iCharts Discussions

[SwingTrader]

[rkchart]

ST Sir, thank You for strategy,

These are the current call rates for dec and Jan respectively
Strikes - Dec , Jan
6500 CE - 54 , 124.5
6400 CE - 90.7 , 166
6300 CE - 138 , 218
6200 CE - 194.5 , 279
6100 CE - 262.6 , 342

my outlook is bullish
based on your diagonal spread guidelines i have identified SHORT dec 6400 CE / Long jan 6200 ce as strikes.
The hedge % comes to 32.509

Can u confirm if these strikes are appropriate ?

[SwingTrader]

[rajanadar]

Hi ST sir,
Thanks for providing a great information.

I had some questions -
1) How to enter diagonals if we enter a bullish view close to expiry, say three or four days before expiry?

2) How do we handle rollover on the expiry day when we are in trends which might span across months?

Thanks again!

[SwingTrader]

[SwingTrader]

6. Diagonal Position Management

Position management is very trader specific. I can give you few guidelines but one will have to develop their own rules that are tuned to their temperment.

1. Before taking the trade decide on an initial stop loss. This can be either NF/NS level based or % loss based. The other alternative is to use a trading system that gives buy and sell signals and stick to those signals for exits too (as one closes and takes trade on the other side).

2. Don't over monitor the position. Keep key levels in mind and just take a look at the position probably once or twice a day. Even this is not required unless price is going fast against your position. The key thing to watch is the long strike price. If NF goes below long strike price, it is time to watch the position carefully as below the long strike price we start losing intrinsic value of the long position. Still, if short position has significant value left in it then that will act as a hedge.

3. As expiry nears it one will have to watch more carefully as gamma picks up for the short option and can result in big fluctuations if price is near the short strike.

4. Have a profit target in mind that is % profit based. 20-25% is usually the max profit for a diagonal (ITM long + OTM short type with steady volatility thru' the trade). Once profit reaches 15% start looking for a reason to get out on a further profit surge intraday. Don't push your luck in the last week before expiry, profit can swing wildly.

5. AVOID HOLDING THE DIAGONAL IN THE LAST THREE DAYS BEFORE EXPIRY. The profit/loss swings will be crazy due to high gamma of the short option. There can be sudden profit surges but a position can go quickly into loss too depending on where NF is at that time.

6. Avoid initiating a diagonal (that uses current month short) in the last 7-10 days before expiry. One may not get a good hedge so late. Going too much ITM for long to get a good hedge is not advisable as it decreases profit potential significantly.

7. Generally, if profit is 15% or more and only three days are left to expiry, consider closing the position.

8. If one wants to carry the position to next month, square off the short option and short the next month option that is OTM (with respect to the long option). This converts the position to a vertical spread. One will then be able to hold the position for another month.

9. There are many other adjustments possible but it is best to keep things simple. I will introduce other adjustments if necessary in the future via examples.

This concludes lessons on Diagonals. Questions are welcome. I will keep posting examples to make things clear.

[rajanadar]

Thanks ST sir.

[paa]

ST Sir
Please let us know which option spread is suitable in uptrend, downtrend or sideways market?

Regards
Pramod

[vvsp]

Hello ST,

In continuation to the conversation about taking vertical spreads for 2 to 5 days and 50 to 200 points move in NF, suppose at 6383 NF I got a sell signal and took bearish put spread with long 6400 put and short 6200 put. If NF moves as expected and goes below 6300, is it OK to book profits in 6400 put and buy 6300 put to make the spread long 6300 put and short 6200 put?

Thanks,
vvsp.

[SwingTrader]

[SwingTrader]

[vvsp]

[paa]

Thanks ST Sir for your prompt response and valuable information. Please keep posting such valuables!

Regards
Pramod

[SwingTrader]

Examples of trading diagonals

Here is what I am planning to do. Instead of posting nicely selected examples which could be unrealistic, I will use a simple technical method to select bullish and bearish trades based on the signals and post examples based on the trade taken for each signal. This will give us all kinds of trades that would be more realistic and will give a good idea of what to expect if one is trading diagonals regularly. I will still have to use EOD data to keep things simple. For this backtest I will start the trades from Dec 2012 and take signals continuously, this should give us full one year.

The technical method is going to be a simple EMA crossover method with a twist on 60 mins NF chart.

*** DISCLAIMER : I AM USING THIS METHOD ONLY AS AN ILLUSTRATION. PLEASE DO YOUR HOMEWORK BEFORE USING THIS METHOD. ***

Chart Setup : EMA(13) and EMA(89) on 60 mins NF chart.

Buy Signal : EMA(13) crosses above EMA(89) and price then closes above nearest price pivot (daily closing basis). A continuation buy will trigger if price closes above any previous pivot and can be used to initiate a trade if one is not in an existing long trade.

Sell Signal : EMA (13) crosses below EMA(89) and price then closes below nearest price pivot (daily closing basis). A continuation sell will trigger if price closes below any previous pivot and can be used to initiate a trade if one is not in an existing short trade.

The only subjectivity is about the price pivot. I will still try and make the signals as clear as possible. For each signal I will : (a) Post a clear chart with the signal and the reason for taking it, (b) Select a diagonal based on the diagonal strikes selection guidelines (c) Post the P/L table for the diagonal.

Please let me know if there are any doubts about the method.

[sambhaji_t]

Dear ST,

Thanks a lot once again for your efforts.

One query :

19 NOV 2013 close (6230.50) was above 8 NOV high (6227) then 22 NOV low was 5983 almost 250 points down within next 3 days in such case do we need to keep SL ??