Low Risk Options Trading Strategy - Option Spreads

[AW10]

Hi AW10

Nice way you trade that straddle.

High-risk strategy; not for novices or intermediates.

For those which just follow AW10 and are now in the trade, but do not have a clue what they do, they may lower there risk by buying further out of the money calls and puts. In that way they will have a long Iron butterfly, which is a less risk strategy.

Take care

Thanks Dan for pointing out on the risk side of Short Straddle thread.
I 100% agree with you.

I am running with open risk on them cause anticipating good support at 5000 level and specially after 8% fall, I don't see much chances of another set of fall. Even if mkt has to fall further, then at least I will see it for next few days and then take appropriate action.

In normal condition, 5% of distance on BEP on either side, after 8% move is quite well within 80% of mkt conditions. Hence comfortable in taking it forward with no hedge at this stage. Above all, I have position size as well. So even if I everything goes worst with this, I will not be out of business.

For others, with limited risk capacity, or lack of position sizing strategy, do take some action to limit the loss by buying protective Put option for downside.

Happy Trading.

 

[trader.trends]

AW10

A point that need some elaboration for me. You said you shorted 5100 straddle when Nifty was at 5305. Here the call would have given you around 250+ while the put would have given you around 40. Why would you lock up margin money for a measly protection of another 40 points on the upside? Since you had a bearish view, you were bound to lose on the 5100 puts at least in the short term. Why not just short the 5100CE?

Can you elaborate your logic of shorting the 5100PE for 40+ points at the beginning of the series with a bearish view in mind?

 

[VJAY]

Dear AW10 sir,
I bought 5000 pe & 5300 ce yesterday for total price of Rs:103...looking market would go any one way up/down...if market goes to sideways what plan to put?can i exit from the trade....

 

[AW10]

AW10

A point that need some elaboration for me. You said you shorted 5100 straddle when Nifty was at 5305. Here the call would have given you around 250+ while the put would have given you around 40. Why would you lock up margin money for a measly protection of another 40 points on the upside? Since you had a bearish view, you were bound to lose on the 5100 puts at least in the short term. Why not just short the 5100CE?

Can you elaborate your logic of shorting the 5100PE for 40+ points at the beginning of the series with a bearish view in mind?

TT, I did not create position at that time to eat time decay.
As mkt was not moving up.. and had all the factors lined up for fall.. so I Choose to pick up 5100 CALL and play on the decay of it's intrinsic value. And while market is taking time to make this move, I was eating the small time decay on this trade. Infact I had 250-5305-5100 = 45 rs of time value on Call as well.
So it was like, I had 45 + 40 rs of timevalue in hand and 200 of intrinsic value in hand. This 85 rs of time value was good enough to protect aginst the upmove from 5300 level. In this fall, I have already enjoyed the decay in intrinsic value + time value.. and now converted the position to play on time decay.

Hope you are getting my thought process.
I am sure there might be better ways to play this scenario but with my limited knowledge, this is what I could visualise and executed the trade.

Others - if you are confused, then go back to basics of option pricing, time value, intrinsic value, effect of timedecay etc.. and come back to this post after you have got the basics.

Happy Trading

 

[AW10]

Dear AW10 sir,
I bought 5000 pe & 5300 ce yesterday for total price of Rs:103...looking market would go any one way up/down...if market goes to sideways what plan to put?can i exit from the trade....

Vijay, for you to see any green light on this trade, market has to end beyond 4900 or 5400 .. Do you think that will happen before expiry ? What if that doesn't happen ? How will premium change on your position ?
When will u cut the position ?

In my view, if market is stuck between 5000 to 5300 (which is quite likely), then u will loose whole premium. Dear the major part of move is already over.
Long strangle strategy that u are using is useful when mkt is contracting and ready to expand..
In my view, market has already expanded and maybe ready to contract now.
or maybe have small expansion remaining now. Hence I have adjusted my position for sideway market.
In otherwords, we both are having opposite view on the market now for next few days. At some stage, we both will change our mind.. but during that period, while time decay is hurting you, it is putting few drops of profit in my pocket. Lets see how market pans out in next few days.

Hence it is important to understand your strategy and current market condition before making the choice.

Happy Trading

 

[AW10]

I think some point call spread 5000-5100 or 5000-5200 (more risky/rewardy) will be good in this series.

If market tests 200 DMA, it will be good bet. What's your opinion on this?

Simple_Trader, check out on the probabilty of max gain in both spreads.
5000-5100 will get into profit early, whereas 5000-5200 will need extra 100 points move by market.

5000- 5100 is costing 67 rs approximately with max profit potential of 100-67 = 33.
5000- 5200 is costing 120 rs approximately with max profit potential of 200-120 = 80.

so why not get two lots of 5000-5100 spread. You risk remains same of 120 points approx but probabilty of making 33*2 lot is much higher.

It is finally your choice, about which risk/reward/probablity profit u are comfortable with.
Happy Trading

 

[simple_trader]

Simple_Trader, check out on the probabilty of max gain in both spreads.
5000-5100 will get into profit early, whereas 5000-5200 will need extra 100 points move by market.

5000- 5100 is costing 67 rs approximately with max profit potential of 100-67 = 33.
5000- 5200 is costing 120 rs approximately with max profit potential of 200-120 = 80.

so why not get two lots of 5000-5100 spread. You risk remains same of 120 points approx but probabilty of making 33*2 lot is much higher.

It is finally your choice, about which risk/reward/probablity profit u are comfortable with.
Happy Trading

Dear AW10,

Thank you for your response.

you are right, 5000-5100 will be better at current level. But I am looking those strike when NIFTY tests 4950-4900 (if at all).

As per my under standing then, it would be like this (at 4950) -

5000-5100 = 95-55 = 40 cost, max profit 60.

5000-5200 = 95-20 = 75 cost, max profit 125.

double position is giving 5 points less in 5000-5100 pair, also brokerage will eat some more. However you have raised a good point.

break even point is lower in 5000-5100 pair, but margin requirement is higher if we consider double position.

All in all, I would prefer 5000-5100 due to lower break even point. As it will increase probability of the trade.

regards

 

[rrmhatre72]

Hi

If you buy a put to the existing positions, you will have a put credit spread and a naked call. (Credit spread, because you had more income than costs).

If market falls, you will lose on the 5100 put and you will win on the 5000 put. So you reduced your risk on that side. You also will win on the sold 5400 call.

------

For the moment you will reduce your win from the sold put at 46 rs minus the bought put for 28 rs = 18 rs and the sold call for 65 rs = 83 rs.

In this calculation is not included the actual option prices from today !

and I did not mention your market view for the next few days, which I do not have any idea about it.

------

If your view is, that the Nifty trades in a range then the next thing comes in which AW10 already mentioned :


"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 a chance that your sideways market view is getting negated ..and then u decide
to buy protection."

-----

You now have the put credit spread and you have a sold call.

If you now get a signal from your chart or what ever you use as indicators, that Nifty will turn upwards, you have to protect your sold call.

To protect your sold call, you will buy the 5500 call. You then have a put credit spread and a call credit spread which is by the way a condor.

You will lose money on the bought put and you will win money on the sold put. You will lose money on the ???? and you will win money on the ????

If you already have a problem to answer that ( any kind of trader or person ), then you do not understand the way option work and you should quickly go to a lower level and learn more about what is a call and what is a put option.

------

rrmhatre72. To me it seems, that you have no idea about option software and before you go and trade such strategies, start to learn how to use the right option software.

First : With such software you can test all of your questions.

We can give you all the answers you need, even me, which is not trading the Nifty.

Understanding options and how they work or what you can do with them is one thing ( it is all the same all over the world ), but trading them in reality is an other thing.

Second : As long as you not learn or know how to use option software, you better stay out of such trades.

Take care

Thanks Dan for your inputs.
I really want to learn more about options in details.
currently I am going through various sites & reading same.
But I am looking for someone who can personally guide me on this.
Appreciate if you can advice on this. I am from Mumbai.

You also mentioned option software. Pls advice more on that.

 

[rrmhatre72]

Thanks Rahul.


I have doubled my position today by selling more 5100 straddle around 225 premium. My net premium collection is 255. This gives me breakeven range of 4850 to 5355 which I am quite comfortable at with. If someone has opened the position, their breakeven point would be at 5100-225 = 4875 and 5100+225 = 5325. That means I have addition buffer of 30 points.

When I opened the position, it had time value of appro 180 points (nifty was at 5305). Today, nifty at 5100, almost whole of premium of 225 (price at close of today) is timevalue. Roughly 15 rs of profit for each passing day due to time decay. So when time decay really works fast, I am holding a position with more higher time decay in hand.

VIX has gone up, Already panic is in the mkt, bulls are doubting their stance, and hence options are at higher price. And as a trader to make money, my goal is to sell pricy stuff (sell higher) and buy under priced stuff ( buy lower). I wouldn't make mistake to buy when options are pricy. specially when position is running in profit. Depending on how market behaves in next few days, I will decide whether to hold it or close the position. I do have stoploss in mind, just in case I need them.


After recent downtrend, it is possible that we might go for sideway market around 5100 +/- 100 points. And hence I have adjusted my positions for sideway conditions (i.e. eat timedecay).
I might be wrong... so plz don't fhink even for a moment that this is what mkt is going to do. Better to form your own views about it.


It depends on your view about the mkt. So decide on your views about the days to come first .. not about what happened in last few days. And then select suitable strategy.

Hope this answers your questions and give you points to think and act on.
Happy Trading

Thanks AW10 for aswering one by one query.
As per me higher side is limited (Max to 5300) But on lower side it may go upto 4800 at expiry. So I want to play in the range of 4800 to 5300.
Currently I have following position in market.
Sold 5100call at 99 - 5lots
Sold 5200put at 133 - 4lots.

This is covering me from 4960 to 5280 in profit if i hold till expiry. (Considering brokrage)
I know I have screwed up by not taking position on both legs at a time.
What is the suggested way to correct this stratergy to meet my range?
Or exiting from it is better option.

 

[hiteshsjoshi]

As mkt was not moving up.. and had all the factors lined up for fall.. so I Choose to pick up 5100 CALL and play on the decay of it's intrinsic value. And while market is taking time to make this move, I was eating the small time decay on this trade. Infact I had 250-5305-5100 = 145 rs of time value on Call as well.
So it was like, I had 145 + 40 rs of timevalue in hand and 200 of intrinsic value in hand. This 185 rs of time value was good enough to protect aginst the upmove from 5300 level. In this fall, I have already enjoyed the decay in intrinsic value + time value.. and now converted the position to play on time decay.

250 - (5305 - 5100) = 45 and not 145 Sir....You were having 45 + 40 = 85 points of time value in your hand leaving 5385 as your high BEP and I must say, that was indeed a very brave move at that time as noises of 5350-5375 were eminent owing to Reliance results and positive OI buildup....
Had positioned myself for April series 5300-5400 Call debit spread, which did not succeed ultimately.

cheers,
:thumb: