Selling options for income query

#1
I am looking to trade in shorting options looking at the theta decay angle.For example the stock CMP is 2000 and i feel it will not go above 2300 so i would like to short this call while going long a 2500 call for protection(Credit spread).But I have seen that one gap up or wrong trade takes away all the gains plus more.Is there any way else to hedge or prevent this loss?How do experienced traders deal in this type of trade as even many times the stop loss will also not get triggered at any favorable rate.
 

mohan.sic

Well-Known Member
#3
I am looking to trade in shorting options looking at the theta decay angle.For example the stock CMP is 2000 and i feel it will not go above 2300 so i would like to short this call while going long a 2500 call for protection(Credit spread).But I have seen that one gap up or wrong trade takes away all the gains plus more.Is there any way else to hedge or prevent this loss?How do experienced traders deal in this type of trade as even many times the stop loss will also not get triggered at any favorable rate.
A trader can implement different strategies and timing and play with the risk:reward like in your example of credit spread but There is no way to trade without risk.
 
#5
For protection, you need to cover both the sides. You have only covered only one leg for the surprise bull move. You can also buy the 1900 put for covering the lower side.

As long as you end up expire within 2300 , you are good. If not , refresh and update your analysis, rather than thinking about the loss.
 
#6
For protection, you need to cover both the sides. You have only covered only one leg for the surprise bull move. You can also buy the 1900 put for covering the lower side.

As long as you end up expire within 2300 , you are good. If not , refresh and update your analysis, rather than thinking about the loss.
Problem in this credit spread is that if i take the 1900 put also it will not me with much on the table
 
#8
Problem in this credit spread is that if i take the 1900 put also it will not me with much on the table
I was talking about , you taking the wrong trade (as you said ) . No particular need to cover the downside when we are doing a credit spread . we anticipate a upper sideways movement. To evade the chance of stock exploding overnight, make sure to select less beta stocks.You may get comparatively much less premium over the intrinsic value of the stock due to the less beta it has , but as long as the stock stays below the 2300 ,you will collect the premium.
Even if anything happens due to entire market exploding up , you could always buy back the first call you sold and sell a lower ITM strike to get more premium. That way you will be close to break even or in profit. Never in loss. Stocks don't often gap up 20% . So you will never be in loss. Hypothetically.
 

mohan.sic

Well-Known Member
#9
I was talking about , you taking the wrong trade (as you said ) . No particular need to cover the downside when we are doing a credit spread . we anticipate a upper sideways movement. To evade the chance of stock exploding overnight, make sure to select less beta stocks.You may get comparatively much less premium over the intrinsic value of the stock due to the less beta it has , but as long as the stock stays below the 2300 ,you will collect the premium.
Even if anything happens due to entire market exploding up , you could always buy back the first call you sold and sell a lower ITM strike to get more premium. That way you will be close to break even or in profit. Never in loss. Stocks don't often gap up 20% . So you will never be in loss. Hypothetically.
You seem to have decent exp on seeing how you explained but things wont work like that when you are in middle of the game. Strike adjustments when trade went against is not possible as we see on paper.
Yes stocks may not move 20% often but his example of cmp 2000, and selecting strikes of 2300&2500 for credit spread is just an example. Practically trading credit spreads on strikes 10% away is useless in terms in probable return and risk.
 
#10
You seem to have decent exp on seeing how you explained but things wont work like that when you are in middle of the game. Strike adjustments when trade went against is not possible as we see on paper.
Yes stocks may not move 20% often but his example of cmp 2000, and selecting strikes of 2300&2500 for credit spread is just an example. Practically trading credit spreads on strikes 10% away is useless in terms in probable return and risk.
Yes. It is actually useless. Kind of like risking 99 to earn 1. 10%+ far otm options don't have a reasonable intrinsic value to bet on. And yes , it's easier said than done about the strike adjustment part. I usually do that in index. Not possible in stocks , as they could be illiquid strikes and I could get trapped for auctions. That's why I said hypothetically.
 

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