Hello,
First of all, I would like to begin by voicing my appreciation for the Traderji community for having put up a wealth of information here on this forum.
I discovered this forum last month, and have since then gone through quite some threads from start to finish. Along the way I have received a lot of knowledge from senior members and I wish to thank them all here in my first post.
I am a young engineering professional, and have no experience of the share market. Having said that, I find both T.A. and F.A. very interesting. I am drawn to options because of the sheer amount of permutations and combinations every trade presents.
I plan to be a midterm investor, and like every mid-term investor has a Jekyll and Hyde Personality, I will be swing trading too, holding stocks for a couple of days or weeks at times. This apart I also see myself dabbling in options trading in a couple of months.
That is a pretty lengthy introduction.
I will list out the books I have read during the past 3-4 months during my research for T.A., F.A., Stocks and Options trading, Portfolio Management, Risk and Reward, Trading size etc.
-----------
Books that I have read and will be using while trading -
Technical Analysis from A-to-Z - Steven B. Achelis - This is my handbook for T.A.
Trading with Candlestick Charts - Clive Lambert - This is my handbook for candlestick patterns.
Futures and Options - A.N. Sridhar - The book I refer for all options related queries.
---------------------
Books I read for basic knowledge and which I will use for reference -
How to Make Money Trading with Charts - Ashwani Gujral - Nice analysis on Indian Stock Market, which is difficult to find since almost all good books are by foreign authors.
Stock Market Trading Rules - William F. Eng - A set of 50 trading rules.
Technical Analysis Plain and Simple - Michael N. Kahn
Guide to Technical Analysis and Candlesticks - Ravi Patel - Very basic introductory book for T.A.
A beginner's guide to Profitable Investment in Shares - S.S. Grewal
Personal Investment and Tax Planning - Y.J. Yasaswy
DSIJ's Stock Market Book - BSE - The basics and history of Indian stock market
---------------------------
Any other recommended, please let me know.
Alright, onto my thoughts on Options trading.
From what I have been following it appears that our stock markets tend to be trending roughly 30% of the time, and trading for the rest of the time. I know all generalities are to be avoided since the market is a beast, but that is how it appears so far.
So over the last 2-3 days I began thinking that if I could take advantage of the trading periods by using a short strangle, and the trending periods by using bear or bull spreads, I could make some money consistently every month.
For the first year I only plan to have a trading capital of 100000 rs. and I plan to put in not more than 5000 rs. in buying a spread position in a trending market. As long as I do not close that position, I will not enter another trade.
In case of selling options for short strangle, each position should last me 2 weeks to make a profit on the time decay I suppose, unless I have to unwind my naked shorts in a hurry if the market rushes in either direction.
The following paper trade on Nifty options was executed on 19th october.
Please note that this is a blind trade. There has been NO analysis of the market eod data BEFORE the trade. I will only be reacting to the market AFTER making my blind trade to enable me to take decisions ruthlessly if the market hits me hard. It will become more clear after the end of this trade that I post. At this point I am only looking at the mechanics of the option trade and not looking to predict the movement of the market. Keeping this in mind, even if it looks foolish that I am selling a strangle in a trending market, please bear with me and analyse my strategy. All trades are 1 lot.
19th October - The market was at 6027.
I shorted a Call @ 6200 for 28th October expiry @21.30. That credited my account with 1065 rs. minus brokerage, say 10rs for R.K. Global
I shorted a Put @ 5800 for same month @19.60 which credited my account with 980 rs. minus brokerage.
As long as the market stayed within the 5759 to 6240 range I wouldn't have lost anything. If the market stayed within 5800 and 6200, I would make a profit of 2025 rs after brokerage.
The Coal India IPO happened, and it took the market upward by about 119 points on 21st october. I reviewed my position at EOD on 21st october and this is what I had.
The short call @ 6200 had risen in value to near 30 rupees.
The short put @ 5800 had fallen in value to near 4.5 rupees.
The market was above 6100, and with another strong day it could very well breach my 6200 trading range. Since these shorts were naked, I could be in trouble very soon. It was clear that with one week remaining, the short put @ 5800 was going to give me full value, so there was no need to touch it.
I unwound my short call @ 6200 at near 30 rupees. That meant a debit of 1500 on that position. My profit reduced from 2025 to 2025-1500 = 500 rs. approx.
Now, my first thought was to short a 6300 call. That would increase my safe range by exactly the same amount that the market moved.
The short call @ 6300 for the same month was available at 10.15, giving me net credit of 500 rupees after brokerage.
That increased my profit from the new position of 5800 short put and 6300 short call to around 1000 rs, assuming I held it till expiry.
But what if the market keeps continuing onwards? I will have to keep liquidating my short call at a loss, and shifting it forwards to recover the loss and get some money for my headache.
I decided to sell two far OTM options instead of the 6300 call.
So I shorted a call at 6400 @ 3.65 which credited me with 175 rupees approx after brokerage.
I shorted a put at 5700 @ 1.95 which credited me with 90 rupees approx after brokerage.
Put together these two trades did not cover the 455 loss I had to eat to unwind my original 6200 call. Also, I was now pumping in 30% more margin money to hold on to the position, reducing my profit percentage.
So I decided to scrap the OTM sale (It is a paper trade so I can). Since the market moved UP by 100 points, I wondered if I could sell a 5900 put, which would be a 100 points above the 5800 put. So I tried that.
So I shorted a 5900 put available for around 9 rupees, which fully covered my loss in unwinding the 6200 short call. Also the only criteria left in the position was that the market stay above the 5900 level for me to take home about a 900 bucks.
So in a nutshell.
I sold an equidistant short strangle when market was at 6000.
Safe Range 5800-6200
Market moved up by 100 points to 6100.
I unwound my 6200 call at a 455 rupee loss and had 3 possibilities.
Sell a 6300 call. Safe Range 5800 - 6300. Covers my loss, and gives small profit.
Sell two OTM calls. Safe Range 5700-5800-6400. Does not completely cover my loss, increases margin requirement.
Sell a 5900 put. Safe Range 5800-5900 + Naked but, Market is in strong uptrend.
Ofcourse, I should be buying a bull spread or a ratio spread in an uptrending market, but I figure buying options is the lesser evil since my max loss will be known beforehand, but selling options requires a lot more management.
If I have made a laughably horrible miscalculation, please laugh at me, but do point it out. What are your thoughts on the short strangle and its management? How do you manage your positions?
Thank you for your time
First of all, I would like to begin by voicing my appreciation for the Traderji community for having put up a wealth of information here on this forum.
I discovered this forum last month, and have since then gone through quite some threads from start to finish. Along the way I have received a lot of knowledge from senior members and I wish to thank them all here in my first post.
I am a young engineering professional, and have no experience of the share market. Having said that, I find both T.A. and F.A. very interesting. I am drawn to options because of the sheer amount of permutations and combinations every trade presents.
I plan to be a midterm investor, and like every mid-term investor has a Jekyll and Hyde Personality, I will be swing trading too, holding stocks for a couple of days or weeks at times. This apart I also see myself dabbling in options trading in a couple of months.
That is a pretty lengthy introduction.
I will list out the books I have read during the past 3-4 months during my research for T.A., F.A., Stocks and Options trading, Portfolio Management, Risk and Reward, Trading size etc.
-----------
Books that I have read and will be using while trading -
Technical Analysis from A-to-Z - Steven B. Achelis - This is my handbook for T.A.
Trading with Candlestick Charts - Clive Lambert - This is my handbook for candlestick patterns.
Futures and Options - A.N. Sridhar - The book I refer for all options related queries.
---------------------
Books I read for basic knowledge and which I will use for reference -
How to Make Money Trading with Charts - Ashwani Gujral - Nice analysis on Indian Stock Market, which is difficult to find since almost all good books are by foreign authors.
Stock Market Trading Rules - William F. Eng - A set of 50 trading rules.
Technical Analysis Plain and Simple - Michael N. Kahn
Guide to Technical Analysis and Candlesticks - Ravi Patel - Very basic introductory book for T.A.
A beginner's guide to Profitable Investment in Shares - S.S. Grewal
Personal Investment and Tax Planning - Y.J. Yasaswy
DSIJ's Stock Market Book - BSE - The basics and history of Indian stock market
---------------------------
Any other recommended, please let me know.
Alright, onto my thoughts on Options trading.
From what I have been following it appears that our stock markets tend to be trending roughly 30% of the time, and trading for the rest of the time. I know all generalities are to be avoided since the market is a beast, but that is how it appears so far.
So over the last 2-3 days I began thinking that if I could take advantage of the trading periods by using a short strangle, and the trending periods by using bear or bull spreads, I could make some money consistently every month.
For the first year I only plan to have a trading capital of 100000 rs. and I plan to put in not more than 5000 rs. in buying a spread position in a trending market. As long as I do not close that position, I will not enter another trade.
In case of selling options for short strangle, each position should last me 2 weeks to make a profit on the time decay I suppose, unless I have to unwind my naked shorts in a hurry if the market rushes in either direction.
The following paper trade on Nifty options was executed on 19th october.
Please note that this is a blind trade. There has been NO analysis of the market eod data BEFORE the trade. I will only be reacting to the market AFTER making my blind trade to enable me to take decisions ruthlessly if the market hits me hard. It will become more clear after the end of this trade that I post. At this point I am only looking at the mechanics of the option trade and not looking to predict the movement of the market. Keeping this in mind, even if it looks foolish that I am selling a strangle in a trending market, please bear with me and analyse my strategy. All trades are 1 lot.
19th October - The market was at 6027.
I shorted a Call @ 6200 for 28th October expiry @21.30. That credited my account with 1065 rs. minus brokerage, say 10rs for R.K. Global
I shorted a Put @ 5800 for same month @19.60 which credited my account with 980 rs. minus brokerage.
As long as the market stayed within the 5759 to 6240 range I wouldn't have lost anything. If the market stayed within 5800 and 6200, I would make a profit of 2025 rs after brokerage.
The Coal India IPO happened, and it took the market upward by about 119 points on 21st october. I reviewed my position at EOD on 21st october and this is what I had.
The short call @ 6200 had risen in value to near 30 rupees.
The short put @ 5800 had fallen in value to near 4.5 rupees.
The market was above 6100, and with another strong day it could very well breach my 6200 trading range. Since these shorts were naked, I could be in trouble very soon. It was clear that with one week remaining, the short put @ 5800 was going to give me full value, so there was no need to touch it.
I unwound my short call @ 6200 at near 30 rupees. That meant a debit of 1500 on that position. My profit reduced from 2025 to 2025-1500 = 500 rs. approx.
Now, my first thought was to short a 6300 call. That would increase my safe range by exactly the same amount that the market moved.
The short call @ 6300 for the same month was available at 10.15, giving me net credit of 500 rupees after brokerage.
That increased my profit from the new position of 5800 short put and 6300 short call to around 1000 rs, assuming I held it till expiry.
But what if the market keeps continuing onwards? I will have to keep liquidating my short call at a loss, and shifting it forwards to recover the loss and get some money for my headache.
I decided to sell two far OTM options instead of the 6300 call.
So I shorted a call at 6400 @ 3.65 which credited me with 175 rupees approx after brokerage.
I shorted a put at 5700 @ 1.95 which credited me with 90 rupees approx after brokerage.
Put together these two trades did not cover the 455 loss I had to eat to unwind my original 6200 call. Also, I was now pumping in 30% more margin money to hold on to the position, reducing my profit percentage.
So I decided to scrap the OTM sale (It is a paper trade so I can). Since the market moved UP by 100 points, I wondered if I could sell a 5900 put, which would be a 100 points above the 5800 put. So I tried that.
So I shorted a 5900 put available for around 9 rupees, which fully covered my loss in unwinding the 6200 short call. Also the only criteria left in the position was that the market stay above the 5900 level for me to take home about a 900 bucks.
So in a nutshell.
I sold an equidistant short strangle when market was at 6000.
Safe Range 5800-6200
Market moved up by 100 points to 6100.
I unwound my 6200 call at a 455 rupee loss and had 3 possibilities.
Sell a 6300 call. Safe Range 5800 - 6300. Covers my loss, and gives small profit.
Sell two OTM calls. Safe Range 5700-5800-6400. Does not completely cover my loss, increases margin requirement.
Sell a 5900 put. Safe Range 5800-5900 + Naked but, Market is in strong uptrend.
Ofcourse, I should be buying a bull spread or a ratio spread in an uptrending market, but I figure buying options is the lesser evil since my max loss will be known beforehand, but selling options requires a lot more management.
If I have made a laughably horrible miscalculation, please laugh at me, but do point it out. What are your thoughts on the short strangle and its management? How do you manage your positions?
Thank you for your time
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