iCharts Discussions

[shekharinvest]

Break-even point - price level of underlying that must be reached for this trade to be profitable for us. Below that price level, we are in loss because we have paid money to market to take this trade.
This level is = strike price of long leg - Cost of trade (for bearish trade) or Strike price of long leg +cost of trade (for bullish trade)

Effect of time decay = Almost Nil.. When Long leg of your strategy is loosing value due to time decay, the Short leg is gaining approximately same advantage of time decay.
(Another advantage over Naked call strategy, where time decay hurts u everyday)

Effect of Volatility = Almost Nil ..During volatile time when you pay more to buy an option, but at the same time when you are selling other options, and collecting more money for same volatility.

Effect of price movement of NIFTY - Any move of NIFTY will have +ive impact on one leg of this position whereas other leg will be -ive impacted. This impact will not be same on both legs depending on at what level NIFTY is compared to our strike price of 6000/ 5900..

[vinay28]

[rk_a2003]

[svkum]

I dought ,there is STT applicable for options rdg

[vinay28]

[apka]

[S.S.]

[shekharinvest]

Planning an Option 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 has probably turned down. 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 5800 and lower levels. For simplicity, lets use PUT options to trade.

Lets take an example and construct a spread trade. (It is based on my trade July 24, 2103) The trade was based on confirmation of Bearish EOD signals closer to 3:25PM


Direction - Bearish

Construction - Buy 1 - PUT option strike 6000, and Sell 1 - PUT option strike 5900

Cost of trade (taking 24 July price for Aug expiry )
Buy 6000 Put @ 102 and
Sell 5900 Put @ 70
Net cost = 32/-

Max Risk = 32

Max Reward = 6000 - 5900 = 100

Break-even point = 6000 - 32 = 5968. (that means, if market closes anywhere below 5968, we will be +ive on this trade. If it closes below 5900 we will get max reward of 100 pts. If market closes above 6000 then we will loose 32 which is max that we have put in this trade from our pocket)


Since, view was very bearish (if you remember my EW counts) spread of 6000/5800 could also have been considered at the cost of 55 for a possible gain of 200.

Selection of the right strike price is the key to a successful trade.

[druzva]

Dear Shekhar,

Good to see you at least on forum page

My knowledge about option is very limited yet few suggestion

1. In India we do not have 24 hours future trading market and hence gap brings different dimensions to option trading

2. Since you are writing one strike price and buying the other one you will have to not only maintain full nifty margin but also have to maintain some fund to maintain MTM

3. Hence capital blocked and return does not make sense. In developed market spread goes in one ticket and hence make sense.

4. If one wants to make money on time decay it need different strategy . I want ST / PT to start a thread on this. I can provide some tufa / futaa Gyaan on that based on my exp on option trading

[SwingTrader]

NSE uses SPAN margins applied to portfolio, so for an option spreads like shekharinvest has suggested below one does get reduced margins (even if these positions are not initiated as a single trade). Even if the two legs of the spread are initiated on different days the position at EOD is treated like a spread and reduced margins are applied. I trade these kind of spreads all the time.

Span margins fluctuate with volatility but for such a position it will be less than half the NF EOD margin.

** shekharinvest, actually the max reward for this trade would be 68 pts (max reward = diff btw strikes minus cost of trade) since you have paid 32 pts as cost of the trade. But still max reward would probably come to around 18% on trade margin which is great!

Keep posting!

[druzva]

How much would be span margin for a lot now at this VIX?.

[druzva]

ST sir I mean one lot of NF margin. ( 30 k app). Also I do not agree to your 18 % return. As you are calculating return on margin or cost of trade. However for me return will be always on total capital / lot allotted . Even if it is in my account not in brokers .

[SwingTrader]

[druzva]

I disagree on your return calculation .

I can not advise any one to risk over 1 % of total trading capital and max 100 points 2. 5% on over night risk . So for this 101 year old trader he will dedicate 1.03 lac for trading such spread . Based on that I will calculate my return.

Else I will inflict nasbandi on myself and may be after 4 loss I will not be able to trade such spread and take ichart subscription .

[SwingTrader]