Selling Straddle and strangle

[RiddhiPD]

I have been toying with idea of selling straddle and strangle and paper trading for few weeks and I have few questions.If anybody can help me clear out few problems I will be grateful.


The whole idea of say selling strangle/straddle is to earn Premium.Time decay works in favour of Option sellers.Now when we sell credit spread the idea is to neutralise Delta (by various mean).Suppose I am neutralising delta by selling future.
Now as an option seller I am looking for volatility to decrease.If I am Sell options when volatility is high and gradually Vola decreases I make profit since both put and call decrease Value.But After taking a position if Vola increase I am going to get hurt(Since Vega is negative in selling spreads)

Now my questions are,-

1.Suppose I sold a strangle/straddle and Vola increases what can be done?(I am neutralising delta already).

Even when we avoid times when we are anticipating increased Vola ,there are times when Market suddenly moves (down 100 point in 15 minutes) and vola jumps up.What to do in that time??


2.There are certain time when Vola probably will go up (e.g 2nd June RBI announcement) and come down after that.Now should I avoid that time altogether or sell just after Event like that.

3.Is it right to avid Expiry Week?What are good strategies for Expiry week?

4.Sometimes Volatility goes up for three to five days (April 20-24).Do I get out quickly or neutralising Delta can help me through that time.Any Past experiences will help me.

5.If you neutralise Delta in a credit spread how often do you do that? like once a day or twice a day? or more?

( I am here assuming I sell Nifty 200 units Call/200 units Put there by giving Theta of 2000 approx and neutralising delta (keeping it within 20-25 Range) but Short Vega is making me worried.



Thanks in advance.

 

[long_gamma]

If implied vol. increases after selling volatility, and it hurts, the position size can be reduced (to control risk) or the trade closed. (Vega can be adjusted only by buying or selling Options)

I hope you understand the risks of selling naked Options.

 

[RiddhiPD]

I am aware that position size can be closed but I am looking for other options barring that.

I am aware of the risk of selling naked option and thats why I am looking for recommendations to limit my risk.For example one option is to convert it into butterfly but are there other better alternatives?

It will be wonderful to hear parctical experinces of members here.I saw thread by Linkon but didn't have the time to read it totally.I am wondering that he also mentions buying futures with credit spread but was he delta neutralising the spread continuously or not.I have to give a read.In the mean time I am looking for other suggestion/experiences.

In other words Do's and Don'ts.

Thanks.

 

[Somatung]

Why would you convert a short option into a butterfly?

If you do so, how would you choose which leg?

If you want answers like Do's and Don'ts, why not first show a bit about your Do's and Don'ts?

 

[RiddhiPD]

Since I was asked to answer my own question,

As far as I understand,

1.We sell spread when Volatility is high hoping that volatility will revert back to mean and we would make profit.

2.As I am selling option time decay works in my favour.For me it is most important as I am looking to earn time premium and not bothered by direction.Actually I suck at forecasting direction.So I want to remove Bias to direction,as far as possible.

3.I intend to devote full time but not like "I-can't-take-a-bathroom-break" situation either.So Instead of day trading I want to shift to options.

4.The theoretical part is all fine.The problem is theories don't work in market as you wish it would.In reality volatility hikes up,dies down abruptly,trade which looks good on paper doesn't actually work out in real life and other million problems.

For example - Last month(actually most times) long straddle showed me loss.But Short straddle with position which was delta neutralised continuously showed me a profit.Actually all the credit spreads and combinations showed profits.{Paper trade].

I AM Not going long unless I have a very very very good reason for doing that.

5.Problem is Paper trading is great but I am making mistakes in real life.

For example,I knew when volatility goes up call/put both gains value.I opened a spread and the moment it did instead of remembering the plan,I messed up and got out with loss.

The pain came when I realised I actually could've made a really good amount if I just stayed few hours more.

I take very very small losses but the problem is I take very small gains.I do intend to correct the mistakes in future but can't see how.:annoyed:

Almost all the trades I got out early with small loss(whether be in equity or derivative showed profit within hour).(Win-loss 66%-34%,after two years)

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _

Now as far as option trading plan goes,

I divided strategies based on when to make and when to not.In other words I want to make strategies based on time of the month and day of the month and event-specific.

Day 1 - till day 12.

What I have noticed nifty remains volatile even after day 4-5 after expiry.I don't want to sell options then since theta decay is low.

[I AM YET TO DECIDE STRATEGIES FOR THIS PERIOD]

Day 12- Day 24

This is the time traditionally(?) volatility starts to die down a bit, and theta decay starts to increase.

I am looking for selling credit spread within this Period.
I am looking to open either Short straddle or strangle,later Iron Condor.( I am yet to decide which is correct and would be better).
I am looking to delta neutralise the position when I get +25 Delta or -25 Delta.But that also makes the brokerage fees goes up.Thats why I asked what is the good interval to delta neutralise positions.Theta is around min 1000 - max 2000(high risk for me).

Being Vega Short I am worried about Vega and want to minimise effect as much as possible.


Day 25-Till Expiry.

Most profitable period to for credit spread but the Risk is also high.
So I AM NOT LOOKING to open New position but to continue the spread if its profitable and volatility is not going to go up.

If I sense volatility spiking I will square off my position.

But if I Square off my position I am yet to decide which one is a good strategy in expiry week.So right now I am just sitting idle.:annoyed:
So,The question is what are the good strategies for Expiry week??

Event Specific
- - - - - - - -

For Event specific ( if known earlier) I am intend to open Call or Put Ratio back spread) with credit.I am looking to play any event specific strategy only within 1-10 Day,Since it requires a large enough move to be profitable.


Strategies
_ _ _ _ _ _ _

A.Long Straddle - 1.Only within 1-5 days.
2.Market is expecting large move.
3.Market is at support or resistance.
3.Hope to avoid.( Bad if market consolidates)

B.Long Strangle - 1.Hope to avoid.
2.Can’t find any reason but I am open to suggestion.

C.Short Strangle -1.Volatility is going down.
2.Market consolidating with support and resistance.
3.Day 12 -22.
4.Weak Point is adjusting.
D.Short straddle -1.Same as before before.

[ for both short straddle and strangle my strategy would be delta neutralise the position by either buy/sell future or synthetic future.]


E.Iron ( Long) Butterfly - 1.Safer than short straddle.[btw. I meant iron butterfly when asked about adjusting,due to that I don’t need to decide which leg.But if I could,that would be lovely]
2.Again adjustment is key.(How?)

F.Iron Condor - Adjustment from short straddle.Still reading up. So can’t say much.But intend to make it principal option strategy in future.

G. Ratio BACK Spread. - Good before Earning and for individual stock.But since I will be solely playing Nifty I am not sure how effective it would be.But for only nifty specific news I am guessing it would be a good strategy.

H. Mix Front Spread - I am musing with idea of opening a Call ratio spread and Put Ratio Spread together.

Call ratio - Purchase One call at resistance and Sell two call at next strike price.
Put Ratio - Purchase One Put at support and Sell Two Put at next lower strike.
Condition 1. Both are opened for Credit.
2. I am constantly monitoring the market,so will close one leg at Max Reward Point.
3.Another leg since opened for credit will still give me money.
4.Con - Market moving extremely fast within a small time frame( unlikely but possible)
5.I am open to criticism [I have a gut feeling it is kinda childish].

I. P/C Vola Arbitrage - Opportunities are there but I am confused.Not going there right now but after seeing results MIND = BLOWN.

Timing
- - - -

1,Intend to open longs only at morning.
2.I intend to open short only after 1 o’clock(take advantage of time decay).
3.Mix position - still no idea.

Volatility
- - - - - -

What I found out is tracking IndiaVIX does a good job (cheaply) at least as long as I have paper traded.So to understand volatility graphically would it suffice?

[ I do have real time greek calculating software with risk graph,but it doesn’t plot greeks and volatility graphically ]

Day Trade or Position trade
- - — - - - - - - - - -

I am not sure in this regard.

1.market Gaps Up - Open Bull Call Spread at 9:30 and continue till 1 o’clock ,continue till 3:30 depending upon condition.

2.Market Gaps Down - Open Bear Put Spread and same as before.

3.Market does nothing - (Confused?)

After 1:30 Sell Credit Spreads and square off around 3:15.


Haven’t done day trading so not clear.But from my understanding I will make my broker rich.


So,now this is my position in nutshell.Wrote a bit much.What I am trying to do is to develop a trading plan taking note of volatility,time and to some extent chart.

I am weak in selecting strike price for each trade.Thats why I trade extremely cautiously and lowest amount possible.I am paying brokerage in comparison to more lots but my brain works better will small lots.

Now I am waiting

 

[RiddhiPD]

Another thing What I want to do is to

1. Pick 4-5 strategies.
2. For Each strategy Study at what strike price is to be opened(whether ITM,ATM or OTM - Books are nice but sometimes in practice doesn't quiet work out)
3.Study at what time of the month to be opened.
4.Study at what volatility level to be opened.
5.Study how to adjust the positions.

So Instead of going after 30-40 strategies and what not and mixing and matching them and wasting time not trading, I want to learn 4-5 strategies throughly.
So I am looking to for 4 to 5 strategies which can be restructured in most market conditions.

Please don't suggest books,unless it is absolutely important.After taking a position all the knowledge from the book goes out of the window.

 

[Somatung]

@RiddhiPD

Yep, that was a lot for two simple counter questions . Any way: Give me some time to read through and then let's see.

Regarding your above post: You already ask for more strategies even you seem to be not bullet proved with one option strategy. Or did I miss interpret this? If so, kindly correct me and which one option strategy would it be you are bullet proved?

Behind my questions is a logic, so I do not ask just for fun. If I have a better understanding about your understanding of option trading and option strategy trading, as more clear I can point out what could be your next step.

The amount of questions you have is any way in a region where you best would get a live mentor to go through.

Dan

 

[RiddhiPD]

Actually,I am bullet proved with NOT a single strategy.What I understand is to master even medium level strategy comes with experience.

Which I Lack.

Theoretical knowledge is fine and I can read as many books as I want but pain in market is completely different thing which no book would help me prepare.

What I intend to do is study only few strategies in great length.

For example take Short strangle.

1.When do I initiate it? What I should look for before initiating it.From where?
2.What position of greeks would make me feel good.[Practically,e.g i know vega short but how much short should it be in comparison to theta to give me a breathing room]
3.What strike price is best?
4.When Greeks start to change how do I react?
5.What adjustments are good and what are better[ for example to delta neutral - buy future or synthetic future?]

I Intend to go through these points one by one for 5-6 strategies at most.I am not going to be option teacher or write a book.I need to cover a month.I am hoping mastering 5-6 strategies and repeating them with discipline would make me enough money to live by

I already purchased one option course (paid dearly so I intend to get my money back:thumb:
I follow youtube and reading books.But as I said reality is quiet different and American option trading scenario is markedly different from ours due to less liquidity in next month series and huge bid-ask spread.
I am looking for live mentor but right now no luck.


In a nutshell,what do you think 5-6 strategies which are most important to know? which covers most market conditions?

 

[Somatung]

@RiddhiPD

Ok.

Now as told: Kindly give me time to work through your post. To spot on each and every question you have would be asked too much into my direction. But that is not main the point. I will make for my self an over view about all what you posted and then I will be back in this thread lasted on Sunday evening.

In the mean time take care / Dan

 

[oilman5]

Hallo RiddhiPD,
u have created a nice thread,and soon option expert Dan will explain most ,and guide u in your journey as option trader.When i want to learnt he helped me a lot, by giving reference of books ,also a good thread exists in his name where he clarified many a thing for new option learner.
My background: one yr learning parttime options.Material as available from various referred book. Basic understanding from OTA option material.
Lecture listened from Basic + advance options from BSE. Online learning from finideas.
From my past i know stocktrading ,so for leverage i am learning options.
On certain condition i use them.
1] bullish view - trend expected more than 5days = buy call option
2] NOW ITS VERY HIGH ,NO FURTHER UP JUSTIFIABLE= sell call
3] strong dn continuation expected, but public yet not participated = buy put
4] slowly price drift stopped,no further big fall expected in nifty, buy atm call
.......................................
moderate trend condition expected, for bullish play ,use vertical bull call strategy-, for moderately bearish use vertical bear put debit strategy.

now i am learning well side ways(when both directional move dont exist as high probability) - its basically Timedecay and understanding VOLATILITY, with cyclicity, a comparison to put historical vol, with implied vol, to see expectation build up. So straddle on theory , but actually using strangle sell to eat premium. Yes strongly understanding validity of low predictive VOL zone ,with eating premium makes this trade.
.....................................
others theoritical aspect imp i see is synthetics, which may help to managing leg.
For me this much is actually helpful.
for my directional option trade, direction bias from TA