Educational thread on a long APR Infy Strangle

[Somatung]

Hello

Some infos and a lesson you have to be clear about:

Even if we hedged yesterdays profit, we exposed our self to higher risk. Analyze the legs and you will recognize why. So be careful when doing such things and take it as a learning lesson. To be safe we need also wings for those new short legs we implemented yesterday. This is why I not wrote any words about the safety of this new legs/positions as I did on the Monday legs. As this is a learning thread, you can do such mistakes and we not can do such mistakes with real money. Remember this trade/lesson for your own safety. The upside is not such a hard problem, but if market now would have crashed over night, let's say 600 points, our short APR 3000 put would have increased more in value compare to our MAR put debit spread and our two short APR calls. I was waiting for any comment on it from anybody, as it was easy to recognize when doing the analyzes on the matrix. But nobody came up with any comment on the legs, so I make this post before the new opening of the new day.

Somatung

 

[Somatung]

Hello

Infosys Limited open @ 3260.50

Until now market is quit. If we made the above mentioned mistakes, we correct it now, as market is on a higher level. We can buy back the shorted MAR 3250 put @ 16.45 (18.15). Now we again have a pure, save Put Calendar Spread on the downside.

As there is only one day more until option expires, we could think about selling the MAR 3330 put @ 44.00 (34.00) with a profit of 10 points. Now this time we invest this 10 point profit in a wing which can be the long
APR 2850 Put @ 10.00 (We give a buy limit order). At the moment we are filled, we have an APR Put Credit Spread (Short 3000 and long 2850) in which the long leg was for free or also called a free trade. In option trading we want as many free trades as possible, so we play with the money from the broker house and not with our money. As an exercise, we still can follow our APR Put Calendar Spread to see how it would end.

Next is to correct the call side: We buy back both of the shorted APR Calls to avoid any thing on this side. By doing this, we buy back the shorted APR 3700 Call @ 20.00 (35.00) and we buy back the shorted
APR 3750 Call @ 11.00 (17.00). Our profit is 21.00. As option expiration days can be wild, we could wait with our next free leg and watch what happen tomorrow. If market really spikes up, we still have the long MAR 3400 in the market. As the call was so cheap when we bought it, we let this wing stay as it is.

All the above shows that we never have to be afraid to correct our mistakes done in option trading, as there are always so many ways to convert any leg in some thing new.

Open trades for the moment: (APR Put Credit Spread)

- Short APR 3000 Put @ 32.25, IV 36.30, OI 40'500 (Entry long at 33.70, IV 34.19, OI 1'625 and switched to shorted at 31.00)
- Long APR 2850 Put @ 10.00, IV -- , OI --

- Long MAR 3400 Call @ 0.95, IV 42.54, OI 282'750 (Entry @ 4.40, IV 32.26, OI 365'375)

Question for 26 Mar 2014: What kind of mistake did I plant in todays trade? (Hint: Analyze the chart from Infosys)

Hope you enjoyed "Todays thoughts about option trading"

Somatung

 

[Somatung]

Hello

Some infos: If we correct a recognized mistake, we first analyze the market, the chart and the option matrix's. This is a MUST. If you analyzed yesterdays chart (Hint I gave), it shows a downtrend. And in a downtrend we do not implement a Put Credit Spread. We implement a Call Credit Spread. Remember this in case you did not know this, as this is the answer to yesterdays question. All the other things shown in yesterdays post can be done very well. By the way: As this is a learning/educational thread I will smuggle in more mistakes in further posts. It will not help to see only perfect things. We also learn by seeing how mistakes are done. If we after woods understand why this is a mistake, we learned some thing.

Infosys Limited open @ 3254.00

Today is option expiration day. We also call them: Witches days. What ever you try today with options which expire today, just be careful, specially with options around atm. In our case, we have this APR Put Credit Spread, we have this absolute cheap long MAR 3400 Call and we have 21 cash to do a free trade. As we have a recognized down trend on the chart, we could switch our Put Credit Spread into a Call Credit Spread if we want to stay with those kind of spreads. This would serve the down trend in a better way.

So we sell the APR 2850 put @ 11 and we buy the APR 3550 call @ 35.50, IV 34.40, OI 1'125. Now we buy back the short APR 3000 put @ 32.00 and we sell the APR 3450 call @ 56.45, IV 33.86, OI 1'750. Now we have a Call Credit Spread with a spread of 21 points. You could go for a bigger spread if you like more risk. In this case the short would be more atm. This spread now serves the down trend which the chart shows.

Open trades for the moment: (APR Call Credit Spread) plus one long MAR call leg

- Short APR 3450 Call @ 56.45, IV 33.86, OI 1'750
- Long APR 3550 Call @ 35.50, IV 34.40, OI 1'125

- Long MAR 3400 Call @ 0.15, IV --, OI 260'375 (Entry @ 4.40, IV 32.26, OI 365'375)

Question for today 27 Mar 2014: What kind of mistake did I smuggle in? (Hint: Order)

Hope you enjoyed "Todays thoughts about option trading"

Somatung

 

[Somatung]

Hello

Let me first give you the answer to yesterdays question. The hint was: Order. Yesterday we switched our Put Credit Spread into a Call Credit Spread. As we not gave a whole sell spread order, we did it leg by leg. First we sold the APR 2850 put and then we bought the APR 3550 call. During this switch, we had the short APR 3000 put in the market. This put was naked. Now imagine you trade 100 lots from those mentioned Put Credit Spread and you now would have 100 naked short puts in the market. As you do not know what happens in the next few minutes, you expose your self to higher risk. Most of you have seen this sudden spikes up or down in the market. What if such a spike exactly at those moment occurs? Bang. So lesson for today: First we always buy back the short leg when we execute a spread, so we do not have a naked short in the market. I am clear this are details. And exactly such details differ the long time trader from the has been traders.

Infosys Limited open @ 3246.00

Expiry over, so we concentrate on the new APR series. What could be next? Let's follow some simple rules: Chart? plus any other market news? plus Option Matrix = Common sense and conclusions.

On the daily chart we see the downtrend and we see some kind of support level @ 3235. This support level is tested since yesterday. If it fails to hold, next level is around 3190 and 3000. After those levels it is free fall. If you analyzed the APR 3000 put since I first time mentioned it, you will have recognized how much OI was added on this strike level. On the 19 Mar we used this strike level for the long Strangle. OI on this level then was by 1'625. Today OI on the APR 3000 put is already at 75'875. The IV went up from 34.19 to now 39.17. So it looks like people are really bearish on this share.

Our position: Call Credit Spread

- Short APR 3450 Call @ 58.50, IV 35.62, OI 7'125 (56.45, IV 33.86, OI 1'750)
- Long APR 3550 Call @ 36.50, IV 35.83, OI 5'750 (35.50, IV 34.40, OI 1'125)

Our Call Credit Spread stays and now we would need an adjustment plan in case market spikes up. What ever option strategy we placed in the market, we have to know at the same time our repair or adjustment strategy for this specific trade. This is a MUST. If you want to do some thing over the weekend, try to find a way how to adjust or repair this Call Credit Spread in case the jump up happens. http://i57.tinypic.com/34q1yqf.png

Now as ever body is bearish and we still have our 21 to invest, inclusive the 56 we got from the sold APR 3450 call, we could buy the long APR 3150 put @ 76.90, IV 36.88, OI 4'125. If we go for time decay, we usually do this already on Thursday, as on Friday in most cases and under normal market conditions the time decay is already priced in the options = No profit on it on Monday.

Positions for today: Three legs (Call Credit Spread) and long the Put

- Short APR 3450 Call @ 58.50, IV 35.62, OI 7'125 (56.45, IV 33.86, OI 1'750)
- Long APR 3550 Call @ 36.50, IV 35.83, OI 5'750 (35.50, IV 34.40, OI 1'125)

- Long APR 3150 put @ 76.90, IV 36.88, OI 4'125

Question for today 28 Mar 2014: What kind of mistake did I make ?

Hope you enjoyed "Todays thoughts about option trading". Have a nice weekend and be happy

Somatung

By the way: If you have any question you may want to ask, post it and if possible I do answer it.

 

[lemondew]

Hey all,

Is it good to go for a long strangle or straddle till post result day in infy this series. Infy closed at 3262. Combined premium for 3300 call and 3250 put is 116.4 and 110.65 = 227.05.

 

[Somatung]

Hey all,

Is it good to go for a long strangle or straddle till post result day in infy this series. Infy closed at 3262. Combined premium for 3300 call and 3250 put is 116.4 and 110.65 = 227.05.

@Lemondew

The question is less if it is good or not to go for a long Straddle or a long Strangle. The question mainly is: Are you able to handle either of the two strategies when market works against you? Do you know the good and the bad side of any of the strategies you ask for? If so, then both of them are practicable and good. If you or any body else has any link which gives more information about the volatility of the stock by it self, this would be fine, as here is one of the main reasons to choose such kind of strategies. A quick rise from the underlying volatility in a certain time frame is needed to succeed with either of the mentioned option strategies.

Somatung

 

[lemondew]

Thanks Somatung,

Are you talking about IVs or implied volatility. What is the take the IVs in infy are going to rise till the results or go down.

@Lemondew

The question is less if it is good or not to go for a long Straddle or a long Strangle. The question mainly is: Are you able to handle either of the two strategies when market works against you? Do you know the good and the bad side of any of the strategies you ask for? If so, then both of them are practicable and good. If you or any body else has any link which gives more information about the volatility of the stock by it self, this would be fine, as here is one of the main reasons to choose such kind of strategies. A quick rise from the underlying volatility in a certain time frame is needed to succeed with either of the mentioned option strategies.

Somatung

 

[Somatung]

Thanks Somatung,

Are you talking about IVs or implied volatility. What is the take the IVs in infy are going to rise till the results or go down.

@Lemondew

Your question is based on absolute basic knowledge about options and option greeks. Basic knowledge you have to know and understand when even thinking to start trading option strategies. Kindly read in the threads I mentioned in post one in this thread about those basic stuff. Sir Pratabvb did a short version thread to explain certain basic knowledge about option greeks and Sir DPU did a very precisely, expanded and really in dept thread about basic option and option strategy trading. Kindly read there to improve your knowledge about it:

http://www.traderji.com/options/92743-options-my-way-looking.html#post941872

http://www.traderji.com/options/66266-option-trading-danpickup.html#post639903

 

[gmt900]

I was able to follow the steps you were taking graphically on OptionsOracle.

However, I cannot use OptionsOracle, after NSE modified their website, for Infy (I can use it for Nifty though).

So I have to use math and my imagination to follow the thread.

 

[Somatung]

I was able to follow the steps you were taking graphically on OptionsOracle.

However, I cannot use OptionsOracle after NSE modified their website for Infy (I can use it for Nifty though).

So I have to use math and my imagination to follow the thread.

@Gmt900

That's fine. In option strategy trading at the end it is all about comparing numbers on the call side and on the put side. Dancing on the different option matrix's and combining the legs under each other in conjunction with what is going on in the chart. Imagination is used to see the pictured option strategy used at those certain moment. No holy grail behind it. , just numbers, numbers, numbers as we work with the pricing numbers, the IV numbers,the OI numbers, all the greek numbers, the used unit numbers, the strike level numbers and so on ............... Welcome in the numbers club. :thumb: