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FINDING EDGE IN OPTIONS

24/08/15: Nifty gap down 250 points & another 250 after that. Previous few months return gone, but since I'm quick to take my losses, was saved from ruin. Before that my only edge in option selling was adjustments & my forever edge of following PA. (1/n)

24/08/15: Nifty gap down 250 points & another 250 after that. Previous few months return gone, but since I'm quick to take my losses, was saved from ruin. Before that my only edge in option selling was adjustments & my forever edge of following PA. (1/n)

I soon realised that theta decay with sound adjustments is not an edge, which i earlier thought was & which gave me good returns over the years. After that i went deeper in understanding volatility behaviour, how/where it manifests & all the discrepancies in option chain. (2/n)

With finding edge in logistics i mean how to keep the greeks in check, SL in place & optimum ways of adjustments with minimum slippages. So the main aim here is to write theta without following vol behaviour & having any actual knowledge of what's going on in the markets. (3/n)

THREAD ON DELTA (The most important GREEK)

Many traders don't indulge in understanding GREEKS because they think they are very complicated.

There are 4 primary greeks:

Delta

Gamma

Theta

Vega

In my experience, understanding DELTA is enough to take benefit of greeks.(1/n)

Many traders don't indulge in understanding GREEKS because they think they are very complicated.

There are 4 primary greeks:

Delta

Gamma

Theta

Vega

In my experience, understanding DELTA is enough to take benefit of greeks.(1/n)

Delta measures the rate of change of options price based on the directional movement of the underlying.

So this means we can know in advance (theoretically) how much an option will move with the underlying & so we can prepare our strategies accordingly. (2/n)

So this means we can know in advance (theoretically) how much an option will move with the underlying & so we can prepare our strategies accordingly. (2/n)

Value of delta varies between 0 & 1 for calls and -1 & 0 for puts. This figure tells how much an option price will change, when the underlying moves 1 point. So example a delta of .2 of call indicates that for every 1 point change in the underlying, the price will move .2 (3/n)

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)

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)

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)

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)