Let us show you an example of NON-Directional trading strategy using Nifty Options. A Non- Directional trading strategy in derivative markets primarily means that we are neither bullish nor bearish about markets. This doesn’t mean that stock markets are non-directional. Markets will always move, but the option strategy is created in such a way that market movements are not impacting the strategy much. Strategy is created to give returns with passage of time, with very low risk.
Please note that we are showing this example only for educational purpose and are not recommending this trade. You must know the intricacies of derivatives trading to trade such spreads.
In this example, we are using Nifty put options to create a strong option strategy with great risk reward ratio. Prices are taken as per the closing time on 02.05.2016 for Nifty options.
Nifty closed at around 7805
A good strategy to trade for next few days can be :-
Buy Nifty 7800 put at Rs 106.
Sell Nifty 7700 put at Rs 72.
Sell Nifty 7400 put at Rs 21.
Net result = 106 -72 – 21 = 13 only.
So, in case market moves up, maximum loss that can occur is only Rs13, whereas in case market goes down, there is a profit potential of Rs 87. Off course, it is safe till market reaches approximately 7300 on downside.
An experienced trader can induce some adjustments based on market movements and thus can completely wipe out the risk of losing even those Rs 13 and hence can generate decent profit out of this strategy.
Now to trade such strategies, you must know :-
- Proper adjustment points – when to adjust and how to adjust.
- Risks involved.
- When to close.
Hope this helps in giving you a glimpse of what Non- directional Option strategies are, how they are created and used to generate consistent returns from market.(more on basics of option spreads –What are Option Spreads ? )