iCharts Discussions

bpsingh · White Belt Joined: 16 May 2008 Posts: 54

ST,
In your reply to paa, for Bullish Trade you have suggested combination of Long Feb 6100 call + Short Jan 6300 call. The hedge % for this combination is 22% (today's closing prices: Feb.6100 call=218/50, Jan 6300 call=48 ) . This is below your suggested ratio of 30%.

Will not the combination, of Long Feb 6000 call + Short Jan 6200 call, be a better combination as hedge % comes to 30.9% (Feb 6000 call=291/60, Jan 6200 call=90/20). This also satisfies ITM-OTM criterion. though 6200 is more of ATM. [/quote]

SwingTrader · Posted: Tue Jan 07, 2014 6:04 pm Post subject:

drsuhask · White Belt Joined: 09 Dec 2009 Posts: 9

Respected ST Sir,
After reading this thread twice-thrice , I started searching this type of spread from Jan2007. Every month I could find this type of spread with more than 30% hedge %age ( I am preparing spreadsheet of this). But in October 2007 , I found pairs with hedging %age more than 50%. What to do in this situation? My opinion is to avoid as this trade had loss of almost 30% i.e. Rs.4300/- per lot of 50. What will be your opinion?
Secondly, we are in trade and position goes in loss, say 13% as in our short position from 17th Dec13 . Suppose the shorted option is having very less value say 10-20 Rs, e.g. in this case Jan.14 PE 5900 is having less value while Jan6000PE is having value Rs.40-50. Can we square off 5900 & freshly short 6000PE in this case. The strike difference between long option(next month or far mth) & short option ( this month or next mth) will become 100, but we will get more hedge %age. I don't know what will happen , I want your expert opinion .
Thanking you.
Dr.Suhas Kothavale

SwingTrader · Posted: Wed Jan 08, 2014 9:31 am Post subject: Re: Diagonal spread

UMESH0909 · White Belt Joined: 02 Jul 2013 Posts: 139

Dear ST sir,

Is there any disadvantage in taking diagonal with non hundred strike prices lets just say strike of 6150-6350 instead of 6100-6300.
Because sometime we get 30% hedge in this.

Thanks

UMESH0909 · White Belt Joined: 02 Jul 2013 Posts: 139

Dear ST sir,

I am a novice trader and had gone through all the diagonal combination of last 1 year after reading the thread and found very useful for person like me who cannot see charts all the time.

In my mind one doubt has been created, during reply to 'drsuhask' you mentioned 3rd month long case. what disadvantage we have in India due to low volume and open interest?
It might me very silly question but i don't understand the linkage with respect to diagonal.
Could you please elaborate this point?
Thanks in advance
Regards
Umesh

SwingTrader · Posted: Wed Jan 08, 2014 6:56 pm Post subject:

SwingTrader · Posted: Wed Jan 08, 2014 7:00 pm Post subject:

SwingTrader · Posted: Thu Jan 09, 2014 10:54 am Post subject:

Modification of TA method to take diagonal trades

Keeping in mind what @vinay28 said recently, here is a modified version of the TA method I had posted earlier to take diagonal trades. The purpose is to reduce whipsaws to some extent. I would have liked to see someone else post their own method but let me start by posting my little bit refined method.

*** NOTE: All discussion below relates to NS 60 mins chart

The 13/89 EMA crossover method I posted earlier deliberately introduces few wrong trades. This was done to see the P/L variation in both good and bad trades. This new method described here is very similar to it, I am just changing the EMA 89 to EMA 233 to give the trend more room to bounce around. This method obviously will keep us in the trend longer but the downsides (there is always downside for everything) are as follows:

1. Trend change signals are delayed. We can't do anything about it. The idea of taking a longer/slower moving average is to keep us in the trend longer.

2. We need additional trade entry criteria (in addition to the crossover + pivot break) and can't wait only for EMA crossovers and subsequent pivot break to enter as they will not happen frequently now (as we are taking a longer EMA).

Entry Criteria

We will have two ways to enter a trade:

1. EMA crossover of 13 EMA and 233 EMA followed by a daily close above/below prior significant pivot

2. Close above/below significant pivot (in the direction of trend already established). This is used for fresh entries or re-entries.

We will need the criteria #2 to enter a new trade after expiry or re-entries after getting stopped out.

NOTE: In addition to this, one could choose to enter the trade at the end of day after pivot break IF price seems to be clearly closing below the previous day's low. Few of you had asked if one should wait for a day or two for confirmation before taking the trade. I think at the most, what I have just said above is what I would do.

The attached chart gives recent examples of trend change, entry & re-entry criteria. "Blue" circles are exipry dates. A break above prior pivot after an expiry gives us an entry into the next trade.

Now....I have done this after a little bit of thought, this should be a bit better than the very crude method I had posted earlier for the specific purpose of taking many trades. The above method should be much better than that as it would keep us in line with the main trend a bit longer. I am requesting everyone to study and check this themselves on the charts and refine as per your ideas before using it for live trading.

I would like to see if you have anything different - your own trading methods with similar or different indicators, refinements to what I have posted etc. If you have, please post. Keep one thing in the mind - we need approx. one trade per month on average so we take at least one diagonal trade per expiry. Also, please try and keep the method you post simple.

Hoping to see some methods posted by others here soon...

Gemini · White Belt Joined: 28 Apr 2009 Posts: 166

Dear ST,

Hello again ! I have been watching interesting discussion on this thread.

I have "found" one diagonal trade today : Long March 63P and short Feb 61P. With price when executed being 154 and 47.25, it seems to have healthy ratio of 33%. ( I got short signal today and hence executed after 2 pm) .

Look forward to profitable journey.

Happy Trading !

SwingTrader · Posted: Fri Jan 17, 2014 7:16 pm Post subject:

givemegold · White Belt Joined: 12 Sep 2010 Posts: 121

Dear ST bhai, I've been closely following this very interesting and excellent discussion.

I would like to say, this type of trading strategy would have benefited a trader had they taken any position in coalindia - options.

Due to large dividend declaration option prices were adjusted by 29. It is a nightmarish situation should some one taken a naked longs in call options.

It would be really wonderful to the core, if you could come out with some writeup in this regard with chart and calculation.

I could not do it because i am out of station and busy with some other work.. not trading since last two months. I donot have proper details in this regard.... which is why this request.

Best Regards

SwingTrader · Posted: Sat Jan 18, 2014 10:48 pm Post subject:

SwingTrader · Posted: Tue Jan 21, 2014 10:28 am Post subject:

The 6100-5900 PUT diagonal initiated on 17th Dec would have got stopped out yesterday as it hit 15% loss. This was an OTM diagonal and these are always risky. An ITM long + OTM short diagonal or completely ITM diagonal would have been in profits (ITM diagonal) or around breakeven (ITM Long-OTM Short).

For those who are still interested in following this method. There are few important things to note:

1. As far as possible avoid OTM diagonals unless you are a super timer. I am not, so I try and stick to ITM Long-OTM Short diagonal or sometimes even ITM diagonal.

2. Can't stress the importance of your timing method. It need not be precise but has to be roughly right.

3. The method I had posted earlier - 13-89 EMA crossover + pivot break - was to specifically introduce few bad trades to test P/L of both good and bad trades. 13-233 EMA crossover + pivot break is probably more suitable as it targets the larger trend and results in fewer whipsaws. Re-entries become important in the 13-233 combination as one will need these for entering trade every month.

Ideally use a method you are most comfortable with in picking the direction of market.

There is one another way to select a diagonal :

Once you get a buy or sell signal look at a strong support or resistance above/below which you signal will get negated. The nearest strike around that level will be your long option strike.

Example 1:

The Dec 17th short trigger - this short signal would obviously have been negated if price went above 6400. This could have been used as the long option strike price and two strikes below it can be the short strike. So the diagonal selected would have been LONG FEB 6400 PUT + SHORT JAN 6200 PUT.

Example 2:

Suppose you are now bullish and want to initiate a diagonal today. We would be wrong if price went below 6150 or 6000 (these two are nearest significant supports). The possible diagonals are :

LONG MAR 6200 CALL + SHORT FEB 6400 CALL (ITM-OTM diagonal)
LONG MAR 6150 CALL + SHORT FEB 6350 CALL (ITM diagonal)
LONG MAR 6000 CALL + SHORT FEB 6200 CALL. (Deep ITM diagonal)

One can pick one of these based on how aggressive one wants to be.

On the other hand, if one is bearish at the moment then the LONG MAR 6400 PUT + SHORT FEB 6200 PUT is the diagonal to go for as 6400 is a clear resistance above which we would be wrong about our bearish scenario.

As you can see this can't be mechanical method. One needs to select diagonal properly based on the confidence one has in the near term direction of the market. In any case, it is a good idea to stick to ITM-OTM or ITM diagonals. This way one can afford to be wrong and still profit or get away with a losing trade cheaply.