Low Risk Options Trading Strategy - Option Spreads

[AW10]

My option strategy
strat from 1st day of new series .
1st step -- assume nifty price is 5000 .
2nd step-- i sell 4800 put and 5200 call .

Nifty assume close at or above 5100 in any of next trading sessions .
My 3rd step exit from 5200 call and sell 5300 call and 4900 put .

Assume nifty close at or above 5200 in next trading sessions .
My 4th step exit from 5300 call and sell 5400 call and 5000 put .

Assume nifty close at or below 5100 in next trading sessions .
My 5th step exit from 5000 put and sell 5300 call and 4900 put .

Do same till expiry with movment of every 100 points .

My diffrence is 200 up n 200 down safe traders can trade with 300 points diffrence .

According to me no loss in this strategy but i am not sure about it .

Please share your views about risk or about your experience .

Rajsumi, In my opinion, with this approach, whenever u are closing the loosing leg, u are just booking losses one after another. Way up as well as way down. So, I don't know what makes u feel that there is no loss in this strategy. Also look at the margin requirement which keeps increasing as u are shorting more and more with each move or 100 points.

And on top of all, short strangle with no protective position is like giving blank cheque to market. Think about it when u have given 2/3 contracts with you and market gives a major opening gap shock ? If you don't close the position, broker might close it against the margin call.. And one such event will take away the profit of few months.

IMO, their are time to sell options i.e when premium is high and the risk is worth the reward. In such cases the premium collected gives u some buffer to live with the short term pain of gaps and market swings. Stragles get the best when time decay is maximum i.e. in last 1 week. Crux of this is to find the possible market movement range for remaining period and create proper strangle (many a time, it will be away from ATM strike).

If we sell strangle in last week, we might get about 100/125 Rs of premium..but that just covers 2% of nifty move in next 5 days. Chances are very high that we might be caught of wrong side on such short strangle, if new trend develops there. Whereas, when u write strangle 4 to 5 weeks in advance, u get 300+ points of buffer on either side. So chances are high that we can strange mkt successfully in such wide range.

As LT has already pointed out, what is the brokerage cost of such strategy cause by writing OTM options, the premium collected is limited. and specailly in later part of the option life, IMO, it is just peanuts (you get 10-20 rs of premium, pay 3 to 5 points of brokerage and then left with small return to carry huge risk).

If you have tested this strategy then plz share ur findings. At first glance, the building of new position (sort of averaging the loosers) look risky to me.

Just my thoughts /opinion.
Happy Trading

 

[terminator_123]

My option strategy
strat from 1st day of new series .
1st step -- assume nifty price is 5000 .
2nd step-- i sell 4800 put and 5200 call .

Nifty assume close at or above 5100 in any of next trading sessions .
My 3rd step exit from 5200 call and sell 5300 call and 4900 put .

Assume nifty close at or above 5200 in next trading sessions .
My 4th step exit from 5300 call and sell 5400 call and 5000 put .

Assume nifty close at or below 5100 in next trading sessions .
My 5th step exit from 5000 put and sell 5300 call and 4900 put .

Do same till expiry with movment of every 100 points .

My diffrence is 200 up n 200 down safe traders can trade with 300 points diffrence .

According to me no loss in this strategy but i am not sure about it .

Please share your views about risk or about your experience .

To keep things simple, you are booking a minor loss (minor because your other leg would offset some of the loss with M2M profit) every time to extend the range and lower the risk. Theoretically its a good idea assuming that there is no strong trend (check ADX at least before doing this).
I some times do the reverse in the sense I close the winning leg and short a near by option. This is to increase the profit (by lowering the range and hence increasing the risk) and take advantage of increase in VIX (if any).
Often I found that VIX does come down after increasing making the position profitable.

 

[snrtrader]

This post is not related to SPREADs but it is my thoughts about learning that one needs to start properly in OPTIONS TRADING. It was in reply to following question --


tvrssvk , I will attempt to give u very practical answer to start in options trading.

1) To make money in any trading (be it a house, stock, goods, options or anything), very first thing to know is the direction of the market. Can u make money by buying something, when market is falling. So very first thing you need to learn is to identify the current trend of the market (up, down or sideway). Better u are in this, solid is your foundation. E.g. If you are in Nagpur and want to go to Delhi, then first thing u have to do is to be on platform where Northbound trains are arriving, and then u need to board the right train for your destination. No great deal but just common sense.. But u will surprised to see how often it is not followed in market where people buy, when market is going south.

2) Once u know the direction of market or stock that u want to trade, then choose appropriate option strategy for this.

3) There 6 basic risk graphs in core option and stock strategy. All other strategy is just combination of these 6 basics. They are Buy Stock, Sell stock, Buy Call, Sell Call, Buy Put, Sell Put. Spend as much time as required to understand them on parameters I am going to mention in next point.

4) For any strategy (including the 6 basic one), know how they are constructed, what is max risk, what is max reward, where is BREAK-EVEN point, How the risk graph looks like at expiry, suitable market condition favourable for these strategies. Once, you should be able to draw risk graph without any option analysis tool, then u pass out from this stage.

5) Understand the concept of option pricing, intrinsic value and time value, the factors that affect option premium. Focus on not the theory, but how change in those factors will affect the premium. Watch them in real life, experiment with them using option calculator.

6) At advance stage, u can look at transition of risk graph from now to final stage at expiry, various option Greeks etc., various strategies that are combination of 6 core strategies. This is the stage, I will advise one to start using a tool. IMO, A professionals doesnt become handicap without a tool. He/she know how to work without tools.. And if they are given the tools, then their performance and efficiency zooms. They know what they are doing, or what they want to do because they have solid foundation. IMO, a great tool in the hand of a monkey is no different from a banana or a stone in its hand. Cause monkey doesnt know how to get best from it. But give a great tool a professional, and see the difference.

There are different approach to get above (read books, take mentorship, play in market and learn the hard way, go-to school/collage etc). The decision is yours. But be careful about selecting the place or option that u are going for. If u read wrong book, go to wrong person for training, do wrong course, etc, you will be just wasting your resources (time, money, energy etc.).

This is just to give base in option trading, so that u can plan an option trader properly. Remember, that doesnt make you a trader still. Trading involves Money mgmt, psychology, risk mgmt, system testing etc which is beyond the scope of this post.

Last but not the least, there is not defined path that u need to follow to get started in options trading like first stocks, then futures, then options. If it is done appropriately, then you can start directly in options, without getting into stocks etc. If you know stock trading (better have good track record in stock trading), then few initial steps are not required.
But that is not limitation, even if you have never traded stocks. As long as you learn to read market trend, you can start with options trading.


Happy Trading

Core of option trading is to understand how the volatility of the underlying is moving. Buy when implied volatility is low, sell when it is high. Do you compute IV daily for your strategies?

 

[AW10]

Core of option trading is to understand how the volatility of the underlying is moving. Buy when implied volatility is low, sell when it is high. Do you compute IV daily for your strategies?

You are right. Knowing volatility is important for options trader.
But I don't calculate them..cause NSE is doing that job and publishing VIX info everyday.
That gives rough idea about what is happening. Besides that I have rough idea about premium based on remaining life of option.. so I use that guideline to compare with current premium and decide where IV is positioned.

My option trading universe is limited to NIFTY and thats too max 2 months of expiry..
It is not the best way, though it serves my purpose.

Happy Trading

 

[snrtrader]

You are right. Knowing volatility is important for options trader.
But I don't calculate them..cause NSE is doing that job and publishing VIX info everyday.
That gives rough idea about what is happening. Besides that I have rough idea about premium based on remaining life of option.. so I use that guideline to compare with current premium and decide where IV is positioned.

My option trading universe is limited to NIFTY and thats too max 2 months of expiry..
It is not the best way, though it serves my purpose.

Happy Trading

Thanks !! If you start crunching the numbers let me know, it'd be nice to compare my results with yours.

 

[jaywings007]

Monitoring Spread trade -If we are comfortable with risking 47 to make 100 rs. We are not worried about loosing 47 rs then we can very well forget about this trade till expiry.
But most of us may not fall in this category and we want to see what is going to happen from now till expiry.

As market falls, price of Long put will increase, and price of Short put will also increase.
But rate at which our 4000 Put will gain value will be faster then what 3900 Put will loose.
If market goes to say 3950 (currently at 4003), then net premium of this position will be more then what we paid (i.e > 47).
Similarly if it goes to say 4100 level, then we may still be able to close the position and gain less then 47 rs. say 20 rs. and reduce our loss from 47 to 20.

At anytime, to monitor this position we have to take the current net premium that we will receive from market.
i.e. for 4000 option take the current Bid price (price on the left side of price table/order book) and for 3900 option, take the Ask price (i.e. price on right side of price table /ordre book).
If confused, then follow the simple logic -
- We always get the worst price from market (cause we are not FII).
- Take the Lowest price for strike that u want to sell back.
- Take the highest price for strike that u want to buy back.
- Calculate the difference and you will know what is the current worth of your position.

Max reward of 100 will be achieved when market expires on 30-July expiration day below 3900. Similarly Max risk of 47 also comes when market closes above 4000 on expiry day.
We can very well close this position for less then 100 rs of reward.. or less then 47 rs of loss before the expiry at any time.

My strong advice will be to close both legs at the same time.. (you might be tempted to close only the loosing leg and but that action will increase the risk of reaming open leg.
If you share my belief then as a trader we should be looking at reducing risk, not increasing it).

Happy Trading

Thanks for very interesting thread.

 

[jaywings007]

You are right. Knowing volatility is important for options trader.
But I don't calculate them..cause NSE is doing that job and publishing VIX info everyday.
That gives rough idea about what is happening. Besides that I have rough idea about premium based on remaining life of option.. so I use that guideline to compare with current premium and decide where IV is positioned.

My option trading universe is limited to NIFTY and thats too max 2 months of expiry..
It is not the best way, though it serves my purpose.

Happy Trading

AW

I am always a option buyer... just because I dont have money to short the options of full margin of a nifty future lot.

Is there any way to short option lots with low margin or the premium price only?

 

[AW10]

Unfortunately not. With current practice, u have to place the margin to cover the risk created by short option position.

It is pity that even for Spread position.. you will have to pay the margin as if it is Naked Short position. Whereas, your losses are far less with spread.. Hence the margin requirement shd be far less..

In US market, the margin for options trade are charged based on risk of combined strategy.. not just on short leg..
So, you have to wait for those practice to come to indian mkt.. till then, unfortunately, you will have to shell higher margin.. about 25 to 35k.

If you have Long term Stock holdings then you can raise margin against those stocks.. and use it carefully.
Plz Plz don't use this margin for risky short options with unlimited risks.. else ur long stock holdings are at risk..

Hope this helps.

 

[rkkarnani]

Unfortunately not. With current practice, u have to place the margin to cover the risk created by short option position.

It is pity that even for Spread position.. you will have to pay the margin as if it is Naked Short position. Whereas, your losses are far less with spread.. Hence the margin requirement shd be far less..

In US market, the margin for options trade are charged based on risk of combined strategy.. not just on short leg..
So, you have to wait for those practice to come to indian mkt.. till then, unfortunately, you will have to shell higher margin.. about 25 to 35k.

If you have Long term Stock holdings then you can raise margin against those stocks.. and use it carefully.
Plz Plz don't use this margin for risky short options with unlimited risks.. else ur long stock holdings are at risk..

Hope this helps.

AW, Am not very sure, but remember reading something on NSe site which said that the Margine on Option Spreads or future intramonth spread was 'lower'!!!
It seems though the exchange has Lower margine prescribed but the Brokers do not care to implement it!!!

 

[AW10]

RKK, I don't know if that is the case. But I won't be surprised if NSE has given this recommendation.. but brokers are taking us forgranted. Only reason is their own crappy backend system which can't calculate net risk on portfolio of options positions in our account and calculates risk on each leg and charges full margin.

If you take an example, if I short 5200 Call today, then with standard volatility calculation, risk enging might see that 5500 is most like max risk on this position so charge me the margin for 300*50 rs of risk..
But if I buy 5300 call and create a 5200-5300 bearish credit call spread.. then my max risk is not 300 but just 100.. So theoratically, my margin calculation shd be on 100 rs of risk, not for 300 rs of risk.

Hope they implement it soon. ICICIDirect has improved their order placement system to place order for 2 legs options trade. Not sure, if their risk engine has also changed or not.

Happy Trading