OPTIONS RATIO SPREAD simplified 🧵 :
Options trading has its risks and rewards where risk is the option expiring as zero to a reward of tens, hundreds or even thousands of percent returns in short period, which is why we see many traders getting into options trading.
Options trading has its risks and rewards where risk is the option expiring as zero to a reward of tens, hundreds or even thousands of percent returns in short period, which is why we see many traders getting into options trading.
First thing to understand here is that the capital has higher probability to become zero than giving decent returns. To avoid such instances, hedged trading is a quite feasible option to preserve the capital and keep making good returns.
One of the easiest strategy to execute in options trading is the ratio spreads strategy. Here ‘In The Money’ (ITM) strike option is bought while ‘Out of The Money’ (OTM) strike option is sold.
Eg.Nifty is at 17585 spot and I have a bullish view so I’ll buy one lot ITM Nifty 17500 CE at 225 and sell one lot Nifty 17850 CE at 75 (my expected target)So in this trade, I have reduced my cost from 225 to 150 because even if market goes down,the call sold will lose premium.
Similar positions can be created in put side if the view is negative and can hedge the plain vanilla option trades which might end up being zero if view goes wrong or market gets too volatile.
Now this ratio can be 1:1 or 1:2 or 2:1 and this can have different risk reward ratios and probability of profit. For getting started with these strategies, we can first simulate the strategy on backtest website to understand how it would perform in different scenarios.
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