King of Ratio Spread Adjustment Part -2 | Get Pro with #equityincome

Introduction

This tutorial focuses on the techniques for adjusting ratio spreads in options trading, specifically when facing bullish market movements. It aims to provide actionable insights and strategies to minimize losses and manage risk effectively.

Step 1: Understanding the Goal of Adjustments

• The primary objective of making adjustments is not to achieve profits immediately but to reduce losses or make the position loss-free.
• Adjustments should focus on solidifying your defense against market volatility, as markets can experience sudden movements.

Step 2: Initial Setup for Bullish Adjustments

• Begin with a ratio spread of 1 call to 2 short calls (1:2 ratio).
• Example: If the market is expected to rise, buy 1 call option and sell 2 out-of-the-money (OTM) calls.
• Capital requirement for the 1:2 ratio setup may be approximately 1 lakh rupees, which is relatively manageable.

Step 3: Adjusting for Market Movements

• When the market rises, wait until it peaks before making adjustments.
• If the market moves up significantly, follow these steps:
  1. Sell two puts at the same strike price as the original call (e.g., 22,200).
  2. Buy back the original call option you purchased (e.g., buy 1 call at 22,100).
  3. Calculate the distance between both calls (e.g., 100 points) and apply this distance upward:
     • Buy 2 calls at a higher strike price (e.g., 22,300).
• This adjustment transforms the position into a structure resembling an iron fly, minimizing the risk of unlimited losses.

Step 4: Implementing the Iron Fly Strategy

• An iron fly consists of:
  • Selling 2 calls at a middle strike price.
  • Buying 1 call at a lower strike price and 1 call at a higher strike price.
• This strategy provides a protective hedge against market fluctuations, allowing for safer trading as the market can move freely without risking significant losses.

Step 5: Additional Adjustments and Best Practices

• Monitor the market closely: If the market continues to rise or falls, know how to adjust further.
• Consider using hard stops: Implement a hard exit strategy, such as a 5% cut-off, to manage losses.
• Avoid trading during major events: Steer clear of trading around elections or significant announcements to minimize risk.

Conclusion

Adjusting ratio spreads effectively requires a solid understanding of market movements and strategic planning. By implementing the iron fly structure and maintaining a disciplined approach to risk management, traders can navigate bullish scenarios more safely. For further learning, consider exploring more advanced strategies and adjustments to enhance your trading skills.