THREAD ON IRONFLY

These days the most preferred strategy for option sellers due to improved margins is IRONFLY. It's essentially a short straddle with long strangle. Long strangle acting as 'WINGS', which help in capping the unlimited risk associated with a short straddle.(1/n)
You can also view the position as a combination of Cal & Put credit spreads, if that makes it more easy for you.

There are 3 important things to understand while trading this strategy:

1) Initial size of the Wings
2) Risk Management
3) Adjustments

(2/n)
Since we are selling an ATM straddle, the 1st question is how far our wings should be? Ideally i sell .50 delta straddle & buy .20 or .10 OTM strangle, depending on my view on volatility. So the distance of wings depends on the IV setup. Higher the IVs, greater the distance.(3/n)
If you don't understand greeks, then ideally with 30 days to expiry (dte), wings should be around 300pts either side. If your trading in weekly then it should be not more than 200pts. Higher the premiums, higher the distance as we have more cushion of theta. (4/n)
It is important to understand that we need to reduce the distance of wings with time so as to manage our RISK in gap openings or sudden volatile move. So for eg. if you started with 300pt wings with 30dte, the wings wouldn't give the same protection when there is 7dte. (5/n)
So as the premiums decay, we need to gradually reduce the distance of wings.

Now on to ADJUSTMENTS. When the index moves it is important to also move with it in this strategy. This is because if we don't then the initial credit received will reduce drastically. (6/n)
An example. Nifty is trading at 13500. You sell 13500 straddle & buy 13800-13200 strangle. If Nifty moves 200pts up, your sold straddle will have lesser theta value & your strangle will have higher as 13800 cal will increase. So your overall credit will drastically reduce. (7/n)
So if market moves one direction, one sold option becomes ITM (means less credit) & one wing comes closer to ATM (means higher debit). So the overall theta received becomes less or even nil. That's a practical problem which is why adjustment is required to receive max theta.(8/n)
For how to do adjustments, best way is to treat Ironfly as a straddle with added protection. So try to keep the straddle near to ATM & when the wings are tested only then adjust them. This way you'll always have maximum credit received which is important in this strategy. (9/n)
What i have explained is a neutral approach on how to trade Ironfly with max credit received. Many try to trade it by exiting the losing leg & keep a TSL on the winning leg. Personally I'm not a fan of this way but that's because I don't want to trade direction like this.(10/n)
Many advocate Ironfly as an easy 4% strategy. It's not. Requires expertise in when to adjust & how much the wing size should be. With experience such issues can be dealt with. Overall it's a good strategy specially for those who want to take less risk with limited capital.(11/n)
How to adjust when a wing is tested?

Example

Nifty @ 13500, our position:

13500 short straddle
13800-13200 long strangle.

So when index reaches 13700, our straddle will be shifted from 13500 to 13600 to 13700.

We need to re-center our long strangle now. (12/n)
So we can exit 13800-13200 & take a new strangle of 14000-13400 or if the premiums have dropped & we need to reduce our wing size, then 13900-13500.

Here aim is to receive max credit, so as when or where the market gives good decay, we are ready to seize the opportunity.(13/n)
Above is just an example. During volatile moves we don't need to adjust at all, because slippages can be high & our wings are there to protect. Only when nifty breaches a level (subjective), where our credit received has reduced drastically, that we need to do the needful. (14/n)

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More from @SarangSood

29 Nov
THREAD ON RATIO SPREADS

Whenever vol is on the rise, my go to strategy is always RS. Apart from Jan, Feb & Jul this year when i traded in straddle, 2020 has all been about RS. It's the flexibility of the strategy to trade in both direction & non-direction which i like.(1/n)
RS is buying one strike with high delta & selling more than 1 lot of lesser delta. Since i do weeklies i prefer buying ATM & selling OTMs on Fri, Mon, Tues as the premiums in OTM options are high. For Wed, Thus i buy ITM & sell ATMs.(2/n)
To make up my decision of which leg (cal or put) to initiate, i look in the option chain on which side the OTMs are not spiking. That's likely the side whose OTMs will melt faster or not increase even if market moves towards them.(3/n)
Read 7 tweets
28 Nov
The Monty hall problem (A Probability Puzzle)

You’re on a game show. There are 3 doors & there’s a car behind one of the doors, while others are empty. You are asked to choose, so you go with door 1. The host instead opens a different door 2, but there's no car behind it. (1/n)
Now he offers you a choice: You can switch to door 3 or stay with your original decision of door 1. Which according to you has more probability of having the car?

There are two doors left and one car. It should be a 50-50 chance no matter which door you pick. But Wrong. (2/n)
From the beginning, you only had a 1 in 3 chance of picking the right door. When the host reveals one of the doors, it doesn't actually change the odds that you initially picked. The first choice remains a 1 in 3 shot. (3/n)
Read 6 tweets
10 Oct
Traders are majority of times trapped in the 'hindsight bias', which is the tendency to believe after learning the outcome, that he could have foreseen it. This is one of the biggest decision traps & it matters because it gets in the way of learning from our experiences.(1/6)
The problem starts when a trader thinks he 'knew it all' & so he actually stops finding reasons why the strategy worked in the first place. He would specifically review data that affirms what he knew to be valid & will attempt to make a strategy around it. (2/6)
The result would be complecency that would later show in his trading results. It would make the trader overconfident in the certainty of an outcome & will view his judgements as something which is ultimately bound to happen. A very simple example is watching a thriller movie(3/6)
Read 6 tweets
8 Jun
AN ESSENTIAL THREAD ON OPTION ADJUSTMENTS

Adjustments can be done in variety of ways & depends totally at the discretion of the trader. To get a clear mind we need to know the following:

1) What to follow,
2) How to make the adjustment,
3) When to make the adjustment. (1/5)
1) We need a way to measure the imbalance created by a delta move in an option strategy. We can measure through premiums, distance from index or delta of greeks (i personally use delta). So basically whatever way of measure we use, both sides should be equal in it. (2/5)
2) Adjustment can either be done by selling extra quantity of profitable side, buying the quantity of losing side or shifting both the sides. I personally shift the sides because with extra quantities our Gamma gets imbalanced & the risk increases if market reverses. (3/5)
Read 5 tweets

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