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How To Trade Ratio Put Selling

A lot of traders love to trade Futures. Unfortunately most of them play it un-hedged or naked. Futures is highly leveraged derivatives and has a Delta of almost 1. Which means it moves 1 point with every 1 point move in the underlying. Isn’t this trying to take too much of risk? Remember you are leveraging your money.

Whatever, if done well, rewards are amazing. Futures can make you a fortune pretty soon or can take away all your wealth within months. Unlike options where the losers bleed slowly, Futures will bring results pretty fast.

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How To Trade Ratio Put Spread

A lot of times when a stock falls we get an idea that it may not fall further or may remain there for sometime in a range bound region. In such a scenario you can trade a ratio put spread.

How To Trade a Ratio Put Spread?

1. Buy X no of ATM (At the Money) Puts.
2. Sell X*2 (double) number of OTM (Out of the Money) Puts.

See the image below to understand the trade:

ratio put spread profit loss

Note: If you but 1 lot ATM put, you need to sell 2 lots OTM puts. But this can change depending on your view. For example if your view is pretty strong that the stock may not fall further, you may sell more than double number of puts than the number of puts bought. The point is you are taking a credit. You can sell as many puts you want, but the risk also increases.

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How to Make Crores from the Stock Markets

Stock market investors in India and around the world want to make a lot of money by investing. That is the sole reason they invest. Else there is no reason to take a risk. Most of us want to make one crore or millions of dollars from the stock markets.

Well good news is its not that difficult to make one crore. In fact you can make crores. The bad news is you yourself is your biggest enemy of your own investing. Our own self-destructive speculative trading and the mindset to get rich quick from the stock markets is the biggest obstacle to make crores from the stock markets.

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How to Trade Ratio Call Write

You must have got some idea about ratio call write strategy by the name itself. Basically it is selling options against futures or stocks. Frankly these kind of positions work only if your view is right else there can be unlimited losses.

Whenever in any trade there is a chance of unlimited loss, I get uncomfortable. Though I agree at some point we will take the losses out by getting out of the position, but the potential damage it can do by that time is unknown. Since the damage is unknown, I usually do not get into these kind of positions. Actually its in-built now, all these unlimited loss trades or speculative trades does not exist for me.

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In my last post I discussed 7 reasons why you should not trade on budget day.

Look how these words came true from that post:

Nifty will move swiftly up and down as the budget speech progresses. One good news and Nifty will jump 25-50 points, one bad and it will dip 50-70 points. You can never predict the direction of the markets that day. However watching Nifty dance will be fun if you are not trading. Moreover since Nifty will move very fast it will be hard to trade.

In this post I will analyze what may have happened to Intraday traders on the Budget Day. Look at the image below. See how Nifty danced:

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7 Reasons Why You Should Not Trade on Budget Day

Being a conservative trader I do not trade on big news days like Budget. 2015 Financial Budget is on 28-Feb-2015, a Saturday. For a conservative trader like me it is NOT an ideal situation to trade. Even though a holiday the markets will remain open for live trading. I do not care, for me big news days are trading holidays.

I think the brokers lobbied and got SEBI (Securities and Exchange Board of India) to let them do their business on a trading holiday. This is one day they make a lot of money. They didn’t want to lose a great money making opportunity this year.

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How to Trade Short Ratio Call Spread

In this post we will learn how to trade the short ratio call spread.

This strategy is traded when a trader has a range-bound view on the stock, but feels that the volatility will decrease in the near future.

Creating the Short Ratio Call Spread:

1) Buy 1 In The Money (ITM) Call Option
2) Sell 2 (or double the number of) Out Of The Money (OTM) Call Options

Note: Refer my article on long call ladder. You will see that in the long call ladder a trader buys one ITM call option and sell one ATM call option and another OTM call option. So what is the difference between long call ladder and the short call ratio trade?

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Well yesterday I got an email which was very disturbing. Someone lost more than Rs. 2 crores trading options.

Click on the image below to enlarge and read the email properly.

Rs 2 Crore Loss

Rs 2 Crore Loss – Click to Enlarge

Disclaimer: I cannot verify the authenticity of this email nor do I know whether it is true or not, but if it is, then probably this is something un-explainable and inexcusable.

I mean you cannot lose so much money that can change your life. 5-7 lakhs is ok. In the long run it won’t matter much, it will not change your life. But that is it.

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How To Trade Short Guts

Short Guts is exact opposite of Long Guts. While in the long guts, In The Money (ITM) options are bought, in the Short Guts In The Money (ITM) options are sold.

A lot of traders in India sell naked out of the money options. If you are one of them please read this article. I am sure it will learn some very important information on shorting options.

Construction of the Short Guts

Sell ITM Call Options.
Sell ITM (same number of) Put Options.
It should be done on the same Stock or Index and of the same expiry.

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How To Trade Long Guts

I am sure you must have heard of Long Straddle. It is an aggressive option strategy where a trader buys both ATM Call and Put options to make use of a big movement that he anticipates in the stock in the next few days. (It is not necessary to buy ATM strikes only; basically if you buy both Call and Put of the same stock or Index and of the same strike and expiry – you are trading a Long Straddle.)

Long Guts is somewhat similar to Long Straddle, except here the traders buys 1 (or more lots) In The Money (ITM) Call options and same number of In The Money (ITM) Put options.

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