How to Take a Short Term Neutral to Bullish View using 4 Legged Option Strategy

How to Take a Short Term Neutral to Bullish View using 4 Legged Option Strategy

In this tutorial, we are going to look into a mild variation of Double Diagonal Spread to take a neutral to the bullish view. Double Diagonal Spread is a 4 legged option strategy and nothing but a combination of bull call diagonal spreads and bear put diagonal spreads which is more of a neutral approach towards trading.

Let see how we can take a mild bullish bias with a slight variation in Double Diagonal Spreads.

Let’s get some primer on Diagonal Spreads and Calendar Spreads before jumping into the actual trading strategy example

A calendar spread is a strategy involving buying longer-term options and selling an equal number of shorter-term options of the same underlying stock or index with the same strike price

A Diagonal spread is a strategy involving buying longer-term options and selling an equal number of shorter-term options of the same underlying stock or index with the different strike price

A Double Diagonal Spread is a neutral approach combining two strategies Bull Call Diagonal Spread + Bear Put Diagonal Spread and here is the sample payoff graph. It can also be viewed as short strangle in a short month options contract (For example . current month contract) hedged with long strangle on both sides in the long month options contract (for example next month contract.)

Double Diagonal Spread Payoff Graph

Now to take a mild bullish approach at the same time hedging the positions on both sides, one can consider going for a Bull Call Calendar Spread + Bear Put Diagonal Spread for the increased width in the profitability spread as shown below

Modified Double Diagonal Spread Payoff

The strategy is composed of 4 legged strategies with a holding period till current month expiry hedged with next month-long options on both the sides as shown below

Actual Position

Sell 11200 Puts – Jul 2020 Contract at Rs173/lot
Sell 11500 Calls – Jul 2020 Contract at Rs 27.05/lot

Hedge Position

Long 11100 Put – Aug 2020 Contract at Rs 299/lot
Long 11500 Call – Aug 2020 Contract at Rs 158.90/lot

Lower Breakeven Levels – 11045
Upper Breakeven Levels – 11723

Risk: Downside risk and Upside risk protected on both sides

The strategy is built to manage up to 680 point range ie 11045 – 11723 levels

Exit one-sided spreads on Trigger of Stops to reduce the risk further.

Nifty Index Downside stop-loss for Exiting Bear Put Diagonal Spread: 10950
Nifty Index Upside stop-loss for exiting Bull Call Calendar Spread: 10750

Margin Required : Rs 47904/- (approx)

What if Analysis for holding the spread till July 2020 Expiry

Nifty Index Expiry DayProfit/Loss in Rupees per set
10,900.0030-Jul-20-7,539.93
10,925.0030-Jul-20-6,413.83
10,950.0030-Jul-20-5,241.50
10,975.0030-Jul-20-4,022.19
11,000.0030-Jul-20-2,755.19
11,025.0030-Jul-20-1,439.85
11,050.0030-Jul-20-75.56
11,075.0030-Jul-201,338.21
11,100.0030-Jul-202,801.97
11,125.0030-Jul-204,316.15
11,150.0030-Jul-205,881.12
11,175.0030-Jul-207,497.21
11,200.0030-Jul-209,164.66
11,225.0030-Jul-209,008.68
11,250.0030-Jul-208,904.40
11,275.0030-Jul-208,851.88
11,300.0030-Jul-208,851.14
11,325.0030-Jul-208,902.13
11,350.0030-Jul-209,004.71
11,375.0030-Jul-209,158.73
11,400.0030-Jul-209,363.94
11,425.0030-Jul-209,620.04
11,450.0030-Jul-209,926.67
11,475.0030-Jul-2010,283.43
11,500.0030-Jul-2010,689.85
11,525.0030-Jul-209,270.41
11,550.0030-Jul-207,899.52
11,575.0030-Jul-206,576.58
11,600.0030-Jul-205,300.91
11,625.0030-Jul-204,071.80
11,650.0030-Jul-202,888.49
11,675.0030-Jul-201,750.19
11,700.0030-Jul-20656.07
11,725.0030-Jul-20-394.75
11,750.0030-Jul-20-1,403.16
11,775.0030-Jul-20-2,370.09
11,800.0030-Jul-20-3,296.48

 

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