You asked how I use options with pair. A small example
Lets say there is Long ICICI and Short Bank Nifty Signal. I will decide which has more probability. If i feel ICICI going up is more probable than banknifty falling, then I would buy ICICI fut and buy bank nifty put. I will replace the doubtful leg with option. So when ICICI goes up by 5% and bank nifty goes up by 2%, I would have made better profit then shorting bank nifty fut. On the other hand by buying put i am reducing my risk in one leg.
If I am in this position
I would buy ICICI Fut and Sell ICICI High strike
and buy one Bank Nifty Put
when using options the overall risk definitely gets reduced.
Lets say there is Long ICICI and Short Bank Nifty Signal. I will decide which has more probability. If i feel ICICI going up is more probable than banknifty falling, then I would buy ICICI fut and buy bank nifty put. I will replace the doubtful leg with option. So when ICICI goes up by 5% and bank nifty goes up by 2%, I would have made better profit then shorting bank nifty fut. On the other hand by buying put i am reducing my risk in one leg.
If I am in this position
I would buy ICICI Fut and Sell ICICI High strike
and buy one Bank Nifty Put
when using options the overall risk definitely gets reduced.
Must add that you have done a lot of hard work in putting up the pair trade website! I feel its one of a kind in Indian Market scenario! There are websites catering to US and other markets for pair trading but not for Indian mkt scenario. Trust you will strive to improve the same with inputs from people like Smart_Trade and others here on TJ !