What is Range Forward Strategy: A Guide for Indian Traders

Options strategies offer an added level of flexibility to your trading strategy. However, finding and implementing the right strategy is not always easy because it requires the use of various advanced indicators, analytical tools and considerations. Samco Securities makes it easier to find and implement suitable strategies with Options B.R.O on the Samco Trading App. 

You can use this advanced tool to shortlist and choose strategies based on your market outlook and trading requirements. This is vital because there are over 1,000 strategies to choose from. One such is the range forward strategy, which we will discuss in this article.

What is a Range Forward Strategy?

A range forward strategy is a type of option trading strategy that involves buying one out of the money call option and selling one out of the money put option. The strike price of the call option and the put option should be equidistant from the at the money strike price. This means that the call option and the put option have the same delta, or the same sensitivity to the underlying stock price movement.

It is a bullish strategy that bets on a large increase in the underlying stock price. It is different from a straddle, which bets on a large movement in either direction.

What is the Payoff of a Range Forward Strategy?

The payoff of a range forward strategy depends on whether you have received the premium (net credit) or you have paid the premium (net debit) for the two options. The premium is the price that you pay or receive for buying or selling an option.

If you have received the premium (net credit), it means that the price of the put option that you sold is higher than the price of the call option that you bought. In this case, your breakeven point will be the strike price of the put option minus the net premium received. You will start making a loss if the underlying stock price falls below the breakeven point. Your maximum loss will be unlimited, as the put option will become more and more valuable as the stock price drops. Your profit will be limited to the net premium received, which will occur if the stock price stays between the two strike prices at expiration.

If you have paid the premium (net debit), it means that the price of the call option that you bought is higher than the price of the put option that you sold. In this case, your breakeven point will be the strike price of the call option plus the net premium paid. You will start making a profit if the underlying stock price rises above the breakeven point. Your maximum profit will be unlimited, as the call option will become more and more valuable as the stock price increases. Your maximum loss will be limited to the net premium paid, which will occur if the stock price stays between the two strike prices at expiration.

The following table summarises the payoff of a range forward strategy:

Who Can Deploy a Range Forward Strategy?

A range forward strategy can be deployed by veteran traders who have an aggressive approach and a high risk appetite. Since this strategy involves unlimited risk on the downside, you need to maintain a strict stop loss to limit your losses. You also need to have enough margin or collateral to cover the potential losses from the short put option.

A range forward strategy is not suitable for beginners or conservative traders, as it requires a high level of market knowledge, technical analysis, and timing skills. You also need to monitor the market closely and adjust your position accordingly.

When Should a Range Forward Strategy be Deployed?

A range forward strategy should be deployed when you are bullish on the underlying stock and you expect a large upward movement in the near future. 

A range forward strategy can be used to take advantage of various market scenarios, such as:

• Anticipating a positive earnings announcement, a product launch, a merger or acquisition, or any other event that can boost the stock price.
• Trading on a technical breakout, a trend reversal, or a momentum indicator that signals a strong upward movement.
• Speculating on a market rally, a sector rotation, or a thematic investment that can benefit the stock.

Understanding Strategy Greeks

The main greeks that affect a range forward strategy are:

• Delta: Delta measures the change in the option’s price for a unit change in the underlying stock price. Delta can range from -1 to 1 for a call option and from -1 to 0 for a put option. A positive delta means that the option’s price will increase as the stock price increases, and vice versa. A negative delta means that the option’s price will decrease as the stock price increases, and vice versa.
• Gamma: Gamma measures the change in the delta for a unit change in the underlying stock price. Gamma can range from 0 to infinity for a call option and from 0 to negative infinity for a put option. 
• Theta: Theta measures the change in the option’s price for a unit change in the time to expiration. Theta can range from 0 to negative infinity for both call and put options. A negative theta means that the option’s price will decrease as the time to expiration decreases, and vice versa.
• Vega: Vega measures the change in the option’s price for a unit change in the volatility. Vega can range from 0 to infinity for both call and put options. A positive vega means that the option’s price will increase as the volatility increases, and vice versa.

Things to Keep in Mind

A range forward strategy is a high-risk, high-reward strategy that requires a strong bullish view on the underlying stock. It can generate unlimited profit if the stock price rises significantly, but it can also incur unlimited loss if the stock price falls significantly.

Therefore, it is important to keep the following things in mind when deploying a range forward strategy:

• Choose the strike prices carefully, as they will determine the breakeven point, the profit potential, and the risk exposure of the strategy. Generally, the farther the strike prices are from the money strike price, the lower the cost and the risk, but also the lower the profit potential. The closer the strike prices are to the money strike price, the higher the cost and the risk, but also the higher the profit potential.
• Maintain a strict stop loss, as the loss can be unlimited if the stock price moves against your view. You can use the support level of the underlying stock as a reference point for setting the stop loss. Alternatively, you can use a protective put option or a protective call option to hedge your risk and limit your loss.
• Monitor the market closely and adjust your position accordingly, as the stock price movement can affect the delta and the gamma of the strategy. You can use technical indicators, such as trend lines, moving averages, and oscillators, to identify the direction and strength of the stock price movement. You can also use fundamental analysis, such as earnings reports, news events, and macroeconomic factors, to anticipate the impact of the market conditions on the stock price.
• Be aware of the expiry date, as the options will expire worthless if the stock price stays between the two strike prices at expiration. You can either close your position before the expiry date or roll over your position to the next expiry date, depending on your view and the market situation.

Build a Range Forward Strategy with Options BRO

Options BRO is a powerful and innovative feature in the Samco trading app that helps you build, research and optimise your option trading strategies. With Options BRO, you can easily create a range forward strategy based on your market view, risk profile and investment objective.