Option Trading strategies Vs Technical Analysis

[jassinko]

As you have mentioned about one mistake of yours. Could you please tell us the mistake you made if you dont want mind. As learning from the mistakes is very important & it will be very helpful for all others try to trade with these strategies.

I have already mentioned in my thread but detailed is like:

i started option selling in mid of 2013......normally iron condors, shorting of strangle/straddle....... did in nifty, bank nifty and some equity options.....

all was going good......started with Rs 2.5 lakh and reached 4.65 lakh till Nov but then auropharma happened.........

i was shorting its 210 call since many months and all with profit but in oct-nov....it breached it and sustained.....but my arrogant, overconfident mind that time didnt left call and infact added 220 call....in a day or two...it breached that as well....i shorted few 230 calls...and by the time...i realize what i m doing........my whole profit and capital left in ruined...mind u auropharma that month breached 300 and 400 by next......came to 1 lakh and in a fit of revenge........lost all in few days by buying options......

why did this all happened.........simple...i broke my all rules which i was following from few months..........and why did i broke my rules........ it hurt to admit but i became mad, sad and bad during those few days....

if i have took the initial loss of 20000......i wouldnt have lost 3.8 lakh......

Now..i can clearly see my mistakes but seriously even one year back....i was mad at god, market makers, operators,etc .....but now only i realize it was all but me who was solely responsible

sorry for long post.......but it all came automatically.........

one more thing.......never do iron condor of equity during result months especially if IV >> historical IV of stock.....all the best for ur trading:thumb:

 

[Somatung]

@Jassinko

Well, your story is the one from someone who did learn it the very heard way. Painful and it can take time to come over it. Hope all is well now. Now in your other post you mentioned that Iron Condor can give unimaginable losses when one direction come. This is wrong, as with an Iron Condor your losses are minimized and your profits are minimized. If you do what you did, short straddles or short strangles, then you have limited profit potential but very high loss potential if market moves against one of your short leg and no or the wrong action is token like for example what you have done. The holy grail is not within shorting instead adding long legs and rolling legs into other positions.

Check the analyzing pictures in those links and you will see it by your self:Short iron condor spread and
Long iron condor spread

And now have a look at this: Short straddle and Short strangle

Take care / Dan​

 

[Somatung]

@Abhi_tyagi

So far ok what you have posted about your paper trade. Now before moving on, I really have one concern about your situation, as you told about your whole amount you can use for this kind of option trading. I strongly do recommend not to move on with this idea, as the margins in your country sadly are far to high for this way of trading. No idea why SEBI is not able to change the rules on it as CME has done it a long time ago, as both of the short legs are hedged and protected when IC are traded. So the risk is automatically reduced and lower risk means lower margins. But it maybe has to do something with how each leg is watched from the broker or exchange side and it seems that they are not able to watch an IC as a whole position, instead only watch or control each option leg separately. Any way, it is as it is in India.


Now why do I mention my concern about your situation on the trading capital side, as the learning and understanding side so far is fine and can be improved?

In my view and experience you are not enough flexible for further actions in your trading. As we trade to make money and as much as possible not to lose or even spent most of it to the broker as commissions, or even being catched with our money in margins, I would recommend to concentrate on an option strategy which will not block such amounts of money in margins, instead give you some more room to act. Being able to do one IC and then wait and wait and may even end only once in loss, you are not even able to make a next try. So in my view the whole thing has to be started from an other point of view.

Now my question to you: Would you be with me by doing so or is your wish to stay with the Iron Condor even under the conditions you are faced with?

Dan​

 

[jassinko]

Now in your other post you mentioned that Iron Condor can give unimaginable losses when one direction come. This is wrong, as with an Iron Condor your losses are minimized and your profits are minimized. If you do what you did, short straddles or short strangles, then you have limited profit potential but very high loss potential if market moves against one of your short leg and no or the wrong action is token like for example what you have done.

​

yes....u r rt.... i used to do short strangle.......wrongly mentioned there as iron condor

 

[lemondew]

Great answers Somatung.Thanks for all the help

My little experience. Options with strategies, adjustments, greeks,technical analysis, economic Events. when all come together it works slightly better.

 

[Markus Lin]

As a new trader into this forum. I would like to analyze technically first then go for starting business. I believe that if a person know what he/she is doing then obviously success will come for sure. Hope for the best.

 

[abhi_tyagi]

Thanks a lot Dan Sir!
I agree with you about the fund part.Ideally, As the position are hedged so Margin block should be equal to the Max risk but Indian market regulatory
does not think that way & we cant do anything about it.
I got your point that as i have used complete funds in IC positions so i will not be having enough fund to adjust the trade if something goes wrong.

So the question is -
1- If someone is having enough fund available for adjustment after making the position in IC then is it fine to go with IC. If so, in that case insufficient funds is the reason for not following this strategy & no issue with the strategy itself.
2- If one does not go for IC in current scenario, what other options are left for less amount of blocking the capital. Below options i can think of as of now -
a) Go for option buying as it will not block huge amount.
b) May be go for one side of credit spread only.

But in both the cases, i have to make a directional view of the market. For directional view one has to understand the TA.
So eventually,discussion has gone to the same original question where we started - Understanding of technical analysis for option trading.
Dan! As i am new to the trading world so my above assumptions might be wrong so please correct me if you think so.
As you have also asked, i am completely with you here so please let me know -
1- what other option strategies can be followed which are less risky & does not block large amount of money.

One more general question -
What is the max lot, one should trade if sufficient funds are available.

Thanks in advance!

 

[lemondew]

The margin for sell legs are taken in full as if its naked so strategies like butterfly long condor etc where risks are nill other than initial debit. The margins are excess. Plus brokerage and adjustments. So after all the efforts you should come out profitable
1 butterfly would cost approx 70K in nifty+ 10k for initial debit. Another 70 k if you want to short further to add some adjustments. 30k spare

So basically a 180 k account.
Now
0.7 % for bank returns is about 1300 Rs . plus taxes /brokerage 0.5 -1k for entire strategy
So 2000 bugs or 27 nifty points is your cost to run 1 strategy.

Thanks a lot Dan Sir!
I agree with you about the fund part.Ideally, As the position are hedged so Margin block should be equal to the Max risk but Indian market regulatory
does not think that way & we cant do anything about it.
I got your point that as i have used complete funds in IC positions so i will not be having enough fund to adjust the trade if something goes wrong.

So the question is -
1- If someone is having enough fund available for adjustment after making the position in IC then is it fine to go with IC. If so, in that case insufficient funds is the reason for not following this strategy & no issue with the strategy itself.
2- If one does not go for IC in current scenario, what other options are left for less amount of blocking the capital. Below options i can think of as of now -
a) Go for option buying as it will not block huge amount.
b) May be go for one side of credit spread only.

But in both the cases, i have to make a directional view of the market. For directional view one has to understand the TA.
So eventually,discussion has gone to the same original question where we started - Understanding of technical analysis for option trading.
Dan! As i am new to the trading world so my above assumptions might be wrong so please correct me if you think so.
As you have also asked, i am completely with you here so please let me know -
1- what other option strategies can be followed which are less risky & does not block large amount of money.

One more general question -
What is the max lot, one should trade if sufficient funds are available.

Thanks in advance!

 

[Somatung]

@Abhi_tyagi

Point one:​

The way you have presented your IC idea was so far ok and so it can be done your way. One point you have to be clear about it and you have to add to your idea, and this topic was not much touched here so far, is how you want to adjust your IC in case any of your break evens do get in danger. You need to know in advance which adjustment you will do when it comes to this point. And yes, the funds in your case are a problem to better concentrate on other ways of option trading.

Point two:

Now what kind of other possibilities would may fit you in your situation? Here it seems, at least to me, that a little crash course in TA could help you a lot. Any other ways of option strategy trading with less then four legs have a more directional approach compare to the four leg strategies. Then there is a time problem which has to be token into account, as this is not your full time job, but you still want to gain some regular income with your option trading and this even with low risk.

You mentioned to go for option buying, as it will not block huge amount, or maybe go for one side of credit spread only. Considering all what we know, you can choose option strategies with two or three legs to minimize risk on the direction of the market, to minimize risk on your invested capital and to reduce the amount of needed margins. At the moment we go for one leg option trading, then we really go into directional trading.

Considering again what all we know and specially your knowledge about option trading, as you say you are quit new to the trading world, comparing all this option strategies and the risk profile they have (I do not write down all these strategies, as they are in my head and you may would get confused about which one has which risk profile) include the time they best needed to be watched, you best stay with what you mentioned and make up your choice between two leg strategies and otm or atm option leg trading. If you go for itm, then risk is high and you need to watch such trades intensively if you not want to do pure gamble.

Now if choosing any two leg option strategy, this not only can be a "Credit or debit spread" in which we have one long and one short leg, instead some of those option strategies have two long legs, like the "Long Guts" or the "Long Straddle" . In your case I do not recommend any short option strategy, as they must be watched. Let me know what may interests you most from the option strategies or the naked s I have mentioned.

By the way: All three mentioned option strategies are choosed with the criteria of time they need to be controlled, the risk they face on both sides of the trade, the costs we have with them and the profit potential we have with them. Further the knowledge needed for them and the margin needed for them, as for example in three leg option strategies we can have two short legs and immediately our room to act with the given fund is minimized. I also did not go into synthetic option strategies as this is really for pros and full time traders.

Point three:

Lemondew has answered this in details.​

Dan​

 

[lemondew]

An interesting study which is valid across all segments including options. If I have a 50-50 probability of winning/loosing. On win I make 50Rs and on loss I loose 50 Rs. I pay a tax of 2 Rs on each trade then by the end of 10 trades I am down by 20 Rs on account of my cost of trade. The wins and losses are taken care of from each other. And by 100 trades I am down by 200 Rs.

So if you have a high probability winning trades people advocate a lot of small trades than few big ones and have limits on each trade like casinos. In long run we will make money. We ensure that we dont get out of the game during drawdowns.

Something in those lines.
http://www-math.bgsu.edu/~albert/m115/probability/average_value.html