Heckyl Alpha Pulse

Options trading strategies simplified

Posted on November 15, 2016 Updated on November 17, 2016

Options provide the best of all worlds. With options, a trader can increase profits, generate regular income and limit overall risk. However, trading in options is not as easy as buying and selling stocks in the cash market. Options are more complex and risky securities. Typically, sophisticated traders take part in options segment. On the other hand, traders new to options are usually advised to understand how it works before placing any bets.

Options, when used properly, can allow traders to gain better control over the risks and rewards. At the same time, one has to align his own forecast for the stock or index with appropriate options trading strategy. However, selecting appropriate options strategy is easier said than done. Especially, when the number of strategies is large. Moreover, execution of strategy involves placing of multiple put and call orders in opposite directions. Hence, it is important for traders to deploy such strategies with extreme caution as any mistake in trade could result in huge losses.

Heckyl’s advanced F&O platform can help options traders to minimize risk and maximize profits. Our option strategies screen allows user to measure probability for future price trend based on his bullish or bearish outlook for stock or index. It further allows user to set target date, price and risk/ reward preferences. Based on user’s inputs, our system generates strategies using algorithm. It also highlights payoff diagram and risk/ reward for each strategy. Let us understand, how our strategies screen can help traders with help of case study.

Case study: Nifty
On Nov. 11, 2016, the broad based Nifty index fell 2.7% to settle at 8,296. Post this fall in the 50-share index, the positional trader expects the Nifty to climb back above 8,400 level within one month. In probability analysis chart, he found that chance of Nifty hitting 8,441 level is 37.33 percent on Dec. 12, 2016 (See image 1 below).

[Image 1: Probability analysis chart]

Subsequently, our system set target price and date for Nifty at 8,441 and Dec. 12, 2016 respectively in strategy input (See image 2 below) based on price level and date selected by the positional trader in probability analysis chart.

[Image 2: Strategy input]

After setting target date and price, the positional trader has assessed his risk preferences. He decided to go with safety (minimize potential loss); probability (maximize chances of max profitability); profit (maximize potential profit) and returns (maximize returns) [See image 3 below]. 

[Image 3: Priorities]

Based on the positional trader’s target price, date and risk preferences, our system algorithm has returned four option strategies – Long Iron Condor, Bear Put Spread, Bull Put Spread, and Long Put Butterfly (See image 4 below). 

[Image 4: System generated Options Strategies] 

After analyzing risk/reward [See image 5 below] and risk profile or payoff diagram [See image 6 below] for all suggested strategies, the positional trader decided to execute Long Iron Condor considering high probability (93.91 percent) of maximum profit (Rs 2,363.08) and very low probability (0.01 percent) of maximum loss (Rs 1,190.07).

[Image 5: Risk/Reward – Long Iron Condor]

[Image 6: Risk Profile – Long Iron Condor]

The Bottom-line:
Heckyl’s option strategies screen is a very powerful tool for traders. Strategies screen allows traders to carry out probability analysis for better price forecasts. It further provides up to 5 option strategies based on trader’s price forecast and risk preferences. Most importantly, it allows a trader to review risk/reward and payoff diagram for each strategy. Finally, a trader can select the best option strategy, which will limit his overall risk and maximize profits.

To know more about Heckyl’s F&O Analytics Platform, email us at info@heckyl.com