This is one of the simplest techniques in derivative trading virtually nullifying the capital risk. In simple words this is a technique in which the trader used to buy two near ‘out of money' call/put option of same strike or different strike and sell one ‘in the money' or ‘at the money' call/put option resulting a small debit.
The benefits of the 2/1 spread –
A.It will reduce your capital risk that is the amount of capital you have put in risk by 80%.
B. It will have unlimited profit if the underlying moves in the direction of the spread.
C.One can minimize the loss to the extent of debit if things go against him.
D. One can exit safely if the underlying consolidates for more than one week.
Draw backs:
A. It will land you in loss if the consolidation range varies between the long and short strike.
Technical aspects for initiating the 2/1 spread:
A. Before initiating the 2/1 spread one must and must remember that the underlying should be above the MACD and RSI break out point.
B.If the Daily chart indicates rising wedge, rectangle, pennants or symmetric triangle then avoid initiating this strategy.
C.The average daily volatility must and must be above 28%. The open interest must be positive for preceding 4 days.
D.The Underlying should be below 75% limit of the Open interest.
E.The daily chart should indicate Flag, head and shoulder or any other trend continuation or trend reversal pattern and near to the break out points.
F.Nothing can be wrong if you can validate the idea with candle formation patterns and gap analysis.
The 2/1 spread can be formed vertically horizontally or linearly.
A. Vertically: Buy strike should be just one step above the sell strike.
B. Horizontally: two different buy strike having one step above another and sell strike follows the same sequence.
C. Linearly: the buy and sell have same strike but different month.
Simulate and experiment this technique to refresh your knowledge base.
I have explained many more interesting techniques on my book named "Master's Key to Futures & Options  ISBN  :8175257741"   to browse 20% of the book clickand enter the search string as   master's key to future and options. recently i have come with an intraday option calculator. you can access this calculator from my site. This calculator is the 1st such option calculator in the world.
Soumya Ranjan Panda
www.smartfinance.in
The benefits of the 2/1 spread –
A.It will reduce your capital risk that is the amount of capital you have put in risk by 80%.
B. It will have unlimited profit if the underlying moves in the direction of the spread.
C.One can minimize the loss to the extent of debit if things go against him.
D. One can exit safely if the underlying consolidates for more than one week.
Draw backs:
A. It will land you in loss if the consolidation range varies between the long and short strike.
Technical aspects for initiating the 2/1 spread:
A. Before initiating the 2/1 spread one must and must remember that the underlying should be above the MACD and RSI break out point.
B.If the Daily chart indicates rising wedge, rectangle, pennants or symmetric triangle then avoid initiating this strategy.
C.The average daily volatility must and must be above 28%. The open interest must be positive for preceding 4 days.
D.The Underlying should be below 75% limit of the Open interest.
E.The daily chart should indicate Flag, head and shoulder or any other trend continuation or trend reversal pattern and near to the break out points.
F.Nothing can be wrong if you can validate the idea with candle formation patterns and gap analysis.
The 2/1 spread can be formed vertically horizontally or linearly.
A. Vertically: Buy strike should be just one step above the sell strike.
B. Horizontally: two different buy strike having one step above another and sell strike follows the same sequence.
C. Linearly: the buy and sell have same strike but different month.
Simulate and experiment this technique to refresh your knowledge base.
I have explained many more interesting techniques on my book named "Master's Key to Futures & Options  ISBN  :8175257741"   to browse 20% of the book clickand enter the search string as   master's key to future and options. recently i have come with an intraday option calculator. you can access this calculator from my site. This calculator is the 1st such option calculator in the world.
Soumya Ranjan Panda
www.smartfinance.in