Low Risk Options Trading Strategy - Option Spreads

[varunsoni31]

hello.. i m new to stocks..have understood everythng but havnt understood options..went through all the forums all books but nothin is gettin in..can u please explain with proper examples..

suppose today airtel spot is 328...

Case 1 - if i believe it will go to 350 wat shud i do with the call optioN..BUY/SELL....

case 2 - if i believe it will go to 320 wat shud i do with the put option BUY /SELL

please explain me cos i m unable to understand at all...thank you

 

[AW10]

My suggestion - If you are new to the market, then first get yourself trained in stock trading. Once comfortable with that, then start looking into options.
Plz check out Post #7 of this thread..where I have written about basic foundation knowledge that one needs to trade properly in option. I have also given few sources for further reading/watching.

In short, when u are bullish, you buy call. Cause value of call increases when underlying goes up. Value of call will drop if underlying is dropping in price.

Similarly, when you are bearish, you buy put's cause value of put will increase with drop in the price of underlying.. Value of PUT will drop when underlying in going up.

So in case 1- you buy CALL and in case 2, you buy PUT.

That is the simplest form of price movement of option. But there are conditions when this relationship does not work i.e. you might see drop in Calls price, even when underlying is going up. As a starter, u can ignore those cases for later stage.

Hope this helps.

 

[Smart_trade]

Hy

Hade to change some of my thoughts like AW10

I checked it now with Opvue on an other Index ( S&P ) and the trade looks really ok as long as it stands in the range of the put ratio spread ( Break evens on both sides ) and if the market now turnes down quickly. It is a really bearish strategy and it is a really directional trade.

It works well with options that are close to expiration and it is implemented in markets with high implied volatility. If the vola rises, the strategy will become difficult and if the vola falls, it is a present and the trade will highly succed and could even bring a higher profit in a shorter time !

Why ? The trade will stay in the range and the puts will profit by loosing very quick on value on both sides. Of two reasons:

1.Prices are high when volatility is high. So, when the vola comes down, the options will be cheaper

2.Second help will be the expiration day. The value of an option loses near to expiration immense quick.

Interesting

DanPickUp

Hy Dan,

My present view on the markets is that it will remain in the range of 5400 -5000 till expiry and this strategy is suitable for the range I have in view. Near the expiration, the out of the money leg gets a very low premium...so cost of the spread goes up.

There are many combinations I can play with this strategy....at 5400 or 5500 I might stack another ratio backspread of buying 5500 put and selling two 5300 puts and so on...if one works,I am in money.......if the market goes down without going up first,I can liquidate both legs of the spread....the 5300 put will be deep in the money,5100 will be at the money and by the time that happens time decay will eat into ATM puts premium more than ITM puts....in downmove also there are many ways to protect the spread......

The only scenario which can put me in trouble is crash scenario....but in that case I will squareoff all and take my losses and bite the bullet but thank God crashes dont happen too often.....

Best wishes,

Smart_trade

 

[DanPickUp]

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[sriugdh]

nice one ST :thumb:

for benefit of others:
Total cost of strategy (with the qty mentioned) is Rs 1025/-
Max profit of Rs 8975/- happens if Nifty spot settles at 5100 on expiry day.
Anything above 5300, loss is limited to the initial cost Rs 1025/-
Loss keeps on increasing below 4900

I guess ST is looking to close the positions before expiry...

the figures of profit and loss are gross (without taking brokerage & others costs into account)

Hi Sir,

I bought Nifty 5300 PUT @ 119 (1 lot) & 5400 CALL @ 54 (1 lot)

Can you please please analyse my maximum loss and best time to exit.

I am a novice and thought to hedge my position and hence have bought a call and put. Please help me sir.

Thanks much in advance.

Please do reply sir.

Thanks

 

[sriugdh]

nice one ST :thumb:

for benefit of others:
Total cost of strategy (with the qty mentioned) is Rs 1025/-
Max profit of Rs 8975/- happens if Nifty spot settles at 5100 on expiry day.
Anything above 5300, loss is limited to the initial cost Rs 1025/-
Loss keeps on increasing below 4900

I guess ST is looking to close the positions before expiry...

the figures of profit and loss are gross (without taking brokerage & others costs into account)

Hi AW10 / Sunil,

I bought Nifty 5300 PUT @ 119 (1 lot) & 5400 CALL @ 54 (1 lot)

Can you please please analyse my maximum loss and best time to exit.

I am a novice and thought to hedge my position and hence have bought a call and put. Please help me sir.

Thanks much in advance.

Please do reply sir.

Thanks

 

[Smart_trade]

Hi AW10 / Sunil,

I bought Nifty 5300 PUT @ 119 (1 lot) & 5400 CALL @ 54 (1 lot)

Can you please please analyse my maximum loss and best time to exit.

I am a novice and thought to hedge my position and hence have bought a call and put. Please help me sir.

Thanks much in advance.

Please do reply sir.

Thanks

The premium paid by you are 119 *50 =5950 plus 54*50=2700 Total Rs 8650 plus brokerage...that is the maximum loss you can suffer in this strategy...this max loss will happen if nifty cash settles at any price between 5300 and 5400....

Yoy will require about 150-200 nifty points move in either direction to make profit in this position.You may wait till Jan21/22 to see whether such move materialises...if this move doesnot come,sell both contracts and recover whatever money you can....last week of the month the premiums will have huge decay everyday so dont wait till the last week....

Best wishes,

Smart_trade

 

[sriugdh]

The premium paid by you are 119 *50 =5950 plus 54*50=2700 Total Rs 8650 plus brokerage...that is the maximum loss you can suffer in this strategy...this max loss will happen if nifty cash settles at any price between 5300 and 5400....

Yoy will require about 150-200 nifty points move in either direction to make profit in this position.You may wait till Jan21/22 to see whether such move materialises...if this move doesnot come,sell both contracts and recover whatever money you can....last week of the month the premiums will have huge decay everyday so dont wait till the last week....

Best wishes,

Smart_trade

Thanks so much!!

Here is my position Sir

I have 10 K to invest. Suggest me the best option to invest. I understand that there needs to lot of technical learnings needed for this. But I would like to have try with this option and at the same time learn. I am not bothered about loosing 10 % of the amount. Please help.

Thanks

 

[Smart_trade]

Thanks so much!!

Here is my position Sir

I have 10 K to invest. Suggest me the best option to invest. I understand that there needs to lot of technical learnings needed for this. But I would like to have try with this option and at the same time learn. I am not bothered about loosing 10 % of the amount. Please help.

Thanks

Your capital is very small...and as you are new,you cannot and should not sell options....options is not an investment...you can buy the call only when youy feel a strong upmove has started...and buy a put only when you get some indication that strong downmove has started.Buying options and waiting for the move to start in a sideways market is a sure way of loosing money....

My sincere advise is preserve your capital...study in the meanwhile...and at strong indication of upward/downward move starting buy options till then study the nuances of options and preserve your capital...

Best wishes,

Smart_trade

 

[AW10]

Thanks so much!!

Here is my position Sir

I have 10 K to invest. Suggest me the best option to invest. I understand that there needs to lot of technical learnings needed for this. But I would like to have try with this option and at the same time learn. I am not bothered about loosing 10 % of the amount. Please help.

Thanks

Sriugdh, I fully support the reply of Smart_Trader above.
The capital is small to get into trading in F&O segment. And your risk limit of 10% of 10k = 1k can be wiped out in 1 day here.

So better stay away and don't trade. Learn about trading, options etc first and then start trading.
Just answer this question with realistic attitude - "when u have no knowledge of trading or option, what makes u think that u can win here ?". "Can a normal man without any knowledge of boxing, fight with Mike Tyson in boxing ring and win?".

Plz don't get me wrong. Get your gears in place first. Market will always be there, but u need to make sure that you have your strategy, approach etc in place before entering in the warzone.

There is something called paper trading, backtesting.. which is learning in a training room environment. Go thru that first (that won't cost you money, but will need time and effort from you).. and then come to real trading with real money. Atleast you will be in better position to win.
Otherwise, chances are high that ur 10k will disappear soon.

Happy learning and trading.