Escape's Options Trading Diary - Phase 2

[escape]

Dear Escape

You should start now with phase 3 as you never will get out of your losses with the kind of directional trading you do. As you are still in a learning stage, do it now for your own good. Phase 3 has to be:

Adjusting and handling losses.

You can do that by using this month series and next month series, even the volume on next months series is not so good.

You go long itm next month series and you do short atm when in loss with this month series. Calculate the loss you made with the itm option and add it to the atm option you sell. This kind of trading will improve your chance to recover losses you made in the past.

As next month itm series will loose less time decay when you are wrong, you sell this month atm series which will loose faster time decay compare to your next month series.

Such trades are called: Calendar Spreads. Even than: Also learn to adjust such Calendar Spreads in case market goes crazy and moves against any of your break even points. With out knowing how to adjust the calendar spread, you do your self not a good thing.

I know that you told in the first post of this thread that you do not hedge, but in the long run hedging this is the only way to survive and recover loses. You can strongly believe me in that.

All the best

DanPickUp

Dear DanPickUp,

Thank you for your posting and suggestion to start Phase 3 and giving me valuable direction. I'll go through your thread once again and specifically find out details on "Calendar Spreads".

On putting some thoughts, I have few questions in mind, will try to find out answers for those.

Questions currently I can thought of are:

1. When is right time to enter in "Calendar Spread" strategy? (1st week, mid of month or during last week of month), what are factors to decide this?
2. What is right strategy for "Calendar Spread" :

• a. Short for current month, Long for next month (As suggested by you)
• b. Short for next month, Long for current month (What are risk for this?)
• c. Sizing (same number for lots for Long and Short or different combination)

3. What to Short (PUT or CALL) and what to Long (PUT or CALL), how do I decide on this?
4. When to exit, what are factors to consider?
5. Do I exit both Long and Short at same time?
6. How are stop losses managed?
7. How many number of trades on monthly options calendar?

I know few questions may look very basic ones or may not be relevant, but being novice in Options strategies, I need to understand these before I can move forward.

Once I complete my preliminary work (need to identify how much extra fund would be required because of different margin requirement) and make plans (decide objective, risk management, etc.) ready, I will start phase 3 (possibly in 2 week from now).

Also I'm thinking should I continue Phase 2 for some more time even if I start Phase 3 (Current one with naked options and new one with Options Combinations/Strategies)?


Once again, thank you for your valuable suggestion, and after reading your post, I'm seriously thinking about phase 3.

:thanx:

Regards,
Escape

 

[DanPickUp]

Dear Escape

Yep, a lot of questions. Never mind, as I have some time today.

You enter the long leg when ever your rules give a go. What ever rules you use for pure directional trading, they will never work all the times. So giving you any new rules you could follow will not necessarily mean that your entries will be better. If you think you are unclear with that, read a bit in the thread of dear ST or dear SG or from any other good member in this forum.

Giving you a starting point when to enter any trade for a calendar: First week of the new month. This will give you more time for the long leg. If you feel save with what you do, you shorten the live of the long leg by entering a trade even in the second or third week of the actual month.

Now some words to the strategy:

Market trend up: Long itm call next month series and if in loss then you go short an atm call from this month series. Vice versa for trend down and there you use puts.

Why this way? Margin reasons. If you are long and you are right with your direction, you will not have blocked much money with your trade.

You short only when in loss with the long option from next month series and you short always option this month series. If you are long one unit, you short only one unit. The very specific name for this strategy is: "Diagonal Calendar Spread".

If you short two units, then it is called "Diagonal Calendar back spread" and your risk profile is changing.

If you short one unit this month series with the same strike level from your itm long option next moth series, it is called "Horizontal Calendar Spread". Again an other risk profile. So do not confuse them.

There are some other variations possible, but the mentioned once are the most known and there is information around in the net about them. Other variations are not mentioned in the net, as they are very much out of the box.

Next: If you have the full strategy running (Long and short as used for the "Diagonal Calendar Spread"), you must know your break even points on the up side and the downside. As far as I am informed, Option oracle works again and there you easily can see those break even points in the market.

As long as market stays between that break even points, your short should give you more returns compare what you lose on your long position and that can be the amount you lost on your long position.

Why does it work like that?

Time decay on the short works in your favor, as it vanishes faster compare to your long position. And that is why you sell this month and not next month series.

An other Greek to look at is the delta. The itm long option has a high delta and moves quick with the underlying. If you are right with your directional play, your profits are higher. The short option is atm and through that it's delta is less compare to any itm option. The short option will not move as heave as the long itm option does and this will reduce the risk which you take on this short leg.

You also do not buy this month series, as time decay works against you, even if market moves finally in your direction. If you use next month series you give the market and your self a bigger chance to be right. Most people do not understand that and argue about that the next months series is more expensive. Yes, that is right. But it loses time decay less faster compare to the short live time options of this month.

What you also can think of is to go long atm next month series and short itm this month series. But how ever you do it: Always long next month series and short this month series.

As told: As long as market stays between the break even points on each side, you do nothing and let the short position expire. After the short has expired, you still have the long position. Now you decide what to do with it. If market moves in your favor, you keep this position and if market not moves in your favor you close it and implement a new long position with the next month series.

If market moves strongly against any of your break even points, you start to adjust by rolling the position up or down in the direction market moves. This will widen your market spread. Rolling down means to buy back the short on the actual level and sell it next moment on the next strike level.

Example: If you are short the 5000 put this month series, you buy back this put and sell the 4900 put this month series. The same you do immediately with your long position. You roll it down. Vice versa on the upside break even point. Always first move your short position and after that position is rolled, you move your long position.

As with every thing in trading: Quality of the trades is first and not the amount of trades done. Also preserving capital is more important then any amount of trades done.

Good trading

DanPickUp

 

[escape]

Dear Escape

Yep, a lot of questions. Never mind, as I have some time today.

You enter the long leg when ever your rules give a go. What ever rules you use for pure directional trading, they will never work all the times. So giving you any new rules you could follow will not necessarily mean that your entries will be better. If you think you are unclear with that, read a bit in the thread of dear ST or dear SG or from any other good member in this forum.

Giving you a starting point when to enter any trade for a calendar: First week of the new month. This will give you more time for the long leg. If you feel save with what you do, you shorten the live of the long leg by entering a trade even in the second or third week of the actual month.

Now some words to the strategy:

Market trend up: Long itm call next month series and if in loss then you go short an atm call from this month series. Vice versa for trend down and there you use puts.

Why this way? Margin reasons. If you are long and you are right with your direction, you will not have blocked much money with your trade.

You short only when in loss with the long option from next month series and you short always option this month series. If you are long one unit, you short only one unit. The very specific name for this strategy is: "Diagonal Calendar Spread".

If you short two units, then it is called "Diagonal Calendar back spread" and your risk profile is changing.

If you short one unit this month series with the same strike level from your itm long option next moth series, it is called "Horizontal Calendar Spread". Again an other risk profile. So do not confuse them.

There are some other variations possible, but the mentioned once are the most known and there is information around in the net about them. Other variations are not mentioned in the net, as they are very much out of the box.

Next: If you have the full strategy running (Long and short as used for the "Diagonal Calendar Spread"), you must know your break even points on the up side and the downside. As far as I am informed, Option oracle works again and there you easily can see those break even points in the market.

As long as market stays between that break even points, your short should give you more returns compare what you lose on your long position and that can be the amount you lost on your long position.

Why does it work like that?

Time decay on the short works in your favor, as it vanishes faster compare to your long position. And that is why you sell this month and not next month series.

An other Greek to look at is the delta. The itm long option has a high delta and moves quick with the underlying. If you are right with your directional play, your profits are higher. The short option is atm and through that it's delta is less compare to any itm option. The short option will not move as heave as the long itm option does and this will reduce the risk which you take on this short leg.

You also do not buy this month series, as time decay works against you, even if market moves finally in your direction. If you use next month series you give the market and your self a bigger chance to be right. Most people do not understand that and argue about that the next months series is more expensive. Yes, that is right. But it loses time decay less faster compare to the short live time options of this month.

What you also can think of is to go long atm next month series and short itm this month series. But how ever you do it: Always long next month series and short this month series.

As told: As long as market stays between the break even points on each side, you do nothing and let the short position expire. After the short has expired, you still have the long position. Now you decide what to do with it. If market moves in your favor, you keep this position and if market not moves in your favor you close it and implement a new long position with the next month series.

If market moves strongly against any of your break even points, you start to adjust by rolling the position up or down in the direction market moves. This will widen your market spread. Rolling down means to buy back the short on the actual level and sell it next moment on the next strike level.

Example: If you are short the 5000 put this month series, you buy back this put and sell the 4900 put this month series. The same you do immediately with your long position. You roll it down. Vice versa on the upside break even point. Always first move your short position and after that position is rolled, you move your long position.

As with every thing in trading: Quality of the trades is first and not the amount of trades done. Also preserving capital is more important then any amount of trades done.

Good trading

DanPickUp

Dear DanPickUp,

Really appreciate for quick response and such a wonderful explanation.

Yes, list of my questions were long, and to my luck, you got some time to reply.

I never ever thought of going Long first and going short in case if you notice loss in Long position and building up strategy.

My biggest reason for not keeping Options overnight, shorting and avoiding Options strategies was to avoid mostly unlimited Risk.

I have read lots of documents about Options strategies, but never ever got courage to use Options Strategies and keeping positions overnight, as earlier whenever I kept Options positions overnight, I ended with huge loss.

Based on your inputs and other documents, I will be building some rules for this, and will seek your advise before I finalize same and go in for phase 3.

Regarding OracleOptions, yes I have used it (both old version) and recently updated version too. I have made some sample strategies, but whenever I notice Risk as "Unlimited" didn't got courage to use those strategies.

Also as you said about myth, my reason not to trade next months Options series were its high cost.

With your explanation, specially
"Market trend up: Long itm call next month series and if in loss then you go short an atm call from this month series."

changed my view about strategies. I'm much more comfortable now.

So I can go Long for next month Options first and if I notice loss into it, I have to go Short for this month's Option.

As in India, current month series ends on last Thursday of month, so I'm targeting to start using this strategies by end if this month.

I hope result of "Phase 3" will not only change my views about strategies, but for most of readers in this forum.

Thank you so much for this.

:thanx:

Regards,
Escape

 

[escape]

Bough 2 lots of Nifty 12OCT2012 CE 5600 @ 102.55, SL 99.10, CMP 104.45

 

[escape]

Bough 2 lots of Nifty 12OCT2012 CE 5600 @ 102.55, SL 99.10, CMP 104.45

Exit @ 105.55, profit of 3 points, less brokerages.

 

[escape]

Placed order to Buy 2 lots of Nifty 12OCT2012 CE 5600 @ 107.45, CMP 106.10 (R) Possible breakout

 

[escape]

Placed order to Buy 2 lots of Nifty 12OCT2012 CE 5600 @ 107.45, CMP 106.10 (R) Possible breakout

Order Executed.

Bought 2 lots of Nifty 12OCT2012 CE 5600 @ 107.45, SL 99.45, CMP 105.10

 

[escape]

Order Executed.

Bought 2 lots of Nifty 12OCT2012 CE 5600 @ 107.45, SL 99.45, CMP 105.10

SL hit @ 99.45, loss of 8 points, less brokerages.

 

[escape]

Bought 2 lots of Nifty 12OCT2012 CE 5600 @ 110.15, SL 100.45, CMP 111.50

 

[escape]

Bought 2 lots of Nifty 12OCT2012 CE 5600 @ 110.15, SL 100.45, CMP 111.50

Exit @ 117.40, profit of 7.25, less brokerages.