Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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 Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

[Option Strategy] Hedged Futures with OTM Options to Save…

These days for Retail Traders trading in futures trading requires a huge margin. Approximately 1.65 Lakh per lot is required to carrying forward future...
Rajandran R
1 min read

A Beginner’s Guide to Hedging in Options Trading

When we talk about Hedging we are talking about minimizing the risk inolved in the trade. In this webinar you are going to learn...
Rajandran R
21 sec read

How to Send Automated Option Orders from Excel Sheet

In this online webinar we will be discussing how to send automated orders using Microsoft Excelsheet and How to Get realtime data into Excel.
Rajandran R
16 sec read

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;

Leave a Reply

Get Notifications, Alerts on Market Updates, Trading Tools, Automation & More