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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:
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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.
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Mr. Sukhani, Good blog.I am an active options trader and I trade only index options. I am not an investor and I am a trader and looking for short-term gains. I do concur with you, trader must be adaptive. I highly recommend to your readers who are options trader, before you open any option position, think about your exit strategy and stick to it regardless whether you are profitable or accepting loss.
I suggest, do not try to hold on to your options spread to expiration. Markets always will give you a chance to exit – hope and/or greed, or keeping my fingers crossed are and must not be your strategy. Nobody ever made money with these strategies.
Great post
Great Strategie Mr. Sukhani!
These strategies will help both Investors and Traders to successful in option trading but one should not ignore the important factor called ‘time value decay’ while trading into options segment.