Low Risk Options Trading Strategy - Option Spreads

[harishr27]

can anyone tell me in practical terms are there any thumb rules followed wrt the selection of options in strategies by option traders?.for eg. the OTM options in a strangle...
how should i decide on the basis of the underlying that how away from the ATM strike should i buy these options???

 

[DanPickUp]

Hi

I hope, you understand the first part of this little performance.

Now lets go to the second part of it.

As the first part is not related to any market, the second part is related to the development of option markets.

As showed in the strategy : ""You sell one deep in the money call, which brings you back cash, you lost with your long calls !! To protect now this sold call, you buy one further out of the money call.""

So, where are here hidden problems here ?

Let us point at them :

- Expiry date is one of this hidden points.

In this case here ( call credit spread ), I spoke about options, which have the same expiry date. To keep it simple, choose the same expiry date as they will most likely act in conjunction, compare to market reactions in such a short time frame.

Many option trader do not have or use analyzing software. Most normal software or free software or all this free excel sheets, not even have the standard to mix futures and options. If you now would make it more complex (as it is possible and as I know, some of you think about it or may even have some experience about that ), you would bring your self only more in danger as you not would know, how your analyzing picture would look and where to adjust.

So, take this as a security advise and if you want to trade such stuff, keep this in mind and do not start to mix different expiry dates in that strategy I explained here. ( You can do so with the calendar spread or diagonal spreads, but this is an other story and doe's not belong here )

Now to the next point :

- The point I spot on now, will very strongly depend to the market develop- ment in which this special credit spread is traded.

There are markets, which give on many strike levels options and there are markets like nifty, which do not. As the range in Nifty is 100 strike levels per option, you may not can go for that part of the whole strategy.

The spread you have to pay and watch in this huge strike levels, seems to me not a high market development sing for such a credit spread, which I showed.

Small spreads are more likely to act in conjunction as big range spreads, which you will have to trade in nifty options.

So, one solutions is to trade such spreads with longer time frames, but this then would not fix the situation !!, we had ; and even have been successful with luck this time with all the bad conditions for such a whole combination of legs.

So, if you try to leg in such ways, be sure on which time frame you do work.

What did we learn until know ?

Know your market very well and know, what risk you take to trade certain ideas. Do never copy a strategy, as long as you do not understand the hidden problems !

Will be continued in the next post.

DanPickUp

 

[DanPickUp]

can anyone tell me in practical terms are there any thumb rules followed wrt the selection of options in strategies by option traders?.for eg. the OTM options in a strangle...
how should i decide on the basis of the underlying that how away from the ATM strike should i buy these options???

Hi harishr

Thumb rules ? Yes ! Volatility is the thumb rule.

http://img195.imageshack.us/img195/4190/strategies.png

Here some other clear rule : If you implemented a strangle atm, adjust it with options otm.

You can trade straddle and strangles, far away from expiry dates. You then take otm options and you close the trade a few weeks before expiration. No stress and trading in very slow motion. I like such trades.

But this depends again on the development of the market you trade, when it comes to options.

To go deeper in selling options, you read onces this post :

http://www.traderji.com/options/305...g-strategy-option-spreads-116.html#post459952

DanPickUp

 

[bharath.mang]

I have setup an account with a discount broker called Zerodha, I am trying to figure out the best strategies using options that would work well.... I am looking at strategies with minimal risks, fixed income kinds..Should work well because, these guys charge not based on lots and have also told me that will give me benefits of cross margining..The last half hour volatility I have shorted 6100 puts and 6000 calls and am expecting that volatility will be low in the morning and should atleast make a couple of points.. The low brokerage will help to see profits much sooner... Any fixed income strategies for the month???

 

[Metal]

I have setup an account with a discount broker called Zerodha

Please do give feedback on the NSE NOW platform which Zerodha people are using. How fast and user-friendly is it esp during market hours etc.

 

[DanPickUp]

I have setup an account with a discount broker called Zerodha, I am trying to figure out the best strategies using options that would work well.... I am looking at strategies with minimal risks, fixed income kinds..Should work well because, these guys charge not based on lots and have also told me that will give me benefits of cross margining..The last half hour volatility I have shorted 6100 puts and 6000 calls and am expecting that volatility will be low in the morning and should atleast make a couple of points.. The low brokerage will help to see profits much sooner... Any fixed income strategies for the month???

Hi bharath

""Opening an account with any discount broker and trying to figure out the best strategies using options that would work well.""

Good effort, so go on.

Having a broker with low commission is just normal for any professional option trader.

""Trying to figure out the best strategies using options that would work well"" :thumb:

We are all here to see your results and discus with you, what you have learned and experienced.

""I am looking at strategies with minimal risks, fixed income kinds. Should work well ""

Hey, that is what we are all searching for and now you joined us. What can I say : Welcome.

""The last half hour volatility I have shorted 6100 puts and 6000 calls and am expecting that volatility will be low in the morning and should atleast make a couple of points""

Let us know, if it worked and let us know, how you locked in this few points. What kind of order did you give to your broker to lock in this few points.

May I ask you, what the strategy you implemented is called ?

I will help you. It is a short Guts. I will give you all the essential to that strategy :

Proficiency normally is for experts.
The outlook for the market direction is neutral.
Volatility in the market has to be low.
Your maximum risk is uncapped and your maximum reward is capped.

Are you sure, you did the right trade at this moment ?

""Any fixed income strategies for the month??""

Not clear about this question ? A short guts is an income strategy !

Let us know, what is going on and we can discuss further details.

Take care

DanPickUp

 

[harishr27]

Hi harishr

Thumb rules ? Yes ! Volatility is the thumb rule.

http://img195.imageshack.us/img195/4190/strategies.png

Here some other clear rule : If you implemented a strangle atm, adjust it with options otm.

You can trade straddle and strangles, far away from expiry dates. You then take otm options and you close the trade a few weeks before expiration. No stress and trading in very slow motion. I like such trades.

But this depends again on the development of the market you trade, when it comes to options.

To go deeper in selling options, you read onces this post :

http://www.traderji.com/options/305...g-strategy-option-spreads-116.html#post459952

DanPickUp

thank a lot dan.....

 

[harishr27]

what do you mean by adjust it with options?

 

[trader_man]

Hi,

Why would anyone choose Long Straddle over Long Strangle? I have tested both strategies for same expiry 25 Nov 2010. Nifty @5983:

Long Straddle
-------------
Long Call 6000 @ 148
Long Put 6000 @ 124

Max Loss:-272
Lower Breakeven: 5727
Upper Breakeven: 6272

Long Strangle
-------------
Long Put 5900 @ 85
Long Call 6100 @ 98

Max Loss:-183
Lower Breakeven: 5717
Upper Breakeven: 6282

Notice here, that Long Strangle has a lower Max Loss than Long Straddle. But, the breakeven points are the same. Both strategies are going long so time decay will be negative in both cases.

So, what is the advantage of Long Straddle over Long Strangle??

 

[nac]

Hi,

Why would anyone choose Long Straddle over Long Strangle? I have tested both strategies for same expiry 25 Nov 2010. Nifty @5983:

Long Straddle
-------------
Long Call 6000 @ 148
Long Put 6000 @ 124

Max Loss:-272
Lower Breakeven: 5727
Upper Breakeven: 6272

Long Strangle
-------------
Long Put 5900 @ 85
Long Call 6100 @ 98

Max Loss:-183
Lower Breakeven: 5717
Upper Breakeven: 6282

Notice here, that Long Strangle has a lower Max Loss than Long Straddle. But, the breakeven points are the same. Both strategies are going long so time decay will be negative in both cases.

So, what is the advantage of Long Straddle over Long Strangle??

I am not an option trader. Somebody would throw some more points on this.

Perhaps, strangle's max loss is smaller than straddle. But probability of losing all the amount (premium paid) on strangle is higher than straddle.

Risk chart of straddle looks like "V" and strangle looks like "BOAT"/"CUP". Probability of closing very end of "V" is lesser than closing anywhere within rim of the "BOAT"