Low Risk Options Trading Strategy - Option Spreads

[DanPickUp]

dear,
tomorrow morning thinking to initiate this trade.....


1 lot Buy 5000CE @ 63
2 lot sell 5100CE @ 30.75
1 lot Buy 4900PE @ 86.85
2 lot sell 4800PE @ 51.75

pls. find the P/L graph by O.O.

Dear Vssoma

What is your next step? In reality you would have blocked approximately Rs 100'000 with your short positions.

Do you just wait until it expires and all that margin for four short lots would be blocked for a few Rs profit or what is next?

How to improve such a strategy or what to do now as market moves in the zone between 4900 and 5000 ?

DanPickUp

 

[vssoma]

You always find just gold mine . Thanks for sharing. Around 15th, there is no other way I am aware to find +/- 300 points protection.

Please consider the margin required, as we are shorting 4 lots here. That will have considerable impact on the P/L calculation.

A slightly different question Swamy. Strangles (100 points +/- current market price) will give similar protection, but much better profits right? A month timeframe is huge and Nifty can move beyond the protection, but that is more or less same here also, we have 15 days left. (Risk part), and anyway we will be ready to manage that risk by coming out or adding protective legs etc.. To keep it simple, to me, risk or exit strategy looks same, while profit/returns looks much different between the strangle and this one, hence my question.

Dear Vssoma

What is your next step? In reality you would have blocked approximately Rs 100'000 with your short positions.

Do you just wait until it expires and all that margin for four short lots would be blocked for a few Rs profit or what is next?

How to improve such a strategy or what to do now as market moves in the zone between 4900 and 5000 ?

DanPickUp

yes, you are right...i blocked more money by shorting 4 lots...i forgot to think abt that ( may be i have enough money in my account ???? ) and pls. welcome your comments on reduce that.

and as of my plan, i'll wait few more days(this is only 3rd day) and according to market condition that time, i'll modify ( add/square off some legs) the strategy.

 

[DanPickUp]

Hope you did write down it.

 

[rajesh pawar]

I have taken the following position on nifty

Long 4900 put at 94.7
Short 4800 put at 75
Short 4700 put at 40.2

Max profit it expiry betwn 4700 and 4800.. I wish today was the expiry day to get the max profit but with 13 days still left now I doubt the strategy may not give max return..

Any thing which I can do to maximise the return...

 

[DanPickUp]

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[DanPickUp]

I have taken the following position on nifty

Long 4900 put at 94.7
Short 4800 put at 75
Short 4700 put at 40.2

Max profit it expiry betwn 4700 and 4800.. I wish today was the expiry day to get the max profit but with 13 days still left now I doubt the strategy may not give max return..

Any thing which I can do to maximise the return...

Hi

Your strategy in specific terms is called: Bear put ladder.

Uncapped risk if market falls. High margins for little profit as you are short with two legs

Trade with just one short leg in your market as the margins are to high for what you can gain.

Good trading

DanPickUp

 

[rajesh pawar]

The strategy was built by legging in.. The long put was taken on 15th and the shorts were added on 16th. The overall credit is more than the debit.. credit spread.. the strategy has uncapped risk below 4600 which seems less probable in the current series.. Will take remedial action if it reaches there. Max profit betwn 4700 and 4800 of Rs 6000 can be possible... Even if the expiry is above 4900 the profit is Rs 1000. I wanted to make it profitable even above 4900 so am planning to add long 5000 call (should have done that yesterday morning). Will do so after a pull back so it is available a bit cheap.. The margin money utilised so far is only 45000 which was any how lying idle in a savings account.. So the return % does not matter (still the more the better).. The idea is to make a strategy with assured return at any level..

New to options and learning thru experimenting... Correct me if my approach is wrong..

 

[ppandya]

Planning an Option Trade

2) Lets take an example and construct a spread trade.
First we need to have some idea about the market direction (doesn't matter even if we are proven wrong. nobody is 100% right here) - so as per our current analysis, we find that market is going down since budget day. And we believe that it is going to go down further. That means we want to take bearish position. Our analysis also suggest that market can fall to 3800 level. For simplicity, lets use PUT options to trade.

Direction - Bearish
Construction - Buy 1 - PUT option strike 4000, and Sell 1 - PUT option strike 3900
Cost of trade (or net premium)= taking Friday (9/July price for July expiry) = to buy 4000 Put we have to pay 144 and when we sell 3900 Put market gives us 97.
so our net cost 144 - 97 = 47/-
Max Risk = 47
Max Reward = 4000 - 3900 47 = 53. (max value of spread = 4000 - 3900 = 100 rs.)
Break-even point = 4000 - 47 = 3953. (that means, if market closes anywhere below 3953, we will be +ive on this trade. If it closes below 3900 we will get max value of 100 pts. If market closes above 4000 then we will loose 47 which is max that we have put in this trade from our pocket)

----------------------
This part is for addressing the most important components of trade planning - EXITs

Stoploss point - Price = When value of spread falls below 25 (i.e. out of initial investment of 47, we are not ready to loose more then 47-25 = 22 rs)
Stoploss point - Time = When 4 days are remaining for expiry and position is still in loss

Profit taking - Direction = When my view about market's direction has changed from bearish to bullish or sideway.
Profit taking - Price = When atleast 80% of potential max profit is achieved. Better to move on to next opportunity rather then waiting for last bit of profit.

EXITs is something that depends from trader to trader hence there is no single correct solution for it. But above points will help you in preparing in advance for eventuality. Once we are in trade, emotions start impacting our decision making capability hence it is better to think about them right now when there is nothing is at stake.

Happy Trading

Thanks for sharing such a gr8 strategy. However, I am not sure if the maximum loss is only 47. Here are understanding as per NSE india site.

If we dont square up the position till expiry and NFITY closes at 4001, then as per NSE website http://www.nseindia.com/content/nsccl/nsccl_forep1.htm

For Long position - Excrise Value = (4001 - 4000) = 1. We paid 97 initially and now value is 1. So, Loss = 97 - 1 = 96
For short position - Assigned Value = -(4001 - 3900) = -101
Total Loss = 101+96 = 197.

Please let me know if I am missing any point here.

 

[AW10]

Thanks for sharing such a gr8 strategy. However, I am not sure if the maximum loss is only 47. Here are understanding as per NSE india site.

If we dont square up the position till expiry and NFITY closes at 4001, then as per NSE website http://www.nseindia.com/content/nsccl/nsccl_forep1.htm

For Long position - Excrise Value = (4001 - 4000) = 1. We paid 97 initially and now value is 1. So, Loss = 97 - 1 = 96
For short position - Assigned Value = -(4001 - 3900) = -101
Total Loss = 101+96 = 197.

Please let me know if I am missing any point here.

ppandya,
You have missed that I have used PUT to create the spread.
A 4000 PUT will be ITM only when market is below 4000 i.e. it will have some value else it is of no value.
A 4000 CALL will be ITM only when market is above 4000.

So when market is 4001, both the PUTs will expire worthless. i.e you will loose the max that is possible. As your net investment was 47 (= cost of trade), that is what you will loose.

If you have taken CALL for this spread then as per basics of option price, 3900 call will always be costlier than 4000 call. Hence the prices given in example will be different.

Appreciate that you asked the question and did not sit on it.
How about making a spread (or few spreads) in current market with more realistic prices and track them for 2 or 3 days along with the movement of NIFTY?

Happy Trading.

 

[vssoma]

ppandya,
You have missed that I have used PUT to create the spread.
A 4000 PUT will be ITM only when market is below 4000 i.e. it will have some value else it is of no value.
A 4000 CALL will be ITM only when market is above 4000.

So when market is 4001, both the PUTs will expire worthless. i.e you will loose the max that is possible. As your net investment was 47 (= cost of trade), that is what you will loose.

If you have taken CALL for this spread then as per basics of option price, 3900 call will always be costlier than 4000 call. Hence the prices given in example will be different.

Appreciate that you asked the question and did not sit on it.
How about making a spread (or few spreads) in current market with more realistic prices and track them for 2 or 3 days along with the movement of NIFTY?

Happy Trading.

dear aw10,
nice to see your post after long time. pls. continue whenever we need you.

i have one query regarding calculation of P/L pls. explain when your time permits.

if i am bearish for this expiry and i took below trade...

buy 4900 CE @ 63.5
sell 4800 CE @ 123.5

we have 10 days to expiry

as per this trade maximum loose only if nifty expires @ 4900
and maximum profit only if it expires @ 4800

Case 1: if today/tomorrow nifty reaches 4900/4800 .....how to calculate the P/L ( to close the trade )

case 2: if after 5 days (before 5 days of expiry) nifty reaches 4900/4800 .....how to calculate the P/L ( to close the trade )

i have idea that you already answered this query somewhere in this thread, but...this time ( if possible ) pls. give me process to calculate as simple as your style.