Low Risk Options Trading Strategy - Option Spreads

[AW10]

For your 4800 PUT to see and Profit, market has to expire below 4800-40 = 4760 rs before the expiry. That means, 200 points from current level.

If you think, that it can happen, then you shd hold the position. Else you know what needs to be done.

My personal view, I don't see that we will hit new low before May expiry, but not ruling out the possibility of New Low in June.

But, Market doesn't follow me or you or anybody else. It has its own behaviour pattern.
So please, trade as per your own view about the market. And when trading option, don't forget the remaining life of the contract.

Happy Trading.

 

[simple_trader]

In my opinion, there is a possibility that market would make a upswing and it is preparing for it. It would take a few days to make the base. If that happens, I guess some the spread like 4900-5000,5000-5100 (June series) etc. look fine in terms of probability. AW10, please comment on this.

 

[AW10]

For your 4800 PUT to see and Profit, market has to expire below 4800-40 = 4760 rs before the expiry. That means, 200 points from current level.

If you think, that it can happen, then you shd hold the position. Else you know what needs to be done.

My personal view, I don't see that we will hit new low before May expiry, but not ruling out the possibility of New Low in June.

But, Market doesn't follow me or you or anybody else. It has its own behaviour pattern.
So please, trade as per your own view about the market. And when trading option, don't forget the remaining life of the contract.

Happy Trading.

I posted this yesterday (bold text), and today market proved me wrong.
Just reinforces the fact that I can fail in anticipating mkts move.

Having said that, I am still of the view that we might be close to the end of current fall. Mkt is in oversold zone..and don't think it has further steam left to go down immediately. It might make a bounce, before falling further. In intermediate term, we still might see lower lows.. but lets wait and listen to the market..

Happy Trading

 

[rrmhatre72]

Planning an Option Trade

2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.

Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 = 100 rs.
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max reward of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)

----------------------
This part is for addressing the most important components of trade planning - EXITs

Stoploss point - Price = When value of spread falls below 25 (i.e. out of initial investment of 47, we are not ready to loose more then 47-25 = 22 rs)
Stoploss point - Time = When 4 days are remaining for expiry and position is still in loss

Profit taking - Direction = When my view about market's direction has changed from bearish to bullish or sideway.
Profit taking - Price = When atleast 80% of potential max profit is achieved. Better to move on to next opportunity rather then waiting for last bit of profit.

EXITs is something that depends from trader to trader hence there is no single correct solution for it. But above points will help you in preparing in advance for eventuality. Once we are in trade, emotions start impacting our decision making capability hence it is better to think about them right now when there is nothing is at stake.

Happy Trading

Hi AW10,

I tried to put this in xls file.
All the points are getting simulated as inidcated by you. i.e max risk, breakeven point etc...
Only point which is not matching is maximum reward.

I have taken example of 5100 put buy @157 & 5000put sell at 113.
Net risk is 44points. Added brokrage of Rs4. My file shows risk of Rs2600 with one lot. So logic is met in my file.
Breakeven point is (5100-44-4)= 5052. This is also getting simulated in file.
Max reward should be 100-Rs4(Brokrage) = Rs4800. But my file shows max profit of Rs2600 (52 points).

I would really appreciate if you can go through file & advice where l am calculating it wrongly & not able to simulate max reward of 96(100-4) points.

 

[trader.trends]

Hi AW10,

I tried to put this in xls file.
All the points are getting simulated as inidcated by you. i.e max risk, breakeven point etc...
Only point which is not matching is maximum reward.

I have taken example of 5100 put buy @157 & 5000put sell at 113.
Net risk is 44points. Added brokrage of Rs4. My file shows risk of Rs2600 with one lot. So logic is met in my file.
Breakeven point is (5100-44-4)= 5052. This is also getting simulated in file.
Max reward should be 100-Rs4(Brokrage) = Rs4800. But my file shows max profit of Rs2600 (52 points).

I would really appreciate if you can go through file & advice where l am calculating it wrongly & not able to simulate max reward of 96(100-4) points.

rrmhatre

This confusion between maximum reward and maximum profits exists due to usage of words in a different manner. For the risk of 44 you receive a reward of 100 means maximum you can lose is 44 from your pocket and maximum money that can come into your pocket after you put on the trade is 100. You have to deduct the cost(44+4) incurred for getting the reward (100) to arrive at maximum profit. This is a peculiarity with spread trades as cost is incurred first unlike say an intraday trade that you put on with stoploss of 2/- and target of 4. Here there is no cost involved. Either you get 4/- or you lose 2/-.

But maximum profit is is 100-44-4= 52/- only. If the trade goes against you max you can lose is 44+4 and maximum profit is 52. Hope you can understand the difference between max rewards and max profits.

 

[DanPickUp]

Hi buddy

Stay here in the good thread and do not care about other stuff.

We appreciate your word and your knowledge.

DanPickUp

 

[AW10]

Hi AW10,

I tried to put this in xls file.
All the points are getting simulated as inidcated by you. i.e max risk, breakeven point etc...
Only point which is not matching is maximum reward.

I have taken example of 5100 put buy @157 & 5000put sell at 113.
Net risk is 44points. Added brokrage of Rs4. My file shows risk of Rs2600 with one lot. So logic is met in my file.
Breakeven point is (5100-44-4)= 5052. This is also getting simulated in file.
Max reward should be 100-Rs4(Brokrage) = Rs4800. But my file shows max profit of Rs2600 (52 points).

I would really appreciate if you can go through file & advice where l am calculating it wrongly & not able to simulate max reward of 96(100-4) points.

Rahul, TT has beautifully answered yr doubt.. You are right in yr calculation.
btw, one suggestion - use only one scale in yr analysis.. i.e. Talk every thing in money terms or convert everything into points..
Mixing them up, only increases the confusion..
And in my belief, u shd not count money while performing any profession. So all my analysis is in points or % always. Never in $ terms. If u do the job right, money will follow.
Would u like to meet a doctor for your treatment, who is looking at his watch regularly during yr appointment, and focusing on how to send you off quickly so that he can meet next client and make extra fee..
in my view, that is focusing on money and not on profession.

Happy Trading

 

[jaywings007]

Hi AW10,

what is difference between American and Europian options? what is their style and expiry pattern with respect to Indian options?

Also can you please elaborate the Exersise mechnism of indian options (Index and stock options)?

Regards,

 

[manimesh29]

hello sir!

first i would really want to appreciate all the amazing work done by you.......
i am an avid trader of stock futures basically with 20 min. chart & i am quite successful in it. i have some questions for u & would be grateful if u look into it........

1. i want to hedge my stock future position with options . how much would time decay & volatility affect my position as i square off my position within 2-3 days ?

2. i want to try the bullish & bearish spreads with liquid stock options like tatamotors & reliance..... how much do u think it is feasible & plz correct me if i m wrong........

regards & happy trading.......

 

[rrmhatre72]

rrmhatre

This confusion between maximum reward and maximum profits exists due to usage of words in a different manner. For the risk of 44 you receive a reward of 100 means maximum you can lose is 44 from your pocket and maximum money that can come into your pocket after you put on the trade is 100. You have to deduct the cost(44+4) incurred for getting the reward (100) to arrive at maximum profit. This is a peculiarity with spread trades as cost is incurred first unlike say an intraday trade that you put on with stoploss of 2/- and target of 4. Here there is no cost involved. Either you get 4/- or you lose 2/-.

But maximum profit is is 100-44-4= 52/- only. If the trade goes against you max you can lose is 44+4 and maximum profit is 52. Hope you can understand the difference between max rewards and max profits.

Thanks TT & AW10,

This has cleared my doubts.
Earlier I was under impression that risk reward ratio will be 1:2. ( 48 points: 96points)
But your explaination indicate it is ~1:1.10 (48points : 52points)
Is there any statergy which has risk reward ratio better than this?