iCharts Discussions

[SwingTrader]

[hiflyer]

Dear ST,

Thanks for your guidance.

[SwingTrader]

[hiflyer]

[SwingTrader]

[hiflyer]

Dear ST,

First of all, thanks a lot for all your guidance.

I have been backtesting diagonal spreads for past few years data. What i have noticed is that the far month is quite illiquid in most of the cases. If your entry signal comes within 2 weeks from 1M expiry, you have to take long in 3M and short in 2M and in such cases this lack of volume hurts you. The volumes are too less to get you a fill at the desired price.

I was researching on finding a good solution to this. One alternative that comes to my mind is instead of going long in 3M option, we can trade the 2M future and short the 2M option. The position can be taken in a ratio such that the delta of this position matches the delta of the original diagonal spread.

The advantage is that volumes in 2M futures are much higher, while the flip side is that margin required is almost 3-4 times. But, if you had not planned to leverage your diagonal to the hilt, then you won't mind the increased margin.

What I would like to know from you is that, in what ways the payoff of such a trade differ from that of a diagonal spread.

Thanks in advance.

[chiragbvyas]

Dear Friends ..

Positive cross over 13 x 89 on 60 min. chart ... also closed above cross over candle high. Is it considered valid or have to wait for 13 x 233 crossover too ?

[SwingTrader]

[SwingTrader]

[chiragbvyas]

[SwingTrader]

TRADE ADJUSTMENTS

There was a bullish crossover of 13/233 EMA around Dec end. If one had taken a bullish trade around that time then the trade turned out to be a losing one. So how could one have adjusted the trade to turn it into a smaller loser or maybe even a winner?

Here are some ideas on diagonal trade adjustments. Please do note that I am giving one idea that is low risk and the other is high risk. Please understand the risk and only then make adjustments using these ideas.

1. Rolldown the short option

This has been mentioned before. Short option can be rolled down multiple times as price keeps going down (and short option loses most of its premium). The idea is to recover as much cost of long option as possible as long as price keeps going the other way (down in this case).

As we keep rolling down the short option, the trade goes from two strike wide diagonal to one strike wide, then a calendar spread and then a one strike wide bearish call diagonal and then to a two strike wide bearish call diagonal. One should not go further than this as it will increase the risk significantly. Also, try and make sure the short strike is at least around two strikes above the current NF price.

2. Convert to ratio and rolldown

This is risky as we will have one naked option short. This adjustment must be done ONLY if you understand the risks and are prepared to adjust trade further quickly if price moves against you.

To do this, roll down the short option one strike down (to make the spread one strike wide) but short two contracts instead of the one. The idea is to recover the cost of long option quicker if price continues down. If price moves back up then you have breathing space only until the short strike and you must adjust quickly (roll up the short again and remove the extra short).

The roll down of two shorts can continue until the spread turns into a bearish ratio spread that is two strikes wide. It is suggested that one stop at this point as a spread wider than this would be risky if there is a price reversal up. Do note that always keep a good gap between NF price and the short strike when adjusting.

For the Dec trade (Jan expiry), if one had initiated a bullish spread then the first adjustment would have resulted in a smaller loser after adjustments and the second adjustment would have turned the trade into a profitable one (but at a greater risk).

Which adjustment to choose depends on the trader based on his risk appetite.

[NiftyTracer]

I had taken the bullish crossover trade of Dec end, by entering in a Bull Call spread (7800c Feb Long and 8000c Jan short). However, on bearish cross at Jan beginning, I simply got out of this bullish diagonal at a small loss AND took the Bear Put spread (7800p Feb Long and 7600p Jan short) which went off very well. Had there been another reversal, I would have again reversed by liquidating bear put spread and entering the bull call spread. On some earlier occasions, I did try this adjustment method, without much success. We do not know how far the market is going to go after each crossover, in which trade to make adjustment, and which one to square-off. Simpler thing is to flow with the trend, whatever method for trend one follows.

My take on adjustments is that when we start making adjustments on seeing reversal on charts, we are simply not accepting the fact of reversal and entering into defending the original position, entering into a fighting mentality. This mentality impacts other trades also. That said, every trader has to formulate strategy, which best suits his/her personality.

[amitagg]

[SwingTrader]

[chiragbvyas]