Low Risk Low Returns- Target 50 NF per month per NF Lot

[gmt900]

Reason for Selling Strangle at 6300 and 6000.

Price is expected to be stay in this bracket. If it breaks it, the trader will resort to NF to cover that leg. And when the trade becomes profitable will neutralize it.

I thought of entering into this short strangle today, but then chickened out,since I have two other short strangles going and thought I may not be able to manage three trades .
I would like to make one point here. When I tried to manage short strangle with NF, I found it more difficult than doing with options. Dan had mentioned this in his thread.
Can you give your thoughts on this?

 

[DanPickUp]

I thought of entering into this short strangle today, but then chickened out,since I have two other short strangles going and thought I may not be able to manage three trades .
I would like to make one point here. When I tried to manage short strangle with NF, I found it more difficult than doing with options. Dan had mentioned this in his thread.
Can you give your thoughts on this?

@Gmt900

In which post did I mention or comment on the subject the way you post it here? Kindly provide the link to that post or posts.

That does not mean that you are wrong or right, no comment from me on that and no critique, just would like to see the post I posted it the way you present it here.

Take care / DanPickUp

 

[gmt900]

@Gmt900

In which post did I mention or comment on the subject the way you post it here? Kindly provide the link to that post or posts.

That does not mean that you are wrong or right, no comment from me on that and no critique, just would like to see the post I posted it the way you present it here.

Take care / DanPickUp

Hi Dan,
I had to search thr' your entire thread as I only remembered the comment reg using options intead of futures `for adjusting short strangle.
As you know I am not tech savvy and hence could not send you the link of the post. You may please check post no 214 of your thread " Option Trading with Dan PickUp". I am pasting the relevant comment below:
Now some come up with the question:
Hey Dan, what about the future. Why should I go for a short strangle or long butterfly or even a condor when I just can trade the future against my short option legs? My answer: Well man, that is a possible way of handling such strategies. But are you a proven profitable day trader and are you in the situation to make some money with the future? Be very true about the answer you give now to your self. So think twice before risking your wife's shoes and shirts. Playing with two devils which are the short straddle and the future, your wife could be become the third one

I felt that you meant that it is preferable to use options instead of futures to modify short strangle.
I had gone thr' another thread by Wastej ( 2009 thread) on Delta Neutral Strategy in which he had suggested adjusting trade using futures.
I had tried using futures but I find it easier to use options.
In fact I wanted to ask your opinion on this but I did not.
Now, jamit's post has given me an opportunity to raise this subject.
Thanks and regards,
gmt900

 

[jamit_05]

Rightly said GMT.

Managing a short strangle gone sour using NF is tough.

So lets put on our thinking caps:

We set a 300 point Short Strangle assuming that the price will not stray much further out. We are expecting a range formation.

As days pass, price could:

1) Make a decisive break of an important level (like 6200 and 5900 currently).
Solution: In that case, there is no point making amends. Price is not ranging anymore, it is trending. It is sensible to square off the losing leg. In addition, one could take a trending position by buying options or spreads.

2) Or price could just stray slowly near (or above) the range. This is not threatening because time decay is fast and furious in the last few days.

3) Or price could remain in the range. (I'd prefer it)

 

[jamit_05]

A simplified reason behind shorting strangles.

An option premium decays to zero at expiry. So, in 20 trading days 100% premium is lost..... 5% each day, but not linearly. This is measured by a greek called Theta.

However, the problem is the dependence of premium value on underlying price changes. This is measured by a greek called Delta. If this delta is neutralized then one can efficiently employ Theta.

 

[gmt900]

Rightly said GMT.

Managing a short strangle gone sour using NF is tough.

So lets put on our thinking caps:

We set a 300 point Short Strangle assuming that the price will not stray much further out. We are expecting a range formation.

As days pass, price could:

1) Make a decisive break of an important level (like 6200 and 5900 currently).
Solution: In that case, there is no point making amends. Price is not ranging anymore, it is trending. It is sensible to square off the losing leg. In addition, one could take a trending position by buying options or spreads.

2) Or price could just stray slowly near (or above) the range. This is not threatening because time decay is fast and furious in the last few days.

3) Or price could remain in the range. (I'd prefer it)

I agree with your analysis (with whatever little experience I have).
The point which we could dwell upon is how catastrophic losses could be avoided by taking preemptive action ( hedging ). In fact this is the only issue one needs to handle properly and then 3-4 % monthly returns could very easily be made.
I am thinking of short strangle as my staple strategy after I develop greater confidence in handling it before it goes sour.
I believe I could learn it only by practice.
Anyway, you seem to agree with me that it is better to use options than futures for managing short strangles.
Incidentally, my broker tries to scare me by telling me about " Unlimited losses". I have realised because he is worried about his brokerage, especially
when i allow my option positions to expire worthless.

 

[timepass]

I agree with your analysis (with whatever little experience I have).
The point which we could dwell upon is how catastrophic losses could be avoided by taking preemptive action ( hedging ). In fact this is the only issue one needs to handle properly and then 3-4 % monthly returns could very easily be made.
I am thinking of short strangle as my staple strategy after I develop greater confidence in handling it before it goes sour.
I believe I could learn it only by practice.
Anyway, you seem to agree with me that it is better to use options than futures for managing short strangles.
Incidentally, my broker tries to scare me by telling me about " Unlimited losses". I have realised because he is worried about his brokerage, especially
when i allow my option positions to expire worthless.

Maybe experiment with BNF options first. Lesser capital required, higher premiums and decay.

 

[jamit_05]

.
.

The point which we could dwell upon is how catastrophic losses could be avoided by taking preemptive action ( hedging ). In fact this is the only issue one needs to handle properly and then 3-4 % monthly returns could very easily be made.
.
.

Hedging an already hedged position will come with additional cost.

Lets analyse our choice at the moment:

We know that the trend is up. So hedging only the upside is sensible.

We could buy 6400 CE at Rs.9; We would still carry a 43 point risk if Nifty continues upward momentum.

6400-6300-66+9=43 points.

But, this is only the worst case. We still have the choice to neutralize this spread in case of a breakout. In that case there will be a loss, albeit alleviated by time decay.

Yes, this feels much better than unlimited risk for a small cost of Rs.9

 

[gmt900]

Rightly said GMT.

As days pass, price could:

Make a decisive break of an important level (like 6200 and 5900 currently).
Solution: In that case, there is no point making amends. Price is not ranging anymore, it is trending. It is sensible to square off the losing leg. In addition, one could take a trending position by buying options or spreads.

Maybe squaring off would be the last resort, if you are not able to manage the trade with hedging in time

 

[jamit_05]

Consider the following two cases. Both are taken from a time when the shorted strangle went wrong the very next day.

Case 1: When the Strangle was not hedged.

Strangle shorted on 30/01/2012
Spot 5087
Sold 5300 CE and Sold 4900 PE @ total credit of Rs. 81.65

With each passing day, the hedge cost continued to rise putting us in a loss.
81.65
93.3
103.4
112.7
146.7
151.35
140.05
151.25
176.2
143
149.5
156.95
255.9



Case 2: When the strangle was hedged by 5400 CE.

Starting with the same dates, only difference is instead of collecting 82, we started with 62, since Rs.20 was the cost of the additional leg. Now the progession is

62.2
56.4
57.25
62.3
66.75
68.25
64.95
65.45
72.4
64.35
69.7
74.3
94

See the difference betw 256 and 94; Risk gets significantly reduced. The interesting fact is, inspite of the hedge going wrong we got several opportunities to get out near break even. Note the 64.95 in Red. At that time the 4900 PE leg went under 10, and had no need to be bought back. So 64.95 - 10 = 55 ! That means, inspite of being wrong we would still be in slight profit (expenses notwithstanding).