What is the best way to lock/exit all positions for option traders?

[4ever_911]

Since I have been selling options for a while, most of the time it works great, I get small profits day by day (0.5-%) , and then a deep drawdown(2+%) hits me. although I get more positive return days, I still want to stay away from big hits.

For stock traders, it's easier to exit all positions as long as you are trading those liquidity stocks. (we don't disscuss black-friday such situation here)

However, for option traders, the spread really hurts, so i wonder if there is a way to easily lock/exit all positions? So I can easily set my max daily drawdown limits, say 2%, once it hits, i can easily automatically exit/lock all my positions.

 

[Robert Morse]

Since I have been selling options for a while, most of the time it works great, I get small profits day by day (0.5-%) , and then a deep drawdown(2+%) hits me. although I get more positive return days, I still want to stay away from big hits.

For stock traders, it's easier to exit all positions as long as you are trading those liquidity stocks. (we don't disscuss black-friday such situation here)

However, for option traders, the spread really hurts, so i wonder if there is a way to easily lock/exit all positions? So I can easily set my max daily drawdown limits, say 2%, once it hits, i can easily automatically exit/lock all my positions.

Not really. You are right, For stock traders, they can all exit MOC. For options, it takes more effort and a little more time.

 

[4ever_911]

Not really. You are right, For stock traders, they can all exit MOC. For options, it takes more effort and a little more time.

So, what can we do?

 

[quant1]

Depends on your options strategy. What risk are you trying to protect yourself from? If it's delta risk, you can do an approximate hedge in equities, where spreads are tighter. Maybe it would make sense to buy or sell a different option as work the bid/offer for that fill (don't pay the spread). It really depends on what you want the risk profile of your book to be and how much capital you have to attain that profile. I'd start with a spreadsheet where you compute your different risk (delta, gamma, etc) and determine what these are for your book.

 

[Martinghoul]

Fundamentally, what you ask is impossible, by construction...

There is NOTHING you can do, because this is the nature of the option contract and the nature of the trading strategy that you're employing to generate profit.

Basically, once you've knowingly and consciously decided to put your cock in the custard, so to speak, you can't complain if things get too hot.

 

[Robert Morse]

So, what can we do?

The best you can do is stage orders or spreads to exit, then manually choose a price to exit when you need to. Some software has basket traders that will enable you to send out multiple order. I would not use them for options. In Silexx, one of the professional platforms we offer, in the portfolio window you can right click on any position and choose from open an order ticket, close at the market, close with a limit plus some other choices. For spreads, you can highlight a few options and bring up a complex order ticket.

You are looking to easy, not what is best for your P/L.

 

[4ever_911]

Depends on your options strategy. What risk are you trying to protect yourself from? If it's delta risk, you can do an approximate hedge in equities, where spreads are tighter. Maybe it would make sense to buy or sell a different option as work the bid/offer for that fill (don't pay the spread). It really depends on what you want the risk profile of your book to be and how much capital you have to attain that profile. I'd start with a spreadsheet where you compute your different risk (delta, gamma, etc) and determine what these are for your book.

Buy/Sell equities looks easy, but as a matter of fact, it's far more complex, the delta dynamically changes as time goes, you have to dynamically hedge the positions.

 

[reformedtraderes]

One way is to put on an OTM hedge which (say) halves delta when you're down and try to exit on a pop/drop. Best to backtest before trying...

 

[tommcginnis]

However, for option traders, the spread really hurts, so i wonder if there is a way to easily lock/exit all positions?

Nope!
As an option seller, you're selling theta -- and as your book ages, the portfolio theta grows. ("Yayyyyyyy!")
But then, so does the book' sensitivity to market movement -- the stability of your portfolio delta goes to crap. That's that bastardly portfolio gamma. ("Boo-oooooo!") Even efforts to bring your p-delta to $0 may be for naught, if the stability (viewable as p-gamma) is not there ("...if the p-gamma is too large.")

How do you do that? Time. ("Theta?? The decay-thing I was *selling*?!?!?) Yup. Closer-to-expiry options have a very unstable delta+gamma relationship, compared to farther out expiries. If you wish a more-stable delta, you need a low-and-more-stable gamma: you need to go 'out.'

If you wish to garner theta, stay 'out' and let 'em cook off, but set an alarm for when gamma gets threatening (I happen to use a [short-strike] 1|10 ratio), retire those positions, and roll out in time for fresh ones. You'll notice your portfolio gamma (read as: "threat of portfolio floppitude") shrinks.

 

[reformedtraderes]

Hi Tom, many thanks for that. Could you spell out the short gamma alarm in a bit more detail.