PUT CREDIT SPREADS:

To be profitable consistently over a period of time a trader needs to master certain skills and make them as a trading habit. 

Sharing one of the easiest and my bread and butter strategy with the trading principles that I follow along with it. This basic strategy has been giving me a consistent return of around 5-10% a month with around 90% probability. 

It's 'PUT CREDIT SPREAD'.

1. SETUP 

Though the setup of a trade is not everything but important as it defines your path moving forward. It's simply the foundation of your trade that defines the strength of your trade. 

For a PUT CREDIT SPREAD to work consistently the stock has to be on an uptrend for at least the last 6-9 months. (Look at the above charts for reference) all three stocks having 50,100,200 EMA moving upwards)

Also, the stock has been respecting and taking the support of 50 EMA if and when there is a correction. Ideally, we would like to enter the trade when it is around that 50 EMA. 

For example, if we take the case of TITAN from the above chart which is trading around Rs 1500 we would like to sell at the strike price around 10-20 delta. That means having a probability of 80-90% winning probability.

And then buy the strike price 1-2 lower than our short price to safeguard our naked sell and make the most of new margin benefits.

2. RISK/REWARD

Have a look at the above pay-off diagram with all risk/reward ratio.

 

So we sell the 1360 strike price for the Feb expiry for a premium of around Rs. 18-19 and 

buy back the 1300 strike price for around Rs. 9 

getting a net credit of Rs. 9-10 for selling the Put Option. Hence the name 'PUT CREDIT SPREAD'.

The margin money required for this trade is around Rs. 70k and reward is around Rs. 7000 if the stock price of titan stays above 1350 (which is our breakeven at the expiry date) 

Hence giving us return in 3 scenarios 

1. If the stock price bounces back and moves upwards

2. If it consolidates and stays around that price.

3. Even if it falls a little from the current price.

3. TRADE MANAGEMENT.

In the above case, there is an 82% probability that our trade will be a winning trade based on the delta that we have selected. But Let's say some Bad News or Black Swan Event occurs and the stock price falls drastically? This where the skill for trade management comes in. In this case, the payoff diagram shows a Max loss of around 37K but remember that is at the day of expiry and we never or rarely let our trade go till expiry. We either book our profit/loss before the day of expiry or when our target is reached.

There are strategies to minimize this loss or even come out of little profit when the trade goes drastically against our setup. Of course, this requires a little more capital. Say around 40-50% off the initial capital brought in. But remember that is in a worst-case scenario. I'll soon share some trades that i adjusted and came out with little or no loss despite a huge turnaround in the stock.

4. PORTFOLIO MANAGEMENT

One big way to manage your risk and hedge your trade is Portfolio management. You simply cannot have all 'PUT CREDIT SPREADS' in your portfolio. You have to make sure your positions overall are neutral or close to neutral in favor of the trend of the market. You have to ensure a mix of different strategies neutralizes your portfolio.

One easy way to do this is to make sure even if you do a lot of PCS it has to be across different sectors of the market. We have seen cash flowing in the market from one sector to another and very rarely do they all move in tandem. Say a trade in Auto, another in IT, one in Manufacturing, Pharma, Bank, etc 

The other is to have some neutral strategies and even some bearish strategies. Even in this Bull run, we can find a stock that is still underperforming and can help us with it. (Shall share some neutral and bearish strategies soon)

5. MINDSET 

Must have heard this cliche many times before but never let losses and profit get into your head. 

Never compare your profits with others.

Keep a journal of all your trades.

Don't jump from one strategy to another before giving it enough time.

Do backtesting if you can. Make sure your strategy goes through different cycles of the market.

Keep your position size small. So many people wipe out their capital in months. 

You got to stay in the market to beat the market.