iCharts Discussions

[rk_a2003]

...Mostly when same strike gets same premiums markets / scripts take U-Turn with a Jet speed....

This is the central point of your presentation. If it is right your preposition is right. But how to back test this...no clue.

How ever, Option spreads hedge with time value depreciation of shorted option.

In this case both the options time value is against us and I read that only 30% of the time markets trend..... means rest of the 70% it will be range bound. Then 70 % of times our trade may go wrong.

Chirag, this is not to discourage....just putting up my initial thoughts after reading your post.

I hope ST don't feel that we are cluttering his thread.

[chiragbvyas]

Dear R K,

I accept every knowledgeble option trader's opinion as i am not that much experienced plus i have shared this method so i can have do's and dont's from the seniors.

As i have written ... if both the conditions met (same strike price options get in line with prices and the price must be around 40 , if these both the conditions satisfied then all the calculations ends here regarding P /L , Market directions etc ..) then only you are taking the trade otherwise keep searching for the posibilities. Plus we have S L also and set up for protecting the profit too. I think if any senior / experienced option player back test or express his views will claer the matter.

If it is not that much helpful for trading on long run, then also it is significant alarming indicator which alerts that market is about to make a big and sharp move either side.

Thanks.

[SwingTrader]

chiragbvyas,

I have not heard about something like this or have checked what happens if we take this trade. I will take a look and see if I can back test if/when I find time.

Just thinking about this it seems to me that put and call premiums for the same strike could be close only just before expiry and that too mostly for ATM strikes. In other cases it has to be due to gross mis-pricing which we don't see much these days. Currently 6300 call is trading at 37 and put at 37.50. 6300 is ATM strike and expiry is near. In this case it could be very normal as expiry is near so time value for the options is very less (especially they being for ATM strike).

On the other hand, you could be catching significant mis-pricing of options which obviously would benefit you once the mis-pricing is gone. So if this is happening consistently then one can probably take advantage of it until it lasts. If this really is mis-pricing then it won't last too long.

Will let you know if I find anything further interesting about this...

[SwingTrader]

FYI:

I have created a new thread titled "Diagonal Spreads - Lessons & Examples". I have copied over all the key lessons & posts to this thread. The thread is locked so only I will be able to post there. I will keep adding examples and other key information over there.

I have also renamed this thread as "Diagonal Spreads - Discussion, Q&A, etc". FROM NOW IN THIS THREAD PLEASE POST YOUR QUESTIONS, TRADES, IDEAS, ETC THAT ARE RELATED ONLY TO DIAGONALS. EVERYTHING ELSE CAN GO INTO "Options - Q & A" THREAD.

Please follow this guideline so as to keep the discussion to relevant topic.

Thanks.

[krish_pm]

ST sir,

Thank you very much for your wonderful Lessons about Diagonal spreads.

Sir, How to handle the Big Gapdown and Gapup using Diagonal Spreads.

I need the diagonal spreads , ema13 ema 89 charts and P/L table with your explanation for these three months.

January 2008 , May 2009 , February 2011.

Thanks & Regards,

Krish

[SwingTrader]

[SwingTrader]

krish_pm,

Here is the Feb 2011 trade. We got bullish EMA crossover on 16.02.2011. Market closed above the prior high pivot on 17th right at market close. Since the signal triggered on the last bar (after market closed), we would have initiated the trade the next day (18.02.2011) just before market close. NF closed on 18th at 5476.



The diagonal selected would have been LONG APR11 5500 CALL @ 198.45 + SHORT MAR11 5700 CALL @ 64.30 (hedge % : 32.40%). FEB expiry would not have been selected as the expiry was near.

I might have thought hard on 24th about adjusting the trade or getting out and waiting for the next signal. I usually get out if loss hits 15% and wait for the next signal. The loss in this case hit 12.5% on 24th. I am not really what I would have done, maybe I might have closed (as it was just 4 days into the trade) or maybe I would have held on to the trade as the loss had not yet hit my 15% limit. Either way is okay, exiting a trade with a loss and waiting for next signal too is perfectly fine.



This trade would certainly have tested the trader's patience as it was a lengthy trade and there was significant P/L swing. But if one had held and followed the rules, eventually the profit was significant once price took off to the upside just before MAR11 expiry.

IMPORTANT : (a) It is important to decide on a stop loss level - 10-12-15% loss in the trade - whatever but select and stick to one level. (b) Your signals are important. The signals won't have to come from some great system that has a very great edge or something. A rough trend selection method will do. Even the method I have shown is more than sufficient. The key thing is - your signals have to come from the same method. Don't swing between different systems for trade selection. This is very important.

krish_pm, let me know if you want any other specific examples between Jan 2011 and now. I don't have options data before Jan 2011 so I can't post the 2008/2009 examples that you wanted.

[yoginishreyas]

Dear ST Sir,

Thank you for your efforts, I really find your information helpful.

I have few questions and would appreciate your opinion on it.

1. I prefer trading FUT instead of options due to lack of knowledge on Vega, thetas etc. But I can plot direction on nifty. My question is, How to hedge position using shorts in OTM with FUT?

2. After initiating my trades on FUT, generally my stop loss is 50-60 points but If there is proper hedge to my trade, it will be good.

3. I am confused on how to calculate this Hedge percentage if I am taking combo of FUT and OTM?

I think this combination of FUT and OTM will also provide good returns since I observe stop loss of FUT very strictly and sometimes I also reverse my positions based on trade.

Your opinion is highly valuable.

[traderindian]

Hello ST sir,

Thanks a lot for the wonderful setup and the efforts you have put in to explain everything.
But I had one doubt in the last example you have given for Feb 2011 trade.

Instead of Long March 5500 call and Short April 5700 call,
Shouldn't it be Long April 5500 call and Short March 5700 call ?
Please pardon me if I am wrong..

Regards,
TraderIndian

[SwingTrader]

[SwingTrader]

[SwingTrader]

yoginishreyas,

Here is a thought for your consideration. Why go for OTM hedge? why not ITM hedge? I do few fut + opt trades from time to time but I use ITM option to hedge. The reason for this is that I always look to limit risk first. My trading philosophy is to ride out the bad trades as well as I can and make sure I am still standing there to take the inevitable big profitable trade when it comes along (this, of course, is true only as long as one is using the same trading method consistently).

Below is a bad trade I took on 30.09.2013. I bought a put on this day and that was the last day of decline I adjusted the trade and eventually closed it in profit. But I like to use this example when testing something. What if I had taken SHORT NF + LONG CALL hedge? How would the position have performed if I had used OTM / ATM / ITM hedge? Let us see:

I will post the P/L table for these three positions from 30th Sep to 9th Oct only. Let us assume we exit the position on 9th as market really took off to the upside and proved us wrong.

NF closed at 5791.45 on 30th Sep.

*** P/L % is based on trade cost + margin required to hold the trade ***

1. SHORT OCT13 NF + LONG OCT13 5900 CALL (OTM hedge)



2. SHORT OCT13 NF + LONG OCT13 5800 CALL (ATM hedge)



3. SHORT OCT13 NF + LONG OCT13 5700 CALL (ITM hedge)



I suggest ITM option as hedge to keep risk relatively lower. But I think one can decide how much risk one wants to take and then decide on which option one should go for.

Can't help but drag diagonals into this (this thread is for diagonals anyway ). If you want to reduce risk further, use next month's options for hedging. The lower time decay rate of those options will give more protection. But since they are priced higher than near month options, they will drag down the profits too. Well...hedging is a double edged sword anyway. One lowers risk but lowers profits as well. But I think it is okay, risk should be lowered first, profits come later.

BTW how would a diagonal have done in this scenario? See the first post of this thread. See the diagonal example there, it is the same as above but a diagonal was traded.

[yoginishreyas]

ST Sir,

Thank you for taking time out in this calculations.

I apologies to post this in Diagonal thread, since this question arises to me after I went through Diagonal sections I post it here but again accept my humble apology if I have done in wrong thread.

Based on your calculations, I did some of my own here as per my trading style.

On 29th Nov at 9:30 since I had my confirmation on going long,

Exhibit A
1) If I would had combination of NF FUT Long @ 6199 + Short 6300C @95
2) on 12th December price confirm that uptrend is over and it is time for some correction, I would had book NF @6292 + Short 6300C @76.50, earning 93 points from FUT and 18 points from OTM Short Hedge. Total 111 Points

Exhibit B
1) If I would had combination of NF FUT Long @ 6199 + Long 6100P @ 90.80
2) on 12th December price confirm that uptrend is over and it is time for some correction, I would had book NF @6292 + Long 6100P @ 22.60, earning 93 points from FUT and -68.20 points from OTM Long Hedge. Total 24.80 points

LOSING EXAMPLE
On 11th Nov at 9:30am I had confirmation on going short

Exhibit A
1) If I would had combination of NF FUT Short @ 6137 + Short 6100P @ 84
2) on 18th November price confirm that Downtrend is over, I would had book NF @6168 + Short 6100P @44.40, earning -31 points from FUT and 39.60 points from OTM Short Hedge. Total 8.60 Points

Exhibit B
1) If I would had combination of NF FUT Short @ 6137 + Long 6200C @ 68.40
2) on 18th November price confirm that Downtrend is over, I would had book NF @6168 + Long 6200C @55, earning -31 points from FUT and -13.40 points from OTM Long Hedge. Total -44.40 Points

This trading is done on my own strategy but I completely agree with you that result of having hedge in LONG can be more fruitful.

I am going to back test few more results and will even try some trading based on this.

Thank you sir.

[SwingTrader]

yoginishreyas,

After reading your latest post I realised that I had misunderstood your question to begin with. You were talking about SHORT option as an hedge for your LONG futures position. That is tricky because you are exposing yourself to unlimited risk. That may be okay if you watch your position closely. I don't watch my position too closely during market hours these days so I stick to limited risk trades.

You can still use option delta to estimate the hedge your short option provides to your long futures but this hedge will go down fast if price goes against your futures position. So you will have to be careful.

You might still want to look at using long option as the hedge (like what I posted in the examples in my reply to you first post). It is much safer....it is taking more risk for greater returns which is okay.

[yoginishreyas]

ST Sir,

Thank you, I am working more on your advice but surely your advice gives me alternate approach to look at concept of hedge. Concept of diagonal is really unique and not easily available even in option books