Low Risk Options Trading Strategy - Option Spreads

[AW10]

AW10,
Let me take your offer and ask one of the doubts bothering me since the August crash of stock markets around the world. For about four months prior to that, the market was rangebound and I was making 4 to 5 % returns by simply writing nifty short strangle with 1000 point difference .. It worked fine but at the begining of August, I didn't know how to hedge my position and had to square up with a loss. In fact that is when I stumbled upon TJ site to know something about delta neutral strategy. I did not follow it, because it would have meant commiting additional funds for margin. Another alternative was to sell NF at the lower break even. In the absence of any experience about this hedging method, I did not do this either. I have learnt that while short strangle is a very good strategy during rangebound market, it can be disasterous when the market moves violently in either direction. I also made good money by selling nifty straddles during those calm times. I was happy to learn the lesson early on my learning curve ,so I can avoid major losses in future.
I have gone thr' one of your earlier posts on the subject. I would be glad if you could give me further guidance on this.
Thanks again,
gmt900

gmt900. Short strangles and directional trades are quite opposite to each other.
If you have got 2 or 3 profitable short strangle trades, then skip more such position and switch over to directional. Mkt can't remain in range for ever. similarly, if directional have made money for 4/5 continuous trades .. then be prepared for range bound period.

That is typical nature of market. It keeps switching between price level of balance (range bound), to level of imbalance (trend), till it find next level of price balance.

anohter tip, market falls are steep...mkt rise are not so much. Hence you might like to atleast buy protective put to hedge short put leg of short strangle. Specially when mkt is in going unidirectional up.

hope this helps.
happy trading

 

[Bigbear]

Dear AW10/DanPickUp,

I have attached a chart on NF5000CE on 29th sept Expiry[ Where Indian markets were acting opposite to global markets]
Markets were highly volatile, here definitely Smart money was option holder at the beginning of the day and option writer by the end of the day.

The question is, I used to calculate target based on nifty moves, if nifty moves by 30-50 points. options would move by 5-10 Points. But this definitely proves me wrong. Should we study option greeks [ Dan i will start studying once i finish my current book] to calculate targets or is there any other way?
On this day NF moved by 70-80 points.. But options increased almost 10 times.


And also i used to keep SL in options based on SL in NF futures, is this right or wrong?

Thank you

 

[jovial01]

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

Hi AW10 Sir,
I bought a Bearish debit spread today (Market -around 5020) at the following rates.

1. Buy1 - 5000 Oct Put - Rs 102.1

2. Sell 1 - 4900 Oct Put - Rs 68.35

Now Max Risk - 33.75
Max Reward - 100-33.75 = 66.25
BEP - 4966

Pl help in understanding how to monitor and be on the top of it.

Currently the market is at 4989 .

5000 Oct Put - Rs 116
4900 Oct Put - Rs 79

Regards
Jovial

 

[AW10]

Jovial, In trading, it is said that you should plan you exits before you open the trade. Cause emotions are least at that stage. Once trade is open, gread, hope, fear starts influencing the decision.

Anyway, to manage this trade - (just my suggestion)
1) exit when your defined loss limit is reached ? say if you don't want to loose more then 20 rs of this, then whenever net premium fall below 14rs, you can come out.
2) when market bias that got u into the trade, is no more there. You got into it cause market is bearish as per your opinion. You need to answer, at what stage, you will change this view and say that mkt is going up. It could be when it stays / closes above 5035/ 5020 or any other number.
Above two conditions are mutually exclusive so whenever either of them is hit, u can get out.
That is for loss exit,
coming to profit exits,
1) If market goes in your favour, you will get max profit only when series expries below 4900. If market goes below 4900, but there is time left in the series, you may not see price of 100, so to manage in that situation, it is better to keep moving your stoploss number from 14rs to 20, 25, 30 and so on. So whenever premium falls below this new stoploss number, you can close the position.

If you can't tolerate the pleasure or excitement, then u can close position at any time.

hope this gives you some ideas about managing the trade. Plz think about it and adjust various numbers that I have mentioned above (they are used just for example)and make your own plan.

Happy trading.

 

[guru vashist]

Dear Aw10,
sounds Great! Keep it up.

 

[jovial01]

Thx a lot .I got ur point and would incoporate and practice on the same.
Sir, I started working on understanding charts using MACD and StochRSI.

Now suppose my analysis is correct that market would be bearish.Now how would i choose the right strike price and the right spread.

Regards
Jovial

 

[vssoma]

dear,
i am planning to take below trade...

buy NF Call 5200 @ 61.35
Sell NF Call 5300 @ 30.10
Sell NF Put 5000 @ 60.25
Buy NF Put 5100 @ 93.00

as per this call, there is one problem with it...problem is P/L ratio...it not good

pls. find below the P/L pic.
gurus pls. suggest me some corrections to this trade and reverse the ratio.
tnx,

 

[vssoma]

dear,
as per my understanding the delta of future is always 1, that means it must move according to stock. to day i observed tatasteel, when stock is +2.90 , future is +2.35
and when stock is -2.10 that time future is -4.40
can anyone ( my gurus savant, anant, aw10,linkon, colombus and dan ) explain this situation...

 

[DanPickUp]

dear,
as per my understanding the delta of future is always 1, that means it must move according to stock. to day i observed tatasteel, when stock is +2.90 , future is +2.35
and when stock is -2.10 that time future is -4.40
can anyone ( my gurus savant, anant, aw10,linkon, colombus and dan ) explain this situation...

Hi vssoma

A single stock and in your case a single index future are not obliged to do the same.

A stock is first connected to its company and then to the future index.

Each one of these products have there own rules to behave under certain conditions.

If stock moves up, index future can move down and vice versa.

A stock is the apple and a stock future is one box with apples. If one stock cost 100 R, it does not mean that one box with apples will exactly project in numbers this 100 R.

Suppose you have ten apples in this box, it not means that this box will cost 1000 R. at the moment one apples is 100 R. So, the delta of one is not applicable to one apple in conjunction to the one box.

You have to look at them separate.

The example I show now is adaptable to your question:

No suppose, you own the stock of a copper producing company, as you by your self only deal with the metal. The link I show, will explain you in many details what forces can move this stock.

http://www.investopedia.com/articles/basics/04/100804.asp#axzz1b2b2Fg9V

On the other hand, you are a pure dealer from this metal with thousands of tonnes of copper every year and you want to protect your self against any possible price loss, as you fixed your prices with the buyers and sellers of your copper. In this case you would prefer to do that with the copper future price. The next link will explain you, what can move this future price:

http://www.futures-explained.com/co...ures-heatmap/what-moves-copper-futures-price/

As you see now, the stock price and the future price are driven by different events.

Hope I was not too complicated with this explanation.

Tc

DanPickUp

 

[AW10]

Swamy,
Future pricing has its own component like Cost of capital, interest rate, remaining life etc to determine fair value of future for an underlying.
Lets not forget that all pricing is subjected to demand supply and sentiments situation at any time, which is not given by any theoratical model.

In theory, you are right that Futures have delta of 1, but in reality, it could be different.
Delta - 1, means if spot move up by 1 tick, futures shd also move up by 1 tick. Will that happen always ? No. cause orderflow, sentiments, etc are very different for them.
So plz accept the reality and take F&O theory with a pinch of salt when tradign.
If you are doing research, then probably you can right big paper just on this topic - "why futures prices don't follow spot".

Happy Trading