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.
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?
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 – 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.
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.
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.
Calendar Spread is a slightly complex but an interesting options strategy. When I will discuss it, you will think its a great strategy which will almost always result in profits. But in reality it is not the case. Yes it can make great profits but one needs some skills to excel in this strategy.
It is also called as Neutral Calendar Spread because the traders view is neutral on the market or the stock over the next few days or till the expiry of the sold options. However we will see that volatility also has a major role to play in Calendar Spreads.
We will discuss if Technical Analysis – trades based on indicators in stock markets does make money or not.
My view on Technical Analysis / Disclaimer:
I do not have much knowledge in Technical Analysis (TA) neither there is a need to learn because I am very happy with my conservative trading strategies. TA is for people who want to be very aggressive – those who want astronomical returns from stock markets. Very few people are able to do it. People like us who are retail traders with a job or business should look for small consistent profits.
In the USA (United States of America) the short call ladder trade is popularly called as Call Backspread Trade. After my article on the short call ladder, I got an email from one of my regular website visitors, Mr. Michael from the US. We exchanged some questions and answers on this trade.
Call Backspread, I assume has a lot of interest to new option traders looking to make unlimited income by paying the least amount of money. We will soon know this is not the case.
Since the discussion was detailed and advanced I have kept this in a different article. This may be of interest to people looking for more information on the Call Backspread trade or the short call ladder.
Short Put Ladder is exactly opposite of Short Call Ladder. In the Short Put Ladder Put options are traded instead of the Call options.
Note: This is the last series on the Ladder trades. A lot of traders whom I have talked to trade the ladder trade without knowing they are actually trading ladders. Most of them sell more and buy less options which means they are trading the Long Ladder unknowingly. Unfortunately most of them are speculating to their comfort and obviously losing money.
It always helps to know what you are trading and why? So if you are one of those who differentiate between the number of lots for buying and selling depending on your view, you are likely to do the same mistake again and again. Because every time you trade you will choose strike prices according to your convenience and not the correct strike for maximizing profits and minimizing losses.
If you love trading Ladders then you should learn how to trade a Short Call Ladder Strategy (or Short Put Ladder that I will discuss in my next post). The reason is that they have limited risk, unlimited profits potential (only on paper) – in reality Short Call Ladder is not a good strategy. We will shortly know why.
On paper they are better than Long Ladders because of the limited risk and unlimited profits – but unfortunately though limited, the risk is just too much on the Short Call Ladder and getting unlimited profits is difficult. Therefore you should know this strategy to actually avoid trading this. Still I highly recommend you read this article to enhance your knowledge.