Comfortable profits from trading Nifty.

[jamit_05]

If you sell May 6300 straddle with 680 points upper BEP is 6980. When do you take action of buying March 6300CE ?

In normal course of day, for this may shorted straddle, when pe will fall ce will rise and vice versa and there is no Mark to market loss as one will adjust for the other. But, after a sharp move this link breaks; delta gets skewed. Then the shorted straddle or strangle starts to make mark to market losses. This is exactly when I intend to purchase March ATM option.

I am expecting that this will happen if and when nifty reaches 6500 within a week. Then I will buy ATM call at its prevailing price of around 70. If market continues its journey upwards then I am protected till march expiry. If it reverses direction, which is what I want, then I will get out of the purchased atm ce.

It is something brave I am trying, as I hv not traded options like this before.

 

[jamit_05]

This is a very good trade!

If one gets say 150 points for May 7100/5500 short strangle, upper and lower BEPs are 7250 and 5350 a range of 1900 points.

Nevermind the profits. Lets see the risk involved.

I hv backtested this for sharp moves in Apr, Jun, Aug, Sept of 2013. It does get painful pretty quickly as the moves were fast.

May 7100 and 5500 will start giving mark to market losses after one sided move of 250 odd points. One must get comfortable paying these losses. At one point the m2m loss is as much as 300 points. Where one starts praying for a reversal. And with only 150 points as collected premium, there is little room left for one to purchase insurance.

To summarize the risks:

1) If one intends to hold them till expiry then chances of any leg closing ITM is less, but when it happens probably only once a year (or twice) it will wipe a decent capital.

2) Till expiry, a lot of money will go into m2m losses. Sometimes it may even recover. A lot can go wrong in those few months. Just considering far away BEPs won't suffice.

 

[Somatung]

Nevermind the profits. Lets see the risk involved.

I hv backtested this for sharp moves in Apr, Jun, Aug, Sept of 2013. It does get painful pretty quickly as the moves were fast.

May 7100 and 5500 will start giving mark to market losses after one sided move of 250 odd points. One must get comfortable paying these losses. At one point the m2m loss is as much as 300 points. Where one starts praying for a reversal. And with only 150 points as collected premium, there is little room left for one to purchase insurance.

To summarize the risks:

1) If one intends to hold them till expiry then chances of any leg closing ITM is less, but when it happens probably only once a year (or twice) it will wipe a decent capital.

2) Till expiry, a lot of money will go into m2m losses. Sometimes it may even recover. A lot can go wrong in those few months. Just considering far away BEPs won't suffice.

Yes, this is very true in the long run. No more to say about this. It is a clear fact to know and it is a clear fact every shorter of strangles has to live with. If some body not can accept this, he must trade Long Iron Condors or Long Iron Calendar Condors which are Circuits.

The once who play those strategies (Short straddle and short strangle under what ever conditions and markets) have to be able to understand there trade adjustments and and how to protect them selfs against the real bad moves. Other wise non not even should consider to go for such kind of trades.

By the way: The trade example I showed is build on the bell curve and on the time frame which fund manager use when doing portfolios mainly on short option strategies. Such trades are, under normal conditions, not hold until expiry. Such kind of shorts are monitored every day and according to market moves and sentiments, the monitoring is even increased at critical levels and times.

 

[gmt900]

Yes, this is very true in the long run. No more to say about this. It is a clear fact to know and it is a clear fact every shorter of strangles has to live with. If some body not can accept this, he must trade Long Iron Condors or Long Iron Calendar Condors which are Circuits.

The once who play those strategies (Short straddle and short strangle under what ever conditions and markets) have to be able to understand there trade adjustments and and how to protect them selfs against the real bad moves. Other wise non not even should consider to go for such kind of trades.

By the way: The trade example I showed is build on the bell curve and on the time frame which fund manager use when doing portfolios mainly on short option strategies. Such trades are, under normal conditions, not hold until expiry. Such kind of shorts are monitored every day and according to market moves and sentiments, the monitoring is even increased at critical levels and times.

Yes, when I say BEPs are far away, I certainly don't mean one has to sit tight till expiry. Of course one has to monitor trade and take action whenever necessary including closing the trade with targetted profit.

As Somatung said in his earlier post, this will be a less stressful trade especially for traders like me who are still learning.

 

[sanjeev258380]

Just stay light fr 4 months...after election ..we will do blast

 

[jamit_05]

Yes, when I say BEPs are far away, I certainly don't mean one has to sit tight till expiry. Of course one has to monitor trade and take action whenever necessary including closing the trade with targetted profit.

As Somatung said in his earlier post, this will be a less stressful trade especially for traders like me who are still learning.

I hv shorted option pair and am expecting to be jolted pretty good and hence expect to learn. And I suggest that you hv same set of expectations. There is no assurance of having more or less stress in strangles as compared to straddles.

Let the learning begin.

 

[jamit_05]

Comparing it with:

Short: 60Jun 544+276-= 820
Long: 64CE+60PE Apr = 67+67=134

Net Credit: 686;

For a 80 point less credit, we get to bring the wings closer by 100 points for CE and 500 for PE... not bad, trading 80 points for 600!

I will place the trade for the later, towards the days end.

Let take an update:

Short: 60Jun 566+216= 782;
Long: 64CE+60PE Apr = 89+46=135;

Cost of buy back: 647;

Around 40 points of gain. This gain is due to change in IV and hence can be recalled anytime in the week.

 

[jamit_05]

As a follow-up of the thought process, hv sold

100 units of 63/62 @ 74/57;

SL is 10%. Rs.1300; 13 points.

My expectation is that the price will touch Daily e15 and then come back up, spending atleast 3 days and a weekend in the process.

63/62 trading at 67/60; Still safe.

 

[jamit_05]

Tracking May 6300 strangle.

356+320=676;

 

[jamit_05]

Comparing it with:

Short: 60Jun 544+276-= 820
Long: 64CE+60PE Apr = 67+67=134

Net Credit: 686;

For a 80 point less credit, we get to bring the wings closer by 100 points for CE and 500 for PE... not bad, trading 80 points for 600!

I will place the trade for the later, towards the days end.

Expiry Date Strike Price Last Traded Price
24-Apr-14 6400 -77.3
26-Jun-14 6000 530
26-Jun-14 6000 224.2
24-Apr-14 6000 -51.25
625.65

Got out at 626; Not bad a deal.

Will take up the May straddle instead.