iCharts Discussions

lokreddi · White Belt Joined: 25 Sep 2015 Posts: 19

Dear ST Sir,

As per nifty condition it is in bearish mode. can i average the 2016 Jan7900ce with CMP..

Kindly advice ..

T/Regards,

Lokesh

SwingTrader · Posted: Tue Dec 08, 2015 9:19 am Post subject:

Alchemist · Yellow Belt Joined: 09 Aug 2010 Posts: 853

Hi ST - quick question, at NF 7900 I initiated a bearish diagonal by buying Jan 8000 PE @ 210 and at the same time selling Dec 7800 PE at 80 giving me 38% hedge

Now today, NF has closed at 7715 (185 points profit) however Jan 8000 PE has closed at 315( 105 points profit) & Dec 7800 PE has closed at 160 (80 point loss). Net profit only 25 points (even after 185 points fall).

However my real question is , while the hedge provided was only for 38%, the profits eaten by the shorted put is almost 75% i.e 80 points out of 105 points? Shouldn't it eat 38% profits only ?

Not sure why this has happened, will help if you can explain.

Cheers
SH

shaheerzaman · White Belt Joined: 05 Aug 2014 Posts: 93

Alchemist,

My thoughts on your question.

This happened because of vertical fall of nifty is last 3-4 days. That is why the near month put premium shot up more than the far month put premium. Please remember current month volatility is always more than far month for options.

If you let the trades continue into the next few weeks you will see the advantage of the far month kicking in and the prices coming back to their proper hedged rations. That is where the benefit of diagonal trades kick in.

Thanks
Shaheer

SwingTrader · Posted: Wed Dec 09, 2015 10:50 am Post subject:

SwingTrader · Posted: Wed Dec 09, 2015 11:10 am Post subject:

Alchemist,

I am assuming you initiated the position on 03.12.2015 (based on the prices you have mentioned for the puts). If you see net position delta for the 8000-7800 put diagonal was around -13 when you initiated it. This means the diagonal will move about 13% of the futures move (this again changes with futures price as delta would also change). This also explains the low profits for the diagonal along with changes due to sudden volatility change. The net position delta for diagonal increases as time passes due to greater time decay of the short option. Which means you get larger moves as time passes but not initially after you initiate the position.

There is one another thing. After you enter a diagonal if the price moves significantly in your favour then the delta of both long and short option begins to converge (both get closer to 1.00) this means diagonal will stop profiting much from that point on (net position delta will be very low) and it would be time to adjust the position (widen the spread).

If you want larger moves in your option spread then a vertical spread might be slightly better (but the downside risk also is greater).

Alchemist · Yellow Belt Joined: 09 Aug 2010 Posts: 853

ST - thanks for the reply, seems I need to learn a lot about options. And yes you are right, I opened this diagonal on 3rd Dec.

How did you calculate the delta by the way? I wouldn't have opened this spread if I knew delta was only 13% ... but is this normally the case whenever you initiate a diagonal?

Also, if I increase the spread, you mean I book loss in 7800 PE and sell something like 7700 PE or 7600 PE ? Won't it increase my risk as if mkts reverse and go back to 7900 I will end up losing?

Cheers
SH

SwingTrader · Posted: Wed Dec 09, 2015 5:43 pm Post subject:

Alchemist · Yellow Belt Joined: 09 Aug 2010 Posts: 853

Thanks ST !

pmg123 · White Belt Joined: 14 Nov 2009 Posts: 25

Hello ST,

Thanks a ton for your valuable inputs on option trading in general and Diagonal spreads in specific.

from what i have understood from your article, please confirm if my below understanding is right ?

Assuming I have a bullish outlook for JAN'16.
Currently NIFTY is @ 7874;

BUY NIFTY FEB16 7900 @ 185
SELL NIFTY JAN16 7700 @ 55

Hedge% = 29.72

Please confirm if the above understanding is right ?

Thanks in anticipation!

SwingTrader · Posted: Sat Dec 26, 2015 6:54 pm Post subject: Re: RE:

pmg123 · White Belt Joined: 14 Nov 2009 Posts: 25

Thanks for your valuable guidance.

Let me paper trade this and see how it goes through the rough's of daily volatile price movement.

Thanks once again.
Smile

ninjadude · White Belt Joined: 29 Jan 2013 Posts: 128

BELATED MERRY CHRISTMAS AND A HAPPY , PROSPEROUS NEW TRADING YEAR 2016 TO ALL THE TRADERS HERE
2guns

hiflyer · White Belt Joined: 13 Aug 2014 Posts: 7

Dear ST,

I have a few queries regarding option selection.

1. Can i use any ratio other than 1:1 for my diagonal spread? How will it affect the performance of my diagonal spread?

e.g. say my desired hedge is 35% and say my preferred spread is ATM long and 2nd OTM short but this spread is not providing the desired hedge. Instead of shifting to ITM or OTM long, can i ratio my preferred spread such as to obtain desired hedge?

2. Can i use delta of the spread as measure of hedge?

I believe you use "short option price/long option price" as measure of hedge as you wish to compare performance of spread vis-a-vis naked long option. But most of us trade normally in futures and hence comparing the spread performance vis-a-vis naked futures will give us a better idea. For this reason, can we use delta of the spread as measure of hedge. What delta value should we look for to obtain reasonable hedge?

Looking forward to your valuable suggestion. Thanks in advance.