Nifty Options Vertical Spread Trading

[TracerBullet]

in debit spread we can reduce the loss...like in this case... 5500pe/5600pe debit spread..if we see mkt going on other side... let it be..
simply sell.. 5400 pe... otms...reverse for calls.
Ex today we entered put with 29 debit spread..if nf move up from support..level means above 5650.. simply sell 5400 pe..and hold on the trade.. and get 10 points on every whipshaw. if mkt range bound you may get .. 40-50 points in a week. without fear of loss.

I am a newbie in these things ... but isnt this risky ?

It seems to me that the short 5400pe will not have any protection.
If nifty were to gap/fall fast below 5500 then the 5600pe long + 5500pe short wont give any more profit and 5400pe will be at increasing loss.

The purpose of spreads vs naked longs was perhaps to reduce risks from wrong call / IV decrease.
But naked short is even more risky unless you hold to near expiry

If you are confident of naked shorts then its ok
pl correct me if i m wrong

 

[ananths]

I am a newbie in these things ... but isnt this risky ?

It seems to me that the short 5400pe will not have any protection.
If nifty were to gap/fall fast below 5500 then the 5600pe long + 5500pe short wont give any more profit and 5400pe will be at increasing loss.

The purpose of spreads vs naked longs was perhaps to reduce risks from wrong call / IV decrease.
But naked short is even more risky unless you hold to near expiry

If you are confident of naked shorts then its ok
pl correct me if i m wrong

Idea is not to go for naked short sell..its only to cover the loss incurred in the spread when market moves in other direction.

 

[TracerBullet]

Idea is not to go for naked short sell..its only to cover the loss incurred in the spread when market moves in other direction.

ok .. Will this increase losses if nifty starts decreasing soon after you sell 5400pe or will the profit in spread be able to compensate the loss in 5400pe short

ie how long can you wait before you have to cover the short fast if market moves down.

It still seems to me risk of short pe in hopes that nifty continues to go against spread for a little while is too much for someone who wants to trade
spreads instead of naked longs.

( i want to start trading with spreads too once i get a bit of confidence / exp )

 

[ananths]

ok .. Will this increase losses if nifty starts decreasing soon after you sell 5400pe or will the profit in spread be able to compensate the loss in 5400pe short

ie how long can you wait before you have to cover the short fast if market moves down.

It still seems to me risk of short pe in hopes that nifty continues to go against spread for a little while is too much for someone who wants to trade
spreads instead of naked longs.

( i want to start trading with spreads too once i get a bit of confidence / exp )

Please note that 5400 strike price mentioned in above post is very old post...so dont consider this strike price now..
For current scenario the strike prices i'm considering is as below,
Buy 1 lot NIFTY13SEPT5300PE @ 92
Sell 1 lot NIFTY13SEPT5200PE @ 68
Total risk = 24 points
(All are today's closing prices)

To cover any loss in this spread, I will sell equal quantity of OTM put (i.e 5100PE) only when the market goes above significant resistance areas for small profits to cover the total risk 24 points. Will never hold the naked short position overnight.
I'm also looking for the strategy to reduce the already low risk we have in spread so that we can achieve maximum profitable trades...I feel this method will help..Let us see how it goes.
Good that you are considering spread trading...good luck!

 

[TracerBullet]

Please note that 5400 strike price mentioned in above post is very old post...so dont consider this strike price now..
For current scenario the strike prices i'm considering is as below,
Buy 1 lot NIFTY13SEPT5300PE @ 92
Sell 1 lot NIFTY13SEPT5200PE @ 68
Total risk = 24 points
(All are today's closing prices)

To cover any loss in this spread, I will sell equal quantity of OTM put (i.e 5100PE) only when the market goes above significant resistance areas for small profits to cover the total risk 24 points. Will never hold the naked short position overnight.
I'm also looking for the strategy to reduce the already low risk we have in spread so that we can achieve maximum profitable trades...I feel this method will help..Let us see how it goes.
Good that you are considering spread trading...good luck!

Understood, but again i ask what happens if the break of resistance is a fakeout (followed by a very fast downmove) and you unluckily sell the 5100PE option at top.

Will this increase your losses or will the profit in spread be able to compensate the losses in 5100pe short.
ie how long can you wait before you have to cover the short fast if market moves down.

I am not yet familiar with option greeks but to me it looks that the losses in short unhedged 5100pe will be much more that the profits in spread.

I dont know if the risk of that outweighs the chances of making money through up downs.
Maybe we can have a stop loss on 5100pe. If yes, where will you place the stop loss?

thanks

 

[ananths]

Understood, but again i ask what happens if the break of resistance is a fakeout (followed by a very fast downmove) and you unluckily sell the 5100PE option at top.

Will this increase your losses or will the profit in spread be able to compensate the losses in 5100pe short.
ie how long can you wait before you have to cover the short fast if market moves down.

I am not yet familiar with option greeks but to me it looks that the losses in short unhedged 5100pe will be much more that the profits in spread.

I dont know if the risk of that outweighs the chances of making money through up downs.
Maybe we can have a stop loss on 5100pe. If yes, where will you place the stop loss?

thanks

I think we really dont need a SL for 5100PE in this case because we know that in the spread we are risking only 20 points for a gain of 80 points and time is in our favor.
If you see now long leg 5300PE is 150 points away from NIFTY FUT(~5450)...after we enter this trade if nifty goes up, 5100PE will be deep OTM..say nifty reaches 5600 then we short 5100PE..but nifty turns bearish same day and falls sharply..how much it can fall in a single day?100 points? 200 points? I think our spread will cover such risks but may see some loss in the short leg..if we are so unlucky that we see a fall in market which tears us apart then we have no other go..just cover the extra leg with losses.
Also we should understand the risk and control our trades and place short orders only where we find a good opportunity because we should see it as just risk reducing trade not a profit making trade.:thumb:

 

[ananths]

Bought sept 5300PE/5200PE @ 113/84
Total cost = 29 points

 

[pakatil]

Good Catch.......Enjoy the ride......:clap:

 

[ananths]

Also got 8 points by selling 5000PE :clapping:

So total risk reduced to 21 points now

 

[pakatil]

Look at the way 5500 PE.......getting covered......