Non-directional Option Strategies for Stocks and Indexes

[Options_Trader]

I am currently holding a long call butterfly spread. Risk reward is favorable with this spread but probability of success is low.

Long: 6800 Call - 1 Lot, 7000 Call - 1 Lot
Short: 6900 Call - 2 Lots

Max loss: 900 - Cost of creating the spread. Paid extra cost as took positions in different spreads at different times.
Max Gain: 4100, if expires at 6900.
Low probability of success as markets are sure to move from this point after elections.

The spread can be viewed at http://i58.tinypic.com/2ah9th5.png

Not the best spread to enter at the start of a series. These spreads are generally made later in the series. It was a forced trade to hedge my long 6800 May call as VIX was dropping and the call was losing value.
Will probably close out the position before elections. Expect to break even or book a loss of 300 rs.

This trade reinforced my view that predicting VIX is very important if you are trading options.

Any views on VIX movement.

 

[Somatung]

Is it advisable to book profits in the short leg of the option as this is a buy on dips market or should I wait for some more pullback ?

Worst case scenario market plunges further and I lose some premium. IV is expected to increase as per trend observed in 2009 before elections, giving the long legs a boost.

Did you test your question you ask with the software you used for this analyzing picture? and if not: Why? Take care

 

[Somatung]

Is it advisable to book profits in the short leg of the option as this is a buy on dips market or should I wait for some more pullback ?

Worst case scenario market plunges further and I lose some premium.

Ok, I see. You edited your post after I posted mine. Now if you think market moves further down, on what kind of facts would this be? If those facts would give a clear signal, that market further moves down, why would you keep your long call 6800 leg and your long call 7000 leg?

You not have to post those answers for me, as I do not need them. Just think about it if you want. Take care

 

[Options_Trader]

Ok, I see. You edited your post after I posted mine. Now if you think market moves further down, on what kind of facts would this be? If those facts would give a clear signal, that market further moves down, why would you keep your long call 6800 leg and your long call 7000 leg?

You not have to post those answers for me, as I do not need them. Just think about it if you want. Take care

Calls look cheap as premium has gone down from 62 points to 43 points in NF (43 is not too cheap though). IV has dropped significantly, IV may have dropped as major results session is almost over. However, VIX should increase as poll results approach. This was observed in the previous election as well.

However, if I book my short calls and keep only long calls open, time value will hurt me. At present IV levels, time value should be more than 4 rs per day for ATM option for this series. So, I get hurt if markets go down or stay in consolidation mode.

Risk reward is not favorable here. The probability of success too is low.

Anyways, thanks for your suggestion.

 

[Options_Trader]

Now if you think market moves further down, on what kind of facts would this be? If those facts would give a clear signal, that market further moves down, why would you keep your long call 6800 leg and your long call 7000 leg?

You not have to post those answers for me, as I do not need them. Just think about it if you want. Take care

Don't want to get into directional call. Anyways, it was not good thinking to break the spread.

 

[Somatung]

Don't want to get into directional call. Anyways, it was not good thinking to break the spread.

Dear friend

- It seems to me that you not have a clear trading plan for you long call butterfly.

- It seems to me that you not have a clear adjustment plan for your long call butterfly.

- It seems to me that you are afraid of risk limited directional trading witch you could do by just trading a call debit spread or a call credit spread, which are both part of your long call butterfly.

- One trick which could improve your trading are broken wing butterflies. Ever heard about them and ever traded them?

Take care

 

[Options_Trader]

Dear friend

- It seems to me that you not have a clear trading plan for you long call butterfly.

- It seems to me that you not have a clear adjustment plan for your long call butterfly.

- It seems to me that you are afraid of risk limited directional trading witch you could do by just trading a call debit spread or a call credit spread, which are both part of your long call butterfly.

- One trick which could improve your trading are broken wing butterflies. Ever heard about them and ever traded them?

Take care

Thanks. Will work on creating a trading and an adjustment plan. I would like to exit the butterfly, if possible, with a profit as it is not a great spread to hold at this juncture.

Regarding being afraid, yes I am a bit afraid. But I also want to see if it is possible to develop a long term non-directional trading plan. I understand that directional element is crucial. Still I would like to minimize that.

I have never traded broken wing butterflies. From what I understand, you move the OTM long call one strike further. This in my view gives limited benefit (considering an average delta of 0.25 for that strike, for a 100 point shift in that strike, it will give you a benefit of 25 rs, 1250 per lot). I think the best time to make this will be a week before expiry.

Again, thanks for your guidance.

 

[toughard]

@Somatung, I do not plan to take any further position till elections. Election results are too unpredictable. At max I will go for a reverse butterfly or a calender or a reverse calender depending on the exit poll. I may also go long vega before exit polls considering historical VIX data.

One thing I realized later was the margin required to make the butterfly spread (51000). There should be very minimal margin requirement for this spread (Max 10000), 1000 if max loss is considered. Can someone explain the margin requirements?

http://zerodha.com/margin-calculator/SPAN/

 

[toughard]

Calls look cheap as premium has gone down from 62 points to 43 points in NF (43 is not too cheap though). IV has dropped significantly, IV may have dropped as major results session is almost over. However, VIX should increase as poll results approach. This was observed in the previous election as well.

However, if I book my short calls and keep only long calls open, time value will hurt me. At present IV levels, time value should be more than 4 rs per day for ATM option for this series. So, I get hurt if markets go down or stay in consolidation mode.

Risk reward is not favorable here. The probability of success too is low.

Anyways, thanks for your suggestion.

you are going good... its a option repair that you have done
please read options-a-strategic-investment

http://www.free-ebooks.com/book/739/options-a-strategic-investment

good luck

 

[Somatung]

Thanks. Will work on creating a trading and an adjustment plan. I would like to exit the butterfly, if possible, with a profit as it is not a great spread to hold at this juncture.

Regarding being afraid, yes I am a bit afraid. But I also want to see if it is possible to develop a long term non-directional trading plan. I understand that directional element is crucial. Still I would like to minimize that.

I have never traded broken wing butterflies. From what I understand, you move the OTM long call one strike further. This in my view gives limited benefit (considering an average delta of 0.25 for that strike, for a 100 point shift in that strike, it will give you a benefit of 25 rs, 1250 per lot). I think the best time to make this will be a week before expiry.

Again, thanks for your guidance.

Certain risk you will have to take in trading. Hopping that market exactly will close where you have the best profit with your long call BFL is like want to be sure to make money with a directional trade. As you know: Both is not the way we trade: Either options nor futures. So how to reduce risk and increase profit in option trading? Here you have to be clear about the amount you want to risk for any option trade you do. You can do this by taking a spread, which defines the amount you risk. Or you can define this by the money you spend to buy an option with the idea that this money is the amount you will risk. So this option could go to zero and it not would hurt you. If you want to set a stop loss on an option, lets say 20 for an option you bought for 70, that will be a bit more difficult, as there are many variables which influence the price of an option. In such a case you could place a limit sell order by your broker for this option. An other way is to set a level on the underlying of those option as a stop loss level, on which you will sell your option. So if you are wrong, your loss will be limited. But probably this is not the only problem you face. What about managing an existing option position in the live market? How strong are your skills for such kind of trading? If you have good skills for this, then most of your arguments above, which show some how unsureness about your live trading, will have no more value. As we can leg in any option strategy in many different ways (Was posted in my thread), we can change the outcome of any of those option strategies. So then comments like: This is not good idea or this those not change much and so on suddenly are gone. Now have a look at the following, which was done through leg in and you will see the different between professional option trading and basic, low profit option trading. And yes, this not always will be successful like every thing in trading does not work all the time 100%. People who tell they always have a 100% success rate are people who not trade in the real market. But we can trade like this with low risk entry strategies and then do what is needed to bring the trade over the zero line, which is the different of having a higher risk of any loss (when being under the zero line like your BFL profile shows) or a very low risk to zero loss in this trades.

Now I hope this will give you some more confidence in your style of option trading, which is related to option strategy trading. Many other styles can be done with options, but you choosed this way. It is not the most easiest way and best would be to have a real mentor which would lead you in your live trading day by day for a few weeks. You may try a mentor program from a serious mentor or option trading company.

I also hope it will motivate you to really define your risk profile a bit in an other way. I not will further post here in this thread as many other things are posted in my thread and in many other threads. So take care dear friend and all the best

All what you now will see are trades which are done by legin in different ways. Some times with three legs, some times with one leg and then converted into non directional trades. All strategies are finally over the zero line, which means where ever market moves, there is profit. The biggest risk on all of those trades where the moments the market was entered with the first leg/s. And the risk was always in advance defined by the amount of money who could be lost on this entry. (You not will find any link in the net about such kind of synthetic option trading shown below)

Long call broken wing BFL: http://i61.tinypic.com/2jdjb0p.png

Synthetic long iron BFL: http://i57.tinypic.com/mhx9nd.png

Synthetic long broken wing iron BFL: http://i62.tinypic.com/bdw3o2.png