Sunday, February 2, 2014

Options Trading Strategies

Many traders use options to take positions in the market, mainly in the Nifty. I have come accross two informative articles discussing option strategies.

Here are the two links:

Vertical Spreads: more baggage than benefits

S.O.S. - Short option Strangles

We will examine the Vertical Spreads in our post. The article links are given for more reading and understanding.

Vertical Spreads in options are the sale and purchase of two options of same type (Both Calls or both puts), same expiration (February), and different strike prices.

Examples: Bullish view on Nifty, so set up a bullish spread:
Buy 6100 call
Sell 6400 Call

Carley Garner, who has written both these articles makes the point that trading two options positions may actually result in inefficient performance. Just to make this clear, a vertical spread trades two options positions. Suppose we have purchased a bullish spread. Even when the market goes in our favor, it is possible that the rise in  the prices of the short options may balance the rise in price of the long option, resulting in no gains while the market moves up. Such a scenario is called a vertical spread handcuff. (Nice name!)

I would go with the conclusions that Ms Garner draws: 
Quote
In summary, vertical spreads are a better “buy and hold” strategy for option traders while outright options are better suited for swing traders.  Don’t fall into the fallacy that any type of strategy can be applied in all circumstances; there is a time and place for everything.

*There is substantial risk of loss in trading futures and options; it is not suitable for everyone.

UnQuote  

3 comments:

Rajesh Alawadhi said...

Dear sir,
The author is absolutely justified in his logic of having an option buyer adapting to buy an hold.The reasons are simple.
1. The very genesis of the option buying is to benefit from a large move in the underlying at the cost of predetermined loss.As it is, an option buyer makes money once in a while and there too, what is the point limiting your profits by hedging.

2. Hedging of buy options may be resorted by somebody who is either over leveraged or does not have a view.If that is so what is the point trading when the design of the trade is to cause a loss over long term.

3. Margin requirements in vertical spreads work out to be 3-4 times than simple options buys.

4. Last but not the least is the recurring double cost of trading the same view over a period of time.

RICKY said...

yes that's true vertical-spreads are more use full in these kinds of markets .. but one should study the risk wholly before attempting a vertical spread trade ( ration spread ) .. my experience in vertical spreads is merely of just 7 years but i have noticed that every expiry is different from the other .so volatility plays an imp role in this kinds of spread

David Dark said...

Investment opportunities are utilized to make influence and control hazard. The methods I gained from my coaches are gainful and basic once you get the hang of them. Thanks for sharing about option adjusted spread trading.