Option Trading strategies Vs Technical Analysis

[abhi_tyagi]

Hi All,

I am new to the trading world & started my journey in option trading some time back. So i start to learn about option trading from different sources but there is no better source of learning than this forum. Already gone through some very nice threads of Dan & AW10 about option trading.

I got to learn that there are good option strategies exist for different market conditions.Then i also study a bit about technical analysis after that i am feeling
lost between the two worlds.
My confusion is that technical experts mostly talk about cash equity/future levels and option trading strategies are mostly based on option greeks.

1- So my question is here for all the expert is that can we use TA for option trading or one can simply focus on learning option greeks/strategies & there is not much need to learn TA for option trading.

2- If we have to TA as well for option trading then how we can combine both the worlds to better use in option trading.

Thanks in advance

 

[abhi_tyagi]

Thanks a lot Dan sir your your elaborate answers! It's so nice of you that you have also answer my broader question asked in separate thread.
As you have also mentioned that thread was more related to future so with your permission, i am shifting my further question to the option thread.

As you have also suggested FHBO will be more suitable for stocks & future and it might also requires me to stay in front of the screen all the time.
Currently it might not be possible for me as i am already in full time job.

I got your point about TA & option strategies that we might not need to know about TA.Specially we can trade with non - directional strategies without much TA.For direction strategies, having knowledge of TA will help.

Now my question is, should we focus on learning many strategies or is it better to be expert in 2-3 strategies and know how to make adjustment in these strategies as per the different market conditions.

Dan sir! do you have any personal favorite option strategy or you think can be best strategy for a new option trader not as knowledgeable as you.

Based on my study so far, i have chosen 1-2 strategies to focus & also have some question about these specific strategies. Will ask you those later on.

Thanks a lot in advance!

 

[Somatung]

@Abhi_tyagi

Let's do this Q&A thread slowly. As you seem to have a lot of questions when it comes to option trading, I will make one post per day and answer your questions in it.

One question I have into your direction: What are the two choosed option strategies from your side, as you must have some reasons to choose them?

I ask this question, as it not helps you when I post what is ok for me, but out of any range or time on your side.

So YOU are here the important man who may needs some help and so lets concentrate on YOU and not what I do.

Dan​

 

[Somatung]

Hi

Point one:

Of course it helps to understand in dept all the different aspects of any option strategies. It specially helps when we trade through leg in and out with different derivatives as we then really can play what ever we want in any market. To get such knowledge about so many different option strategies comes over time and with the many years we do trade. Still: All of us do and did start with one or two option strategies we learned to handle in dept before we got better and better to try this and that. So to answer your question: No, you do not need to focus on many option strategies instead just one or two you really have use for and know there adjustment and which are specially for your comfort zone trading. If you still want to know more after you understood those one or two option strategies in dept, it will be your choice to move on deeper into option strategies trading.

Point two:

Non directional option strategies are only good in sideway markets and do not guarantee any profit. If you want to go for them, then do go for broken wing condors or broken wing butterfly's. This will allow you to have directional approach on any side you choose.​

Point three:

As you must concentrate on your daily job and trading is so far just some thing you want to do beside your main job, you will need to work with a low risk option strategy/s and with one which you not need to always think about it when you do your normal job. You further do best with an option strategy you just can implement at once and then let it run until expiry. Would you agree with me or do you have any other wishes or thought in your mind? If so, kindly explain and then we can move on. By the way: I do recommend that you organize your self the book from Guy Cohen: The bible of option strategies.

Dan​

 

[abhi_tyagi]

Thanks a lot Dan! for your wonderful explanation.
As you have mentioned, i myself wants to start with 1-2 strategies initially & with the time and experience can focus on some other strategies as well.
My chosen 2 strategies are -
1- If not sure about the direction of the market (non direction) - Iron condor - first & primary choice
2- If wants to play the direction - Credit spread

The reason for choosing above strategies specially Iron condor (Though some of them are already hidden in your answers)
1- I feel more comfortable in trading non - directional as i am not good & also dont want to predict the direction of the market.Iron condor looks to me one of the better strategy for non directional market.
2- As i am in full time job & has to give 8-10 Hrs in my job so it might not be possible for me to track the market whole day.
3- As i am in learning phase so initially i wants to trade safely so it's fine for me to get less return/profit but my focus is to get the consistency & get expertise
in chosen strategy.

I know Iron condor has its disadvantages as well as you have also mentioned that trouble can be started if market goes in one direction & one of the credit spread
comes in danger due that. So the trick will be here, how to make an adjustment in that case. for adjustment, I will once again go through your thread & also
the adjustment technique available on the internet.
Some of the technique i can remember as of now -
1- Take the stop loss & close the position.
2- Shift the credit spread of the side in danger.

May be i will be able to find some more.

For choosing the strike price level for credit spread of both sides call/put -
1- I can follow the nifty option chain Max Open Interest for that month on both the sides. (Here i can also make the adjustment if any significant change in Open Interest on any of the chosen strike price)
2- Look for nifty 3 months charts and choose the levels as per 3 months chart level.

Here my focus will be on keeping the risk at minimum.

Dan! my question are -
1-Is it fine to begin in this way for a new option trader.
2- Do you think if consistency can be achieved in the long term using Iron condor.

The reason for asking the long term is that my aim is gain consistency & to find a way, which we can follow in long term.

Thanks for suggesting the book to study, will try to start reading the book.

Also got the books you have suggested in your thread -

1- Lawrence McMillan - Profit With Options Essential Methods For Investing Success
2- Guy Cohen - The Bible of Options Strategies (Prentice Hall-2005)
3- George Jabbour - The Option Trader Handbook.


Thanks in advance

 

[jassinko]

Hi.........sorry to intrude in ur thread but cant stop myself when i hear word "option"

though Dan sir will and can give elaborate answers to ur question, my swift replies will be:

1. yes, it is good starting approach towards options but pls do keep in mind that if for any reason....u didnt complied with ur system, iron condor can give unimaginable losses when one direction come.....my one mistake erode my 6 months of continuous profits ...

2. Yes it can give consistent results expiry after expiry......just needed to honour ur system (MM, R:R, startegy, entry, exit)..........just follow option chains to get an idea of trending and non trending market and follow the respective strategy.........

 

[Somatung]

Hi Abhi_tyagi

Iron Condors: It is important to look at the risk-to-reward profile of an iron condor spread and to understand it. So you may use the following link and work with it: http://www.avasaram.com/index.jsp in case your broker does not offer such things. In your place the data seem to be free for this tool in the link. (May we know what broker you have or plan to choose?)

Your trading plan so far is ok, even I now could writte a lot what could be changed. But we let it stay as it is. To not lose any time, you should today implement your idea as a paper trade. It makes no sense to discuss for days and weeks theories but not doing any practical things beside it. So today is your starting day in case you not even did try it before. Post a screen shot from Nifty and the option chain and shortly explain what you see and where your legs would be implemented. Also tell (A) about which orders from your broker you would use for your all four option legs, (B) your margins you have to deposit and (C) if this will take your whole amount you can trade with. Having done this from your side, we then can have a look at it and keep an eye on it.

Why this way? As this is a forum, it is a non risky way to learn. If I would be your real mentor, then I would tell you to implement this trading plan of yours now live in the market with real money. This is what my mentor has done with me when I started with option trading, even I had absolute no clue about options at those time. Beside not having any clue about options, it was the fasted way to learn about how feelings are when doing and being in any option trades. Only knowing that some thing may could work or may has to be improved is only part of the game. But knowing how to handle your feelings when it gets hot with your real money and then how to handle those feelings and act on the trade, this is an other game. And this only can be learned in real trading. Any way and as told this is a forum: Let us start now with a paper trade you present from your side and then we will move on.

By the way: No need to read all this book at once, as you will get confused, this may specially with Mc. Millen. My recommendation for the Guy Cohen book was because of its simpleness and the way the book is structured.​

Take care / Dan​

 

[abhi_tyagi]

Thanks a lot Dan sir for your answers! You are once again right on target with your answers.I have trading account with Zerodha.
Thanks for the link, i have a look what it offers but will again go through in detail once i got the time.I have also downloaded the option oracle tool.Dont know much advance use of the tool but can do basic analysis using this like Max gain/loss, Break even etc.Will try to send you the detail with respect to my trade.
I completely agree with you that real part is practical implementation of all the knowledge gained through different sources.I can understand what your mentor
tells you about the real trade as it gives us the experiance, how our minds & imotions works when the real money involve. May be from next month will try do real trade
but for now, can start with paper trade.
1-
I am choosing the next month option(March) as it will give me more flexibility & time to adjust the trade in case of any adverse movement.
Now the strike selection from nifty option chain.Current nifty spot is 7108.
For put the max OI is on 7000 but its too close to comfort. Next max OI is on 6700 it seems ok to me for now.
So on put side my credit spread will be 1 lot 6700/6500 - Net credit will be 70-41 = 29 points per lot
On call side max OI is on 7200 & the next OI is at 7400 - so choosing 7400
So on call side my credit spread will be 1 lot 7400/7600 - Net credit will be 81-36 = 45 points per lot
So the total credit will be 29 + 45 = 74 points per lot
On call side i still see a risk as recently market took a beating since last 2-3 months so risk is more at call side.

Note:Here we can go for both credit spread at different time as you have suggested in your thread but for now i am taking it simple so all 4 leg at once.

I am not sure what option my broker provide for this kind of order so i am assuming for now that all 4 different orders will be at market order and simultaneously.
Margin requirement for 1 lot will be 70K & this is my whole amount.
As per option oracle tool
max profit potential -Rs 5437
max loss risk - Rs 9562
lower protection - 6627
upper protection - 7472

So this will be initial setup for trade & will keep an eye on this.Due to lack of time might not be able to post daily but will keep a track on this & will update whenever got the time.
Try to upload the screeshot of nifty option chain & option oracle but not able to do it. may be have to learn how to do it here will try do do it on weekend

Sir,Your thoughts awaited about the setup till now.

 

[abhi_tyagi]

jassinko! Thanks for your comments.
Its not only my thread. its for every one who wants to share the knowledge with each other. There is always seniors members like Dan sir who are helping everyone with their vast knowledge.
As you have mentioned about one mistake of yours. Could you please tell us the mistake you made if you dont want mind. As learning from the mistakes is very important & it will be very helpful for all others try to trade with these strategies.

 

[Somatung]

@Abhi_tyagi

You told: Try to upload the screeshot of nifty option chain & option oracle but not able to do it.

May this helps if the problem is how and with which software you can do it: http://www.traderji.com/equities/47979-canteen-741.html#post591768​