Low Risk Options Trading Strategy - Option Spreads

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rrmhatre72

Well-Known Member
Why don't you produce the trade plan for both strategy ?

You will yourself, which one suits YOU.
I might have different views about the range, but you are trading your views.. so that is fine. Both strategies are for rangebound market, but if you do complete trade plan, then u will realised many other factors.

Happy Trading.
Hi AW10,

I use attached xls file to understand various scenario. All calculations are based on the assumption last day price of the option.
I plug the data in it to check.
If anyone has better tool then pls advice.

Here I have plotted both the scenario.
1. Selling 5300call @ 45 & Selling 4700put @78.
2. Selling 5000call@138 & 5000put @190
I have added brokerage while calculating net gain.

Both the strategy are covering my range from 4700 to 5300.
First strategy cover me till 4600 to 5400.

But I want to know the risk involved. Which one is more risky based on your opinion as market will keep on moving its own way till June expiry. If I want to get out of it inbetween then where loss will be minimal.

Anyway, Pls share your views/range predication for June.
 
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AW10

Well-Known Member
Rahul, thanks for sharing the sheet. to tell u frankly, it is far far away from the was an option trade has to be planned.

Plz chk out this post where I have explained how to plan an option trade.

http://www.traderji.com/options/305...ading-strategy-option-spreads.html#post333543

Till the time, u don't address various points like max risk, max reward, Breakeven points, your exit criterias etc.. IMO, it is not option trade plan.

Hope this helps. Plz share you work here and I will provide feedback on that.
Happy Trading
 

VaibhavPRO

Well-Known Member
Hello AW10 Sir

I hope u remember me... Sir i have been trading for last month in options only and have traded with lots of strategies... after a month i would say that for a intelligent and safe trader Spreads are the best strategy to trade in options.. but sir sometimes reason like patience one needs in spreads and profit in beginning being small in spreads has diverted me to other strategy but still in end i come back to spreads.. so sir thank you for sharing ur knowledge in this thread with us.

today i was holding a bearish spread it was today in gain of Rs 1300 and i squared it off and took the profit. still there was around 1200 of profit to be taken in it left. I felt that market will make recovery in coming days. so i bought a bullish spread

bought 5000 call @ Rs48 and sold 5100 call @ Rs18
Max risk = 30 pts
Max profit = 70 pts(at 5100 level)
breakeven point 5030

Now seeing FTSE close weak and DOW trading weak i feel that i was impatient today and should have continue holding the bear spread...wat d u think sir ?

one more thing i wanted to ask was how does volatility or voloume of a particular option effects its price
How come 4700 put is trading at Rs 23.5 and 5100 call is trading at Rs 19.35?
is it because sentiments are bearish and most people are writing 5100 call?
 

AW10

Well-Known Member
Hi Vaibhav, Good to see your post. If you read some of the first posts of this thread, I mentioned that very first step of option trading is "forming your view about the market".
This is also required when it comes to managing our open trade.

today i was holding a bearish spread it was today in gain of Rs 1300 and i squared it off and took the profit. still there was around 1200 of profit to be taken in it left. I felt that market will make recovery in coming days. so i bought a bullish spread

bought 5000 call @ Rs48 and sold 5100 call @ Rs18
Max risk = 30 pts
Max profit = 70 pts(at 5100 level)
breakeven point 5030

Now seeing FTSE close weak and DOW trading weak i feel that i was impatient today and should have continue holding the bear spread...wat d u think sir ?
If for some reason, during the day, if ur view is no more bullish, then that is fine. So what u have done is right. i.e. when u are bullish, then closed bearish position and take bullish positon. Well done. You did what was right at that time. If Dow/FTSE had been in green then u might have been happy. That's not a pro trader would trade. We got to trade the reality and what we see. And once order is executed. job is over. Positive or -ive, doesn't matter. it is over. Now move on to next trade.

The spread that u have selected will be in green only when nifty crosses the BEP of 5030.. so that shd be your first target to watch for. If you see that mkt is struggling to go above 5k before expiry, and 5030 is looking distant chance, then u may decide to cut the loss to <30 and close the position. Making 200 points upmove in remaining 6 days could be difficult.. so I am bit skeptic about hitting max profit on this trade. But anything can happen. If we get strong bounce then we might hit 5100 too. So, don't worry about that now. Let market tell u that, first.

Coming back to your trading - Stick with your approach (i am assuming that u have structured approach to determine mkt trend) and learn "on the job" from your mistakes. Don't form your view about the mkt based on news or what Dow is doing. Still there is 3 hrs for dow to close so anything can happen. Maybe we can have any new news breakout.. Our trading shd not be at the mercy of news /media. Trade the fact. Make decisoin based on facts..i.e. what u see.

You might be proven wrong from time to time.. but that is fine. Nobody, yes NOBODY gets it right 100% of the time. Just ensure that your risk is limited even when u are wrong. But when u are right, stay with it. Patience is one of the most important attribute for success in trading.. You will gain it with practice over time.
Don't spend time on clsoed trade thinking should have, could have etc..." Rather spend energy to find out the will u do with your open trade if 1) this happens or 2) if that happens or 3) of something else happens..

one more thing i wanted to ask was how does volatility or voloume of a particular option effects its price
Volatility of underlying affects option price. More volatile is underlying, higher the option premium. Cause person who is writing option (i.e being insurance compny here), will ask for higher premium
to cover higher risk that comes with high volatility. Volume of a particular strike just indicates demand/supply .. But for we retail traders who trade in 10s or 100s of contract, volume doesn't matter so much.

How come 4700 put is trading at Rs 23.5 and 5100 call is trading at Rs 19.35?
is it because sentiments are bearish and most people are writing 5100 call?
Good observation. With mkt being at 4900, both strike are 200 points away. But they are carrying different premium. Due to recent fall, eveybody wants to buy Puts hence they are in high demand, and hence writer are selling at higher price. Nobody wants to buy calls, hence demand is low, and hence the premium too.

Hope this helps.
Happy Option Trading.
 

DanPickUp

Well-Known Member
Edit : I just see, that AW10 has given some answer to your post. AW10 and me just crossed with our posts. Next time I call him and ask, What do you answer at the moment :lol:

Hello AW10 Sir

I hope u remember me... Sir i have been trading for last month in options only and have traded with lots of strategies... after a month i would say that for a intelligent and safe trader Spreads are the best strategy to trade in options.. but sir sometimes reason like patience one needs in spreads and profit in beginning being small in spreads has diverted me to other strategy but still in end i come back to spreads.. so sir thank you for sharing ur knowledge in this thread with us.

today i was holding a bearish spread it was today in gain of Rs 1300 and i squared it off and took the profit. still there was around 1200 of profit to be taken in it left. I felt that market will make recovery in coming days. so i bought a bullish spread

bought 5000 call @ Rs48 and sold 5100 call @ Rs18
Max risk = 30 pts
Max profit = 70 pts(at 5100 level)
breakeven point 5030

Now seeing FTSE close weak and DOW trading weak i feel that i was impatient today and should have continue holding the bear spread...wat d u think sir ?

one more thing i wanted to ask was how does volatility or voloume of a particular option effects its price
How come 4700 put is trading at Rs 23.5 and 5100 call is trading at Rs 19.35?
is it because sentiments are bearish and most people are writing 5100 call?
Hi

First :

I wondering why you no more trade other strategies ?

You say :

"""i would say that for a intelligent and safe trader Spreads are the best strategy to trade in options"""

That is your view, never forget that. Other traders, which successfully trade other option strategies, have a far more different mind about, what is the best way for ( Intelligent ) option traders !

As you also say :

"""Now seeing FTSE close weak and DOW trading weak i feel that

i was impatient today

and should have continue holding the bear spread...wat d u think sir ?"""

Is it you, which is weak or is it the strategies you tried to trade but not implemented in the right way, because you did not understand what the strategy means ?
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Second :

Your question is a basic beginner question.

If you are an option trader, you MUST know the impact of the volatility !

It is called the options greek.

Volume has no impact of the price of an option.

By trading credit spreads, your long position and your short position will in general move the same way the vola doe's.

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Third :

"""How come 4700 put is trading at Rs 23.5 and 5100 call is trading at Rs 19.35? is it because sentiments are bearish and most people are writing 5100 call """

As I do not trade nifty options, this has to be answered by a trader which trade this market.

( The answer is here : Where is spot nifty price and how far away is your put and your call from that spot price ? )

If markets are bearish, then there are sometimes situations, where the puts are over priced. The option dealers know their risk and they want to save them self's with higher prices. It is like your car insurance : At the moment you fill out your papers to get the insurance, the company will check your answers and then decide, there is more risk or less risk. If the risk is less you pay less and if for them the risk is higher, you pay more. You can apply the same way of thinking to the options dealers, which make the prices of the options.

Take care

DanPickUp
 
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VaibhavPRO

Well-Known Member
@ AW10 sir

Thank you sir for ur elaborate response.
sir i know a bit about how vega affects the stock price.. what i wanted to know was whether only seeing the relative volume of 2 options we can guess the relative volatility of the two options . sir some 2 weeks back there was a situation when market was trading at around 5060 and the volume of 5200 call was much more than the 5000 put...
and sir how is this voltility calculated.. how many days average of volatility is taken?.. and is the volatility calculated by seeing high lows or open close for the day and hw is then vega calculated . is thr a simple way or calculator.. giv link sir..
 
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VaibhavPRO

Well-Known Member
@Danpickup

Sir u feel a bit offended.. actually sir i have a capital of mere Rs 30000. i can only write one lot at a time(as my broker requires rs 20000 margin for writing 1 lot). also i cant even buy a nifty future(cost 26000) and write 1 lot simultaneously.

so what i should have written was "for a intelligent, safe trader with small capital credit spreads are best"

i know about most other strategies would have loved to implement them but cant do due to limited capital

so if u have any better strategy with better risk reward ratio than spreads which is possible in 30000 then plz share it .
 

DanPickUp

Well-Known Member
@Danpickup

Sir u feel a bit offended.. actually sir i have a capital of mere Rs 30000. i can only write one lot at a time(as my broker requires rs 20000 margin for writing 1 lot). also i cant even buy a nifty future(cost 26000) and write 1 lot simultaneously.

so what i should have written was "for a intelligent, safe trader with small capital credit spreads are best"

i know about most other strategies would have loved to implement them but cant do due to limited capital

so if u have any better strategy with better risk reward ratio than spreads which is possible in 30000 then plz share it .
Hi

Check your PM
 

DanPickUp

Well-Known Member
Hi VaibhavPRO

You have a lot of interesting questions in your post.

Here is one way to see the real value of an option and to say, if it is over priced or under priced :

The example is made on a future and it should also work with stock options.

The difference between the futures price and the strike price is ALWAYS equal to the difference between the prices of the put and the call.


EXAMPLE :

Future Sept. Coffee at : 135.20
Strike price of the put : 160.00

I know the price of the 160 call which has a value of 8.50

I know the price of the 160 put which has a value of 33.30

Next step :

Put strike ( 160 ) minus Future price ( 135.20 ) gives us 160.00 - 135.20 = 24.80

24.80 is the difference between the call of 8.50 and the put of 33.30.

33.30 - 24.80 = 8.50

Look at the strike price and then look at the option prices. They must be all perfectly in line.
If they are not they will be overpriced or under priced.

If overpriced, sell them and if under priced buy them.

If the option is overpriced, you can be sure, that the implied volatility is high.

To understand more about implied volatility and long term volatility ( statistical volatility ) you should once google for : Black Scholes formula and take your time to read about that subject.

Take care

DanPickUp
 
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Volatility of underlying affects option price. More volatile is underlying, higher the option premium. Cause person who is writing option (i.e being insurance compny here), will ask for higher premium
to cover higher risk that comes with high volatility. Volume of a particular strike just indicates demand/supply .. But for we retail traders who trade in 10s or 100s of contract, volume doesn't matter so much.


Hi AW10 sir,

I am new to options, and as mentioned above, I am one amongst option writer, I have straight away shorted PUT 5800 May 27 at the premium of 25,34 and 44. Now it's just another 100 odd points away from my strike price. Now I am having sleepless night, time of this post [12.52 AM], please suggest if I should short PUT 5700 May 27. or short any CALL options.

Your strategy is really good, but will take some time for me to understand.
 
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