iCharts Discussions

[SwingTrader]

DIAGONALS - LOCKING PROFITS

I have posted adjustments to diagonals that can be used if things go wrong (especially in the first few days after trade is initialized). Most of those adjustments are for reducing the chance of a bigger loss. Now, if a diagonal is in profit, we will have to try and lock at least some of the profits if we are getting closer to expiry. We also need to lock in some profits if profit is around 20%. In most cases greater profits are possible from this point only if volatility explodes.

Profits can be locked by squaring off the short option and initiating another short that is closer to the long option. This bumps up the hedge for the long option thus reducing the chance of profits evaporating if price moves against our position.

This adjustment can be done for losing trades also but I did not highlight in the previous post because this adjustment also restricts further profit potential. If done on losing trades and price recovers then the chance of profit is lesser after the adjustment. But for profitable trades this is effective in protecting part of the profits.

Example: @rk_a2003 had initiated a bullish diagonal on 4th Dec (he had posted about it in the "Market Sentiment" thread) :

Long NF JAN14 6100 CALL @ 317 + Short NF DEC13 6300 CALL @ 118.

He had bought the spread for 199 pts. NF has gone sideways to down since then. The trade is currently at breakeven as the spread is available at around 200-201 pts. But there is downside risk for this trade as the 6300 call is now trading only at 9.40 pts. So it is not going to provide much hedge to the long option. Since there is less than a week left to Dec expiry, one can re-hedge by adjusting the trade by squaring off the short 6300 option and shorting the DEC 6200 CALL @ 38. This will provide some more hedge and still maintain the chance of a possible profit if NF rallies...though less than the original trade.

NOTE: After Dec expiry this trade can continue. To get further hedge just short JAN expiry CALL with higher strike than the long call strike.

The same adjustment would have worked to provide profit protection if the trade was in significant profit.

[SwingTrader]

Attached is a spreadsheet listing diagonal trades selected using the EMA crossover method on NS 60 mins chart.

These trades have been selected strictly based on the rules outlined in the guidelines posted in this thread. In the spreadsheet the P/L highlighted in "Blue" is the one that should be taken as the final P/L of the trade. The one that is marked "3 DBE" is to be ignored. That is "3 days before expiry", I monitor that because last three days of diagonal before the short expiry are very risky due to gamma of the short option exploding.

*** The final trade initiated in 2013 is not yet included in this spreadsheet as it is still in progress.

There is lot of room for improvement. Mainly one can refine the trade selection method to get better entries. Secondly, one can also have a profit target so profit is not lost. There in one trade in the spreadsheet where the trade exit resulted in small loss but the trade was in significant profits (as much as 33%) before that when trade was in progress. Maybe a profit target of 20-25-30% needs to be used instead of waiting until short option expiry or trade reversal exit. These changes to the system are trader specific and I leave it to the trader to decide on these two refinements as per his ideas/thoughts.

Based on my experience trading diagonals I do bend the rules slightly while selecting the diagonal combination. I bend the rules mainly when:the diagonal satisfying 30% hedge rule is too OTM. I don't like the diagonal to be too much OTM. The ideal diagonal is ITM long + OTM short.

I will try and post a similar list for 2012 later.