Hi Tradingstudent
Hope you had a good night and did enter the new year with fun and happiness.
Now lets start with the post, so that you can move on:
Point one to make every reader understand what trading setup we have:
Your example:
Long Nifty Fut @ 8800
Long Nifty 8900 PE @ 150 and long Nifty 8700 CE @ 150
This is your trading set up with out the long future, which is a long "Strangle"
http://i57.tinypic.com/23k5zl.png . Now after adding the long future to those two option legs, it looks like this
http://i57.tinypic.com/2ezr6a8.png and this is a directional trade setup which is ok. Why is it directional? Because of the many delta you have on the plus side, which is around plus 150, but on the down side it is only around minus 40.
Point two: In the thread you mentioned, I posted that he has now a synthetic long call after he sold his long option call leg. He now had a long put and a long future leg which looks like this
http://i60.tinypic.com/qybzgk.png So market did make a move and then he acted. (Belongs to the question one you had). Now with this synthetic call you can do many things.
Point three to which we now come to your question three which was this:
Scenario 3 is, Nifty instead of going up, falls down.. I am breaking my head about any possible adjustments but no avail.. What type of adjustment can we look in this scenario? Here it is not clear about what we talk. Do you mean this question after you did enter your trading setup or do you mean this question after market moved up and you already have sold your long call or do we mean this question after market moved up and you still have all three legs?
And here to me it looks a bit like you do not understand in dept what you have in front of you and why the trading setup is like it is and not in an other way. But never mind and let's clear it up to a certain point:
Scenario one: Your trading setup as posted, with out any move in the market, is and stays as a bullish, directional trading set up. If you want to have it non directional at this moment when market goes down instead up, then you take away the long future leg and you have a long, classical strangle. As simple as that. Now your put leg start to add value and if the market makes a strong down move, this profit will even compensate the loss you make on the call leg. If you want to make it directional on the down side, then you sell two futures so that you are short one future and have the two option legs. Why shorting two futures? Because in your original trading setup you are long one future, so you have to sell two futures to have one short future left.
Scenario two: If market moves fast and quit strongly up, you will quickly add value on this side because of the plus 150 delta you have in the original trading setup. At the moment you sell the long call, you have the synthetic call left. The idea behind that concept is to profit on the long future at the same time you profit on the long call. But the long call you through away at the moment he has doubled. So the long put is paid and that is the main reason to implement the trading setup in this way and not in any other way.
Now market moves further up and you move on with the two legs you have left, which is the long future and the long put. If your question was pointed to that specific moment, then you should have mentioned that clearly, but you didn't do that in your post. Any way. Now you can do what ever with those two legs. You can keep the put and keep the future leg or you also can get rid off either of them or you convert into an other option strategy. Here no limits are given and you have to act according to what market does. Still, do not trade such trading setups in case you are not feeling comfortable with such way of trading, as at the moment you lose your self with the legs you have in the market, you can make quick bigger losses. Teaching on that level over a forum is to time consuming for me. So I will not further move on from here and you have to start to play around with the legs by your self according to what market is showing on the screen. That is the best way to understand what each leg you have in the market means and can be used for. (To start such a training you make a small notice on your computer on which you all the time see which option, if short call/put or long call/put, is used for what direction. The same for the future. The whole game is to understand those in dept, so that if market goes crazy you are able to do the right things with the different legs you have implemented in the market in a very quick and sure way. To reach that level you have to train your self in case you really want to move on with in dept option strategy trading, which is a way to make money in the market, but not the only way.
So it is your choice. Later you do make such a notice with the greeks).
Take care / Dan
