5350 you might loose money on it. This is primarily due to time decay. As a golden rule you have to consider volatility and time decay before entering into any option position. It is said that 80+% people loose money in options and this is primarily due to not taking into account the above mentioned factors.

Coming back to your original query now, I'll be entering a straddle only when i see first signs of volatility expansion. Volatility can remain low for a long time and if we presume it to expand before the signs appear, then our positions can move into losses. Volatility is definitely going to pick up soon. But as of now, its a wait and watch scenario.

Tc.

 

[abigbull]

Thanks Raunak . AW10 . Let us know when the favorable situation arrives!!

 

[simple_trader]

I guess next week, would be good for entering straddle. It was was a doji kind of candle on last week, we would see volatility expansion after breaking last week's low or high.

But the risk is volatility can remain low for long time.

Happy trading


regards