What could be a reasonable stop loss in options trading?

[jamit_05]

Example of this approach - lets say my view on NIFTY on 30/April is that it is rangebound between 3300 and 3500.. so I enter into SHORT Straddle @3400 (i.e. sell 3400 put and 3400 call). Say I get Rs 300 for this and my stop is at 400 (i.e. I will buy both the options and close this position if combined premium is greater then 400 rs).
As long as market is in 3300 to 3500, I am happy with this straddle, no action required.
But lets say, market closes below 3300 level for some days and my view has changed from Rangebound to Downward trend.. Then even if my straddle stop of 400 Rs is not hit, I will decide to take action because the main reason for opening the trade is not valid.
Options gives various possibilities which may be
1) close the short put leg and leave short call leg as it is..(risk is high in this)
2) close short put leg and buy 3500 call...and create a bearish call spread with Long 3500 call and short 3400 call. Long call position will limit my losses.
3) Forget the complexity of adjustment, and just close the position without waiting for 400 Rs stop to hit.. So instead of taking a loss of 100 rs. I might cut my loss short.
4) If I want to be aggressive depending on my reading of market trend at that moment, I can close short 3400 put position and buy 3300 put and sell 3300 call.
This will leave me with Long 3300 put + 3400 short call + 3300 short call. This is really aggressive position but has very high rewards. Certainly that comes with very high risk of loss cause if market starts going up, then all 3 positions will loose money.
So I will be on my toes to manage my risk (by buying 3500 call, or by reduced position size with less contracts)

Hope this helps.. I am just giving some example, plz don't trade them without understanding the RISK.

Happy Trading.

A very good peek into a world of options sir.

 

[linkon7]

I use sharekhan basic a/c and the brokerage for options trading is >= Rs.100 per lot.

That means brokerage+tax = Rs.260 will go out of my pocket no matter what.

10% of 3000 is 300 already close to 260. That leaves me with little options.

You can't use options as an income generating tool with such high brokerage. Preferably open an account in reliance money, their brokerage works out to just 75 paisa for the buy + sell + taxes.
eg I buy a call option for 40 Rs and i sell it for 41, I still end up with a profit of 15 Rs per lot.

Their site is web based and can get irritating. I trade with Indiabulls also and they offer me Rs 50 or 1% of the premium (whichever is higher) and that works out to 2.5 Rs. The same trade would give me a loss of 75 Rs per lot. bargain with your RM, he can reduce the brokerage to at least half of what u r paying.

My experience has taught me that it gets hard to exit a options position simply because of the high brokerage. Even when you realise the position is going from bad to worse, you dont want to exit because of the brokerage.

I treat options just like stocks.... and exit when ever i feel the reason i took the position is no longer valid... No mental SL.... Since the movement of options is not as volatile as nifty, i can manage risk the way i want to...

 

[jamit_05]

Example of this approach - lets say my view on NIFTY on 30/April is that it is rangebound between 3300 and 3500.. so I enter into SHORT Straddle @3400 (i.e. sell 3400 put and 3400 call). Say I get Rs 300 for this and my stop is at 400 (i.e. I will buy both the options and close this position if combined premium is greater then 400 rs).

Happy Trading.

<Seniors pls feel free to post your views as the question in the post is of general interest>

Sir/s,

From the above bolden line I am pressed to jump to a conclusion that it would be very difficult to formulate a trading system for options. To elaborate, firstly one has to establish a view of the market viz rangebound or trending, if trending then what direction etc... After that, looking at the volatility one places his options strategy, which is a entire book altogether.

Since there are so many parameters it must be a herculean task to devise a system on paper. If so, then clearly it is not a job of 99% of readers at TJ to trade options. Emotions like fear and greed easily take over us in times when precise action is required. Moreso, with absence of clear guidelines the end result of trading options seems pretty grim, and not because its a lousy instrument but because our minds are not trained to drive in the fast lane yet.

Please provide your views with the fact in mind that most of us have sub-6months of experience in proper disciplined trading (never mind the fact that majority of us have spend most of our adult lives trading without discipline, which counts little as experience).

 

[linkon7]

Jamt,
options trading is the most difficult and the most satisfying aspect of derivative trading. One must have a good perspective of the market, risk management and ability to size positions, to be successful on options trading.

Its never easy to make money in this market and every time you put your capital at risk, you need to protect it from the big sharks by hedging and thats what options are normally used for.

if u want to earn from options, then you have to be prepared to take higher risk to your capital.

 

[sudoku1]

EASIEST way 2 put a stoploss in options is 2 track the futs & use its stop 2 exit the option positions.....

 

[AW10]

Sir/s,

From the above bolden line I am pressed to jump to a conclusion that it would be very difficult to formulate a trading system for options. To elaborate, firstly one has to establish a view of the market viz rangebound or trending, if trending then what direction etc... After that, looking at the volatility one places his options strategy, which is a entire book altogether.

Since there are so many parameters it must be a herculean task to devise a system on paper. If so, then clearly it is not a job of 99% of readers at TJ to trade options. Emotions like fear and greed easily take over us in times when precise action is required. Moreso, with absence of clear guidelines the end result of trading options seems pretty grim, and not because its a lousy instrument but because our minds are not trained to drive in the fast lane yet.

Please provide your views with the fact in mind that most of us have sub-6months of experience in proper disciplined trading (never mind the fact that majority of us have spend most of our adult lives trading without discipline, which counts little as experience).

No Amit. I think you are missing the point. Maybe because u have different belief about market them mine.

In my view, market goes thru different phases and we have to have tools for each phase. One tool can't fit everywhere. Strategies that work in rangebound market, fails in nice trending market and vice-versa.

Most us know (also in TJ family) that market remains in 3 trends - Up, Down and No trend i.e Rangebound.. And out of these 3 phases, market spends 60 to 70% time in range or sideway move. Unfortunately, trading literature and most of the people don't talk too much about strategies for rangebound market. When mkt is rangebound and one tries to implement a trend-following strategy(like MACD based, moving average based etc), then it certainly will keep hitting the stops.

So how to identify the current state of market should be the base for any type of trading. If anybody is serious about trading then this should be the first thing to learn (I learnt it thru hard way by paying too much of tution fee to the market).

I agree that option trading is not straight forward like stock or futures but amount of flexibility it gives to manage risk, makes it worthwhile to take the pain to understand it. And yes, you can develop many trading strategies. It is not that difficult. Some of them are already discussed in this forum. Infact, some of the strategies can be great holiday trading strategy where u open the trade with well defined risk and just let it run till expiry without monitoring it daily. Your risk is so well defined.. One might say that putting stoploss order takes care of it for stock/future trade as well but there are cases when stoploss order might not get executed, if the trigger price is not traded by the market.. That type of risk does not exist in well thought-out option strategy.

Following are the steps that I will suggest to develop option trading strategy
1) Identify current trend of the market - up, down or sideway
2) Start selecting one market condition and find suitable option strategy for it
3) Write down your rule for Setup or precondition, Entry, Stoploss Exit, Target Exit, Trailing stop
4) Backtest it.. and analyse the results
5) If results are unacceptable the try to improve the rules and test again.. or dump it and draw the new rules

Happy Trading

 

[jamit_05]

.
.
Following are the steps that I will suggest to develop option trading strategy
1) Identify current trend of the market - up, down or sideway
2) Start selecting one market condition and find suitable option strategy for it
3) Write down your rule for Setup or precondition, Entry, Stoploss Exit, Target Exit, Trailing stop
4) Backtest it.. and analyse the results
5) If results are unacceptable the try to improve the rules and test again.. or dump it and draw the new rules

Happy Trading

Sir,

Pls bear with me for asking more questions, so if I may...

We (flow traders) use pivots in the respective timeframe to define an up or a down trend. But, how would one go about identifying a rangebound price action? Could you specifically provide a suitable logic.

Amit.

 

[jamit_05]

Jamt,
options trading is the most difficult and the most satisfying aspect of derivative trading. One must have a good perspective of the market, risk management and ability to size positions, to be successful on options trading.

Risk management, trend detection and position sizing, these things Saint and ST sir have already taught us We are implementing these on a daily basis, so I guess I am gradually catching up.

But for options its a new beginning...

 

[AW10]

Sir,

Pls bear with me for asking more questions, so if I may...

We (flow traders) use pivots in the respective timeframe to define an up or a down trend. But, how would one go about identifying a rangebound price action? Could you specifically provide a suitable logic.

Amit.

The way I classify rangebound mkt is as below.. (There might be other approaches as well but I use this framework)
1) Go to higher TF chart.. (i.e. If my trading TF is 60m then goto daily chart, if I am trading 5min then goto 30min chart etc). My rule of higher TF is a trading TF approx 5times of trading timeframe.
2) Find out most recent PH / PL on this TF
3) If Current price is between PH/PL band of step 2, then it is in Range.
4) If it is not in range as per step 3 then it is in Trend.
Thats how simple it is.

eg - On last friday 29/Apr - PH on Daily chart was 3500 (approx) and PL was 3300 (approx) and market close was within this range hence my reading was that we are in rangebound market.
But on Monday, we broke past PH and hence that view is no more valid now.
So I had following options on Monday
1) close the 3400 short call leg and leave 3400 short PUT leg as it is..
2) close short 3400 CALL leg and open bullish 3400 - 3500 call spread (i.e. 3400 Call and sell 3500 Call) .
3) Forget the complexity of adjustment, and just close the position and take the loss.
4) Take aggressive position depending on my reading of market trend at the moment (Personally, I will certainly avoid this aggressive stance on bullish side after 1000 pts rise in index On bearish side, it is different case all togather), I can close short 3400 Call position and buy 3500 CAll and sell 3500 PUT.
So I will be Short 3400 put + 3500 short PUT + 3500 LONG call. This is really aggressive position (triple leverage) cause with every move up all 3 positions are going to gain but at the same time if market starts going down, then all 3 positions will loose money.

Doesn't it give me more control then futures trading ?

Hope I have not made any typo in explaining it. Else pls highlight it and I will correct it.

Happy Trading.

 

[myvineet]

The way I classify rangebound mkt is as below.. (There might be other approaches as well but I use this framework)
1) Go to higher TF chart.. (i.e. If my trading TF is 60m then goto daily chart, if I am trading 5min then goto 30min chart etc). My rule of higher TF is a trading TF approx 5times of trading timeframe.
2) Find out most recent PH / PL on this TF
3) If Current price is between PH/PL band of step 2, then it is in Range.
4) If it is not in range as per step 3 then it is in Trend.
Thats how simple it is.

eg - On last friday 29/Apr - PH on Daily chart was 3500 (approx) and PL was 3300 (approx) and market close was within this range hence my reading was that we are in rangebound market.
But on Monday, we broke past PH and hence that view is no more valid now.
So I had following options on Monday
1) close the 3400 short call leg and leave 3400 short PUT leg as it is..
2) close short 3400 CALL leg and open bullish 3400 - 3500 call spread (i.e. 3400 Call and sell 3500 Call) .
3) Forget the complexity of adjustment, and just close the position and take the loss.
4) Take aggressive position depending on my reading of market trend at the moment (Personally, I will certainly avoid this aggressive stance on bullish side after 1000 pts rise in index On bearish side, it is different case all togather), I can close short 3400 Call position and buy 3500 CAll and sell 3500 PUT.
So I will be Short 3400 put + 3500 short PUT + 3500 LONG call. This is really aggressive position (triple leverage) cause with every move up all 3 positions are going to gain but at the same time if market starts going down, then all 3 positions will loose money.

Doesn't it give me more control then futures trading ?

Hope I have not made any typo in explaining it. Else pls highlight it and I will correct it.

Happy Trading.

excellent AW10 as usual..

with this aggressive plan. is our SL at 3500 means that is a resistance first & resistance if crossed will become support ...so on that belief should we place SL at 3500..?

vineet