Low Risk Options Trading Strategy - Option Spreads

[AW10]

Often market participants don't understand that it takes specialization in just one domain in the market to make a living (killing) out of it. Thus if you think you want to trade options, then get your mind, body and soul behind it. This applies to nearly everyone who is either participating in the thread or in this forum.

Market participants often switch from instruments (Equities, Futures and Options) to strategies (time based, MA based, volatility based). They just don't realize that they are paying a very high price for switching so often (switching costs). I think majority of participants aim to try out all the strategies posted here to see which one gives the maximum return. There is no holy grail in markets and despite knowing this, subconsciously participants still try and find it. By switching so many instruments and strategies, participants ideally are not even giving time for law of averages to work in their favor.

The reason I wrote this here is because I have seen many new participants trying to earn quickly by investing in options by seeking Aw10's advise. I am sure Aw10 will help you, but I think new participants have to help themselves. Else, one big loss will come your way and then you will start the process of finding the holy grail all over again.

Hence, it's better for new participants to get properly educated (books, dvd, seminars) about options and then finally come here to refine and enhance your knowledge. Aw10 can increase your learning curve by leaps and bounds, but effort has to be there from your own side. Trading a instrument or a strategy is profitable only when you can virtually live with it. It's all about practice. As someone rightly said, "It's only practice that can make a man (trader) perfect".

Aw10 sorry for the off topic post.

Well said Raunak, I totally agree with you.
Infact, I also learned the TA and Stock trading first before taking a jump in Options world. Each of the instrument - stock, future, option has its own disadvantages and advantages. And not to forget, their own behaviour/complexity/rules to trade successfully. So, until a trader doesn't know what he/she wants, and finds out right instruments to achieve those goals, and master those instuments.. it will be resultless journey for the search of holy grail, profitable system.

To address these points, I have made this post to tell the basic foundation that one needs to properly trade options.

http://www.traderji.com/options/305...ading-strategy-option-spreads.html#post333547

I can only show the right steps from my point of view to others here. Whether they follow it or not, is in their control.. and hence the trading outcome as well.

I am happy that there are few regular visitors to this thread who have benefited from systematic approach. Hope more people join the league of profitable and consistent low risk option trading.

Happy Trading

 

[VJAY]

Dear AW10 ,
when the better time to enter in spreads?i mean start of the month/midway month/closing of month...(suppose i have one direction in trend)..or we look its risk capabilities in that trade...sure am asking a silly question...please give some light on it..

 

[AW10]

Vijay, it is not silly question cause it has proped up few times in this thread.
Here is link to my prev reply on this topic.

http://www.traderji.com/options/305...ng-strategy-option-spreads-25.html#post409390

I surprised why do people think of timing option trades as per the time of the month rather then looking at suitable situation for the strategy.
Yes, effect of time decay is high near the expiry.. but that also gives us opportunity.
Important is to understand what we are doing and what will be impact of time decay on our position. With a spread, effect of time decay is far less lower cause loss in time value on Long leg is compensated by gain in time value on other leg. Near expiry, thogh this gaps widens cause far distant leg would have very less time value so it can loose only that much value.. whereas nearer leg will have more timevalue and will loose more.

But in such scenario, you can alway use Credit Spread and collect time premium.

In my trading, I prefer to give sufficient time to market to make a directional move without worrying about expiry of option. So generally try to evaluate same position for near month as well as Far month contracts after 15th of the month.

Happy Trading

 

[nano16]

DearAW10
Could you please reflect on the following trades of mine and suggest.
On 25-03 I sold a straddle of 5200 put and 5200 call @227x10 while nifty was at about 5220. At the end of that day about 3.20 pm I bought back the straddle at about 220.
The next day being Friday with the week end coming up and expecting premium to decline a little faster and nifty being again at about round figure (5290) I sold 5300 put and 5300 call at about 202.30.but had to buy back the straddle at 208 at about closing. Intriguing. This straddle had closed at about 199 on Thursday with nifty futures at 5272 and on Friday with weekend coming up the straddle closed higher. The decline in the put premium was insignificant compared to the rise in call premium. Obviously the demand for the put was higher than the call. Now how does one reckon how the straddle will behave during the course of the day
Do we know of any option calculator or software that will help us on this.

Thanks

 

[linkon7]

Trade for this month : To be initiated on Monday

Long : 5200 put April @ 70
Short : 5400 call April @ 54
Short : 5300 put April @ 108
Short : 5300 Call April @ 99

Upper Protection : 5445
Profit Target : 6%

Exit plan : Long NF at 5450 if 5445 is broken

Comments welcome...

 

[hills_5000]

very very safe ...

Trade for this month : To be initiated on Monday

Long : 5200 put April @ 70
Short : 5400 call April @ 54
Short : 5300 put April @ 108
Short : 5300 Call April @ 99

Upper Protection : 5445
Profit Target : 6%

Exit plan : Long NF at 5450 if 5445 is broken

Comments welcome...

 

[trader.trends]

Trade for this month : To be initiated on Monday

Long : 5200 put April @ 70
Short : 5400 call April @ 54
Short : 5300 put April @ 108
Short : 5300 Call April @ 99



Upper Protection : 5445
Profit Target : 6%

Exit plan : Long NF at 5450 if 5445 is broken

Comments welcome...

Net points collected is 190. Hence BE at 5445. Since the idea is to cover with NF above 5450, doubling the qty of 5400CE shorts will push the BE by 3 points to 5448. You can still start the cover at 5450 with matching qty of NF but it gives you a net points of 244 instead of 190 making the 6% returns on capital blocked that much easier. Assuming 100 qty of others and 200 qty of 5400CE cap blocked is around 2L and 6% of that is 12K. That works out to 50% of the premium collected. Whipsaws around 5450 will be the only risk. But knowing your greased lightning speed of trading with 5pts SL that should be cake walk.

 

[prasham]

Just yesterday I initiated a new (paper trade)

Write PE 5000 @ 27.4
Write PE 5100 @ 38.7
Write CE 5400 @ 54.15
Write CE 5500 @ 30.2

Have kept SL for around 30% in each of the above.

Please give your valuable advice.

 

[AW10]

Just yesterday I initiated a new (paper trade)

Write PE 5000 @ 27.4
Write PE 5100 @ 38.7
Write CE 5400 @ 54.15
Write CE 5500 @ 30.2

Have kept SL for around 30% in each of the above.

Please give your valuable advice.

Prasham, hope you have read the first few post on this thread (specially the one where I have mentioned about planning an option trade.

http://www.traderji.com/options/305...ading-strategy-option-spreads.html#post333543

So, If you plan your trade, then it is fairly simple to trade it.

Personally, this is low volatility period, so I don't like option writing in this conditions. You are selling 2 strangles in this case and collecting small premium. As 400 to 500 point range is anytime possible for nifty in 1 months time, In my view, these position will run into problem if left unattanded. Though they may work during certain months when mkt is range bound.

Trading short straddle/ short strangle is game of enjoying time decay and hence you need to 1) have good juice in them in terms of time value, and 2) sit on the position for long time without doing anything and let time decay work for you.

Hope you enjoy the ride (don't know if it will be roller coaster or smooth) and learn from it.

Happy Trading

 

[SwingKing]

Just yesterday I initiated a new (paper trade)

Write PE 5000 @ 27.4
Write PE 5100 @ 38.7
Write CE 5400 @ 54.15
Write CE 5500 @ 30.2

Have kept SL for around 30% in each of the above.

Please give your valuable advice.

By writing options you are ideally collecting premiums. Though this might be a good strategy in highly volatile period, it is certainly not the "best" strategy in low volatile period. During high volatility you can collect more premium as supposed to periods when the volatility is low. Hence going forward you need to identify the market conditions and then pick the right strategy to trade it. This way you will be more profitable and more consistent.

Hope this helps.

Tc