Trading in options is considered as very risky especially for newbies. Options are known to wipe out entire trading capital of most of the retail traders. It's indeed a dangerous game to play but if used cautiously with proper risk management it can do wonders for you. In this post, we are going to introduce a proven low risk options strategy known as Diagonal Spread. Trading naked options is very riskier and one should avoid it unless you are extremely sure about the future price movement. That is the reason experienced investors trade in Option spreads which involves both buying and selling of option strikes. For ex: Buy 8600 Nifty CE and Sell 8800 Nifty CE. In this scenario one position hedges the other thus limiting your risk.
The options income strategy that allows you to make consistent money whether the market goes up, down, or sideways. How to make money on a stock or index trade even if you're outright wrong on the direction (the stock can do the exact opposite of what you predict, and you'll still win). 7 Low-Risk Investments With High Returns 1. Dividend-Paying Stocks. To be clear, dividend-paying stocks do carry risk as they are still subject to the same factors that impact the stock market. Long guts is a low-risk, high-reward strangle that allows traders to maintain a bullish or bearish bias There are several options strategies that allow traders to use market volatility to their.
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Diagonal spread is a kind of options spread where far month option is bought and near month option is sold. For ex: Buy 8600 Nifty CE December contract and Sell 8800 Nifty CE November contract. This strategy would be called bullish diagonal spread. Buying and selling Puts will constitute bearish diagonal spread. The idea behind this strategy is that far month options contract will suffer less time decay as compared to near month options contract. So even if the trade goes against you the loss would be minimal. Even sideways trend would not cause any loss, thus making this a very low risk options strategy. We will explain this with an example in the following section.
We'll try to apply this strategy on NSE Nifty Nov Expiry. Let's suppose we had bearish view on Nifty at the start of November series, and so we entered in a bearish diagonal spread. We bought 1 lot of 8800 PE Dec series and sold 1 lot of 8600 PE Nov series. Below is the trade setup with P/L each day.
The strategy has earned a decent 2% profit in 8 trading days. Profit/Loss has been calculated considering 1 lot (75 quantities) of Nifty, and approx 70000 Rupees of initial margin to take this trade. You would definitely have earned better if you would have gone naked in long Puts, but then your risk would have grown substantially higher and any sideways movement might have hurt your capital.
Now, if Nifty expires at 8000 in Nov series, then below is the theoretical value of your position at the end of series:
This strategy would have earned 30% in a span of one month if our prediction is accurate.
There are n number of ways to select strike prices while trading options. But for this strategy, we would recommend percentage hedge method. Below are the steps to select strike prices based on this method:
- For long option take strike from the next/far month. Select the strike that is at-the-money (ATM) or slightly out-of-the-money (OTM). NOTE: ATM or OTM is with respect to current month futures price and not the next month (even though the strikes are being selected from the next month).
- For short option take strike from the current/near month that is two strikes OTM from the long strike selected. Long and short options two strikes apart is optimum for NF. One strike apart and the profit will start to dip after price crosses the short strike which can be a major problem in managing the trade. More than two strikes part means you will not be able to get the optimum hedge % required (see the next point about this).
- Compute the hedge % using the formula below:
Hedge % = (Price of short call / Price of the long call ) * 100 - If the hedge % is above 30% this strike combination can be selected. If the hedge % is less than 30%, start the process again from #1 by going for more nearer ATM or ITM option for long and then repeat the steps and recompute the hedge %. Most of the time we end up with ITM long and OTM short which is usually the optimum combination unless one is initiating the trade close to expiry when the position has to be more ITM to provide enough protection.
- Once you have a strike combination with hedge % greater than 30%, it can be used to enter the trade.
| Parameter | Value |
| Trade Setup | Buy ITM or ATM option and Short OTM option. |
| Direction Neutral? | No. Trade Call options if you have Bullish view and trade Put options if you have Bearish view. |
| Strike Price selection | Select the strike prices so that hedge % among both the strikes is greater than 30%. |
| When to enter? | Trade should be entered usually 15-30 days before current month expiry. Avoid entering in the expiry week as the time decay may hurt you. |
| When to exit? | Trade should be exited usually 2-3 days before expiry. |
| Stock Selection | Trade highly liquid option contracts as this strategy involves buying of far month contract. |
| Risk Management | Try to maintain a risk reward ratio of 2:1. Example: 20% target and 10% stop loss |
Please see the below link to download excel sheet for Diagonal Spread: Low risk options strategy. You may use this sheet to test the strategy result on variety of contracts. You would need to enter the prices manually and the profit/loss would be calculated automatically. Please let us know if you have any queries.
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The following trading system is very good for the intraday as well as the long term trader.. It will work on any timeframe and any pair. But I suggest you do not use it on any timeframe below the 15-minute timeframe as you will be getting many fake signals.
When we work with a indicators on a system, the most common problem we all face is the late-entries.. That is, when the indicators give a trading signal, the price has already moved quite a few pips, and these pips, we could have catch them as well. Now the other problem regarding late entries in trades is the stoploss, since most of the time, we will be placing stoploss at recent swings (high or low), with late entries, these swings are further from the entry therefore when we place the stoploss so far from the actual late entries, we are decreasing the Risk/Reward ratio thus turning a whole trading system into a Poor Risk Reward system.. You could be risking 2x to earn 1x and so on.. this will never work in the long run and you would eventually go broke.
The Bounce20 system is here to fix this late entry problem, infact the aim of this system is to catch a trend/mini trend as early as possible. These pips which we would have missed with other trading systems due to late entries, we can definitely book them now with the bounce20 method.
So let us look into this system in detail please:
1. Place Simple Moving Average 5 (red) and Simple Moving Average 20 (blue) on the chart.
2. Place MACD indicator on the chart with the default setting.
Now your chart should be looking nice and uncluttered with only these 3 indicators. Let us look into the mechanics of this system.
The Bounce20 does not rely on the cross of the moving averages to give you a trading signal but rely on the MACD and a bounce on the SMA 20. We can even get in a trade before any cross on the moving averages.
When to BUY
The procedure to determine a buy signal from the Bounce20 trading system are as follows:
1. MACD should be below 0 and MACD Histogram should be moving away (retreating) from MACD Signal line (red)
Now, if Nifty expires at 8000 in Nov series, then below is the theoretical value of your position at the end of series:
This strategy would have earned 30% in a span of one month if our prediction is accurate.
There are n number of ways to select strike prices while trading options. But for this strategy, we would recommend percentage hedge method. Below are the steps to select strike prices based on this method:
- For long option take strike from the next/far month. Select the strike that is at-the-money (ATM) or slightly out-of-the-money (OTM). NOTE: ATM or OTM is with respect to current month futures price and not the next month (even though the strikes are being selected from the next month).
- For short option take strike from the current/near month that is two strikes OTM from the long strike selected. Long and short options two strikes apart is optimum for NF. One strike apart and the profit will start to dip after price crosses the short strike which can be a major problem in managing the trade. More than two strikes part means you will not be able to get the optimum hedge % required (see the next point about this).
- Compute the hedge % using the formula below:
Hedge % = (Price of short call / Price of the long call ) * 100 - If the hedge % is above 30% this strike combination can be selected. If the hedge % is less than 30%, start the process again from #1 by going for more nearer ATM or ITM option for long and then repeat the steps and recompute the hedge %. Most of the time we end up with ITM long and OTM short which is usually the optimum combination unless one is initiating the trade close to expiry when the position has to be more ITM to provide enough protection.
- Once you have a strike combination with hedge % greater than 30%, it can be used to enter the trade.
| Parameter | Value |
| Trade Setup | Buy ITM or ATM option and Short OTM option. |
| Direction Neutral? | No. Trade Call options if you have Bullish view and trade Put options if you have Bearish view. |
| Strike Price selection | Select the strike prices so that hedge % among both the strikes is greater than 30%. |
| When to enter? | Trade should be entered usually 15-30 days before current month expiry. Avoid entering in the expiry week as the time decay may hurt you. |
| When to exit? | Trade should be exited usually 2-3 days before expiry. |
| Stock Selection | Trade highly liquid option contracts as this strategy involves buying of far month contract. |
| Risk Management | Try to maintain a risk reward ratio of 2:1. Example: 20% target and 10% stop loss |
Please see the below link to download excel sheet for Diagonal Spread: Low risk options strategy. You may use this sheet to test the strategy result on variety of contracts. You would need to enter the prices manually and the profit/loss would be calculated automatically. Please let us know if you have any queries.
Related Posts
The following trading system is very good for the intraday as well as the long term trader.. It will work on any timeframe and any pair. But I suggest you do not use it on any timeframe below the 15-minute timeframe as you will be getting many fake signals.
When we work with a indicators on a system, the most common problem we all face is the late-entries.. That is, when the indicators give a trading signal, the price has already moved quite a few pips, and these pips, we could have catch them as well. Now the other problem regarding late entries in trades is the stoploss, since most of the time, we will be placing stoploss at recent swings (high or low), with late entries, these swings are further from the entry therefore when we place the stoploss so far from the actual late entries, we are decreasing the Risk/Reward ratio thus turning a whole trading system into a Poor Risk Reward system.. You could be risking 2x to earn 1x and so on.. this will never work in the long run and you would eventually go broke.
The Bounce20 system is here to fix this late entry problem, infact the aim of this system is to catch a trend/mini trend as early as possible. These pips which we would have missed with other trading systems due to late entries, we can definitely book them now with the bounce20 method.
So let us look into this system in detail please:
1. Place Simple Moving Average 5 (red) and Simple Moving Average 20 (blue) on the chart.
2. Place MACD indicator on the chart with the default setting.
Now your chart should be looking nice and uncluttered with only these 3 indicators. Let us look into the mechanics of this system.
The Bounce20 does not rely on the cross of the moving averages to give you a trading signal but rely on the MACD and a bounce on the SMA 20. We can even get in a trade before any cross on the moving averages.
When to BUY
The procedure to determine a buy signal from the Bounce20 trading system are as follows:
1. MACD should be below 0 and MACD Histogram should be moving away (retreating) from MACD Signal line (red)
The above rule are the main ones which gives you the earliest warning about a possible trade forming. However, do not take any trade now itself because there comes the other rules
2. Price should be trying to go UP by now, but it normally BOUNCES off the SMA20 (blue).. we should look for this bounce
3. The last rule is, after the bounce price should normally go little below the SMA5(red) and a bar might close below it.
Do not get confused. Follow the rules closely and you will be out of trouble. Look at the screenshots below for further detail on this trading setup. I have also numbered the steps and this is how you should be numbering yours as well.
When to SELL
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I have already explained the buy setup in detail, therefore I would not be doing the same for explaining the sell situation as it is exactly the opposite of the Buy Setup. Just observe this perfect SELL setup below and I will write a little about it after the screenshot.
The procedure to determine a SELL signal from the Bounce20 trading system are as follows:
1. MACD should be ABOVE 0 and MACD Histogram should be moving away (retreating) from MACD Signal line (red)
2. Price should be trying to go DOWN by now, but it normally BOUNCES off the SMA20 (yellow).. we should look for this bounce
3. The last rule is, after the bounce price should normally go little below the SMA5(blue) and a bar might close below it.
NOTE!!!! The Moving Averages in the screenshot below are DIFFERENT IN COLOR from the one in the screenshots above. Do not get confused about it.
In the screenshot above, I have detailed and illustrated a perfect SELL setup and if you had taken this one, it would have made many pips. I suggest you read the rules again and follow the steps on this screenshot altogether. Our entry should be either at a close above the SMA 5(blue) or if it makes a shoot above the SMA 5, we can also open an entry because there are times when price will just go briefly above the SMA5 and then immediately go in the down direction, if in that case you were waiting for a close below the SMA5, you would have miss the trade.
What about Stoploss and Takeprofit
As I said briefly above, the stoploss is best placed a few pips (5-10) below or above the most recent swing before your trade entry. For a buy, it would be the most recent LOW before your entry and for a sell it would be the most recent HIGH from your entry. This system will keep your stoploss very close to your entries as we tend to enter earliest into the trades, therefore we risk little and we aim a 2x or more profit from what we risked.
High Risk High Reward Stocks
The takeprofit should be reasonable, you can use the next resistance as takeprofit level for a buy and the next support level for a sell. Breakeven your trade as soon as you can. After than you can ride the trade and see how much you can make from it. The trades taken with this system will usually give you a lot of pips.
Heads up poker strategy. Now let me show you more examples of BUY signals generated by the bounce20 trading system.. I will be labeling the screenshot as above and will also add the stoploss and possible takeprofit levels.
Low Risk High Reward Investing
3 successful buy trade signals generated by the Bounce20 Trading Method netting around 500pips altogether.. Is not this great?? You should study the chart posted above and read the rules again and again. You can notice how our stoploss is tight when compared to the profit made (expected) from this trading method. This is a Low Risk High Reward system. Even a beginner in forex can learn this system overnight. But again, no system is perfect and we should have a few losses here and then.. but again, our losses will be minimal when compared to the profit potential.
I will pen off for now.. When I come back, I will write about the Sell details.. Have fun and hope to hear from you.
