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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)

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)

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)

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)

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)

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)

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)

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)