Game of Spreading
Hey all, I’ve just started using spreading techniques a few months ago under someone’s guidance. I’ve found this technique amazing for trading in options of stocks.
You might have heard rumors that options are dangerous. That’s somewhat true, or it might be false. It totally depends on how you’re doing your trades. If you’re trading based on emotions, then it can be dangerous. However, if you’re following stop-loss and rules, then I don’t think it’s dangerous.
I’ve also traded based on emotions back in 2022 using Telegram groups 😂. The ultimate result was a loss.
So let’s get started with the concept of spreading. There are two types of spreads: Call Spread and Put Spread.
I used to apply these more when stocks’ quarterly results were about to be declared, but there was still doubt about it, as there might not be good momentum after the result. So, to minimize losses if the trade went wrong, we generally use this strategy.
What we do is we generally buy ATM (At the Money) strike price calls and simultaneously sell the OTM (Out of the Money) strike price.
You may have heard that selling options requires a lot of margin. But in the spreading technique, we don’t need the margin in the lakhs
As you can see, we buy and sell the call simultaneously, requiring very little margin. You cannot lose more than the maximum loss, even if the trade goes completely wrong or the market goes up or crashes. However, in the case of calendar spreads, the maximum loss can be more than this number, as some option legs are open when the earliest expiry leg expires.
If you have conviction and from your analysis, you’re sure that the stock will blast , with this strategy you can hold your option until expiry without worrying about your loss.
Similar article on LinkedIn regarding to this topic, encouraged me to write this article. I hope my little learning will help you minimize losses.
Don’t be afraid of losses. Please try different strategies. I have made losses while trying different things. But yes, those mistakes help you get stronger with the process.
