Selling Deep out of Money Options!!

[umeshmandal]

My mentor , a friend and me... we have developed an indicator in Metastock where we get certain level in Nifty future and the same is not breached for the entire current Derivative month.
It was backtested right from almost the inception of Nifty, September 2000! We have the data , but the number of minimum bars required by the indicator we do not get any signal prior to September!!
In last 12 years , it was only on 8 occassions that the Signal changed midway during the month, i.e. if in a month we got a Long signal it remained so till derivative closure and if we got a Short signal it remained so till Derivative close. Only on 8 occassions out of 106 months we had change of signals!!
As the Level we get is quiet away from CMP, we had a look at Selling Options for Strike price nearest to those levels, i.e. if Signal was long and the Nifty level we got that would not be breached was say 4790, we would short Put of strike price 4800 for the current month and vice versa for the Short, sell Deep out of Mony Call!!!
We found that 4790 was never breached and the option expired worthless on close!!!
If the level was generated in the last week of derivative close, we plan to short next months option.
Now my query is : How to hedge this position as it is uncomfortable to carry open Short position in Options!! ???
ps.: Have very small idea about options beyond buy a call when you are bullish and buy a put when bearish!!

Please help!!

 

[ethan hunt]

My mentor , a friend and me... we have developed an indicator in Metastock where we get certain level in Nifty future and the same is not breached for the entire current Derivative month.
It was backtested right from almost the inception of Nifty, September 2000! We have the data , but the number of minimum bars required by the indicator we do not get any signal prior to September!!
In last 12 years , it was only on 8 occassions that the Signal changed midway during the month, i.e. if in a month we got a Long signal it remained so till derivative closure and if we got a Short signal it remained so till Derivative close. Only on 8 occassions out of 106 months we had change of signals!!
As the Level we get is quiet away from CMP, we had a look at Selling Options for Strike price nearest to those levels, i.e. if Signal was long and the Nifty level we got that would not be breached was say 4790, we would short Put of strike price 4800 for the current month and vice versa for the Short, sell Deep out of Mony Call!!!
We found that 4790 was never breached and the option expired worthless on close!!!
If the level was generated in the last week of derivative close, we plan to short next months option.
Now my query is : How to hedge this position as it is uncomfortable to carry open Short position in Options!! ???
ps.: Have very small idea about options beyond buy a call when you are bullish and buy a put when bearish!!

Please help!!

ask your mentor

 

[SavantGarde]

My mentor , a friend and me... we have developed an indicator in Metastock where we get certain level in Nifty future and the same is not breached for the entire current Derivative month.
It was backtested right from almost the inception of Nifty, September 2000! We have the data , but the number of minimum bars required by the indicator we do not get any signal prior to September!!
In last 12 years , it was only on 8 occassions that the Signal changed midway during the month, i.e. if in a month we got a Long signal it remained so till derivative closure and if we got a Short signal it remained so till Derivative close. Only on 8 occassions out of 106 months we had change of signals!!
As the Level we get is quiet away from CMP, we had a look at Selling Options for Strike price nearest to those levels, i.e. if Signal was long and the Nifty level we got that would not be breached was say 4790, we would short Put of strike price 4800 for the current month and vice versa for the Short, sell Deep out of Mony Call!!!
We found that 4790 was never breached and the option expired worthless on close!!!
If the level was generated in the last week of derivative close, we plan to short next months option.
Now my query is : How to hedge this position as it is uncomfortable to carry open Short position in Options!! ???
ps.: Have very small idea about options beyond buy a call when you are bullish and buy a put when bearish!!

Please help!!

To hedge the position one will need to workout the percentage range of the last 3 months and then identify the Strike to hedge....!!!

SG

 

[umeshmandal]

ask your mentor

Thanks sir!!!
Mentor could not answer as he is not at all versed with Options!! The SL we get in the indicaor is too big for comfot level!!

It was me who suggested Options but with limited knowledge could not go beyond a certain point!

 

[DanPickUp]

My mentor , a friend and me... we have developed an indicator in Metastock where we get certain level in Nifty future and the same is not breached for the entire current Derivative month.
It was backtested right from almost the inception of Nifty, September 2000! We have the data , but the number of minimum bars required by the indicator we do not get any signal prior to September!!
In last 12 years , it was only on 8 occassions that the Signal changed midway during the month, i.e. if in a month we got a Long signal it remained so till derivative closure and if we got a Short signal it remained so till Derivative close. Only on 8 occassions out of 106 months we had change of signals!!
As the Level we get is quiet away from CMP, we had a look at Selling Options for Strike price nearest to those levels, i.e. if Signal was long and the Nifty level we got that would not be breached was say 4790, we would short Put of strike price 4800 for the current month and vice versa for the Short, sell Deep out of Mony Call!!!
We found that 4790 was never breached and the option expired worthless on close!!!
If the level was generated in the last week of derivative close, we plan to short next months option.
Now my query is : How to hedge this position as it is uncomfortable to carry open Short position in Options!! ???
ps.: Have very small idea about options beyond buy a call when you are bullish and buy a put when bearish!!

Please help!!

Show us the indicator in detail and we show you the answer in detail. As simple as that or what are we in your mind?

 

[umeshmandal]

To hedge the position one will need to workout the percentage range of the last 3 months and then identify the Strike to hedge....!!!

SG

Thamks for the suggestion to workout the % range of last 3 months to identify the Strike... but dont know what to do : With a Put shorted, do we hedge it with a deeper put buy or a deeper Call sell!!!

Suppose, just suppose that we are 80% sure mkt wont hit 4800 within this clearing and have shoted a Put.. actually

The first trade we have taken is selling 4800 Put on 11th june @ 19.85

The SL as per NF on entry was 4770 (Exit on breach of NF below 4770) , the same is now trailed to 4863 today!!

Since our entry this Option touched a high of ~30 ! We cannot have a SL based on Option price!! Main requirement is to safegurad from gap up or down openings!!

If we are Short in 4800 Put, how do we hedge the position, Buy a Put for deeper strike? Or Sell a call ?

 

[SavantGarde]

Thamks for the suggestion to workout the % range of last 3 months to identify the Strike... but dont know what to do : With a Put shorted, do we hedge it with a deeper put buy or a deeper Call sell!!!

Suppose, just suppose that we are 80% sure mkt wont hit 4800 within this clearing and have shoted a Put.. actually

The first trade we have taken is selling 4800 Put on 11th june @ 19.85

The SL as per NF on entry was 4770 (Exit on breach of NF below 4770) , the same is now trailed to 4863 today!!

Since our entry this Option touched a high of ~30 ! We cannot have a SL based on Option price!! Main requirement is to safegurad from gap up or down openings!!

If we are Short in 4800 Put, how do we hedge the position, Buy a Put for deeper strike? Or Sell a call ?

Will explain it over the weekend....it is a bit of long drawn...!!!

 

[DanPickUp]

Suppose, just suppose that we are 80% sure mkt wont hit 4800 within this clearing and have shoted a Put.. actually

If we are Short in 4800 Put, how do we hedge the position, Buy a Put for deeper strike? Or Sell a call ?

The way you talk it seems to be a simple standard deviation system. Thats fine and nothing special. Not a new invention of the wheel.

Now: What would be the advantage or disadvantage to buy a deeper put strike or sell a call (By the way: On what strike)?

 

[umeshmandal]

Show us the indicator in detail and we show you the answer in detail. As simple as that or what are we in your mind?

I am no TA, its a Chandelier Stop Tweeked, I will post an image soon.

Details after I post my details, however do answer :
If we have sold a 4800 PUT on the 11th of a month expiring on 28th, with still 14 sessions to expiry while the underlying is around 5050, how do we hedge this position?

 

[umeshmandal]

The way you talk it seems to be a simple standard deviation system. Thats fine and nothing special. Not a new invention of the wheel.

Now: What would be the advantage or disadvantage to buy a deeper put strike or sell a call (By the way: On what strike)?

That was a layman's idea(mine), seeking expert advise (yours)!! No idea at all.. abt advantage or disadvantage, just know that selling a put means bullish stance so hedge it with a bearish stance by buying a Put or selling a Call!!
If there is an easy answer do post, otherwise please direct me to any particular site where I may search/research for an answer!!
Thanks for taking interest!!