Low Risk Options Trading Strategy - Option Spreads

[AW10]

Dear sir, i am long in bharti 350 oct call @ 17, so whats the advise, cmp is 16

Manjeet,

hope you have read my post #315 in this thread where I have given elaborate answer to talisman's query which is very similar to yours.

http://www.traderji.com/options/30597-low-risk-options-trading-strategy-option-spreads-16.html#post370587

Who am I to tell you what should be done with this Bharti 350 CALL ? If I tell u hold, and it goes down, I am not loosing anything but you are going to loose. And if it goes up and you make money, again I am not gaining anything.
so mere baap kaa kya jaata, manjeet bhai ko kuch bhee bol do..

I don't believe in that approach hence I have given detailed reply in prev post.

If you still have doubt or not able to read direction, or confused then feel free to reframe your question and post here. I will come back and reply that.

Don't get me wrong, hope you understand my intention here.

Happy Trading

 

[talisman]

To answer your question - first you need to decide what is your current view about the direction of the market ? (I am keeping it simple by skipping time perspective here)
Doesn't matter, if u were bullish 2 days back when bought the call. We must be flexible to change our view on market, if required, based on current reality,

Buy CALL strategy works well in strongly bullish market. It doesn't have great track record in mild bullish or sideway market. Timedecay will eat away the premium everyday when market is not going up.
Thats where, you can use Spreads to safegaurd against timedecay etc.

So, if your view is still bullish, then u can sell 5100 CALL and atleast reduce part of risk from 145 to lower amount and safegaurd against time decay. Say if you get 70 Rs for this spread, then your investment risk comes down to 145-70 = 75 for the potential profit of 100 (5100-5000).

If your view has changed to Bearish, then you can sell 4900 CALL say at 160 and collect money from market. Your gain in this case will be (160-145) = 15rs.. but if market goes up, then your risk will be
100 rs (5000-4900).
If you are buying 5000 PUT that means your view has changed to bearish. then why hold a bullish long position and loose time premium on it. Rather stay away from market and let the trend develop.
In sideway market,, long option positions are risky.

By selling 2 OTM calls (as suggested by someone), in my view, u will just recover your initial investment but block lot of margin capital. You will not make any profit.
With the same margin capital you can create spreads that can easily give u 1.5 to 1 reward, risk ratio. for example on bearish side - 50-49 long put spread giving 100/40, 51- 50 put spread giving =100/55, 51-50 credit call spread giving (115-72)=43/100.

Otherwise, simplest and best will be to take small loss and search for new opportunity. If you are not sure then atleast cut the position size to 1 lot and satisfy your ego to some extent, and preseve your capital to some extent.

My personal view on your position - it will come into profit only when market goes above 5000+145 = 5150 level.. So far, market has not gone beyond that level, so there are resistance zone to overcome before it reaches there. Personally I don't see that kind of strenght in the mkt now, otherwise, 5111 level should not hold for 5 days, and 5077 for 4 days. now even 5050 is holding from last 3 days. With each passing day, like a freezing ice block, this resistence zone keeps getting stronger and stronger, and it will need lot bigger force/impact to break.

Yes it can go there but question is when.. and can u wait that long. Else take action and trade what you see. Do fall in love with your position, but be ruthless with it. Better search love somewhere else.

Happy Trading

Hi AW,

You make complete sense with your observations. Yes, I managed to salvage the situation and the underlying anxieties but will definitely try to handle things in a better way in future trades.

Thanks a lot for your time.

Regards,

 

[abigbull]

Smart Trade : just wantd ur advice about options :
If i have the view that the Nifty will go up in nov ,will buy the next months call after 20th of Oct month . What should i do in options to hedge the : Buy Nov 5200 . Call now . ? and how what should be my approach if i buy the 5200 CE nov call on oct 23 .
I mean what will happen if the nifty goes up , goes down , stays near this value of 5000- 5050 or what should be the right options that i should buy for nov when the Nifty has lost 150 pts from its peak .

 

[AW10]

If i have the view that the Nifty will go up in nov ,will buy the next months call after 20th of Oct month . What should i do in options to hedge the : Buy Nov 5200 . Call now . ? and how what should be my approach if i buy the 5200 CE nov call on oct 23 .
I mean what will happen if the nifty goes up , goes down , stays near this value of 5000- 5050 or what should be the right options that i should buy for nov when the Nifty has lost 150 pts from its peak .

Have you checked out the first few posts of this thread..else take your time and go thru them.

For bullish position, you should be buying lower strike and selling higher strike.
Whether it is calls or puts - It makes no difference.. As long as strike price is arranged properly.
You can make as many combinations as possible - eg - buy 5000 /5100, 5000/5200, 4900/ 5000, 4900/5100, 4900/5200 etc,

For each combination, u can work out your reward risk ratio, and make a decision.
If you use ITM strikes, you have higher probablity of getting into money..
If you use OTM strike, the probablity will be lower.but reward risk may look attractive.

So select the one that suits you.. there is no single right answer.. That is beauty of options trading.. - it has spoiled me by offering so many choices. Why would I look at stocks where I can just Go long and nothing else.

Happy Trading

 

[arnav_rulz]

I was just thinking.. When a new month starts.. Which strategy is better ??

Say we are bearish. Which is better..

1)Buying a put and selling out of the money put? OR
2)Selling a call and Buying a out of money call..


Example-> Current Prices of Nov Options.. NIFTY is at 5000.

5000 Call = 150
5100 call = 100

5000 Put = 135
4900 Put = 95

If we Buy a 5000 put and sell a 4900 Put..
Max gain = 60
Max loss = 40
Gain starts below 4960

If we Sell 5000 call and buy 5100 call
Max gain = 50
Max loss = 50
Gain below 5050

Which of the two do you find better ? Or do u think both are equally good..??

 

[arnav_rulz]

You are effectively going long 2 spreads...back to back...your max profit is 100 points less the cost of these spreads...if the cost is over 100,this will a loosing strategy....

Max risk if mkt is between 4600-4800 on expiry day and max loss if all the spreads expire worthless...so the cost of both spreads is the max risk...

Best wishes,

Smart_trade

hi, AW10 what happens if i buy 4800 call, 4600 put, and sell 4500put ,4900call at 4700 stot level.can i gain profit?If yes, how and when?

Hi ST , he buyd 4800 call n 4600 put when nifty at 4700.

if nifty moves up or down, in either case , his one leg will be a sure losser n other a sure winner , they will cancel out , n same with selling of 4500 put n 4900 call ,
he will only end up paying brokerages , n so will always be at loss.

Well i was just reading some old posts.. And i have to disagree with Sameer. He will not always be at loss..

ST is right.. he will be in profit if cost of spread is less than 100 points which im 100% sure will always be the case as he is selling OTM Spreads..

Although im not saying this is a sound strategy.. But Just to theoretically correct.. it is a valid strategy if your expecting one way(and your not sure which way) movement in the market..

So if one adopts the strategy he will be in profits above 4900 or below 4500.
How much profit depending on the cost of strategy.

Actually i have also tried this strategy just for fun and made a profit of 20 points+ although it wasn't worth it considering i had to pay brokerage for 4 lots..

 

[AW10]

I was just thinking.. When a new month starts..

Arnav, I don't know why people are so fascinated with new series starts/ or expiry of current series to take position for next month.

Specially when constructing a strategy, I have found good bargain in far months contract when majority is focused on trading current month's contract. So I keep hunting far month contracts, specially when buy leg is important.

Which strategy is better ??
Say we are bearish. Which is better..

1)Buying a put and selling out of the money put? OR
2)Selling a call and Buying a out of money call..

Example-> Current Prices of Nov Options.. NIFTY is at 5000.

5000 Call = 150
5100 call = 100

5000 Put = 135
4900 Put = 95

If we Buy a 5000 put and sell a 4900 Put..
Max gain = 60
Max loss = 40
Gain starts below 4960

If we Sell 5000 call and buy 5100 call
Max gain = 50
Max loss = 50
Gain below 5050

Which of the two do you find better ? Or do u think both are equally good..??

I will look at both strategy on following parameters and take a decision. We all have different preferences.. so there is no correct answer but personal preference..

1) Both strategies are bearish.. First one is Debit Strategy where we pay now, and get return later.. Second one is Credit strategy, where get paid now.

2) Daily M2M margin for first strategy (short 4900) will be less then 2nd strategy (short 5000). As market falls, Short 4900 strike will have less liability then 5000 short..and hence higher M2M.

3) Reward to risk ratio of both strategy.. 1st one has ratio of 60/40 = 1.5:1.. and other one has 1:1. So obviously, we are inclined to pick up the 1st one.

4) Probablity of success - 1st strategy with breakeven at 4960 has lower chances of getting into success/remaining in success then 2nd one which has got higher BEven at 5050.

Keeping these 4 points in mind, personally I will tend towards 2nd strategy of the two, because of higher probabililty of success. But again, as risk reward is 1:1, it is also not attractive enough to risk my money. Probably I will search of other combination with better RRRatio and higher BEPoint, or will try to sell 2 contracts of 5000 strike (ratio spread) to improve reward at the cost of compromising on BE lower then 5050.

Hope this helps.

 

[arnav_rulz]

Arnav, I don't know why people are so fascinated with new series starts/ or expiry of current series to take position for next month.

Specially when constructing a strategy, I have found good bargain in far months contract when majority is focused on trading current month's contract. So I keep hunting far month contracts, specially when buy leg is important.

I totally second that.. I too usually deal in far month contracts..

In my last query i specifically said as a new month starts because my main motive from the post was to ask which bearish strategy is better.. buying and selling a OTM put OR selling and buying a OTM call because the risk reward ratio is very similar in both during the start of a new series and not when the series is near expiry or tooo far away from it... This doubt comes to me only during the start of a new series..

or will try to sell 2 contracts of 5000 strike (ratio spread) to improve reward at the cost of compromising on BE lower then 5050.

Also could u kindly elaborate a bit more on this.. i didnt get it completely.. but it sounds interesting.. (srry im poor when it comes to names of the strategy

 

[AW10]

Arnav, Let me compare standard spread and ratio spread with the example.

Strategy 1 = standard Bearish Credit spread
Sell 1 5000 Call @150 and buy 1 - 5100 call @100
Max gain = (amt collect - amt paid ) = 150 - 100 = 50
BEP = Short Call position + amt collected = 5000+50 = 5050
Max loss = Size of spread - amt collected = (5100-5000) - 50 = 50

Strategy 2 = Ratio Bearish Credit spread
If we Sell two 5000 call @150 and buy 5100 call @100 . In other words, it is same as 1 credit call spread as above + 1 naked short call. The open short call position makes this a bit more risky but that depends on our view about the market.

Max gain = (amt collect - amt paid ) = 300 - 100 = 200
Max loss = 50 on part 1 of combination + very high on short call position (by collecting 150, we are protected for upside move of 150 pts)
= i.e. Could be Very high.. If required, we can always buy 5200/ 5300 call to limit this risk to a defined number by compromising a bit on max gain.
BEP = 5100. (sorry I was wrong in my prev post by mentioning that BEP goes lower. Actually BEP goes up cause we are collecting more money has wider range to remain profitable .i.e. higher probability of success..

To summarise the pros and cons
- If I was ok with first strategy with BEP at 5050, then I must be happy with this too as BEP is even higher.
- Amount collected is higher
- While first strategy is more or less theta neutral i.e. time decay neutral (1 long, 1 short option), 2 nd strategy has time working for us as we are short more number of option then we are long.
(so if we want to close the position earlier then expiry, the time decay will bring added benefit to 2nd ratio spread).
- Reward Risk calculation starts getting complicated.. so plz use any option analysis tool. If required, we can always buy a higher strike call to limit upside risk from the naked short call position.
One can also adjust the ratio from 2:1 to 3:2, 4:3 etc.

Hope this gives sufficient intro to ratio spread. One can always refer to material on the net/books to know more about it.

Happy Trading

 

[arnav_rulz]

Ohk.. taking a trade for Nov Series.. Looking for a market bounce back..

Brought 4900 call @ 81.5
Sold 5000 call @ 51.5

Risk = 30 points.
Would look to square up at any decent bounce back.

cheers