Low Risk Options Trading Strategy - Option Spreads

[tnsn2345]

I made a post related to budget trade in 2009. Here are related posts.

http://www.traderji.com/options/26217-paper-trading-nifty-straddles-12.html#post330742
http://www.traderji.com/options/26217-paper-trading-nifty-straddles-12.html#post331879

One of the best thread on budget trading is by Sunil (missing him in TJ now-a-day).

http://www.traderji.com/trading-diary/30324-annual-tryst-nifty-union-budget.html

happy trading

Dear AW,

I realised that taking trades for such important days involves some external thinking too (other than reading charts) which IMO is wrong as I trade only the charts. But due to sentiments and news floating around - newspapers, friends, TV, colleagues etc you are bound to be distracted to the developments outside other than the charts. And this thinking influences decisions arrived from the charts. So I realised that the best thing to do is not to do anything and sit on cash on such day.

So like we have 'dry day' on a few occasions in a year, such important days are dry day for trading. So chill out with some beer and enjoy the 'dry day', next day onward is business as usual, treading and trading a known domain by reading charts.

Regards,

 

[prashyrao]

I made a post related to budget trade in 2009. Here are related posts.

http://www.traderji.com/options/26217-paper-trading-nifty-straddles-12.html#post330742
http://www.traderji.com/options/26217-paper-trading-nifty-straddles-12.html#post331879

One of the best thread on budget trading is by Sunil (missing him in TJ now-a-day).

http://www.traderji.com/trading-diary/30324-annual-tryst-nifty-union-budget.html

happy trading

Sirji, one doubt: Sunil ji's strategy is to go for LONG straddle, and you have put in a SHORT straddle. And both are profitable!! Whoa!!
But, please help me here: when IV shoots up, isn't it better to go LONG first and close it immediately after the even AND then short the straddle, since IV takes about a day to 'heal'?

 

[Talon]

After long time posting here, it's like coming back home!!
OTM call Reverse Calendar spread + OTM put Calendar spread.
I feel this should be the one with least risk.
-Talon

AW10,
Can you comment the above setup.

 

[MurAtt]

One of the best thread on budget trading is by Sunil (missing him in TJ now-a-day).

happy trading

Missing him everywhere

 

[columbus]

I think market will go down like this ,till the BUDGET.
The markets fell so badly till now,that at one point they will bounce back.
Then the govt will pat their back.
In case they still go down, they say BUDGET has nothing to do with markets,
putting blame on GLOBAL ques.
If markets do well ,then they issue statements likes MARKETS ARE BAROMETER
OF BUDGET.

 

[AW10]

Sirji, one doubt: Sunil ji's strategy is to go for LONG straddle, and you have put in a SHORT straddle. And both are profitable!! Whoa!!
But, please help me here: when IV shoots up, isn't it better to go LONG first and close it immediately after the even AND then short the straddle, since IV takes about a day to 'heal'?

It depends on when you are initiating the trade, and when you want to exit.

For long straddle to work - we need to open when iv is low, and time the exit when iv is high.

For short straddle - open the trade during high iv time, and wait for exit after the event when iv has cooled down.

happy trading.

 

[AW10]

After long time posting here, it's like coming back home!!
OTM call Reverse Calendar spread + OTM put Calendar spread.
I feel this should be the one with least risk.
-Talon

If you rearrange the positions then this trade will end up in 2 positions of
1) long feb call+ short feb put (bullish position for feb)
2) long mar put+ short mar call (bearish position for mar)

As feb series will expire before the budget event, I think, it will pass the high volatility to march series for somedays and then volatlity of march series will drop.

So if you are planning to close calender spreads, on feb expiry, then probably march options will not be cheap at that time.

I would rather construct a position for each month instead of calender position.

Maybe your strategy will workout with march/april calender, but not sure if April series is correctly priced and has sufficient liquidity at this moment.

note - above are based on my views, i have no fact or backtesting to support it. So please validate them before you take decision.

happy trading

 

[AW10]

I think market will go down like this ,till the BUDGET.
The markets fell so badly till now,that at one point they will bounce back.
Then the govt will pat their back.
In case they still go down, they say BUDGET has nothing to do with markets,
putting blame on GLOBAL ques.
If markets do well ,then they issue statements likes MARKETS ARE BAROMETER
OF BUDGET.

typical of "Grab the Credit" and "pass the blame". And global events, fii, etc are always easy target to blame.

We had great bull period but no one will say that it was due to fii inflow. But it was our growth story. And now when market is down 15%, it is all due to fii outflow/global event/oil price.

US mkt is sitting at crucial point of 1325 level which is the starting of 2008 crash. Will be interesting to watch how our market reacts if US mkt goes for correction.
Yahoo headline like "longest winning streak of dow", "dow above 12k", are some of the media contrarian signals. Moreover, bullish trend in commodity prices and stock market does not stay togather for long. Higher commodity price will impact the business, and hence the market.

But all global central banks have great tool in hand to bring down the commodity prices. Just start buying dollar and as dollar rise, all commodity prices will fall and inflation is gone. Interestingly, dollar index is also sitting at very important support level of 77/78.

So lets see what comes next. Atleast for me, I am not fighting the fed hence bullish on dollar.

happy trading

 

[tnsn2345]

It depends on when you are initiating the trade, and when you want to exit.

For long straddle to work - we need to open when iv is low, and time the exit when iv is high.

For short straddle - open the trade during high iv time, and wait for exit after the event when iv has cooled down.

happy trading.

Friends, also to add to the above, do consider Theta in such setups, by definition Theta favours short straddle / strangle setups. Hence it is important to note the timing of the set up, Theta / Price is high post half period and thereafter accelerates exponentially. Moreoften, short straddle / strangle setups give favourable results.

Also note that IV is a relative term, so apart from ATM options IV, their relative position to OTM and ITM options IV needs to the gauged (through Volatility Smile)

Regards,

 

[tnsn2345]

If you rearrange the positions then this trade will end up in 2 positions of
1) long feb call+ short feb put (bullish position for feb)
2) long mar put+ short mar call (bearish position for mar)

As feb series will expire before the budget event, I think, it will pass the high volatility to march series for somedays and then volatlity of march series will drop.

So if you are planning to close calender spreads, on feb expiry, then probably march options will not be cheap at that time.

I would rather construct a position for each month instead of calender position.

Maybe your strategy will workout with march/april calender, but not sure if April series is correctly priced and has sufficient liquidity at this moment.

note - above are based on my views, i have no fact or backtesting to support it. So please validate them before you take decision.

happy trading

IMO, calender spreads should be set for medium TF holdings. Hence decision should be made on the basis of weekly charts and not on the daily charts / numbers. The gestation period of such setups is relatively large. Calender spreads can be rewarding if taken after middle of the current month when the time decay of the current month options hurts (for long positions) and the same can be offset / compensated partially by next month options.

I have occasionally tried such setups but IMO there are many opportunities (with the similar risk) for shorter TF setups (involving current month Options). Also Calender spread setups involves having two opnions, bullish in current month and bearish in the next or viceaversa, hence requires a compartmentalised thinking to execute, hold and manage such setups. I would put such setups in the category of wealth creation (investment of savings) and not income generation (trading activity) and hence should be used to create wealth (low risk) once the savings reach a sizeable figure.

Regards,