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How to Trade Options, When the Trend Is Not Clear?

We are all aware of choppy markets. It’s the kind of market that doesn’t have a defined direction. The current Nifty September contract is a perfect example of a choppy market scenario. January 2023 contract opened at 18,175 and plunged to 17,820. Thereafter it registered a high of 18,224 and again fell more than 150 points as it hit a low of 18,036 today. The important question is how professional option traders trade such choppy markets. The answer is, they build Positional Option Spreads. The question is how can we create these Positional Spreads at a retail level? To find out, first, let us understand what option spreads are.


What are Spreads?

One of the most lucrative methods of options trading is by building ratio spreads. A spread is an intelligently crafted option sequence which involves two or more options of the same type. In practice, spreads have two legs. One leg is created to generate returns, the other acts as a protective cover. Take for example a trader is long one lot of 18,200 calls @ Rs30 and shorts 2 lots of 18,400 call @ Rs10 each, at a time ‘t’. To execute this options sequence, the trader pays Rs.30 to buy one lot 18,200 call and receives Rs.20 by selling 2 lots of 18,400 call. The net value of the spread, therefore, is Rs(20-30)= Rs-10. This implies that there is an investment of Rs10 in this spread for the trader. So what is the advantage of creating a spread and how does one choose the strikes? These questions, we shall address later in the article.