newbie's trade plan! your views pls

Hello Rally,

You said -

Being 2 sigmas out of the money doesnt mean you arent trading direction.

I didn't understand this statement. I thought that
as long as I'm not short naked options and hold positions to expiry, it is immaterial to me, which side the underlying moves.

so the risk is whether the underlying moves outside the 2 sigma points.

What am I missing? Could you please give me some pointers?

Rgds,

Newboyo
 
Quote from newboyo:

Hello Rally,

You said -

Being 2 sigmas out of the money doesnt mean you arent trading direction.

I didn't understand this statement. I thought that
as long as I'm not short naked options and hold positions to expiry, it is immaterial to me, which side the underlying moves.

so the risk is whether the underlying moves outside the 2 sigma points.

What am I missing? Could you please give me some pointers?

Rgds,

Newboyo
More...

Quick example I just pulled up this evening using Jan options.

Sell IC (1 contract each)
puts 1825/1800 for 2.30
calls 2200/2225 for 2.75

Max profit is $505
Max loss is $1995
As you can see, you are risking 2 grand to make five hundred.

Let's say the market drops 222 points from Wednesday morning through Friday close (like it did 11/7-11/12) just to pick a recent large move.

Rough numbers at close this Friday would be 1807. I estimated a pop in the VIX of 5 points. You would have a loss of $711.

You need a good options modeling program to see how different market levels change your profit/loss. You are right that your risk is outside your breakeven points. The question is, can you stomach the large loss showing on your statement if the market makes a quick move in either direction? Using the same assumptions above, a 100 point drop by Friday gives you a 10% loss (around $200) but the market is still 100 points from your breakeven on the down side. Do you close at a loss or hold on? You can only answer that when you have real money on the line, not a paper trade.
 
Hi Ryank,

Thank you for your explanation. I see what you mean in terms of the risk.

Wouldn't a stoploss limit order help restrict my loss. Say if the stoploss limit is placed at credit received+10% of margin at risk?

Rgds,

Newboyo
 
Not necessarily. Your stop can get blown big time by an overnight gap. You will get stopped out when the market opens but you might be surprised at how far past your stop you actually get out.

Your P/L can swing pretty wildly even when the market is still well away from your strikes.
 
Hello Ryank,

Understood!!

I had prepared my (now discredited) trade plan, based upon the teachings of gentle brokers.

Could you point me where I could learn a more sensible way to selling premium?

Rgds,

Newboyo
 
Quote from newboyo:

Hello Ryank,

Understood!!

I had prepared my (now discredited) trade plan, based upon the teachings of gentle brokers.

Could you point me where I could learn a more sensible way to selling premium?

Rgds,

Newboyo
More...

Go to the SPX thread and read posts by rallymode about selling 5 point spreads close to the money.
 
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