Hi
Subject number eight: How to implement a strategy?
I think, this part is underestimated here in Traderji as it is the Sudoku part in strategically option trading. The word Strategically now becomes its value.
There are different ways to implement a strategy in the market. We have the choice to implement a strategy at once with all legs or we can start with one leg and add other legs one by one. More ways are possible.
Here some examples to give you an idea what is meant in case you are not familiar with it:
Long straddle with two legs: If done at once, we buy at the same time one atm call and one atm put.
If done by leg in: First buy the atm call or the atm put, depending on what you expect market will do, wait until market moved and then buy the atm put or call.
Long iron condor with four legs: If done at once, you would place your four legs and then the strategy would be executed.
If done by leg in, you have various combinations to do so. To trade in that way, you need a very clear understanding of how the whole strategy is produced. You further need a very clear understanding about how options can be used like long put, short put, long call, short call. You have to know under what market conditions each of these legs is implemented in the market and what strategies are best used for different market conditions. If I want to go further, you even have to know how to use different time frames from different options, especially when it comes to horizontal spread trading. The next level than is to understand different derivatives and start to combine them with options on different levels with different time frames.
Back to the long iron condor. Possibilities you have when leg in that strategy strategically:
Go long one put or call. Later add all other legs at once or move on with leg in one by one.
Go long one put and one call. Later add the other two legs at once or move on with leg in.
Go long one put and short one put. Later add the other legs at once or move on with leg in.
Go long one call and short one call. Later add the other legs at once or move on with leg in.
Go short one otm put or one otm call. Later add the other legs at once or move on with leg in.
Go short one otm put and one otm call. Later add the other legs at once or move on with leg in.
Go long one otm call, one otm put and short one atm call. Later leg in the missing leg.
There are more ways. Try to find it out by your self as you now have the idea behind it.
If you start to trade like that, you will find many ways to implement a strategy. That is more or less the only way to bring a strategy over the zero line, for those who use a matrix for option trading.
If you do trade options strategically, as told many times: Use a matrix.
Eight subject closed
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DanPickUp
