This thread is about how premiums behave in different setups. Though identifying them early takes years of practice, being mindful of what's happening in the present can give us an edge. So we can be better prepared with our strategies.(1/n)
1) Gentle decay in premiums/ less delta moves

Such days are pure delight for option sellers. The adjustment cost is less because of less delta moves, so vega realisation is more. Usually such days are plentiful when Vix is below 15. (2/n)
2) Decay with High delta moves

Such days are common when Vix is high. Since delta moves are more, vega realisation is less because of high adjustment cost. Those who don't adjust their positions usually miss out on it's profit potential. (3/n)
3) Rapid rise & fall of Premiums

This situation is when volatility is relatively high in the markets, with dominant SL hunting. Compulsive straddle sellers usually get exhausted during such days & those in the habit of scalping or selling when IVs rise, make some profit. (4/n)
4) Rise in premiums with High delta moves

This is the most dangerous scenario for any kind of option seller. If caught in such move with no decent SL in place, can lead to huge drawdowns. In such times it's important to skew your strategies & ride the trend. (5/n)
5) No decay & No delta moves

Such days usually confuse the retailers, as the decay stops for a while. These are typical days when market is waiting for an event to unfold. What may follow after the event is vol crush but with high delta moves (combination of 2 & 3).(6/n)
Since there are so many variations in how premiums behave, no single strategy works all the time. So an option seller needs to have different strategies in his armoury to profit from different scenarios. There are some categories like 3&5, where making profit would be tough.(7/n)
Strategies that can be used:

1) Straddle, Strangle, Ratio spreads, Ironfly
2) Straddle/Ironfly (High adjustment), Ratio spreads, Credit spreads
3) Ratio spreads, Straddle/Strangle scalping
4) Ratio spreads, Credit spreads
5) Let the event unfold & act accordingly.(8/n)
Aim of this thread was to make new/struggling option sellers realise that theta decay is not always consistent. There are variety of skill sets like adjustment, execution, strategy selection, following volatility which is required to make decent money through option selling.(9/n)

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More from @SarangSood

30 Jan
Hello! Welcome to my profile.

This is Master thread of all the useful tweets (imo) that i have shared in the past. Going through them may provide some knowledge on options, volatility, greeks & trading psychology. Will keep updating in the future.

Thanks for following 🙏

Read 21 tweets
16 Jan
Friday's specially after the introduction of weeklies have become very unpredictable for option sellers IMO. Usually I'm able to forsee a volatile move & if not then through hindsight analysis I'm able to understand how a spike manifested, which ultimately adds to my system.(1/n)
But days like 14th Aug'20 when everything is going super fine & all of a sudden within seconds huge vol spike occurs is baffling. There are many such Friday's before when such moves have manifested without any prior sign of volatility (according to me). (2/n)
What i have understood is that since current weekly has max liquidity & Friday is the first day of a new series, the positions are not mature enough. So the operator can afford to shake up things. I haven't seen such spikes coming on Tue-Thus without prior signal. (3/n)
Read 7 tweets
9 Jan

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)
Read 9 tweets
2 Jan
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:


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)
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)
Read 12 tweets
12 Dec 20

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

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)
Read 14 tweets
29 Nov 20

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 8 tweets

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