Escape's Options Trading Diary - Strategy Based (Phase 1)

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!!! Om Shree Ganeshaya Namah !!!

Happy Dussehra to all

Escape's Options Trading Diary - Strategy Based (Phase 1)

Objective:
Using various Options Strategies to trade options, and main focus would be adjusting and handling losses, to make loosing trade into winner.

Strategy:
I will start with "Calendar Spread" Strategy and will move on using different strategies based on situation.

Rules:
I'll be trading only NIFTY Index Option chain.
I'll not "Short" without any "Long" position or some safeguard present.
I'll go short if "SL for short" is hit.

FAQs:
1. Based on moving average, if NIFTY is above 100 moving day average and RSI is below 80, and is not approaching critical Resistance level, will consider upside move else downside move.

2. Observe Long position on subsequent day and in case market moves in our direction, trail SL up. In case if market moves against our direction and "SL for Short" is hit, go short for same option type for current months series in ATM.

3. Target/Exit for Long Position?
Based on some MA cross-over on NIFTY Day chart, decide when to exit.

4. If Long shows exception upside move, we have two alternatives, we will take decide this on case basis:
A. Just Exit, and re-enter after correction.
B. Hold position with some SL.

5. How do I define "SL for Short"?
Based on certain % of capital value (at the end of day we are trading in terms of Rs.)

6. If short position chain is expiring as "zero" or "near zero" on expiring day, should I exit from Long or keep it further?
Check Chart in following order to decide to hold:
1. MA cross-over chances (may happen in 2-3 days), i.e. distance between higher-lower MA are reducing.
2. Current level is coming to near certain Support Level and market may change direction.
3. RSI value is in OS zone

Result Expected:
At the end of each Options series, try to end with positive result.

Challenges:
I have never used strategy based option trades earlier. This is first time I'm trying under guidance of DanPickUP. He will support me based on his availability.

Expectations from forum members:
Honest feedback and encouragement so as to improve my methodology.
If you have some suggestions to modify above strategy or methods, please let me know.

 

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Strategy: Calendar Spread

You go long itm next month series and you do short atm when in loss with this month series. Calculate the loss you made with the itm option and add it to the atm option you sell. This kind of trading will improve your chance to recover losses you made in the past.

As next month itm series will loose less time decay when you are wrong, you sell this month atm series which will loose faster time decay compare to your next month series.

Flowchart: Calendar Spread

Guidelines: Calendar Spread

http://www.traderji.com/trading-diar...tml#post732317

Dear Escape

Yep, a lot of questions. Never mind, as I have some time today.

You enter the long leg when ever your rules give a go. What ever rules you use for pure directional trading, they will never work all the times. So giving you any new rules you could follow will not necessarily mean that your entries will be better. If you think you are unclear with that, read a bit in the thread of dear ST or dear SG or from any other good member in this forum.

Giving you a starting point when to enter any trade for a calendar: First week of the new month. This will give you more time for the long leg. If you feel save with what you do, you shorten the live of the long leg by entering a trade even in the second or third week of the actual month.

Now some words to the strategy:

Market trend up: Long itm call next month series and if in loss then you go short an atm call from this month series. Vice versa for trend down and there you use puts.

Why this way? Margin reasons. If you are long and you are right with your direction, you will not have blocked much money with your trade.

You short only when in loss with the long option from next month series and you short always option this month series. If you are long one unit, you short only one unit. The very specific name for this strategy is: "Diagonal Calendar Spread".

If you short two units, then it is called "Diagonal Calendar back spread" and your risk profile is changing.

If you short one unit this month series with the same strike level from your itm long option next moth series, it is called "Horizontal Calendar Spread". Again an other risk profile. So do not confuse them.

There are some other variations possible, but the mentioned once are the most known and there is information around in the net about them. Other variations are not mentioned in the net, as they are very much out of the box.

Next: If you have the full strategy running (Long and short as used for the "Diagonal Calendar Spread"), you must know your break even points on the up side and the downside. As far as I am informed, Option oracle works again and there you easily can see those break even points in the market.

As long as market stays between that break even points, your short should give you more returns compare what you lose on your long position and that can be the amount you lost on your long position.

Why does it work like that?

Time decay on the short works in your favor, as it vanishes faster compare to your long position. And that is why you sell this month and not next month series.

An other Greek to look at is the delta. The itm long option has a high delta and moves quick with the underlying. If you are right with your directional play, your profits are higher. The short option is atm and through that it's delta is less compare to any itm option. The short option will not move as heave as the long itm option does and this will reduce the risk which you take on this short leg.

You also do not buy this month series, as time decay works against you, even if market moves finally in your direction. If you use next month series you give the market and your self a bigger chance to be right. Most people do not understand that and argue about that the next months series is more expensive. Yes, that is right. But it loses time decay less faster compare to the short live time options of this month.

What you also can think of is to go long atm next month series and short itm this month series. But how ever you do it: Always long next month series and short this month series.

As told: As long as market stays between the break even points on each side, you do nothing and let the short position expire. After the short has expired, you still have the long position. Now you decide what to do with it. If market moves in your favor, you keep this position and if market not moves in your favor you close it and implement a new long position with the next month series.

If market moves strongly against any of your break even points, you start to adjust by rolling the position up or down in the direction market moves. This will widen your market spread. Rolling down means to buy back the short on the actual level and sell it next moment on the next strike level.

Example: If you are short the 5000 put this month series, you buy back this put and sell the 4900 put this month series. The same you do immediately with your long position. You roll it down. Vice versa on the upside break even point. Always first move your short position and after that position is rolled, you move your long position.

As with every thing in trading: Quality of the trades is first and not the amount of trades done. Also preserving capital is more important then any amount of trades done.

Good trading

DanPickUp

 

[DanPickUp]

Dear Escape

Do you still have the Dec 5600 put?

As the option still has over 60 days to go, the fluctuation on the tail is given and to accept. Can you live with that or is that to difficult?

DanPickUp

 

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Dear Escape

Do you still have the Dec 5600 put?

As the option still has over 60 days to go, the fluctuation on the tail is given and to accept. Can you live with that or is that to difficult?

DanPickUp

Dear Dan,

Yes, it is still with me. Being Expiry day, I was expecting lots of fluctuation. Dec 5600 PUT closed at 66.

NIFTY is trading range-bound, if it breaks upper-side, it may go around 100-125 up.

Regards,
Escape

 

[DanPickUp]

Resistance seems to be around 5714 in Nifty and this was not token today. Dow now is testing 12980.

Until presidents voting, there could be a nasty market.

The Dec 5600 put is a directional speculative trade. If you think market could move up 100-120 points, then you could sell two Dec 5400 put with 30.00. Your risk would be reduced to 12 Rp, as you payed 72 Rp for the long put. You then have a put ratio back spread for the moment. Important here would be, that the market really makes such a move as you other wise lose to much time decay on the two short positions.

 

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Resistance seems to be around 5714 in Nifty and this was not token today. Dow now is testing 12980.

Until presidents voting, there could be a nasty market.

The Dec 5600 put is a directional speculative trade. If you think market could move up 100-120 points, then you could sell two Dec 5400 put with 30.00. Your risk would be reduced to 12 Rp, as you payed 72 Rp for the long put. You then have a put ratio back spread for the moment. Important here would be, that the market really makes such a move as you other wise lose to much time decay on the two short positions.

Thank you Dan for this advise.

Also as you said until President election, we expect nasty market.

Let's see if NIFTY breaks resistance level, if so, will go shorting positions as suggested.

 

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Open Positions:

1) Long Nifty Dec 5600 PE on Oct 23 @ 71.00, CMP 66.00

 

[DanPickUp]

Dear Escape

Dec 5600 PE at 77.20. (Yesterday in loss, today in profit)

Dow fights again with 13'000.

Still every thing open until 13'100 is token again.

Risk for us: Rise in Standard Volatility.

Good for us when market would plunge. Option then would save value very quick and bad for us if market jumps up as option in this case would lose value very quick.

Time decay is against us as weekend time nags on our position.

Important: Pre and after market orders. As you told: This can not be done in your market.

Lesson for the moment:

Never ever let a naked option position run over the weekend. It is called: Harakiri.

http://en.wikipedia.org/wiki/Seppuku

Good trading

DanPickUp

 

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Open Positions:

1) Long Nifty Dec 5600 PE on Oct 23 @ 71.00, CMP 77.20

 

[DanPickUp]

Dow: Beautiful double top at 13'065/70 and then bum again. As it happen on the hourly chart, this has some value. Next time frame is the daily, in which the Dow has to show what he likes to do.