Paper Trading Nifty Straddles

[linkon7]

Look at it this way... You got hit by lightning and survived. Now would you take precautions against lightning next time you go out of ur house...

Options is a probability game and market's 650 points reaction was a bolt from the blue. But we have to accept the probability of such event and play accordingly. Those who bought straddle or strangle didnt expect to win a lottery ticket either. just an effect of a zero sum game. probability is what we can factor in with options.... not abnormality...!

 

[AW10]

Hi AW10,

Have gone through the problems mentioned by you number of times with lot of unpleasant memories......
I am not disagreeing with your views as they are very valid but just putting forward my views so that I would like to learn from you.....

....
Smart_trade

ST, I fully agree with your views that are supported by good experience.
I am also not in favour of adjusting a loosing position but as an option trader, we do get tempted from time to time to adjust our loosing position.

The current situation is more of an exception and going by probabilty, it should not matter much in long run. One loosing trade, doesn't make me a looser.

Only issue that comes in here is that if we don't use right position size (specially around such known events), then there is chance that it willl pass control account to our broker due to margin call and then they don't care for price and just square off the position.
IMO, this is a risk that we trader are always exposed to and my risk mitigation step in such scenario is to take the bitter pile and close the position at loss.
Once I am out of the position and not carrying any emotional baggage, then look at market afresh and take new position.

Looking forward for more suggestions on this topic.
Happy trading

 

[linkon7]

just a retrospect on the issue of expecting the unexpected reaction to our election.

Market as on friday :
General consensus was that a fractured mandate was factored into the price so election would be a non event. The toss was between UPA or NDA and market was ok with either coming to power as long as left front didnt form a govt. In case the mandate gave a bad result, we would see a gap down and the fact that plenty of big money missed the bus and was waiting for a dip to get in. So the downside would be bought aggressively and the up side looked capped. The market was trading at a 16x PE and valuations looked stretched and seemed a correction was due post election results.

What were the alternatives :

1. To play a short 3400 - 3800 strangle : It gave protection to 3250 on the down side and about 3950 on the up side. This seemed the most logical strategy considering broader range was within the safety zone. But any surprise might stretch us on either direction and we might open gap up at 3900 or or gap down at 3400. Line of action would be to buy / sell nifty futures and close the losing leg and hence work towards a recovery. The probability of loss was relatively low.

2. we could play the long 3400-3800 strangle or long 3100 - 4000 strangle or play the 3700 straddle or some variant of long strangle / straddle. There was just 9 days left for expiry and the time value was exceptionally high. Unless there was a big surprise making money from this strategy looked difficult. The probability of a major profit was relatively low considering a 200 points gap up or a 300 points gap down would hardly make much difference to the value of the straddle or strangle. ( intrinsic value replacing time value).

3. Covered call or covered put : this strategy was directional with a limited protection on one side. Still covered call i.e. buying the NF and selling ATM call would look like a preferred strategy as there was cushion on the down side (dips being bought). The probability of a loss looked less remote for a covered call and more likely for a covered put.

4. long Calender spread : Buying June 3700 call and selling may 3700 call kept the lid open on the upside. or short calender spread: selling june 3700 call and buying may 3700 call kept the lid open on the down side. June call has to counter aggressive movement on either direction while May is used to bring the cost down. The profit target would remain small depending whether i am long or short. either calender spread protected me against exaggerated movement or incase it became a non event. I opted for this strategy.

This were my line of thought and my adopted strategy to the mega event. I would appreciate if everyone gave their thought process and the rationale for adopting their strategy.

 

[myvineet]

Look at it this way... You got hit by lightning and survived. Now would you take precautions against lightning next time you go out of ur house...

Options is a probability game and market's 650 points reaction was a bolt from the blue. But we have to accept the probability of such event and play accordingly. Those who bought straddle or strangle didnt expect to win a lottery ticket either. just an effect of a zero sum game. probability is what we can factor in with options.... not abnormality...!

yes , we don't take precaution against lightning everyday but when the weather dept. has issued warning for lightning & thunderstorm & you still not take precaution then its your fault not bolt from blue...

my views for sure

vineet

 

[linkon7]

yes , we don't take precaution against lightning everyday but when the weather dept. has issued warning for lightning & thunderstorm & you still not take precaution then its your fault not bolt from blue...

my views for sure

vineet

when the weather dept. has issued warning for lightning & thunderstorm, why venture out of the house.
Tell me, if i told you on friday, i would pay you 10 thousand for every 100 Rs you bet for a 650 points gap up / down in just 55 sec of trading on monday, how much would you bet...?

It was not the 650 points that caused the damage, it was the 55 sec where no trading happened. You really think you need to protect against such events in future...?

 

[munde_77]

Is this thread " Paper Trading Nifty Straddles " closed

 

[munde_77]

This seems inactive or closed

 

[bandlab2]

today i sold 4400 stradle for a combined preminum of 425 rs. bought 5000 call, 3900 put for total 90 rs as insurance.

 

[AW10]

Hope you don't mind me extending your post

Trade reason - Benefit from high premium before the budget day. Expecting premium to fall due to timedecay and drop in IV post budget. Selecting Short Straddle strategy as it will benefit for timedecay on 2 option positions. Protecting unlimited risk part of strategy by buying far OTM call and put.

Trade open date - 3/July.
Nifty 4400 July Short Straddle
4400 Call = xxx
4400 put = xxx
total = 425

Target Premium - 300 or less (+125 pts)
Stop loss - 550 (-125 pts)
Time limit - ready to hold till expiry
Breakeven point = 4825 on higher side / 3975 on lower side.

note - though reward risk ratio is 1:1, but probability is in our favour.
=================

Happy Trading

 

[myvineet]

AW da,

i have bought 4500CE & 4500PE at different time means bought 4500PE (NIFTY AT 4650) & 4500CE (nifty at 4200)....this way i tried to reduce the cost of straddle...

can we know how you prepare yourself for this event means what position you have now ?

just have a curiosity that how master of options prepare himself for big event..it will be a study material for us...

thanx & regards