Low Risk Options Trading Strategy - Option Spreads

[born_2_trade]

AW10 Sir

U were right sir we should not think about our past trades and should think about future.. today i covered my bull spread @ 350 profit and took a new position

i think it is calender spread(not sure )

sold may 5000 call @ 58
bought june call 5100 @ 96.9 rs
as per my calculations
no loss between 4750 - 5080 (for 7 days)
max profit @5000 = around 3500
Reason for trade : I think market will be range bound for 7 days.

sir plz correct me if i m wrong..
thanx for helping beginners like us sir

vaibhav

.. i am also a newbie.. strtd trading options 5-6 mnths back... wht i have learnt from trading calender spreads is that they are mostly succesful when the expiry is nearer for one the position..
talking about ur position.. i think this the best trade u cud have done keeping the markt sentimnts and ur capital constraint in mind..
5000 may call trading at 58 means its purely a time value for 7 days and even a bullish peson will think twice before buying it because there is no gain until markt closes above 5058.. which is still 110-120 points away.. so a movemnt of atleast 150 points is wht u r expecting whn u r buying such a call.. n keeping sentiments in mind this might not be gud trade.. so selling the call was a bttr strtgy and u r safe till 5058..

also, hedging it with a 5100 june cal was also gud because it has lot of time in expiry and hence if markt falls furthr from here it will not fall as sharply.. and u can gain from ur above position.. and if markt increases on worse side say 150 points nxt week.. thn in such situation sentimnts will chng from bearish to bullish and the 5100 june call will increase shrply and will reach around 160-170.. so overall u will be in gain from your position...

thnx.. commnts to improve the above are surely welcomed..

n regarding the calculator.. u can alwyz chck ur position from the link:

http://www.volatilitytrading.net/option_position_calculator.htm

 

[VaibhavPRO]

Aw 10 sir

You are right sir.. i m still struggling to find a structured method to determine market trend.. have tried 100's of technical indicators and AFL codes . right now I feel that simple support, resistance, pivots and patterns are best to trade in nifty.

Right Time frame is also an issue... earlier i used to trade on a very small TF charts , now trying to shift on larger TF.. m on a learning curve.. patience is a big factor which i lack and which i feel is an important factor for an option trader...

from last week i have been trading on global cues only.I had decided to trade today on a small TF (seeing volatile nature of market) .Firstly i had decided to keep position till 1230pm and see where FTSE opens .. it opened in +ve..i decided to exit my position with any sign of weakness from there onwards..So when the uptrend's last pivot in nifty was broken (simultaneously pivot broken in FTSE 100) i decided to close my position with 350 profit. The position i took then is bearish but i felt that it was the best position i can take in this choppy market, every recovery in the market is choped of very next day.. More than profit this trade is for learning and curiosity .Even if market moves up in 7 days then i feel it will continue to move up and i would hedge 5100 call(june) by selling 5200 call(june ) after 27th march . i know i would be lucky if this trade gives handsome profit.

Sir my brokerage is flat 9rs per lot (one side) + stt etc

thanks for reply and plz continue to help.. your comments are very useful

vaibhav

 

[rrmhatre72]

Thanks AW10 for your feedback.
I have gone through given thread. Let me put my strategy in same prospective. (I get this info from my xls file)

Direction - Rangebound
Construction - Sell 1 - PUT option strike June5000, and Sell 1 - Call option strike June5000
Cost of trade (or net premium)= 5000call sell 138 +5000 put sell 190
so our net cost 138 + 190 = 328/-
Max Risk = Unlimited if market is below 4678(5000-328) or above 5328 (5000+328)at expiry
Max Reward = 328X50=16400 rs. (If market is at 5000 on expiry)
Break-even point = below 4678(5000-328) or above 5328 (5000+328)at expiry

Stoploss : I am confused here as due to volatility price may increase but still I may be within my breakeven range. (this part is not getting covered in my xls file) Should I exit in this case? or wait paitinely for expiry.

Am I missing anything more while planning option? Pls advice.

Hi AW10,

Your advice will help me in improving myself.

 

[AW10]

Volatility of underlying affects option price. More volatile is underlying, higher the option premium. Cause person who is writing option (i.e being insurance compny here), will ask for higher premium
to cover higher risk that comes with high volatility. Volume of a particular strike just indicates demand/supply .. But for we retail traders who trade in 10s or 100s of contract, volume doesn't matter so much.


Hi AW10 sir,

I am new to options, and as mentioned above, I am one amongst option writer, I have straight away shorted PUT 5800 May 27 at the premium of 25,34 and 44. Now it's just another 100 odd points away from my strike price. Now I am having sleepless night, time of this post [12.52 AM], please suggest if I should short PUT 5700 May 27. or short any CALL options.

Your strategy is really good, but will take some time for me to understand.

Hi Naveen, to manage risk of short put, you don't short more puts. You know what will happen if I find that I am in a hole, and to come out, I want to dig more...
If you can't take the pain, then close the position and bite the bullet. Else buy PUTs to protect the short PUT position. Read few posts of this thread to get some info about proper trade and exit planning for your future options trade.

To have peaceful sleep in the night, u need to understand and implement risk management... By giving back 10/20 points from 100+ points of premium, you could have bought the peace for nights.

If you have not shaken up and still holding the position then quite likely that u will retain whole 100 rs of premium as market seems to reversed from 4850 level.

Hope you learn from this trade and improve yr trading in future.

Happy Trading

 

[hiteshsjoshi]

AW10 Sir,
Request you to post updates of your 5200 Short Strangles. Your methods of tackling the current fall would serve as important learning step for all of us.

Thanks
:thumb:

 

[simple_trader]

If you have not shaken up and still holding the position then quite likely that u will retain whole 100 rs of premium as market seems to reversed from 4850 level.

In my opinion, I guess still it is not sure that market has reversed. In case market shows weakness again, it is better to be hedged. This is my personal opinion. 4980 Closing basis is resistance i think.

May not rule out more volatility tending downwards!

 

[AW10]

Hi AW10,

Your advice will help me in improving myself.

[/quote]
Sorry Rahul, did not have enough time to respond to you earlier. btw, you have done only 50% of homework.. Yr orginal question was for strangle and straddle but the plan is only for straddle.

Anyway, Let me collect the facts first and then will leave it to you to take decision. At the end, it is your money and your trading psychology that will have to accept the decision.

We are comparing
1. Short Straddle - Selling - 5000call@138 & 5000put @190
2. Short Strangle - Selling 5300call @ 45 & Selling 4700put @78.

                        [B] Straddle                      Strangle[/B]
Max Reward               328                             123
Max Risk                   very high                    very high
BEP                     4678 - 5328               4567 - 5467
Yr view on mkt range      4700 - 5300             4700 - 5300              
Max profit zone             mkt @5000             mkt between 4700 to 5300
Fluctuation in M2M
reqrmt                    High                                  Low

Interpretation -
1) BEP in both cases is beyond your view on the market. Maybe you can look for 4800-5200 strangle to see, if the BEP given by that is acceptable to you.
this will certainly increase the max profit from strangle but the range of profitability might get reduced.. so it is trade-off.
2) What is your holding period. for the trade. If you are not going to hold till expiry, then it will be good idea to simulate how the timedecay will affect it in next n days.
ATM strikes have highest timevalue, hence straddle will see faster timedecay.. but as spot moves, away from straddle strike, this equation will change.
3) Behaviour of options greek is for both positions is sensitive to the position of underlying.
4) Comparing these 2 trades for pre-expiry is like comparing high volatiity stock against low volatility stock. Strddle will be experience more action for any swing in the market.
That also means that M2M requirement for straddle will change a lot more then that is for strangle
5) But if you are not going to hold till expiry, then straddle might win against the strangle..

So keep above factors (holding period, probability of success etc) in mind and make your own decision. Don't forget to think of various what if scenarios to take action to manage the risk, and decide on the points when u will trigger your risk mgmt actions.
Maybe something worth experimenting is to shift the strikes, as per market sentiment. Say, if you are expecting mkt to go to 5100 level in next 5 to 10 days, then it is better to sell 5100 straddle
so that by the time mkt reaches 5100, you would have enjoyed higher timedecay. To get best from these strategy, u have to show lot of patience, cause best of timedecay comes in last week of expiry.

Hope this helps.
Happy Trading

 

[jaywings007]

Hi AW10,

I use attached xls file to understand various scenario. All calculations are based on the assumption last day price of the option.
I plug the data in it to check.
If anyone has better tool then pls advice.

Here I have plotted both the scenario.
1. Selling 5300call @ 45 & Selling 4700put @78.
2. Selling 5000call@138 & 5000put @190
I have added brokerage while calculating net gain.

Both the strategy are covering my range from 4700 to 5300.
First strategy cover me till 4600 to 5400.

But I want to know the risk involved. Which one is more risky based on your opinion as market will keep on moving its own way till June expiry. If I want to get out of it inbetween then where loss will be minimal.

Anyway, Pls share your views/range predication for June.

check this option strategy xls file... the nice one ...

ohh.. I am not able to uploar sorry...

 

[DanPickUp]

Sorry Rahul, did not have enough time to respond to you earlier. btw, you have done only 50% of homework.. Yr orginal question was for strangle and straddle but the plan is only for straddle.

Anyway, Let me collect the facts first and then will leave it to you to take decision. At the end, it is your money and your trading psychology that will have to accept the decision.

We are comparing
1. Short Straddle - Selling - 5000call@138 & 5000put @190
2. Short Strangle - Selling 5300call @ 45 & Selling 4700put @78.

                        [B] Straddle                      Strangle[/B]
Max Reward               328                             123
Max Risk                   very high                    very high
BEP                     4678 - 5328               4567 - 5467
Yr view on mkt range      4700 - 5300             4700 - 5300              
Max profit zone             mkt @5000             mkt between 4700 to 5300
Fluctuation in M2M
reqrmt                    High                                  Low

Interpretation -
1) BEP in both cases is beyond your view on the market. Maybe you can look for 4800-5200 strangle to see, if the BEP given by that is acceptable to you.
this will certainly increase the max profit from strangle but the range of profitability might get reduced.. so it is trade-off.
2) What is your holding period. for the trade. If you are not going to hold till expiry, then it will be good idea to simulate how the timedecay will affect it in next n days.
ATM strikes have highest timevalue, hence straddle will see faster timedecay.. but as spot moves, away from straddle strike, this equation will change.
3) Behaviour of options greek is for both positions is sensitive to the position of underlying.
4) Comparing these 2 trades for pre-expiry is like comparing high volatiity stock against low volatility stock. Strddle will be experience more action for any swing in the market.
That also means that M2M requirement for straddle will change a lot more then that is for strangle
5) But if you are not going to hold till expiry, then straddle might win against the strangle..

So keep above factors (holding period, probability of success etc) in mind and make your own decision. Don't forget to think of various what if scenarios to take action to manage the risk, and decide on the points when u will trigger your risk mgmt actions.
Maybe something worth experimenting is to shift the strikes, as per market sentiment. Say, if you are expecting mkt to go to 5100 level in next 5 to 10 days, then it is better to sell 5100 straddle
so that by the time mkt reaches 5100, you would have enjoyed higher timedecay. To get best from these strategy, u have to show lot of patience, cause best of timedecay comes in last week of expiry.

Hope this helps.
Happy Trading[/QUOTE]

Hi AW10

A post as it not can be better in any option trading book !:thumb:

 

[simple_trader]

I guess it is risky to write naked option now.

Still 4800 CALL+PUT and 4800PUT+4900CALL are better I feel. Both are June series.

Though currently these trades have high risk I feel.

Dear AW10, your opinion on these two combination for writing. Just for education purpose.

Happy trading!