If your view is bearish, you can trade Strip. This strategy is opposite to Strap. The Strip is a modified version of long Straddle.
In a Long Straddle a trader buys ATM calls and puts in the same quantity. However in Strip since his view is bearish, he will buy 2 ATM puts and 1 ATM call.
Here is the construction of the Strip Strategy:
1. Buy 1 Call
2. Buy 2 Puts
These options should be of the same stock/index, strike and expiry.
If the trader is lucky and the down-move actually happens – he will make more than had he implemented just the straddle strategy. Lets look at the following graph:
Most retail option traders in India do not know option Greeks or do not care for them. Option Greeks are very vital part of options trading. If you do not understand them, than it is very important to know about them. At least you should have an idea of what they are. Lets discuss them.
The Five Option Greeks:
It is the amount an option price will move with every 1 point move in the Index/Stock. If expiry is not near, Delta movement is NOT 1 point increase with 1 point increase in the stock. Which means if the stock moves 1 point up, depending on the strike price of the option, the option will move less than 1.
Though I always promote non-directional strategies, sometimes we as traders want to explore strategies to benefit from a directional movement.
Lets say a news has come in and its a good news. We know for sure that Nifty may move up for sometime at least till people fully digest this news. Strap Options Strategy is good for these times.
Note: Why does a stock or Index gives a knee-jerk reaction when a big news comes in? Because some kind of emotional trading starts taking place. If a good news comes in, most professional traders (who get access to this news much before retail traders) act pretty fast to make a quick buck or two.
This is the last article in the butterfly series.
Here are the rest:
1. Long Call Butterfly
2. Short Call Butterfly
3. Long Put Butterfly
… and this article is on Short Put Butterfly Strategy.
Note that the Long Call and Put Butterfly strategies work when Nifty expiry is very near the ATM strike that was sold. A credit is required to play the trade therefore the trade is called long butterfly.
Short Call and Put Butterfly works when Nifty is more than 100 points away in any direction from the ATM strike on the expiry day. The trader gets a credit therefore its called the short butterfly.
I have already discussed how to trade Long Call Butterfly and Short Call Butterfly. This article discusses how to trade a long put butterfly.
Note: Most traders I have talked to like to play butterfly with call options and not with put options. I think it has more to do with human psychology than anything technical. We love to buy call options more than the put options, don’t we? I do not know the reason why, but I think we perceive markets going up more rather than down.
The fact is, it does not matter what option you are choosing to play a butterfly with, the risk reward will remain the same. Whether you trade a long put butterfly, or a long call butterfly – the risk and reward will be same.
I hear a lot of stories on how people lose money trading options. Most of them are not worth sharing. But this one stands out and I thought I should share this with visitors of my website who are looking to buy that option for a big home-run. I do not think anyone in this world exists who has had a real home-run buying options (I mean made so much money buying options that they can now stop trading and live a comfortable life). Yes, you will find people who are doing well trading options – but they have a solid strategy that they master.
Most traders, not just in India but the whole world wonder if they can make enough money from trading to live a comfortable life. Yes the real question is if they can leave their day jobs and make similar amount trading the stock markets to feed their families.
Well frankly I really don’t get this. Why everyone want to leave their jobs? Lets keep it for another day.
I get many phone calls and mails asking something similar on the above lines. However recently I got this email from one of my subscribers Mr. Chandirasekaran which is quite interesting and I would like to share his question too. I have taken his permission. My answer follows the question.
One of the best things about this website is that I come to know some amazing and some not so amazing traders in India.
Well unfortunately most traders are losing money. Why people lose money is that they do not have a trading plan to execute when their prediction goes wrong. They simply do not know where to take a stop loss or to book a profit. I mean when you trade you should have a trade plan in place. You should know clearly when to take a stop loss and when to take out profits.
If you take a stop loss at 50% of your profits – even if you are right 50% of the times – you will make money. Risk management is the most important decision in trading which everyone forgets.
If you have read my post on Long Call Butterfly, this trade will be easy for you to understand. Results for the Short Call Butterfly will be exactly opposite of the Long Call Butterfly.
Lets discuss the trade straight away.
When should you trade Short Call Butterfly?
You should trade this strategy when you think that Nifty will move away from the current strike and expire 100-200 points away on the either side – up or down does not matter.
Three trades are involved (note that these trades are exact opposite of the Long Call Butterfly):
Most traders who call me to inquire about my course tell me that they know how to trade a butterfly. In fact this is first of the many trades they tell me they know. Strange it seems, but it looks like most Indian retail traders love to trade butterfly. Well frankly butterfly trade is not as easy as it seems and contrary to what many traders believe, it is a trade where some kind of prediction is required. Technically therefore it cannot be considered a non-directional trade.
Personally I stay miles away from a trade that needs any kind of prediction.