Derivatives - Need guidance in Spread strategy in MARKETS - Hi all would be grateful if somebody could throw some light on spread strategy in derivatives and how could i ...
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Need guidance in Spread strategy

  1. 11-21-2011 04:45 PM
    puneetmotwani

    Need guidance in Spread strategy

    Hi all

    would be grateful if somebody could throw some light on spread strategy in derivatives and how could i effectively implement it to gain profits.

    thanx

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  2. 11-21-2011 04:57 PM
    rmani84
    rmani84's Avatar
    Quote Originally Posted by puneetmotwani View Post
    Hi all

    would be grateful if somebody could throw some light on spread strategy in derivatives and how could i effectively implement it to gain profits.

    thanx
    Hi Puneet, one of the most popular among spread strategies is Straddle Strategy.

    For example, Nifty is currently at 4800. December expiry 5000 Call Option is trading at a premium of 80 and 4600 Put is trading at a premium of 90. Straddle strategy would involve buying one lot of both 4600 Put and one lot of 5000 Call.

    Investment = (50 * 90) + (50 * 80) = Rs 8500

    When Nifty moves Up or Down in a big way, the trader would benefit in Straddle strategy. However, if markets stay at same place and as expiry gets closer, one's positions will drift to losses.

    Key is to enter in to positions 4-5 weeks before expiry and exit positions at-least a week and half before expiry. Keeping positions open till expiry can totally wipe your capital.

    Practice this strategy with minimal investments to start with and you will know what to do as you gain experience in time.
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  3. 11-21-2011 06:41 PM
    puneetmotwani
    Thanx mani, this was really insightful......would u be able to throw some light on other spread strategies as well. thanx again...
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  4. 11-22-2011 10:32 AM
    rmani84
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    Quote Originally Posted by puneetmotwani View Post
    Thanx mani, this was really insightful......would u be able to throw some light on other spread strategies as well. thanx again...
    I have tried spread strategy before and i didn't find it fruitful. Straddle strategy is the only strategy that yielded profits for me. I had already made below threads on spread strategy,
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  5. 11-22-2011 02:01 PM
    puneetmotwani
    Thanx mani...........i really appreciate your prompt reply and the posts give great insight into the strategy...thanx a ton for your help!!!
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  6. 11-22-2011 02:34 PM
    rmani84
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    Quote Originally Posted by puneetmotwani View Post
    Thanx mani...........i really appreciate your prompt reply and the posts give great insight into the strategy...thanx a ton for your help!!!
    you are most welcome. We are here to share experiences and benefit from each other's knowledge.

    Try to combine both Bull Spread and Bear Spread ... That way, it also includes Straddle strategy within the spread strategy.

    For example.

    Currently Nifty is trading at 4800. Lets take December series for example,

    Bear Spread: Investment = (50 * 77) - (50 * 37) = Rs 2000 [You would need margins of like 20,000 to write]
    • Buy 4600 Put for Premium of Rs 77
    • Write/Sell 4400 Put at Rs 37

    Bull Spread: Investment = (50 * 77) - (50 * 25) = Rs 2600 [You would need margins of like 20,000 to write]
    • Buy 5000 Call for premium of Rs 77
    • Write/Sell 5200 Call for a premium of Rs 25

    Enter into both Bull Spread and Bear Spread to combine spread strategy with straddle strategy. (Investment of Rs 2600 + 2000 = Rs 4600). Margins needed might be 40,000 for writing options depending upon your broker.

    Below would be the profit scenarios,

    Nifty at 5200 or any value above it.
    5000 Call would trade at intrinsic value of 200 at Nifty 5200 and any value of Nifty above 5200 would be absorbed by 5200 Call which was written.

    So, Investment of Rs 4600 would be effectively worth Rs 10,000 (50 * 200).

    Nifty at 4400 or below:
    4600 Put would trade at intrinsic value of 200 at Nifty 4400 and any value of nifty below 4400 would be absorbed by 4400 Put which was written.

    So, Investment of Rs 4600 would be effectively worth Rs 10,000 (50 * 200).

    Nifty within range 4600 to 5000:
    This may yield profits or losses based on time to expiry and VIX value. You may still make profits if you trade smartly.

    PS: One can tweak this strategy based on one's own imaginations. For example, buy only 4600 Put and 5000 call. Wait for markets to move either way to lock profits by writing options.
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