Actually i am an amateur trader, who tries to find an edge in trding options and is constantly trying to find new, better ways of trading.
It just happened in my mind a thought, that i would like to share to the board. And I welcome everyone that would like to share his points of view about this trading tecnique.
This trading tecnique consist in combining two trading stiles.
Lets assume that you trade stocks and you apply trend trading.
Well in this situations, as i know, the stock is about 80% the time in a sideways and only 20% in some trend. So you could(theoreticaly speaking) loose money 80% of the time, and would earn money 20% of the time.
Now lets assume that you are trading only options.
Well in this situation, you can apply many different strategies...but lets assume that you could be Long Gamma or Short Gamma.
Well if you are LONG, then(theoretically and statistically speaking) you would loose money 80% of the time and earn BIG money 20% of the time.
If you are SHORT, then(again theoretically and statistically speaking) you would earn 80% of the time and loose BIG money 20% of the time.
Well i am asking myself. How can i apply a SHORT gamma trade and reduce at minimum the risk to loose BIG money?
It happened to my mind, that i can combine stock trading and option trading in this way, but i am not sure if it would actually work. If there is someone who is expert in trading that would give an opinion, I(and many others) would appreciate it very much:
Assume that we are trading very volatile stocks(with some news or something to be expected). wait the news to come and in the same day(when volatility is stil high enough to capture a good credit) apply a short gamma trade like(short strangle, short stradle, short butterfly,....) for a month or two.
Well now in this situation we have two breakpoints and two risk zones.
Can we hedge this position, by short term trend trading with stocks?
Example:
Stock @25$ vol is @100% and some bad news is released(could be inverse...) in the premarket, the stock falls @20$
At market open we, in about 1h, estabilish for example, a short butterfly.
Stock @20,
buy 1 17,5 call
Sell 2 20 call
buy 1 22,5 call
For this day the stock has rallyed very much and there are less possibilities that it can go another 12,5% in some way to our breakeven points.
The next thing we shoul consider a hedge. The stock could go to 17,5/22,5 allready today, or in the future. Lets assume that the stock hits the 17,5 breakeven in the next few days. Now the stock is @17$ The short-term trend is bearish(if the short-term trend is bullish, dont sell short).
Short stock @17(stop loss @17,5)
Now the question is, should this strategy be applyed differently?
Could a short-term trend stock trading be considered as a hedge?
---------------------------------------------------------------------------------
Different point of view
Strategy no.2:
Stock has fallen to 20$
Long condor estabilished:
Sell 22,5 call
Buy 25 call
Sell 17,5 put
Buy 15 put
If the stock hits the breakeven points 17,5/22,5 we should consider sell short/buy stock.
What do you think about this?
----------------------------------------------------------------------------------
I hope that this post will help some traders improove their trading knowledge.
Denis
P.S:If you misunderstood my post in some way, please let me know. English is not my mother language.
It just happened in my mind a thought, that i would like to share to the board. And I welcome everyone that would like to share his points of view about this trading tecnique.
This trading tecnique consist in combining two trading stiles.
Lets assume that you trade stocks and you apply trend trading.
Well in this situations, as i know, the stock is about 80% the time in a sideways and only 20% in some trend. So you could(theoreticaly speaking) loose money 80% of the time, and would earn money 20% of the time.
Now lets assume that you are trading only options.
Well in this situation, you can apply many different strategies...but lets assume that you could be Long Gamma or Short Gamma.
Well if you are LONG, then(theoretically and statistically speaking) you would loose money 80% of the time and earn BIG money 20% of the time.
If you are SHORT, then(again theoretically and statistically speaking) you would earn 80% of the time and loose BIG money 20% of the time.
Well i am asking myself. How can i apply a SHORT gamma trade and reduce at minimum the risk to loose BIG money?
It happened to my mind, that i can combine stock trading and option trading in this way, but i am not sure if it would actually work. If there is someone who is expert in trading that would give an opinion, I(and many others) would appreciate it very much:
Assume that we are trading very volatile stocks(with some news or something to be expected). wait the news to come and in the same day(when volatility is stil high enough to capture a good credit) apply a short gamma trade like(short strangle, short stradle, short butterfly,....) for a month or two.
Well now in this situation we have two breakpoints and two risk zones.
Can we hedge this position, by short term trend trading with stocks?
Example:
Stock @25$ vol is @100% and some bad news is released(could be inverse...) in the premarket, the stock falls @20$
At market open we, in about 1h, estabilish for example, a short butterfly.
Stock @20,
buy 1 17,5 call
Sell 2 20 call
buy 1 22,5 call
For this day the stock has rallyed very much and there are less possibilities that it can go another 12,5% in some way to our breakeven points.
The next thing we shoul consider a hedge. The stock could go to 17,5/22,5 allready today, or in the future. Lets assume that the stock hits the 17,5 breakeven in the next few days. Now the stock is @17$ The short-term trend is bearish(if the short-term trend is bullish, dont sell short).
Short stock @17(stop loss @17,5)
Now the question is, should this strategy be applyed differently?
Could a short-term trend stock trading be considered as a hedge?
---------------------------------------------------------------------------------
Different point of view
Strategy no.2:
Stock has fallen to 20$
Long condor estabilished:
Sell 22,5 call
Buy 25 call
Sell 17,5 put
Buy 15 put
If the stock hits the breakeven points 17,5/22,5 we should consider sell short/buy stock.
What do you think about this?
----------------------------------------------------------------------------------
I hope that this post will help some traders improove their trading knowledge.
Denis
P.S:If you misunderstood my post in some way, please let me know. English is not my mother language.
