High Profit EOD based option Strategy for Advanced Traders

[SaravananKS]

Hi to every body and to you SaravananKS

I will expand my comment about your above post, so others also can sort out some of there thoughts and maybe questions or diffusions they have about option and option strategy trading.

You have to short strangles on different strikes. That is what you have and how you call that. Acquiring more and more knowledge about option strategies can make sense under certain circumstances. But option trading is not all about option strategies. Option strategies are just a part of it like oil is part of cooking. Get the book " The bible of option strategies" from Guy Cohen. So you have a book at hand you always can use and that will do for quit a while when want to get a bit deeper into option strategies. No need for any other books to get an overview and understanding about that topic. All what is written there is done in a way every one can understand. All the strategies presented there are pure vanilla strategies and not expanded or mixed up with other legs and tools.

Now you ask for some sort of "Option trading system". Simple told: Use a future trading system and instead of futures you trade options with the signals which occur in that future trading system. If the underlying has enough volume on the option strikes and the filled you get are on a high level, you can do that with atm or even itm options. You may are surprised by that answer and if so. what is in your mind about what an option trading system is? To me that is a mechanical system and for that you need TA which is done through/with indicators and math. If you want you even can bring in some common sense to any go or not go in such mechanical systems.

Now let me spot a bit to the next point: What is option trading the way you do it now? It is not based on any TA, isn't it? Can you make profit with it, can't you? You know that answer by your self. So by what you do now, you use other facts and tools instead by what you would do when using a mechanical trading system. By what you do now you use math, you use the option Greeks, you use common sense, you use FA, you have to know the market calendar and so on.

So why this guy is posting so much instead of just giving some simple answers? Here we go:

By what I just posted it should be clear to anybody that we can trade options in different ways. Now the question comes up: Which way do we want to trade those options? Do we want the mechanical way or do we want the non mechanical way. Sort that out and you will know how much more you will need on information to trade options. If you trade them mechanical with atm and itm options, you will not need to learn about option strategies. If you want to do it the other way round, you will need some more time to understand the strategy you want to trade and implement and then concentrate more on such kind of knowledge. Here the above mentioned book will show you between what you can choose. It would go behind the scope to explain all that now here in this place, as I already made an expanded post here.

I am happy to see that SaravananKS has already start using my presented link. Request others which have open questions to use them intensively as the knowledge presented there is of high quality. Take care / DanPickUp

By the way: Here the sun came up, snow outside, so will be a great day.

Thank Dan for such a detailed reply which will be use full not only for me but also any options traders:clapping:

 

[DanPickUp]

@Pannalal

Thanks for you kind words. I am glad if you people can profit from it. I have learned a lot here in the forum, specially about future trading. Many names I could name like Smart_trade, SwingKing, SG, Saint and so on and on. So what I did/do is always giving back to the forum in my way. In the past it was with a thread about option trading and many post about it and in the present with those links. Posting in an expanded way like the few post I did in the last few days is incredible time consuming. Now to your questions:

I guess you know that I trade at the CME in the USA. So to some specific questions in your market I am not able to give the specif answer. Margins: Per lot (which are 50 options) you face normally 25'000 RS with your India broker. I do not know how they calculate it when you trade your one or two short strangles at once. Munde told yesterday that he has a good deal with India Infoline http://www.traderji.com/futures/89068-day-trading-nifty-futures-1516.html#post918151 and then read on to post 15162. Do also follow this guy here in that thread: http://www.traderji.com/trading-diary/88670-nifty-options-trading-raj-393.html#post917970 as he is also an option seller. Healthraj is the owner of that specific thread. Good guy.

Next topic: I do not calculate the gain in % by my self, as OpVue is doing that work. OpVue does not support any option data from your market (Einstein has cleared that point with OpVue), so I not can do that work for you. But as you program your software, include such a formula in it. The net result is a net result when the money you made is in your pocket. Before that it is always a computed theoretical result, how ever you do it. As more advanced your software is you plan to create, as more you can do with it. If you are able to write your program as far as to be able to show analyzing pictures, at that moment you are able to picture your ideas in advance and to see the theoretical max profit you will make at its best. Other wise you have to calculate it the way you do it now and keep that doing day by day. By the way: I have such an excel file but I have no idea how it was written or how it was created. Here just a screen shot which may gives you some ideas how some think like that does/could look: http://i43.tinypic.com/aaw4t3.png That excel file is not available any where and it is not for sale. Had to promise that to my mentor when he gave me that as a present many years ago.

Coming to the question about which month we should use for our option trades, in this case: Short strangles on STDV (In some cases at once implemented and in other cases by leg in. This already depends again on your acceptance of what risk level you want to face). First of all: There is no one rule about that. Here again: If there IS a rule, then it is again and again:"Trading in your comfort zone" and nothing else. What is fine for me is absolute out of questions for others and vice versa. It all depends on what kind of risk level we can handle and mentally are able to handle. High volatile markets face a bigger risk compare to low volatile markets when it comes to option selling. Commodity markets, which you not can trade with options on your Exchange, have a less chance to spike up or down 20% a day. Index futures on other hand face that risk some times. So in commodity I take the risk of selling options in the last month, even the return is less and in Index futures I prefer to sell options around three months far away. Those sold index options are bought back or rolled into the next series after two months. Why? I do not want to face the even increasing risk in the last month by unexpected events. That is my comfort level and others do have other comfort levels. Guess the "Trading in the zone or trading in the comfort level" is now clear to every body.

As you even mentioned six months far away options, there is an other way of option selling and that is called: Leap option trading. Not possible in your market, but one of the clever ways to trade options on stocks when those options face a loss. But that is an other topic. Take care / DanPickUp

 

[DanPickUp]

@Pannalal

The above post rolled up your trades with short strangles and I have there include your questions you came up with in your last post which you pointed to me. Why did I do it that way? I do not fully understand your new presented idea, so though I do it on the strangle. Your new idea shows an atm debit credit spread and at the same time you show an itm put debit spread. Never traded such stuff, so not can comment on it. I prefer either one of them on the side it is needed in a trendy market or the credit spreads. I would say Novice30 has given you the answer to your question about that idea. Sorry, can not help you in that case. Take care / DanPickUp

 

[pannalal]

Many thanks to all the members for nice interaction we are having here. Danji with his expert knowledge has given links to nice tools, referred good books and web site. He has given lot of suggestions also.

My only concern if some people (particularly those who are new to options) may follow my strategy blindly. So, I am making certain changes in my strategy. I request all the members (whether novice or expert) to follow the certain ground rules when using my strategy:

Please do not do naked option selling. Instead of that use bear call spread. For example, if you sell 6600 CE, buy 6700 CE. This reduces your margin but your exposure to risk is limited (otherwise it is unlimited).

What can happen if you sell naked options. Nifty spot is at 6300. You are selling naked option 6600 CE (assuming that Nifty never touched 6416, so it will not touch in this month also. This assumption is wrong because there is a probability of Nifty crossing 6600 by 30th Jan 2014 is around 18% and this will keep changing every second). Below, I give some examples:

(1) RBI decides that CRR will be reduced by 1%. Though, generally such decisions are taken at the time of quarterly or annual RBI Policy but its RBI's prerogative to decide about CRR. If CRR is reduced by 1%, suddenly market will have huge money and next day Nifty may open with 500+ points. So, 6300 may become 6800 or even 7000.

(2) If RBI reduces repo rates by 50 points, the money will become cheaper (though it will hurt bank deposits), the Nifty may go up by 300 to 500 points.

(3) If Federal Bank (of USA) decides that instead of buying $85 billion bonds every month (now, it is reduced to $75 billion every month), it will buy $100 billion bonds every month, Nifty is likely to go up.

These are just a few examples. Anything may happen overnight or on Saturday and Sunday. There may be election result, RBI Policy, GDP growth or sentiments of institutions or operators. So, please avoid selling naked options at any cost.

Happy trading to all members.

 

[Shantala]

Dan n Pannalal,

Thanks for discussion and links.

Really useful for novice traders like me

 

[DanPickUp]

Dan n Pannalal,

Thanks for discussion and links.

Really useful for novice traders like me

Thanks for your kind words.

It is always a pleasure to see or post for one of the most beautiful names here in the forum, specially as it is a name or an avatar from a woman (I hope at least). By the way: What does that beautiful name Shantala mean?

Happy new year in advance to you. Take care / DanPickUp

 

[ananths]

Dear Dan,

I have no words to appreciate you for your contribution to options trading in this forum. You did it in your thread and doing it continuously. You are the master. Like Sachin in Cricket.

@Pannalalji, thanks for highlighting the risk..so that novice people wont take it as an easy method to make money. Hope everyone knows what risk they are taking and then trade. A known risk is much better than the unknown one. Your knowledge in options is excellent too. hats off.

One question...just wanted to know whether your software considers the vola also whilst giving all the strategies? For example now vola is very low and does it give the same strategy when vola is high or low? Is probability calculation considers the vola also?

As mentioned by Dan, I'm an option trader who trades in his comfort zone. Once I got the idea of how to trade options I stopped further research. May be there is much more than what I know. Yes...learning never stops. Like Dan's thread this thread is becoming a very useful thread for option traders. Excellent.

 

[LondonVisitor]

Please do not start with naked option selling. It is risky and only for those who know what they are doing.

Yeah, thanks. I want to combine options selling with Futures trading which I am already doing. So they will complement. I don't mind risking the money you are talking about in selling options. Did you publish your strategy for January expiry?

 

[DanPickUp]

Yeah, thanks. I want to combine options selling with Futures trading which I am already doing. So they will complement. I don't mind risking the money you are talking about in selling options. Did you publish your strategy for January expiry?

@LondonVisitor

First of all: Welcome in the thread. Interesting name you have. Have been in London many time and love it.

Now my second point: As you ask him may I ask you: What is your strategy for January or how do you trade your short options with the future leg/s? As he takes his time, I guess it would not be more than fair enough when you also bring in some thing into this thread by telling a bit more in detail about what you are doing. Are you doing synthetics or what are you doing? You know: Most here are curios what others do . Take care / DanPickUp

 

[pannalal]

Dear Dan,

I have no words to appreciate you for your contribution to options trading in this forum. You did it in your thread and doing it continuously. You are the master. Like Sachin in Cricket.

@Pannalalji, thanks for highlighting the risk..so that novice people wont take it as an easy method to make money. Hope everyone knows what risk they are taking and then trade. A known risk is much better than the unknown one. Your knowledge in options is excellent too. hats off.

One question...just wanted to know whether your software considers the vola also whilst giving all the strategies? For example now vola is very low and does it give the same strategy when vola is high or low? Is probability calculation considers the vola also?

As mentioned by Dan, I'm an option trader who trades in his comfort zone. Once I got the idea of how to trade options I stopped further research. May be there is much more than what I know. Yes...learning never stops. Like Dan's thread this thread is becoming a very useful thread for option traders. Excellent.

Dear Ananthji,

Many thanks for your nice post. My software computes implied volatility for each option (and it slightly differs from NSE IV). Below, I reply your questions:

(1) The probability is calculated based on Current Nifty Spot, Strike Price (or Nifty price for which you want to compute probability), Number of Days and Volatality. Then, it refines using past Nifty spot data for 5 years.

(2) The software asks the range (you should be in profit in Nifty remains in this range). Then, it asks number of legs (these can be 1, 2, 3 or 4). In case, number of legs are 1, 2 or 3, you can also tell the software to hedge with Future (along with options, it tells to buy or sell Future). It computes hundreds (or thousands) of strategies, then you can sort it based on returns, probability, delta etc. (Obviously, nobody has time to study thousands of strategies so I choose according to my taste).

As, I prefer to short the options, I choose this type of strategy. However, it gives almost all types of strategies (except calendar spread). The key thing is you need know even the name of these strategies. Just you give me range of Nifty and Number of legs and I shall give you the strategy. For example, you want a strategy where you should earn profit if Nifty remains between 6000 and 6600 and you want 2 legs. You can also use 3 legs or 4 legs (choice is yours).

As an example, I am giving you strategy where you will be earning money if Nifty remains between 6000 and 6600 (this may not be best strategy but one of the strategy given by the software, giving as example):

Transaction to be done on 30 Dec 2013 for Base Index at 6316.10
Sell 6000 PE at Price 17.43
Sell 6600 CE at Price 25.40
Net Points Received: 42.83

Delta: -0.07792
Gamma: -0.00169
Theta: 2.17770
Vega: -8.47427
Rho: -0.38160

Loss for Index equal to 5500 on 30 Jan 2014 is -457.17
Loss for Index equal to 5550 on 30 Jan 2014 is -407.17
Loss for Index equal to 5600 on 30 Jan 2014 is -357.17
Loss for Index equal to 5650 on 30 Jan 2014 is -307.17
Loss for Index equal to 5700 on 30 Jan 2014 is -257.17
Loss for Index equal to 5750 on 30 Jan 2014 is -207.17
Loss for Index equal to 5800 on 30 Jan 2014 is -157.17
Loss for Index equal to 5850 on 30 Jan 2014 is -107.17
Loss for Index equal to 5900 on 30 Jan 2014 is -57.17
Loss for Index equal to 5950 on 30 Jan 2014 is -7.17
Profit for Index equal to 6000 on 30 Jan 2014 is 42.83
Profit for Index equal to 6050 on 30 Jan 2014 is 42.83
Profit for Index equal to 6100 on 30 Jan 2014 is 42.83
Profit for Index equal to 6150 on 30 Jan 2014 is 42.83
Profit for Index equal to 6200 on 30 Jan 2014 is 42.83
Profit for Index equal to 6250 on 30 Jan 2014 is 42.83
Profit for Index equal to 6300 on 30 Jan 2014 is 42.83
Profit for Index equal to 6350 on 30 Jan 2014 is 42.83
Profit for Index equal to 6400 on 30 Jan 2014 is 42.83
Profit for Index equal to 6450 on 30 Jan 2014 is 42.83
Profit for Index equal to 6500 on 30 Jan 2014 is 42.83
Profit for Index equal to 6550 on 30 Jan 2014 is 42.83
Profit for Index equal to 6600 on 30 Jan 2014 is 42.83
Loss for Index equal to 6650 on 30 Jan 2014 is -7.17
Loss for Index equal to 6700 on 30 Jan 2014 is -57.17
Loss for Index equal to 6750 on 30 Jan 2014 is -107.17
Loss for Index equal to 6800 on 30 Jan 2014 is -157.17
Loss for Index equal to 6850 on 30 Jan 2014 is -207.17
Loss for Index equal to 6900 on 30 Jan 2014 is -257.17
Loss for Index equal to 6950 on 30 Jan 2014 is -307.17
Loss for Index equal to 7000 on 30 Jan 2014 is -357.17