Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

How to Design a 1:2 Risk Reward Ratio Trade using Bear Put Spread?

56 sec read

While trading the debit strategies measuring the risk-reward ratio matters a lot for the options trader. Though you might have a bearish opinion about the market. However, the overall objective of the trader is to maximize the gain and minimize the losses.

Generally, debit strategies have a better risk-reward ratio compared to credit strategies. Let’s look into the bear put spread HDFC Bank example where the view is HDFC Bank hitting 970 in the short term before this expiry. It is basically the view here is bearish from a positional point of view.

Any time decay could eat up the premium and hence to trade the view we need to mitigate the risk with the hedged position. Since the expectation is towards making a test towards sub-1000 levels.

HDFCBANK LTP : 1103 (Underlying Spot)

In order to trade this strategy one can initiate ITM Long Put Option of 30th July expiry i.e at 1100PE at 38.69 CE

And to reduce the risk of premium erosion, adding a hedge 1000PE (Shorting 1000PE July Expiry at Rs 8.65) one can reduce the net debit cost of the put option and also the max expected returns too improved as we are shorting 1000PE which is the also the expected target level.

Net Cost of Debit Spread = 38.69 – 8.7 = Rs 30
Max Total Loss = 30 x 550 = Rs 16500 per lot

Total Gain Anticipated at 1000: 15,000 to 38500
Max Possible Gain on Expiry: 3
8500

Strategy Break even Levels : 1070

Max Possible Risk reward Ratio : 1:2.33

Total Margin Required to execute on set of spread Rs 21,222 (approx)

Update as on 13th June 2020. HDFC Bank Spot 1071 Exit at Rs5300 gain per set.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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4 Replies to “How to Design a 1:2 Risk Reward Ratio Trade…”

  1. Dear Sir,
    I subscribed to your YouTube channel and regularly observing your videos. Please give me a intraday strategy to earn atleast 20 points with Nifty and 60 points with bank nifty weekly options.
    Regards,
    V.Ramasubramanian

    1. There are no such holy grail. There are no such consistent returns on every trades. Risk and Returns are more of a distribution;

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