Low-risk, low-return strategy discussion
Why this strategy with options and zero risk is not possible? - Personal Finance & Money Stack Exchange
Is this a zero risk trade or I am missing something?
Very low risk with low return; but high probability - Option strategy
Can I use zero-risk strategies for intraday trading?
Most zero or low-risk strategies are better suited for positional trades, but some like intraday spreads may be used with caution.
How much capital should I start with for zero-risk F&O strategies?
It depends on the strategy. For basic spreads, you may begin with ₹ 50,000 – ₹ 1,00,000 but always start with amounts you can afford to lose.
Is it really possible to have zero risk in F&O trading?
No. Risk can be reduced significantly but not eliminated. A zero-risk label usually refers to hedged or low-risk strategies.
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Noting options are generally highly risky and volatile compared to buy-and-hold stock investing, and the fact that options can easily produce strong returns in short timeframes (albeit with more risk), but risk tolerance can still be chosen with options, I’m trying to formulate an investment strategy based on stock/ETF investment with higher returns by employing conservative options trading as well.
If I could earn, say, 8% p.a. with a buy and hold of stock XYZ, what strategies involving options could I employ to boost my return to say, 20% p.a.? Obviously this requires taking on more risk, but I believe that it is very realistic to achieve 20% p.a with an active, but conservative options investment strategy.
What would you guys do or recommend as a strategy for achieving around 20% returns with a relatively conservative approach?
The best approach I can think of off the top of my head would be to maybe buy a stock with low volatility, and sell cheap OTM calls/puts every two months. I.e., sell options with unrealistic strike prices, and obviously receive low amounts, but with low risk and doing it every two months or so, selling another option when the previous option expires.
What do you guys think of this approach, and what ideas do you have? I hope to get some different opinions and ideas on this.
Thanks all!
In terms of the risk graphs, your thought process is correct. If you combine a Short Butterfly with a Long Straddle, you end up with the risk graph of the green line. Unfortunately, because options cost money, there are no free lunches and that is the error in your assumption. Now I know that you're not going to accept that explanation on face value so let's try something more technical.
There are 6 basic synthetic positions relating to combinations of Puts, Calls and their underlying Stock. It's called the Synthetic Triangle:
Synthetic Long Stock = Long Call + Short Put
Synthetic Short Stock = Short Call + Long Put
Synthetic Long Call = Long Stock + Long Put
Synthetic Short Call = Short Stock + Short Put
Synthetic Short Put = Long Stock + Short Call
Synthetic Long Put = Short Stock + Long Call
There are additional synthetic combinations. For example, a Bullish Vertical Spread is equal to Long Collared Stock. A bullish debit Vertical Spread is equivalent to a bullish credit Vertical Spread when options of the same strikes and series are used. Once you understand the Synthetic Triangle, you can simplify complex positions into positions with fewer legs. That has two benefits. First, it's often easier to visualize the simplified position's P&L and second, you incur less frictional costs when you transact with fewer legs.
A Butterfly Spread is comprised of a bullish and bearish Vertical Spread with a common central strike. It can be constructed several ways and they all have a similar R/R. Using the Synthetic Triangle you can verify that the following three positions are equivalent:
1) Buy one $95p, sell two $100p, buy one $105p
2) Buy one $95c, sell two $100c, buy one $105c
3) Buy one $95 put, sell one $100p, sell one $100c, buy one $105c
Now, let's take # 3 and add a long straddle at the center strike and simplify the equation. We then have:
+1 $95p - 1 $100p -1 $100c + 1 $105c (Long Butterfly)
+1 $100p + 1 $100c (Long Straddle)
- +1 $95p +1 $105c (Long Strangle)
The green line in your graph is the P&L of a Long Strangle. The problem is that you assumed that it would be free and you put the horizontal line at ZERO. Long Strangles aren't given out for free. They cost money. The base of your green line graph belongs in negative territory and that will always be the risk.
The question was asked as to how one can place a Butterfly Spread by "mixing puts and calls".
The relationship between put and call prices involves an arbitrage position called a Conversion. This process dates back to the over the counter days when a dealer who owned a put was able to satisfy a potential call buyer by "converting" the put to a call. The formula is:
Stock - Strike Price + Put - Call + Carry Cost + Dividend = 0
To make this easier to follow, let's assume that the Strike Price is equal to the Stock Price, that there is no dividend and let's pretend that there is no Carry Cost. That leaves us with:
Stock + Put - Call = 0
There are 6 factored combinations of this equation (see the previously posted Synthetic Triangle info). For example, the following demonstrates that a Covered Call is synthetically equivalent to a Short Put.
Stock - Call = - Put
Now back to Butterflies. The first one listed in my previous answer was:
(A) Buy one $95p, sell two $100p, buy one $105p
This is a pair of Vertical Spreads:
(B) = + 95p - 100p and (C) = - 100p + 105p
Let's take Vertical Spread (C) and do some Synthetic Triangle magic with it.
If S + P = C then S + 100p = + 100c and if factored with the signs changed it becomes:
(D) - 100p = S - 100c
Similarly, S + 105p = + 105c becomes:
(E) +105p = + 105c - S
Let's substitute (D) and (E) into (C)
(C) - 100p + 105p =
S - 100c + 105c - S =
(F) - 100c + 105c
which demonstrates that
(C) - 100p + 105p = (F) - 100c + 105c
Therefore, the vertical spreads (C) and (F) are equivalent. Substitute (F) for (C) in (A) and the result is:
(G) + 95p - 100p - 100c + 105c
which is buy one $95p, sell one $100p, sell one $100c and buy one $105c
and this Butterfly is equivalent to:
(A) Buy one $95p, sell two $100p, buy one $105p
QED
Hi I'm new to options. I came upon the collar strategy (own underlying stock, buy 1 otm put, sell 1 otm call) and thought it could be really useful.
Then I looked at the options chain of SPY and found something interesting. The price for an atm/slightly itm call is higher than that of an atm/slight itm put, and if I establish a collar here, it seems like I would receive a net credit and there is no chance I could lose money however the price of the stock moves.
For example, SPY is currently trading at 545.12, Jul31 545 call is 8.46 and Jul31 546 put is 6.3. Using the collar strategy, I would receive a net credit of 2.16.
If the price drops below 545, let's say 540, the call will expire worthless but I can excise the put, so my profit would be (546-545.12+2.16)x100=304.
If the price rises significantly, let's say 560, the put will be worthless and my stock will get assigned at 545, and my profit would be (545-545.12+2.16)x100=204
If the price stays between 545 and 546 my profit would always be somewhere between 204 and 304.
Is there a mistake somewhere in my understanding? Because there is no way I could lose money on this trade and I'm afraid this is too good to be true. Please help! Thanks.
Hi, I am normally an investor for e past 20 years but never tried to trade. Recently I was looking into options and see this as very safe strategy; experts can comment please.
If I sell puts far out of the money (backed by a buy option also to avoid unlimited risk), we get decent money everyday (about $10 for a $500 invested.)
Example Intel is around$25 now I am looking at selling puts strike price 20 @0.11 (expiry in a month) And backed by a buy puts strike price 15 @0.08 Max profit is about $9 and max. Loss can be $500 but the probability is very high (intel has to tank 20%-expiry in a month but I would even look others with few days expiry to avoid waiting and day to day volatility influence lowering stock price)
Is it a safe strategy or any hidden risks still? Looking for options experts feedback. Thanks for your time.