Derivative Strategy

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Sell Strangle
Derivative-Strategy

 The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock. You have to cover this strategy in first 10 days of the market for safely trade.

Short Strangle
Sell 1 OTM Call

Sell 1 OTM Put

The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Eg :-

March 24 2010

Niftly closed on 5202

April 5200 CE = 121 Sell                   236 * 50 = 11800/-

April 5200 PE = 115 Sell

5200 + 236 = 5436 Stop Loss

5200 – 236 = 4964 Stop Loss

Nifty closed for the month of April on 5150

5200 CE = 121 Sell

5150 – 5200 = -50 = 0 (121 Profit)

5200 PE 115 Sell

5200 – 5150 = 50 (115 – 50 = 65 Profit)

Total earned points = 186

 So, 186 * 50 = 9300 Net Earnings. 

Covered Call

The covered call is a strategy in options trading whereby call options are written against a holding of the underlying security.

Covered Call Construction

Long 100 Shares

Sell 1 Call

Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares. However, the profit potential of covered call writing is limited as the investor had, in return for the premium, given up the chance to fully profit from a substantial rise in the price of the underlying asset

Butterfly Strategies

The long butterfly spread is a three-leg strategy that is appropriate for a neutral forecast – when you expect the underlying stock price (or index level) to change very little over the life of the options. A butterfly can be implemented using either call or put options.

A long call butterfly spread consists of three legs with a total of four options: long one call with a lower strike, short two calls with a middle strike and long one call of a higher strike. All the calls have the same expiration, and the middle strike is halfway between the lower and the higher strikes. The position is considered “long” because it requires a net cash outlay to initiate.

When a butterfly spread is implemented properly, the potential gain is higher than the potential loss, but both the potential gain and loss will be limited.The total cost of a long butterfly spread is calculated by multiplying the net debit (cost) of the strategy by the number of shares each contract represents. A butterfly will break-even at expiration if the price of the underlying is equal to one of two values. The first break-even value is calculated by adding the net debit to the lowest strike price. The second break-even value is calculated by subtracting the net debit from the highest strike price. The maximum profit potential of a long butterfly is calculated by subtracting the net debit from the difference between the middle and lower strike prices. The maximum risk is limited to the net debit paid for the position.

Butterfly spreads achieve their maxim profit potential at expiration if the price of the underlying is equal to the middle strike price. The maximum loss is realized when the price of the underlying is below the lowest strike or above the highest strike at expiration

Eg :

1.  Buy Call at X + 1 level

2. Buy call at X – 1 level

3. Sell 2 Calls at X level

Nifty 5100 is the X level.

5100 CE = 117 Sell

5200 CE = 63 Buy

5000 CE = 185 Buy

5200 = 63 Buy

5100 = 117 Sell                                                   5100 = 117 Sell

5000 = 185 Buy

So,

5200 = 63

5100 = 117 & 2 = 234

5000 = 185

5500 (Cash Price)

Closing mkt price in call (5300)

1.  5500 – 5200 = 300 pints

300 – 63 = 237 points profit

2. 5300 – 5700 = 400

117 – 400 = 283 & 2 = 566 Loss

3. 5500 – 5220 = 500

500 – 185 = 315 Profit

So,

566

-532

-14 (Loss) 

Straddler

In this Straddler strategy we always try to gain maximum profit on either side but time value always works against this strategy. We have to utilize volatility of the mkt as well as time value. This is short term investment short term profit strategy. An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.A long straddle is a combination of buying a call and buying a put, both with the same strike price and expiration. Together, they produce a position that should profit if the stock makes a big move either up or down. Typically, investors buy the straddle because they predict a big price move and/or a great deal of volatility in the foreseeable future. For example, the investor might be expecting an important court ruling in the next quarter, the outcome of which will be either very good news or very bad news for the stock.

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Plain Synthetic Straddle

This strategy is called Limited Risk & Unlimited profit strategy. For this strategy we have to follow below strategy.

1. Buy Single future at X Level

Buy  one Put at X Level

2. Sell one future at X Level

Buy one call at X Level

This method is a theoretical method at which is used in the market for number of years. But we can modify this as follows:

1. Buy Single Future at X Level

Buy 2 Put Options at (X – 1) Level

2. Sell Single future at X Level

Buy 2 Calls at (X + 1) Level

This strategy is should be used in extremely over sold or over bought market that is market should be Volatile for this strategy.

Eg.

1  RNRL  FUT  Buy  – 68

2  RNRL  PUT  Buy  -  65 – 4 = 7152

Closed,  RNRL  FUT  51.50 – 68 = 16.50 Loss

RNRL  PUT  14 – 4 = 10

Back Spread Call

The call backspreadis a bullish strategy in options trading that involves selling a number of call options and buying more call options of the same underlying stock and expiration date at a higher strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant upside movement in the near term. Call back spread can be implemented by selling a number of calls at a lower strike and buying twice the number of calls at a higher strike

Eg.

BhartiAirtel Close – 260 (Lot Size 500)

Sell 260 Call – 9.00 = 4500

2 Buy 280 Call – 3.00 = 3000

So, 310 – 280 = 30 -3 = 27

310 – 280 = 30 – 3 = 27

54

54 – 9 = 45

54 – 45 = 9 Profit

RSI

RSI is an extremely popular momentum indicator that has been featured in a number of articles, interviews and books over the years. In particular, Constance Brown’s book, Technical Analysis for the Trading Professional, features the concept of bull market and bear market ranges for RSI. Andrew Cardwell, Brown’s RSI mentor, introduced positive and negative reversals for RSI. In addition, Cardwell turned the notion of divergence, literally and figuratively, on its head.

Wilder features RSI in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, Average True Range and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder’s indicators have stood the test of time and remain extremely popular.

Calculation

100

RSI = 100 – ——–

1 + RS

RS = Average Gain / Average Loss

 

RS = Average Gain / Average Loss

To simplify the calculation explanation, RSI has been broken down into its basic components: RS, Average Gain and Average Loss. This RSI calculation is based on 14 periods, which is the default suggested by Wilder in his book. Losses are expressed as positive values, not negative values.

The very first calculations for average gain and average loss are simple 14 period averages.

  • First Average Gain = Sum of Gains over the past 14 periods / 14.
  • First Average Loss = Sum of Losses over the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain loss:

  • Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
  • Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

Taking the prior value plus the current value is a smoothing technique similar to that used in exponential moving average calculation. This also means that RSI values become more accurate as the calculation period extends. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To exactly replicate our RSI numbers, a formula will need at least 250 data points.ADDA2

Covered Put Strategy

In this strategy we have to Sell One Future at X Level simultaneously Sell one Put at (X – 1) level. This strategy should be used if stock index is likely towards down. This strategy should be done in 1st two week of the series premium if the put option should be added in to future price to sell a stop loss.   TCS = 760 (CMP) MAY PUT 740 = 12.75 Sell 760 FUT SELL

 

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