Low Risk Options Trading Strategy - Option Spreads

[AW10]

Decay of next month sets in once before current months positions starts getting rolled over to next month and then 1-2 weeks before actual expiry...

I don't think so.. Timedecay work for all options at all the time. Though their effect start getting more and more prominent as they come to their end of life.
To keep things simple, I mention a linear decay in timevalue from current TValue to 0 on the day of expiry, but theoretically the graphs is logarithmic (or exponential, don't remember exactly).
So while front month option, due to lower life decays at much faster rate, far month option decays at comparatively slower rate. This gaps between decay of both options timevalue widens near the expiry of front month option, cause they start loosing value at much faster rate.

Effect of intrinsic value is same on both options.

Personally, I prefer next months options since it gives me a chance to off set some of the risk using current months options. But it can back fire also...

I bot 5200 call of this month at 52 (sl 44) to offset some of the possible risk of the shorts i'm carrying of the next month.

This is something unique part of Linkon's trading. He is using market's money, to manage his risk on other trades. From that perspective, selling Far month options certainly gives lot more flexibility and wide profit zone.

Happy Trading.

 

[AW10]

Hi AW10,

One always get wider spread if next month's options are written for rangebound startergy. If we go for current month then range is narrow & possibility of SL trigger is high.
In this case even volatility increase will not affect much as we have higher time decey value. (????)
Is it always better(for rangebound stratergy) to have next month's option written instead of current month's option?
Will this work good if one exit it in couple of weeks instead of waiting till last day? (I mean to say probability of winning trade will be more in next month option as compare to current month's option for rangebound statergy)
Pls share your experience...

Rahul, here are my views on your questions..

In this case even volatility increase will not affect much as we have higher time decay value. (????)

Near month options are always more sensitive to change in option greeks then far months options. Pro option trader who design strategies to trade GREEKs, exploits this beautifully.
If you want to start in this area, then start with Calendar spreads strategy, which try to exploit one of the easiest GREEK i.e. Theta or timedecay.
Leave trading Vega (i.e volatility ) for later stage.

Is it always better(for rangebound strategy) to have next month's option written instead of current month's option?

Not true always. In above case, 45days range for nifty might be easily 500 points.. though it might seem that u have 500 points of safety zone, but that is well within normal move of nifty (i.e. 1 std dev) in 45 days of life. And it is quite possible to have 15 days straddle giving you 250 points range (which is say then 1.5 std dev range of nifty move in 15 days)

From that perspective, near month straddle is safer then far month.
This also depends on your objective of trading.. If you are relaxed trader who will adjust position once in 3 days, then far month strategies are better. But if u daytrading or adjusting daily then far months should be the focus.

Will this work good if one exit it in couple of weeks instead of waiting till last day? (I mean to say probability of winning trade will be more in next month option as compare to current month's option for rangebound strategy)

If that is what u want, i.e. to exit in 1week, then u need to plan that in your trade and see the reward /risk ratio. Expiry day risk graph, break-even points etc are of no use then.. You should look at the risk graph scene in next 1 week's period and make trading decision.

Happy Trading

 

[DanPickUp]

Decay of next month sets in once before current months positions starts getting rolled over to next month and then 1-2 weeks before actual expiry...

But playing next months series is tough as BID-ASK is always wide as market moves away from the strike price.

Personally, I prefer next months options since it gives me a chance to off set some of the risk using current months options. But it can back fire also...

I bot 5200 call of this month at 52 (sl 44) to offset some of the possible risk of the shorts i'm carrying of the next month.

Hi linkon7

You asked for comments and now you answer by your self.

So why asking for comments ? Did you want to test other ones or what is the reason ?

You say : But playing next months series is tough as BID-ASK is always wide as market moves away from the strike price.

What about scalping option prices, you can give limit orders, you can choose OCO orders or you even can work in that situations with credit spreads orders .

You say, you offset some positions by buying this month options for the risk you have on other sold options from the next month.

How those this look on your analyze picture ?

Also here : If I was misinterpreting your valuable thoughts, you have to excuse my bad English.

Take care

DanPickUp

 

[linkon7]

Hi linkon7

You asked for comments and now you answer by your self.

So why asking for comments ? Did you want to test other ones or what is the reason ?

I trade options according to my plan. Which is very dynamic and position changes every few days. Asking for comments is only to assure myself that i have not left any what-if scenario untouched. I dont like market catching me with my pants down, so all views are welcome.

You say : But playing next months series is tough as BID-ASK is always wide as market moves away from the strike price.

What about scalping option prices, you can give limit orders, you can choose OCO orders or you even can work in that situations with credit spreads orders .

Most options traders trade the hrly or 15 min tf and look for daily tf for direction.... I prefer using 2 min tf to max 5 min tf for my day trading and i trade options since they offer me better MM...so for me BID-ASK does matter...
If i'm trading a pair, then i place a limit order on one leg and the moment it gets executed i trade the other leg by giving a market order...

You say, you offset some positions by buying this month options for the risk you have on other sold options from the next month.

How those this look on your analyze picture ?

My charts tell me that market is going to face a lot of resistance above and the short term trend is up... i'm hoping that we enter a phase of consolidation around these levels till direction is clear...

I lack patience and normally like to keep the premium market gave me with lot of thanks... I'm holding a delta neutral strategy for the next month and if the short term trend is up... i'll make my position bullish in the short term. Normally i would carry naked nifty longs but when this months options are prepared to take responsibility for my risk, why trouble NF...

 

[sagarkapoor]

Hi guys,

I'm a relatively new player to strategy based options trading although I've traded and burnt my fingers in naked options trading earlier. I have carried out the following trades, can someone please comment on the trades:

Long Straddle:
June - 5100 Call bought @ 89
June - 5100 Put bought @ 122

Bull put spread:
July - 5000 Put bought @ 162
July - 5100 Put sold @ 196

Looking forward to hearing from everyone

 

[Talon]

Hi AW10,
How do we interpret change in OI, when should we assume it's been written and when should we assume it is bought? Thanks for knowledge sharing, I have been learning a lot from you.
-Talon

 

[DanPickUp]

I trade options according to my plan. Which is very dynamic and position changes every few days. Asking for comments is only to assure myself that i have not left any what-if scenario untouched. I dont like market catching me with my pants down, so all views are welcome.

Most options traders trade the hrly or 15 min tf and look for daily tf for direction.... I prefer using 2 min tf to max 5 min tf for my day trading and i trade options since they offer me better MM...so for me BID-ASK does matter...
If i'm trading a pair, then i place a limit order on one leg and the moment it gets executed i trade the other leg by giving a market order...

My charts tell me that market is going to face a lot of resistance above and the short term trend is up... i'm hoping that we enter a phase of consolidation around these levels till direction is clear...

I lack patience and normally like to keep the premium market gave me with lot of thanks... I'm holding a delta neutral strategy for the next month and if the short term trend is up... i'll make my position bullish in the short term. Normally i would carry naked nifty longs but when this months options are prepared to take responsibility for my risk, why trouble NF...

Hi linkon7

Thanks a lot for your open comments.

It is legal and clever to ask for comments to assure your self that you have not left any what-if scenario untouched.

As I am clearer now with the way you trade, I understand the reasons behind your way of selling next months options and buying for short protection in the months options.

When I was asking about the analyse picture, I looked at the trade from the point, that you do that only with options and then the picture would have looked wrong.

In your case, there is the future as second derivative in the strategy included and that makes perfectly sense.

I wish you furthermore successful trades.

DanPickUp

 

[DanPickUp]

Hi guys,

I'm a relatively new player to strategy based options trading although I've traded and burnt my fingers in naked options trading earlier. I have carried out the following trades, can someone please comment on the trades:

Long Straddle:
June - 5100 Call bought @ 89
June - 5100 Put bought @ 122

Bull put spread:
July - 5000 Put bought @ 162
July - 5100 Put sold @ 196

Looking forward to hearing from everyone

Hi

As you go for a July bull put spread, you must be bullish for the next few weeks for the nifty. Is this correct ?

At the same time you trade the June long straddles, which would show that you are neutral for Nifty on a short time frame. Is this correct ?

What is your trading plan for the straddle in details ?

What is your stop loss for the put spread or do you have an adjustment plan to convert the spread into some thing else when market moves against you ?

Take care

DanPickUp

 

[sagarkapoor]

Hi

As you go for a July bull put spread, you must be bullish for the next few weeks for the nifty. Is this correct ?

At the same time you trade the June long straddles, which would show that you are neutral for Nifty on a short time frame. Is this correct ?

What is your trading plan for the straddle in details ?

What is your stop loss for the put spread or do you have an adjustment plan to convert the spread into some thing else when market moves against you ?

Take care

DanPickUp

Hi Dan,

My strategy for July is mildish positive but currently I'm neutral with high on volatility hence the straddle for this month.

Since I've chosen a long straddle I'm banking on the fact that Nifty will give wild swings in either direction and I plan to wind up my position within the next 2 weeks on that move.

For the SL I don't have a fixed Nifty target but the amount of Loss which I can bear and that is 2k on both the strategies, currently I'm down 700 on the straddle and down 100 on the spread.

I don't really have an adjustment plan as such apart from my SL

 

[linkon7]

Hi guys,

I'm a relatively new player to strategy based options trading although I've traded and burnt my fingers in naked options trading earlier. I have carried out the following trades, can someone please comment on the trades:

Long Straddle:
June - 5100 Call bought @ 89
June - 5100 Put bought @ 122

Bull put spread:
July - 5000 Put bought @ 162
July - 5100 Put sold @ 196

Looking forward to hearing from everyone

your june straddle long will be tough...since u need 211 points from 5100 to gain...

Short term trend is up... and plenty of resistance above...news flow is uncertain... now it seems Hungary is joining the pigs... so up move is very cautious... this is a short month with expiry on 24th... means time decay will come in from next week... You decide on the probability of 5312 or 4889 being hit...

Your July spread doesnt look safe either, with so much time, things can turn any given day... the difference is just 34 points...it wont come down in a hurry means chance of gaining that 34 points is again limited...