Guide to
Option Spread
Stratagies
by
Arun Bau
CA | CFA Level 3 Candidate | Trader | Mentor
Index
You can click on the respective page
number to go there directly.
How Naked Option Buying & Selling Works Page 1
The need for Option Spread Strategies Page 2
Bull Call Spread with Payoff Chart Page 3
Bull Put Spread with Payoff Chart Page 4
Bear Put Spread with Payoff Chart Page 5
Bear Call Spread with Payoff Chart Page 6
Calendar & Ratio Spreads Page 7
Debit Vs Credit Spreads Page 8
How to Master Option Spreads Page 9
Access to Options Basics Free Course Page 10
Page 1
Option Spreads are the safest among all option
strategies - Let's understand why:
Many options traders start with naked option
buying as they are easy to understand and require
less capital.
However, Option buying does not have a high win
rate;
Without significant momentum in the market, the
buyers won't make money.
The probability of making a profit for a naked
option buyer is around 25% or less if they hold that
option until expiry.
The main reason for this is the Theta / Time Decay,
which always reduces the value of an option over
time, no matter what.
On the other hand, naked option selling is risky as
it can have undefined losses in case of unusual
gap-up or gap-down openings.
Of course, there will be Pros and Cons for both
naked option buying and selling.
Page 2
For Beginner to Intermediate Option Traders, it
can be risky to trade in naked options.
A better alternative is to start with Spread Positions,
created by combining Option buy legs and sell
legs.
Option Spread Strategies are less risky than
naked buying or selling.
All the spread strategies will have a defined
maximum loss and maximum profit. So the risk can
be managed better before the deployment itself.
The max loss will not increase because of a huge
gap up or down against you.
Every spread strategy will have one option: buy leg
and sell leg.
Let's understand the types of spread strategies and
the capital needed.
Page 3
First, let’s see 4 Popular Spreads Strategies.
These are the popular spread strategies, and they
need approx. 20 to 30k capital for one lot.
1. Bull Call Spread
You deploy this when you have a bullish
perspective on the market and expect that markets
go up from current levels.
This is a Debit Spread; if your analysis goes
completely wrong, this strategy can be easily
adjusted.
Payoff Chart for Nifty Bull Call Spread - 22 Feb Exp.
Page 4
2. Bull Put Spread
When you expect markets to be sideways or
moderately bullish but not bearish.
To improve this strategy, a good support zone
should be near the breakeven level.
This is a Credit Spread, so to have better
risk-reward, exit this strategy when that support
level is broken clearly in a daily timeframe.
If your analysis goes wrong, you will be out only
with 30 to 40% of your original max loss.
Payoff Chart for Nifty Bull Put Spread - 22 Feb Exp.
Page 5
3. Bear Put Spread
When you have a bearish perspective on the
market, expect markets to go down from current
levels.
This is a Debit Spread; this strategy can be easily
adjusted if your analysis goes completely wrong.
Payoff Chart for Nifty Bear Put Spread - 22 Feb Exp.
Page 6
4. Bear Call Spread
When you expect markets to be sideways or
moderately bearish but not bullish.
A good resistance zone should be near the
breakeven level to improve this strategy.
This is a Credit Spread, so to have better
risk-reward, exit this strategy when that resistance
level is broken clearly in a daily timeframe.
If your analysis goes wrong, you will be out only
with 30 to 40% of your original max loss.
Payoff Chart for Nifty Bear Call Spread - 22 Feb Exp.
Page 7
Unique Spread Strategy (Calendar spreads)
Call & Put calendar spreads can be deployed with
a neutral perspective.
The payoff chart looks similar to Short Iron-fly, but
the execution differs.
You can choose this over Iron Fly when you feel VIX
will rise from the current levels before the expiry.
For this, the sell leg is of this expiry, and the buy leg
is of the next expiry.
Apart from these Strategies, other spreads
include:
Ratio Spreads and Ratio Back Spreads are not
frequently used but can be useful during advanced
firefighting or adjustments when creating Straddle
/ Strangles.
Page 8
Also, these Spread Strategies can be grouped into
two categories:
Debit Spreads:
If the buy premiums are more than the sell
premiums, It's a Debit Spread.
They work well in good directional markets and can
be adjusted easily when it goes against your
analysis.
Credit Spreads:
If the sell premiums exceed the buy premiums, It's a
Credit Spread.
If the market expires sideways, you can end up in
profits and some strategies at breakeven.
Page 9
Deploying these strategies is just a click away, as
you can do it directly from the Sensibull platform.
The good news is that all the Sensibull premium
features are now completely free for all Zerodha
and Angel One users.
The main skill is knowing which strategy to deploy
in different market conditions.
Most importantly, you need to master how to select
the strike prices and how to adjust when your
spread position is getting into losses.
Option Spread strategies are always suitable
regardless of the market situation and the VIX
levels.
As mentioned above - For Debit Spreads like Bul
Call Spread and Bear Pur Spreads
👇🏻
The default win rate will be around 45%, but with
simple adjustments, that can be increased to
80%.
These adjustments are difficult to explain in Ebook.
Page 10
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In this 3 Hrs. Course, these are the topics you will
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👇🏻
🚀 Option Greeks
🚀 How to Read the Options Chain Data Like a Pro
🚀 Strike Price Selection in Options
🚀 Intrinsic Value & Time Value of the Option
🚀 PCR & Max Pain Concepts
🚀 Option Selling Vs Option Buying
🚀 ITM / ATM / OTM - Best ROI?
You can also download the E-book related to these
topics.
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In this course, you’ll learn
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🚀 Option Greeks
🚀 Option Chain Analysis
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🚀 Intrinsic & Time Value
🚀 Option Chain Analysis
🚀 PCR & MAX pain
🚀 Option Buying Vs Selling
🚀 ITM vs ATM vs OTM