Options is the highly dynamic instruments unlike Equity & future where we see linear movement, movement in options depends upon number of other factors also (interest, dividend,expiry etc), in options trading its quite possible you see a movement in underline but no change or exact change in Option price.Solution of the above given problem is spread or trading in options with spread.
Spread is strategy that involves taking opposing position in same instruments or related instrument, both positions move in a different direction, If the value of one position rises as a result of a directional move in the underlying, the value of the opposing position is expected to decline. There is no fixed formula to calculate option strike price, what I do if I am having strong convication about the move in intraday I create position in OTM and for swing trades i create position in ITM if i am confident about the directional move, It gives me better Risk Reward Ratio
In option its possible to create a position where we will be having different options Greeks in same Trade and all of them will give contradictory or related reading in the given time. Ref under given chart, I use Opstra for option analysis
Option spreads can be created where regular adjustments is required we call it Dynamic spread and on the other hand when we make a spread where no adjustment is required and risk is predefined we call it static spread.
Common reasons for creating spreads
- A Trader might to take advantage of mispricing in different options strike
- A Trader wants to construct a position that reflects his particular view
- Last but not least it helps you in risk management & position sizing
No Trader can survive in market for quite long especially if he is managing or planning to mange bigger capital if his only focus on direction, spread is the only methods which provide solution to large margin of error.
An important part of any serious option trader’s life is to learn a wide variety of Spreading strategies
Naked options Vs Spread
As we all know Purchase of Call or sale of Put creates positive Delta and sale of calls or purchase of put will create a negative Delta, IF implied volatiliy is high its time to sell options & if implied volatility is low its time to buy options.The problem with this system there is very little scope of marging on error if things didnt move in your direction or moved but with a slow space, options is going to loose its value. An experience Trader will prefer strategy where risk reward ration is good and there is scope for margin of error, Every Trader Know that it only over a long period of Time that Good Luck and Bad Luck factor even out. Hence No Trader should initiate a strategy where short term Bad Luck might end his career.
we will read all possible or strategy in othe blogs,Some of them are :-
- Vertical Spreads
A)Debit Spread (Bull Spread/Bear Spread
B)Credit Spread
2. Volatility Spread
A)Straddle
B) Strangle
C) Butterfly
D) Condor
E) Ratio Spread
F) Calander Spread
G) Others
