Low Risk Low Returns- Target 50 NF per month per NF Lot

[jamit_05]

Lets have a look at a case where the Short Strangle worked out and whether the extra leg weighs us down somehow.

Date 21/12/2011
Spot 4693
Shorted: 4800 CE and 4600 PE

Price progression till expiry, WITHOUT the extra leg

69.35
65.25
46.45
44.2
22.7
8.9


Now with the extra protective leg of 4500 PE

53.65
56.4
39.1
42.3
21.2
8.05


No major changes. Meaning, both ways the extra protective leg only benefits. Since, we are in the business of reducing risk, this extra leg makes enormous sense.

What remains to be seen, is the risk we are exposed to when price breaks out against the direction of the protective leg.

 

[jamit_05]

Date: 28/11/2011
Spot 4850
Shorted 5000 CE and 4700 PE
(Hedge Leg of 4600 PE was purchased since the trend was down.)

Let us compare the two cases when the price break or moves sharply in the direction opposite to the hedge leg.

Without the hedge the price of the shorted pair progressed like this:

157.3
146.75
144
146.15
189.45
182.55
196
157.85
145.1
124.75
107.9
109.5
107.45


With the hedged leg of 4600 PE

98.25
79.6
83.7
115.85
171.8
164
178.1
123.55
100.75
67.9
67.45
58.4
57.9

It is expected that the hedge leg will cause more percentage loss since the price is moving against our delta bias. Note the 171.80 in red. At that point, our position was 75% is loss !

In conclusion, it then becomes very important to watch out for the other side !

 

[gmt900]

Date: 28/11/2011
Spot 4850
Shorted 5000 CE and 4700 PE
(Hedge Leg of 4600 PE was purchased since the trend was down.)

Let us compare the two cases when the price break or moves sharply in the direction opposite to the hedge leg.

Without the hedge the price of the shorted pair progressed like this:

157.3
146.75
144
146.15
189.45
182.55
196
157.85
145.1
124.75
107.9
109.5
107.45


With the hedged leg of 4600 PE

98.25
79.6
83.7
115.85
171.8
164
178.1
123.55
100.75
67.9
67.45
58.4
57.9

It is expected that the hedge leg will cause more percentage loss since the price is moving against our delta bias. Note the 171.80 in red. At that point, our position was 75% is loss !

In conclusion, it then becomes very important to watch out for the other side !

Thanks for very important analysis, especially for me since I am planning to use short strangle as a staple strategy.
Dan has made a point in his thread that options should be sold when vola is high since the option prices are higher. But I feel lower volatility might give you lesser returns, but the trade would be safer since the chances of both legs expiring worthless are higher. Add to that the advantage of lesser cost of managing the trade as well as lesser stress.
Your short strangle is coming along fine. Let's hope you sail through the expiry

 

[jamit_05]

Thanks for very important analysis, especially for me since I am planning to use short strangle as a staple strategy.
Dan has made a point in his thread that options should be sold when vola is high since the option prices are higher. But I feel lower volatility might give you lesser returns, but the trade would be safer since the chances of both legs expiring worthless are higher. Add to that the advantage of lesser cost of managing the trade as well as lesser stress.
Your short strangle is coming along fine. Let's hope you sail through the expiry

What you consider as stress is inevitable part of selling options.

You have purchased a hedge for your short strangle on the upside. What if the market starts to fall? You will have to learn to manage that...

Moreover, there is a difference of one strike between your hedge and the shorted CE. That is a risk. How do you plan to address that?

 

[jamit_05]

All these numbers and analysis, so to speak, is just talk. Shorting strangles is a very tough job. What is 100% guaranteed is that you will not earn every month.

 

[DanPickUp]

Well, interesting discussion. What I would recogmend to both of you is to work with an option matrix which is able to show you the analyzing pictures to what you do. Makes the job really much more easy, as you will see your BE and all the greeks at glanze. When you work with such a matrix, you can test what ever with what ever. So you literally will have a very clear picture about what you do or plan to do.

About the post handling a short strangle with futures. It was meant to make people thinking about it and becoming clear about the risk involved in such kind of trading. Short a strangle or straddle is already a risky game, specially when done in short time frames and then adding a play with the future is not for beginners, as when done one mistake on either side or on either derivative it could be come very sad. You may flip the coin to the other side when you trade short time frames.

Take care / DanPickUp

 

[gmt900]

These are the two things ( managing hedge as the market moves up and down and the risk of say 100 points for nifty) one has to learn to do.
I am sure it is possible to do it ,though it is not easy. That exactly is a matter of experience and I am trying to learn that.
Except arbritrage nothing is safe . So it is the degree of risk we are talking about ( same as R?R ratio). I for one feel that this is a low risk , low return strategy as the title of this thread says.
Not many peaple may agree with my arguments, what with the prospect of facing" unlimited losses" .

 

[DanPickUp]

These are the two things ( managing hedge as the market moves up and down and the risk of say 100 points for nifty) one has to learn to do.
I am sure it is possible to do it ,though it is not easy. That exactly is a matter of experience and I am trying to learn that.
Except arbritrage nothing is safe . So it is the degree of risk we are talking about ( same as R?R ratio). I for one feel that this is a low risk , low return strategy as the title of this thread says.
Not many peaple may agree with my arguments, what with the prospect of facing" unlimited losses" .

Have not read the whole thread, but to reduce your risk you also can go for options with a live time of three months and then buy them back one month before expiry.

 

[gmt900]

Well, interesting discussion. What I would recogmend to both of you is to work with an option matrix which is able to show you the analyzing pictures to what you do. Makes the job really much more easy, as you will see your BE and all the greeks at glanze. When you work with such a matrix, you can test what ever with what ever. So you literally will have a very clear picture about what you do or plan to do.

About the post handling a short strangle with futures. It was meant to make people thinking about it and becoming clear about the risk involved in such kind of trading. Short a strangle or straddle is already a risky game, specially when done in short time frames and then adding a play with the future is not for beginners, as when done one mistake on either side or on either derivative it could be come very sad. You may flip the coin to the other side when you trade short time frames.

Take care / DanPickUp

Thanks for your suggestion. Jamit may be able to use it. I neither have any software available with me nor do I have a mentor who could help. ( even option oracle is not working these days ).
It is just that I have taken fancy for short strangle especially after going through your thread in which you have discussed hedging at great length.
If one keeps position small to begin with, it is comparatively easier to manage trade.
Earlier I used to think that the only way to minimise risk is to get out of the trade at the first opportunity if trades starts going sour. Or else hang in there hoping that the tide will turn in your favour only to find that things have gone out of control. Thanks a million Dan for showing a way to manage such trades.
I know I am indulging in a game which is risky for a person of my age as well a person who is just learning to trade options but that is what I find interesting.

 

[gmt900]

Have not read the whole thread, but to reduce your risk you also can go for options with a live time of three months and then buy them back one month before expiry.

Yes, you had mentioned that in your thread. I am currently managing two trades one for May and the other for June expiry. I find it easier to adjust June trade than May trade. Also if one wants to be safer one could choose strike rates wider apart, although it would reduce returns.