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THREAD ON RATIO SPREADS
Whenever vol is on the rise, my go to strategy is always RS. Apart from Jan, Feb & Jul this year when i traded in straddle, 2020 has all been about RS. It's the flexibility of the strategy to trade in both direction & non-direction which i like.(1/n)
Whenever vol is on the rise, my go to strategy is always RS. Apart from Jan, Feb & Jul this year when i traded in straddle, 2020 has all been about RS. It's the flexibility of the strategy to trade in both direction & non-direction which i like.(1/n)
RS is buying one strike with high delta & selling more than 1 lot of lesser delta. Since i do weeklies i prefer buying ATM & selling OTMs on Fri, Mon, Tues as the premiums in OTM options are high. For Wed, Thus i buy ITM & sell ATMs.(2/n)
To make up my decision of which leg (cal or put) to initiate, i look in the option chain on which side the OTMs are not spiking. That's likely the side whose OTMs will melt faster or not increase even if market moves towards them.(3/n)
If your willing to adjust, then even if the view goes wrong you can buy or sell extra qty of sold option to stay +ve. For example if you have initiated a PUT RS & there is a volatile downmove, then you can keep buying extra sold qty & convert the RS into debit spread.(4/n)
If there is a volatile upmove, u can sell extra qty to receive more premium, which will ultimately decay. If market doesn't go anywhere, then also sold OTMs will decay faster. So it's kind of a win win situation, if ur willing to adjust & look carefully in the option chain.(5/n)
Many times during high IVs when there is good vol crush, both the strikes can give profit. So if you have a Put spread & market opens 70pts down, your ATM put will increase & OTM put will decrease. It's hard to believe that puts can fall when nifty falls but it happens.(6/n)
Deciding what ratio is subjective. I personally initiate a delta neutral RS which has an inherent debit. If one doesn't know greeks, then can match the premiums of bought & sold options accordingly, preferably some debit because credit can increase the risk during vol spike.(7/n)
Ideally best days for ratios are Tue, Wed & Thus. It's because many a times the OTMs can behave irrationally in the starting of the week, as the time left for expiry is high. Overnight positions can give good profits due to vol crush, but intraday can be tricky. (8/n)
