Low Risk Options Trading Strategy - Option Spreads

[trader.trends]

u r rite in saying that by seling option u have unlimited liability..but isnt it possible to square off after u think ur sl is hit? (i am asking a question n not commenting)

Again seniors pls explain me one thing... Today mkt was in marginal red...still the % change in put of 5200 and 5400 was different..how come.
5200 put remained stagnant around 5.5 whereas 5400 put went from 79 to 89.
I know 5400 put is in the money n 5200 is out of money but the change in option price is very different...I would have made money if i had bought 5400 put instead of 5200...here even after correctly identifying the trend i chose wrong strike price :annoyed:

Can seniors pls explain why this happened, n is it that u always buy in the money options ?

Ashish
With two days to expiry, 5400put has no time value left in it. It has complete intrinsic value in it. This means its delta becomes one. For every point that Nifty moves down the 5400PE will also move down one point. In turn this means I can get the maximum leverage if I trade ITM options towards expiry. For one lot of NF I will need to block 25K. Whereas for one lot of 5400PE, I block only Rs.4500-5000 and get the same advantage of trading in NF. Hence although in Derivative segment the NF1 is the most traded security towards expiry you will find the nearest options taking that place. The ROI in trading ITM options is phenomenal in the expiry week. Since more people will prefer to trade the 5400PE compared to the 5200PE, the OI in 5400 will be more.

 

[AW10]

Hi ,

m starting to learn to trade options... If i m of the view that nifty will be range bound and in between 5100 and 5400 then do i sell 5100 put and sell 5400 call..
will this be a good strategy?
(sorry if the questions seems stupid )

This is Short Strangle Strategy. (you can read more about it online). which is fit for sideway market. you are enjoying the timedecay when market stays in the range.
As Swamy mentioned, short option can result in high losses (In my view, there is nothing called as unlimited..but Very High is more appropriate).

So think of using part of collected premium to buy further otm option and limit the risk.
specailly one should protect short put position.. cause surprise shocks don't come after telling anyone.. and whenever those shocks come, first reaction is market selloff.

Happy Trading

 

[AW10]

dear ashish,
i am also new to options. as of my understanding selling is unlimited risk, in your strategy, if you buy indteaded of selling both call and put,, it'll be turn to unlimitted profit and loss is limitted to your premium only.
seniors....correct me if i am wrong.
tnx,

In range bound market, all option buyers loose money as timedecay is eating the profit.
And when one buys Put and call, the impact of time decay is double. Hence I would not suggest to keep LONG options position in sideway market.

These market neutral strategy works great after market has spent few days in narrow range and breakout is just around the corner. (like what we have seen from last 2 days).

Check out my NR7 thread where I have given sample strategy in first few posts to play the forthcoming breakout thru options.

Happy Trading

 

[ashish1802]

This is Short Strangle Strategy. (you can read more about it online). which is fit for sideway market. you are enjoying the timedecay when market stays in the range.
As Swamy mentioned, short option can result in high losses (In my view, there is nothing called as unlimited..but Very High is more appropriate).

So think of using part of collected premium to buy further otm option and limit the risk.
specailly one should protect short put position.. cause surprise shocks don't come after telling anyone.. and whenever those shocks come, first reaction is market selloff.

Happy Trading

sorry for asking this but can u explain this part in a simpler term...went bouncer


So think of using part of collected premium to buy further otm option and limit the risk.
specailly one should protect short put position.. cause surprise shocks don't come after telling anyone.. and whenever those shocks come, first reaction is market selloff.

 

[ashish1802]

Ashish
With two days to expiry, 5400put has no time value left in it. It has complete intrinsic value in it. This means its delta becomes one. For every point that Nifty moves down the 5400PE will also move down one point. In turn this means I can get the maximum leverage if I trade ITM options towards expiry. For one lot of NF I will need to block 25K. Whereas for one lot of 5400PE, I block only Rs.4500-5000 and get the same advantage of trading in NF. Hence although in Derivative segment the NF1 is the most traded security towards expiry you will find the nearest options taking that place. The ROI in trading ITM options is phenomenal in the expiry week. Since more people will prefer to trade the 5400PE compared to the 5200PE, the OI in 5400 will be more.

thanks for the reply... got it.... will c tommorrow how ITM options play out..

 

[AW10]

sorry for asking this but can u explain this part in a simpler term...went bouncer


So think of using part of collected premium to buy further otm option and limit the risk.
specailly one should protect short put position.. cause surprise shocks don't come after telling anyone.. and whenever those shocks come, first reaction is market selloff.

Ashish, To trade your view of rangebound market between 5100 to 5400, you can sell 5100 Put and 5400 Call. For May-10 series, you will collect 46 rs for Put ad 65 rs for Call.
i.e. you have collected 110 rs. Now u can buy 5000 May Put at 28 rs and limit the risk of any fall. After having 5000 Put long position, you can't loose more then 100 rs in this trade when market falls.

If you still want to play safe, then u can also buy 5500 call..
Depending on your personality, you might decide to buy this protective leg when u are opening the trade.. or u might decide to wait and see if there is chance that your sideway market view is getting negated ..and then u decide to buy protection.

Better to think about that all such issues in advance and note it as your plan. Once u in the trade, we get emotionally attached to it and hence decision making is influenced by emotions.

hope it is clear now.
Happy Trading

 

[AW10]

If you want to learn it in 1 week.. then plz chk it out Dummies series / or some free PDF on net. I have given some sites in the 5th or 6th post of this thread.
You will be able to get good matrial there (video/audio/text).

Check out this book as well.
Options Made Easy: Your Guide to Profitable Trading by Guy Cohen

Happy Trading

 

[sumitdasjoshi]

hey aw10 and other member i just have a question if any one can help me suposse
nifty is a trading at 5234 and have my view that it will go up but i dont want to go for future i want to buy a call option for that so my question is that which call option should i go for is it in the money like 5200 ce or is it out the money 5300.look i want to take advantage of the ce option completly so what i want that i want that if nifty moves on point i want my call option is also move one point plz help i am confuse here.

 

[AW10]

Sumit, for this purpose you should trade ITM strikes. Deeper the ITM strike is, more closely it moves with underlying.
It is related to concept of Option Greek called Delta. Please read more about delta for better understanding of it.

Happy Trading

 

[DanPickUp]

Had to delete the post. It belongs not here.