Trade Options with Peace of Mind: The 1-3-2 Low Risk Strategy

Low Risk High Reward , Option Trading Strategy

Hello and welcome to casperency.org! If you're tired of the constant stress and unlimited risk that often comes with options trading, this post is for you.

Today, we're breaking down a powerful strategy I call the "1-3-2 Strategy." This is a low risk high reward option trading strategy that defines your maximum potential loss upfront, giving you the confidence to trade without worrying about a market crash wiping you out.

It’s a form of swing trading where you can hold positions for a day or a few days, exiting whenever you are satisfied with the profit. Because you know your max profit and max loss before you even enter the trade, you can execute it with true peace of mind.

Why is it called the 1-3-2 Strategy?

The name comes from the order of the trades we place: buying one lot, selling three lots, and then buying two lots for hedging. It's not named 1-2-3 for a specific reason, which we'll see in the example.

A Practical Example: How the 1-3-2 Strategy Works

Let's walk through a real example using Nifty, just as I did in the video.

Our Market View: Let's assume our analysis suggests Nifty will close above 25,000 at expiry. This is just an example for educational purposes—the market could go up or down.

The Basic Problem: If we simply buy a 25,150 Call option, we're taking a high-risk bet. Statistics show that 9 out of 10 option buyers lose money because of the "limited loss, unlimited profit" myth. In reality, time decay works against buyers.

The 1-3-2 Solution:

Instead of just buying a call, we structure a trade that defines our risk.

Step 1 (The "1" - Buying the Put): Since we think Nifty will expire around 24,800 or below, we first BUY 1 lot of a 24,800 Put option.

Step 2 (The "3" - Selling to Collect Premium): We then SELL 3 lots of a 24,600 Put option. This is 200 points below our long put. This sale generates immediate premium income.

Step 3 (The "2" - Hedging the Risk): Finally, to hedge the risk from selling three lots, we BUY 2 lots of a 24,550 Put option. This crucial step caps our maximum loss.

What does this achieve?

Maximum Profit: Around ₹12,000

Maximum Loss: Capped at approximately ₹2,482 (this amount may change as you get closer to expiry).

Probability of Profit: Based on the setup, the platform showed a 37% probability of profit.

The Best Part: Flexibility

You don't have to hold until expiry. If the market moves in your favor quickly and you see a profit of ₹5,000-₹6,000 (a great risk-to-reward ratio), you can exit early and lock in those gains. This flexibility is a key advantage of this option trading strategy.

Why This is a Great Beginner Option Trading Strategy

Defined, Capped Risk: Your maximum loss is known from the moment you place the trade. Even if the market crashes, you won't lose more than your calculated amount.

Favorable Math: Even with a 37% probability, the potential reward (₹12,000) is much larger than the potential loss (₹2,482). This means you can be profitable over the long run even if you don't win every trade.

Reduces Stress: Knowing your exact risk allows you to trade without emotion and sleep soundly at night.

How to Find the Right Direction

A critical part of this option buying strategy is having a market view. How do you get that?

Technical Analysis: Learn to read charts, identify support/resistance levels, and use indicators.

Options Chain Analysis: Understand how to interpret Open Interest (OI) data to gauge market sentiment.

News & Events: Keep an eye on broader market news (like FII/DII activity).