Low Risk Options Trading Strategy - Option Spreads

[rrmhatre72]

Hi VaibhavPRO

You have a lot of interesting questions in your post.

Here is one way to see the value of an option :

The example is made on a future but you can also apply it to a stock.

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. Coffe at : 135.20

Strike price of the put : 160.00


Put strike minus Future price : 160.00 - 135.20 = 24.80


24.80 is the difference between the call of 8.50 and the put 33.30 : 33.30 - 8.50 = 24.80


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

Hi Dan,

Example went bouncer for new guy like me.
Appreciate if you can explain it with Nifty prices.
Let us take current prices of Nifty.

Nifty Spot :4940
June 5200call : Rs 55
June 4700 Put : Rs94
Nifty June Future :4936

 

[rrmhatre72]

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

Thanks AW10 for your feedback.
I have gone through given thread. Let me put my strategy in same prospective. (I get this info from my xls file)

Direction - Rangebound
Construction - Sell 1 - PUT option strike June5000, and Sell 1 - Call option strike June5000
Cost of trade (or net premium)= 5000call sell 138 +5000 put sell 190
so our net cost 138 + 190 = 328/-
Max Risk = Unlimited if market is below 4678(5000-328) or above 5328 (5000+328)at expiry
Max Reward = 328X50=16400 rs. (If market is at 5000 on expiry)
Break-even point = below 4678(5000-328) or above 5328 (5000+328)at expiry

Stoploss : I am confused here as due to volatility price may increase but still I may be within my breakeven range. (this part is not getting covered in my xls file) Should I exit in this case? or wait paitinely for expiry.

Am I missing anything more while planning option? Pls advice.

 

[VaibhavPRO]

AW10 Sir

U were right sir we should not think about our past trades and should think about future.. today i covered my bull spread @ 350 profit and took a new position

i think it is calender spread(not sure )

sold may 5000 call @ 58
bought june call 5100 @ 96.9 rs
as per my calculations
no loss between 4750 - 5080 (for 7 days)
max profit @5000 = around 3500
Reason for trade : I think market will be range bound for 7 days.

sir plz correct me if i m wrong..
thanx for helping beginners like us sir

vaibhav

 

[DanPickUp]

Hi Dan,

Example went bouncer for new guy like me.
Appreciate if you can explain it with Nifty prices.
Let us take current prices of Nifty.

Nifty Spot :4940
June 5200call : Rs 55
June 4700 Put : Rs94
Nifty June Future :4936

Hi rrmhatre72

You are right, when you say it is confusing. It is really my mistake. This has nothing to do with new or not new.

I edited the post to make it more clear and now it should be possible for you to make the calculation in an easy way.

As you see, it is about American style options in a pit traded future market.

All American style option have the same pricing model.

If you not can make this calculations on the nifty options, then nifty options have a different pricing model.

Take care

DanPickUp

 

[rrmhatre72]

Hi rrmhatre72

You are right, when you say it is confusing. It is really my mistake. This has nothing to do with new or not new.

I edited the post to make it more clear and now it should be possible for you to make the calculation in an easy way.

As you see, it is about American style options in a pit traded future market.

All American style option have the same pricing model.

If you not can make this calculations on the nifty options, then nifty options have a different pricing model.

Take care

DanPickUp

It is crystel clear now. Thanks for new learning for the day.

 

[AW10]

AW10 Sir

U were right sir we should not think about our past trades and should think about future.. today i covered my bull spread @ 350 profit and took a new position

Have you turned bearish today or what was the reason to close your bullish position ?
Today't market has given inside bar.. and I don't think one can make decision about next trend on inside bar.
hope you are keeping track of the brokerage that u pay on yr options trade. Calculate your P&L after adjusting for brokerage cause just to open and close this position you would have done 4 transactions i.e 2 buy and 2 sell.
Otherwise, u need to calculate your personal BEP for option trade by giving little bit of extra margin.

i think it is calender spread(not sure )

sold may 5000 call @ 58
bought june call 5100 @ 96.9 rs
as per my calculations
no loss between 4750 - 5080 (for 7 days)
max profit @5000 = around 3500
Reason for trade : I think market will be range bound for 7 days.

sir plz correct me if i m wrong..
thanx for helping beginners like us sir

vaibhav

This strategy is Diagonal Calender Spread. Diagonal because the strike price of both legs are different.
I don't think, the BEP calculation is correct (not sure if u used any tool for this). Risk graph of Calender spread is not simple hence u should use tool to determine the breakeven points.

I can't comment on calculation as I don't have access to tool now. But I don't think you have no loss till 4750. If market falls, both Calls will loose value. Good for your May Call, but June call will also loose value. So effectively, you might gain only the differential of the two. Then next question comes about what shd u do with Jun leg, after May leg has expired.

Personally, I don't trade calender spread so can't contribute my experience on it. Best will be that you simulate various scenarios and be ready with your plan of action.

Happy Trading

 

[DanPickUp]

Hi

Intrinsic Value and Time Value.

How to find out about each one ?

Each option price is made out of an intrinsic value and a time value.

In the last example, you have seen, that the 160 put has a value of 33.30

I will take the same situation as given there.

First I want to know about the intrinsic value of the option.

The intrinsic value of the option is the different between the strike price and the spot price.
This you already have seen.

Future spot is by 135.20 and option strike price is by 160.

You now calculate the different of those : 160 - 135.20 = 24.80

We now know, that the intrinsic value of the option is 24.80

As we know, the broker want to sell the put for 33.30

Now we can find out about the time value of the option.

We take the market price from 33.30 minus the intrinsic value price of 24.80 = 8.50

Now we have the time value of the option which is 8.50

Do not get confused now. In reality, there will be all over miss pricing and this calculations you see here are the ideal prices.

As you also see, the time value in this example is at the same time the price of the call. In reality you nearly not will find such constellations.

But it is important to understand the time value and the intrinsic value of an option.

This comes in to play, when you compare far out of the month options with in the month options.

Take care

DanPickUp

 

[simple_trader]

Have the names got swapped in your example?

 

[AW10]

DanPickUp.. I also think so, that u have misplaced Intrinsic value and time value.
When market is at 135, then 160 strike put is already worth 160-135 = 25. Any price that we pay above 25, is toward the time premium ie.time value. So here 8.x is time value.
If clock stops and option is settled now, then it will be settled at 25 i.e. Intrinsic value and time value component of 8.x will disappear.

Maybe you would like to edit the post.

Happy Trading.

 

[DanPickUp]

Have the names got swapped in your example?

Hi

Thanks for the quick reply to you and AW10.

English puzzles me some times as it is not my mother tongue.

It always takes time to write any of this post and mistakes are many times just programmed.

Have edited the one and now it should be right.

DanPickUp