Which option strategy to apply for this market outlook?

[amiuser]

My outlook to a stock option is as follows ...

expiration days pending = 30 days

(i) stock may stay flat till expiration.

(ii) very bearish on the stock

(ii) very little pull back


Could you please name which Option Strategy is suitable for such outlook ?

 

[wayneL]

My outlook to a stock option is as follows ...

expiration days pending = 30 days

(i) stock may stay flat till expiration.

(ii) very bearish on the stock

(ii) very little pull back


Could you please name which Option Strategy is suitable for such outlook ?

Whadayawanna play, flat or bearish. Or a hedged scenario?

What is IV and relative IV?

More information is better.

 

[amiuser]

Here is the reply to your queries ..

Whadayawanna play, flat or bearish. Or a hedged scenario?

I want to be positional . No intraday. .......presently this month contract has just ended....next month contract is going to begin tomorrow(expiration is after 30 days)....I want to play next month contract starting now.

Regarding flat or bearish, I have positional outlook as mostly flat or bearish and a minor pullback.

Regarding hedged , Yes...I would love to do the hedging and go for a sound sleep....happy to sacrifice little profit......will prefer minimum 1:2 Risk/Reward ratio....and high probability of winning.

What is IV and relative IV?

IV is high compared to historical IV


Hope this information is fine with you. Could you please guide ?

Thanks for the post.

 

[hhse]

What market - makes a big difference.

 

[amiuser]

What market - makes a big difference.

Equity Market.

 

[hhse]

Equity Market.

Sorry I was not specific enough. Reason being is that if you are talking about the ASX, there is really no point in doing spreads because the bid & ask is too wide, and you end up losing too much edge

In regards to different strategies for neutral to bearish in high implied IV rank, includes but not limited to:

(1) Naked Call (credit)
(2) Call Credit Spread (credit)
(3) Skewed Iron Condor (credit)
(4) Broken wing butterfly (debit)
(5) Covered Put (sell stock, sell put)

In regards to managing risk, if you are in the ASX market where there are wider bid & ask spread, strategies (1) & (5) would be more appropriate, and you would go about adjusting risk by trading small amounts of contract.

If you are trading in a market with more liquidity with 1 or 2 cent wide bid/ask, then any of the strategies are fine.
Strategies 2, 3 & 4 are defined risk trades.

You define your probability of success by max loss on strike width for defined risk trade & for the naked call, display delta for call you are selling and it will give you a proxy of probability of ITM. For the covered call, check the delta of the corresponding put.

For all positions, close at 50% max profit. And for naked positions, consider closing at 2 x credit loss. Defined risk you only close winning.

Above is only general guide, and normal disclaimer applies - that it is only an opinion and not advice.

 

[amiuser]

Sorry I was not specific enough. Reason being is that if you are talking about the ASX, there is really no point in doing spreads because the bid & ask is too wide, and you end up losing too much edge

In regards to different strategies for neutral to bearish in high implied IV rank, includes but not limited to:

(1) Naked Call (credit)
(2) Call Credit Spread (credit)
(3) Skewed Iron Condor (credit)
(4) Broken wing butterfly (debit)
(5) Covered Put (sell stock, sell put)

In regards to managing risk, if you are in the ASX market where there are wider bid & ask spread, strategies (1) & (5) would be more appropriate, and you would go about adjusting risk by trading small amounts of contract.

If you are trading in a market with more liquidity with 1 or 2 cent wide bid/ask, then any of the strategies are fine.
Strategies 2, 3 & 4 are defined risk trades.

You define your probability of success by max loss on strike width for defined risk trade & for the naked call, display delta for call you are selling and it will give you a proxy of probability of ITM. For the covered call, check the delta of the corresponding put.

For all positions, close at 50% max profit. And for naked positions, consider closing at 2 x credit loss. Defined risk you only close winning.

Above is only general guide, and normal disclaimer applies - that it is only an opinion and not advice.

Thanks for the post.

bid/ask is good in my stock...acceptable range.

Please dont get me wrong ... I would like to post few criticisms on your remark for a healthy discussion.

I already had some homework on my own....and so posting some concerns here

some issues I find here is ..

(3) & (4) ...have not studied much .....but it seems too many legs here ...is it ?... ..high transaction cost......difficult to manage....I dont feel comfortable with this.

(1) ....high risk...sleep less night ...sudden up surge ...I am busted.

(2) ...good ....but I have 30 days to expiration...I think this works fine when you are 1/2 weeks prior to expiration

(5) stop loss required for stock separately ...afraid of gap up


I actually don't like your strategies much.....I want a conservative , consistent , higher winning probability , lower risk , good reward directional Strategy.


in simple words ..my broad view is

If stock goes down....I want to earn money
If stock is flat....I may/may not want to earn money.....but surely don't want to loose
If stock is up....I want to loose money..but want to loose small & limited .

You know ....I have a strategy in my mind though ...but I am not sure if this fits the bell ...Could you please comment on this Startegy.

Bear Put Spread(debit) - I think risk/reward is limited here ...but risk:reward is not 1:2 ..this is a concern to me... .also since new month contract has just started......I have the entire month now....do you think this will be good Strategy in my expected stock broad view ?

Having said these definitely I'll look at 3 & 4 for more information .....and thanks for your post & time.

 

[hhse]

Thanks for the post.
Bear Put Spread(debit) - I like this Strategy ..coz its hedged ...risk/reward is also limited ...but risk:reward is not 1:2 ..this is a concern to me... .also since new month contract has just started......I have the entire month now....do you think it would be good Strategy before its too far from expiration ?

Your comment of High Implied IV rank already ruled that out as an ideal strategy. You will not find a reward risk of 1:2 with high probability of success. 30-55 days is good duration, 45 optimal.

And as mentioned before, risk can be managed either via defined risk OR keeping your position size small.

 

[amiuser]

Your comment of High Implied IV rank already ruled that out as an ideal strategy.

correct.

How about BEAR CALL SPREAD ?

You will not find a reward risk of 1:2 with high probability of success. 30-55 days is good duration, 45 optimal.

How much winning percentage 3 & 4 normally will give ? approx ?

I assume you mean I can apply your Strategies safely if I am 30 days far from expiration.

And as mentioned before, risk can be managed either via defined risk OR keeping your position size small.

correct.... we dont have micro size lots ....so I can not go with the position sizing....I'll prefer defined risk.

Thanks for the post.

 

[hhse]

correct.

How about BEAR CALL SPREAD ?



How much winning percentage 3 & 4 normally will give ? approx ?

I assume you mean I can apply your Strategies safely if I am 30 days far from expiration.


correct.... we dont have micro size lots ....so I can not go with the position sizing....I'll prefer defined risk.

Thanks for the post.

Bear Call Spread, Credit Call Spread same thing different name. You can modify your risk profile by either widening strike between short call & long call and/or by varying the distance of short call. The probability of success is the max loss divided by width of strike.

Other two strategies though will have negative delta (i.e bearish), you can still lose money/not make money if it goes too far down, so maybe just skip that and research in your own time.

If you are still unsure of what strikes to pick, start out at one standard deviation (i.e sell the call spread where you get 1/3rd width of the strike). Close-out at 50% of max profit (i.e 1/6th width of strike profit) - this would provide just over 70% pop even though implied would be 66%.

 

[amiuser]

Bear Call Spread, Credit Call Spread same thing different name. You can modify your risk profile by either widening strike between short call & long call and/or by varying the distance of short call. The probability of success is the max loss divided by width of strike.

Other two strategies though will have negative delta (i.e bearish), you can still lose money/not make money if it goes too far down, so maybe just skip that and research in your own time.

If you are still unsure of what strikes to pick, start out at one standard deviation (i.e sell the call spread where you get 1/3rd width of the strike). Close-out at 50% of max profit (i.e 1/6th width of strike profit) - this would provide just over 70% pop even though implied would be 66%.

I am willing to take a call on (2) Call Credit Spread ..........I am happy as you said 30 days to expire is also good enough for Credit Spread.

But I did not understand that blue part of your comment....an example will be excellent in this context.

Let me take an hypothetical example.

say stock is trading at 100$
So you are saying 100 + 68% (since 1 SD=68%) = 168 is the strike price where I should sell Call....fair enough.......what is the long Call Strike I should choose ? Is there any similar rule for that ?

Also what is Close-out at 50% of max profit (i.e 1/6th width of strike profit) ? I dont get this part.

Thanks for the help and your time.

 

[hhse]

Lets say XYZ is $50. To execute trade, you will need to sell a call & buy a call further OTM.

So lets say XYZ $52 strike is $1 and $53 dollars is 67cent. Then the width of strikes is difference between $53 & $52 dollars (1 dollar width). Also, the credit you will collect is $1 - $0.67 = $0.33. Therefore your probability of success in this trade is ($1-$0.33)/$1 = 67% probability of success. Your max loss is $0.67 dollars and max profit is $0.33.

However, you'd want to close-out when you can buy back the spread for about $0.16.

 

[amiuser]

Lets say XYZ is $50. To execute trade, you will need to sell a call & buy a call further OTM.

So lets say XYZ $52 strike is $1 and $53 dollars is 67cent. Then the width of strikes is difference between $53 & $52 dollars (1 dollar width). Also, the credit you will collect is $1 - $0.67 = $0.33. Therefore your probability of success in this trade is ($1-$0.33)/$1 = 67% probability of success. Your max loss is $0.67 dollars and max profit is $0.33.

However, you'd want to close-out when you can buy back the spread for about $0.16.

have some query here.

I understand you would favour to close the trade as soon as 50% profit is achieved....you want a slice ...not the full cake...fine.

but what I fail to understand is , shall I take a wider strike difference or a narrower strike difference.....I am unable to decide this part....what is the best practice here ?

 

[hhse]

have some query here.

I understand you would favour to close the trade as soon as 50% profit is achieved....you want a slice ...not the full cake...fine.

but what I fail to understand is , shall I take a wider strike difference or a narrower strike difference.....I am unable to decide this part....what is the best practice here ?

Well there are two ways to scale your trade, either increase the number of contracts you do OR widen the strikes.
The latter is preferable as your probability of profit is better.

 

[wayneL]

For all positions, close at 50% max profit. And for naked positions, consider closing at 2 x credit loss. Defined risk you only close winning.

Above is only general guide, and normal disclaimer applies - that it is only an opinion and not advice.

I don't get this advice hhse.

Closing of a position is relative to risk taken and probability of profit/loss, vis a vis expectancy. It may make sense in YOUR overall trading plan, but may not be good advice for someone else doing things a bit differently.

However taking partial profits makes sense in a host of circumstances, when future risk/reward/probability becomes unfavourable.

 

[hhse]

I don't get this advice hhse.

As I said, was not advice, just an opinion.
Opinion is based on studies from Tom Sosnoffs research team. Closing early also reduces gamma risk.

 

[amiuser]

As I said, was not advice, just an opinion.
Opinion is based on studies from Tom Sosnoffs research team. Closing early also reduces gamma risk.

I saw few videos from tastytrade & few material of thinkorswim platform.

I have feeling that they advocated for this starategy when expiration is very close..2 weeks .....

But I just started a new month expiry ...I have 30 days to expire ...I am not getting decent premium credit also.


I was thinking another Strategy...As I said my outlook is bearish & flat market ...little minor pulback will also be there

How about ...
Sell future + sell an OTM put and buy OTM call......do you see any issue with Strategy ?

my only concern is when time goes by I dont want to punished.

any comments to this Strategy ?

 

[wayneL]

As I said, was not advice, just an opinion.
Opinion is based on studies from Tom Sosnoffs research team. Closing early also reduces gamma risk.

My point is that it with without context. Nothing wrong if it is framed by other trading vectors as mentioned, but worthless without.

Please don't take offence, but it must be framed by those other things.

 

[mazzatelli]

As I said, was not advice, just an opinion.
Opinion is based on studies from Tom Sosnoffs research team. Closing early also reduces gamma risk.

Tom Sosnoff's team also likes you to trade condors and butterflies as much as possible - more legs, more brokerage fees for them.

 

[amiuser]

@waynl,

which Strategy you would like to deploy in such case ?
comments please