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Part 3: Thread on #OptionBasics for #Nifty #BankNifty or #Stocks for beginners
In Part 2 we understood how to determine what IV is high and when to buy and sell options. Now we need to understand when to exit, roll or take a stop-loss.
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In Part 2 we understood how to determine what IV is high and when to buy and sell options. Now we need to understand when to exit, roll or take a stop-loss.
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Lets take a credit spread today:
Sell 11800 PE at 118
Buy 11700 PE at 75
Max risk is 57 point & max reward is 43 points. As visible from the Greeks, delta is almost neutralized and position is theta positive. Does one need to always look at greeks to strategize
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Sell 11800 PE at 118
Buy 11700 PE at 75
Max risk is 57 point & max reward is 43 points. As visible from the Greeks, delta is almost neutralized and position is theta positive. Does one need to always look at greeks to strategize
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There is a quick way to remain delta and theta neutral i.e.
When doing credit spreads: Sell one strike ITM and buy one strike OTM.
When doing debit spreads: Buy one strike ITM and sell one strike OTM.
This is a quick and dirty way to remain greek neutral.
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When doing credit spreads: Sell one strike ITM and buy one strike OTM.
When doing debit spreads: Buy one strike ITM and sell one strike OTM.
This is a quick and dirty way to remain greek neutral.
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Coming to the targets:
When you receive 55-65% of max profit, you should either roll the position or cover it. Reason is, you started position with 1:1 R:R. Now the R:R is 1:4. There is no need to jeopardize whole position for such R:R. Either roll or exit.
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When you receive 55-65% of max profit, you should either roll the position or cover it. Reason is, you started position with 1:1 R:R. Now the R:R is 1:4. There is no need to jeopardize whole position for such R:R. Either roll or exit.
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Now the question remains: What should be the stoploss?
Spread is a risk defined strategy so we do not need any Stoploss. If uncomfortable, trade in less size & let the trade run. But we need to exit when trade does not go in our favor.
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Spread is a risk defined strategy so we do not need any Stoploss. If uncomfortable, trade in less size & let the trade run. But we need to exit when trade does not go in our favor.
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For this, we will not use charts. We will use the information given to us by the options marketplace to determine whether our
trade still has probability to succeed, OR Does the probabilities say that the trade will not achieve our targets, so we better get out?
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trade still has probability to succeed, OR Does the probabilities say that the trade will not achieve our targets, so we better get out?
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Probability of touching
Probability of touching means the probability of an individual options strike being crossed anytime between now and expiry. Understand more about Probability of Touch at https://www.tastytrade.com/tt/shows/options-jive/episodes/understanding-probability-of-touch-04-20-2016
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Probability of touching means the probability of an individual options strike being crossed anytime between now and expiry. Understand more about Probability of Touch at https://www.tastytrade.com/tt/shows/options-jive/episodes/understanding-probability-of-touch-04-20-2016
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If the Probability of touching of the sold OTM option dips below 45%, exit the spread position. Quick way to know this is:
Check the DELTA of the OTM option Multiply that by 2. This is your POT. If this drops below 45%, exit the spread position.
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Check the DELTA of the OTM option Multiply that by 2. This is your POT. If this drops below 45%, exit the spread position.
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This is just a basic of how option spreads can be taken based on Option Greeks. A lot needs to be considered when taking Greeks in consideration. But I hope this gives beginners an idea into what the world of Options look like.
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In part 4, next week, I will share some beginners information on Historical Volatility and Implied Volatility. Stay tuned. End of Thread.
