While trading the debit strategies measuring the risk-reward ratio matters a lot for the options trader. Though you might have a bullish 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 bull call spread reliance example where the view is Reliance hitting an all-time high in the short term before this expiry. It is basically the view here is bullish from a positional point of view.
Though the view is bullish trading the direct call option hurts the option buyer as the IV Percentile values are relatively high and so the option premium is costlier.
Any timedecay could eatup 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 fresh All time high in a short term. The downside risk in reliance is still under-rated.
Reliance LTP : 1519 (Underlying Spot)
In order to trade this strategy one can initiate ATM Long call Option of 25th Jun expiry i.e 1525.55 CE at Rs 44.70
And to reduce the risk of premium erosion, adding a hedge around the prev swing high 1620 levels (Shorting 1620CE June Expiry at Rs 13.90) one can reduce the net debit cost of the call option and also the max expected returns too improved as we are shorting 1620CE which is the also the expected target level (breach of previous swing high).
Net Cost of Debit Spread = 44.70 – 13.90 = 30
Max Total Loss = 30 x 505 = Rs 15015 per lot
Total Gain Anticipated at 1620: 15,000 to 31,825
Max Possible Gain on Expiry: 31,825
Strategy Break even Levels : 1556.35
Max Possible Risk reward Ratio : 1:2.11
Total Margin Required to execute on set of spread Rs 26,828 (approx)
What if on Expiry Analysis
| Reliance Spot Price on Expiry | Expiry Date | Profit/Loss |
| 1,500.00 | 25-Jun-20 | -15,400.00 |
| 1,510.00 | 25-Jun-20 | -15,400.00 |
| 1,520.00 | 25-Jun-20 | -15,400.00 |
| 1,530.00 | 25-Jun-20 | -13,175.00 |
| 1,540.00 | 25-Jun-20 | -8,175.00 |
| 1,550.00 | 25-Jun-20 | -3,175.00 |
| 1,560.00 | 25-Jun-20 | 1,825.00 |
| 1,570.00 | 25-Jun-20 | 6,825.00 |
| 1,580.00 | 25-Jun-20 | 11,825.00 |
| 1,590.00 | 25-Jun-20 | 16,825.00 |
| 1,600.00 | 25-Jun-20 | 21,825.00 |
| 1,610.00 | 25-Jun-20 | 26,825.00 |
| 1,620.00 | 25-Jun-20 | 31,825.00 |
| 1,630.00 | 25-Jun-20 | 31,825.00 |
| 1,640.00 | 25-Jun-20 | 31,825.00 |
Rajandran Bhai, I am from Ahmadabad 380004, retired Senior Administrative Officer. I appreciate your efforts to assist and help. You are always the best of best. Thanking you again.
Very nice and use ful thanks for sharing