Sarang Sood

@SarangSood

Two things i have been doing in the recent past:

1) Having a directional bias Can't do adjustments for staying neutral in such

environment. The cost is way too high.

2) Staying away from ATM options Staying near 20 delta options helps to
keep the slippages low & hedges active.

THREAD ON RATIO SPREADS

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) 

Ratio Spread 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)
If your willing to adjust, then even if the view goes wrong you can buy or
sell extra qty of sold option to stay +ve. For example if you have initiated a
PUT RS & there is a volatile downmove, then you can keep buying extra
sold qty & convert the RS into debit spread.(4/n)

If there is a volatile upmove, u can sell extra qty to receive more premium,
which will ultimately decay. If market doesn't go anywhere, then also sold
OTMs will decay faster. So it's kind of a win win situation, if ur willing to
adjust & look carefully in the option chain.(5/n)

Many times during high IVs when there is good vol crush, both the strikes
can give profit. So if you have a Put spread & market opens 70pts down,
your ATM put will increase & OTM put will decrease. It's hard to believe
that puts can fall when nifty falls but it happens.(6/n)

Deciding what ratio is subjective. I personally initiate a delta neutral RS

which has an inherent debit. If one doesn't know greeks, then can match
the premiums of bought & sold options accordingly, preferably some debit
because credit can increase the risk during vol spike.(7/n)

Ideally best days for ratios are Tue, Wed & Thus. It's because many a times
the OTMs can behave irrationally in the starting of the week, as the time left
for expiry is high. Overnight positions can give good profits due to vol
crush, but intraday can be tricky. (8/n)

Sir I m not able to follow a simple thing which you said a lot earlier, as a
option buyer don't buy put above yesterday high and call below
yesterday's low, following this could have saved me lot of money.
Sarang Sood @SarangSood

THREAD ON IRONFLY

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)

If you don't understand greeks, then ideally with 30 days to expiry (dte),
wings should be around 300pts either side. If your trading in weekly then it
should be not more than 200pts. Higher the premiums, higher the distance
as we have more cushion of theta. (4/n)

It is important to understand that we need to reduce the distance of wings

with time so as to manage our RISK in gap openings or sudden volatile
move. So for eg. if you started with 300pt wings with 30dte, the wings
wouldn't give the same protection when there is 7dte. (5/n)
So as the premiums decay, we need to gradually reduce the distance of
wings. Now on to ADJUSTMENTS. When the index moves it is important to
also move with it in this strategy. This is because if we don't then the initial
credit received will reduce drastically. (6/n)

An example. Nifty is trading at 13500. You sell 13500 straddle & buy 13800-
13200 strangle. If Nifty moves 200pts up, your sold straddle will have lesser
theta value & your strangle will have higher as 13800 cal will increase. So
your overall credit will drastically reduce. (7/n)

So if market moves one direction, one sold option becomes ITM (means
less credit) & one wing comes closer to ATM (means higher debit). So the
overall theta received becomes less or even nil. That's a practical problem
which is why adjustment is required to receive max theta.(8/n)

For how to do adjustments, best way is to treat Ironfly as a straddle with

added protection. So try to keep the straddle near to ATM & when the
wings are tested only then adjust them. This way you'll always have
maximum credit received which is important in this strategy. (9/n)

What i have explained is a neutral approach on how to trade Ironfly with

max credit received. Many try to trade it by exiting the losing leg & keep a
TSL on the winning leg. Personally I'm not a fan of this way but that's
because I don't want to trade direction like this.(10/n)

Many advocate Ironfly as an easy 4% strategy. It's not. Requires expertise in

when to adjust & how much the wing size should be. With experience such
issues can be dealt with. Overall it's a good strategy specially for those who
want to take less risk with limited capital.(11/n)

How to adjust when a wing is tested? Example Nifty @ 13500, our position:
13500 short straddle 13800-13200 long strangle. So when index reaches
13700, our straddle will be shifted from 13500 to 13600 to 13700. We need
to re-center our long strangle now. (12/n)

So we can exit 13800-13200 & take a new strangle of 14000-13400 or if the

premiums have dropped & we need to reduce our wing size, then 13900-
13500. Here aim is to receive max credit, so as when or where the market
gives good decay, we are ready to seize the opportunity.(13/n)

Above is just an example. During volatile moves we don't need to adjust at

all, because slippages can be high & our wings are there to protect. Only
when nifty breaches a level (subjective), where our credit received has
reduced drastically, that we need to do the needful. (14/n)

Kapil Dhama
@kapildhama

Simply people can buy wings according to combined premium if they dont
understand IV If straddle gave 230 points in combined premium then buy
200 points on both sides

Sarang Sood
@SarangSood

Yes weekly straddle these days usually starts with 220-230 premium. So 200
point wings is optimum.

There comes a stage when the strategies have been explored, the
adjustments & risk management skills have been sort of mastered. After
that one realises that the end is in no sight. So one has to work on creating
a strong bias be it directional or volatility. That takes time.
Good high octane day. Call IVs first increased in the downside & then
crushed violently in the upside. It's the day when ratios give profit in both
bought & sold legs.

In ratios we are not playing only direction, but cashing in the movement of
IVs between different strikes.

Put selling was easy today. Even OTM calls didn't spike much & could have
been managed without much effort, but staying with short term trend is
always safer specially on expiry days when gamma can hurt bad.

Sarang Sood@SarangSood

AN ESSENTIAL THREAD ON OPTION ADJUSTMENTS

Adjustments can be done in variety of ways & depends totally at the

discretion of the trader. To get a clear mind we need to know the following:

1) What to follow,
2) How to make the adjustment,
3) When to make the adjustment. (1/5)

1) We need a way to measure the imbalance created by a delta move in an

option strategy. We can measure through premiums, distance from index or
delta of greeks (i personally use delta). So basically whatever way of
measure we use, both sides should be equal in it. (2/5)
2) Adjustment can either be done by selling extra quantity of profitable side,
buying the quantity of losing side or shifting both the sides. I personally
shift the sides because with extra quantities our Gamma gets imbalanced &
the risk increases if market reverses. (3/5)
3) While the first 2pts are objective, when to make an adjustment is totally
subjective. It can be fine tuned through experience. It also depends upon
what strategy u are using. For a short strangle the adjustment required is
faster than a ratio spread or an IC. (4/5)

Adjustments are a vital part of option trading & the goal should be to adjust
spontaneously without any hesitation. A good adjustment system can save
you from wild delta moves & even put you on the profitable side. But it
takes practice in live trading to develop one. (5/5)

Straddle/strangle require faster adjustments because they are more

vulnerable to delta or IV spike. Any other strategies like ratio spreads,
ironfly, butterfly have some bought option, which can negate the spikes for
a while. So we need a defined system as to WHEN to adjust.(5/n)

It becomes important that we find the imbalance of the position objectively

(as explained in point 1), and then as the defined threshold of the
imbalance approaches, adjust either by selling/buying extra options or shift
the strikes (either losing, winning or both). (6/n)

The problem arises when market reverts back. So your winning side which
has more qty will start to bleed & the losing side with less qty will not be
able to compensate. In such cases the position doesn't last for long. To
trade for long, shift both the legs to neutralize IMO.

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:

Delta
Gamma
Theta
Vega

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)
 
For option writers who want to trade in neutral strategies like straddle,
strangle, ratios, calendar etc, delta can be very helpful. So be it any complex
strategy, knowing the NET DELTA can give you an idea of how your strategy
will perform in different scenarios. (4/n) 

Net delta is just the sum of the deltas of all the bull options (call+ & put-)
minus the bear options (call- & put+).So if we can track this, we will always
be in the know of how much exposed our position is. It makes it easier then
to adjust our position. (5/n) 

Even for directional option traders trading in risk defined strategies, it can
be very useful because the net delta can give a fair idea of how much risk a
trader is taking. Same goes for deep otm naked option sellers. It can tell
exactly how much delta they are exposed to. (6/n) 
We can also know if an option is spiking or falling through delta. So for
example a call option has .4 delta & nifty moves 100 points. If it moves more
than 40 points then the call is spiking & if it has moved only 30 points then
it is falling. (7/n) 

Even experienced option traders get confused of whether options have

increased or decreased when underlying moves in high volatile moves. So
with the help of this we can form a view of whether the premiums are falling
or not. (8/n) 

With options, premiums aren't everything. There is this crutial factor of

distance of strike from the spot.That's where it becomes complicated &
delta takes that into account. Many times calls & puts have same premiums,
but the distance from spot is different. (9/n) 

Many traders think that their position is neutral because the premiums in
both sides is equal, but infact it's not. So if the underlying moves towards
the option which is closer to the spot, then the same priced option will
move way faster than the other option. (10/n) 

So a trader just needs to focus on the net delta of his position & how will he
manage it if it breaches whatever predefined level. This will allow him to
focus more on other important stuff, while the logistics of his position is
objectively taken care of. (11/n) 

Will make a thread on Gamma (the 2nd most important greek & more
difficult to master) in the future, but if you follow delta for few months &
actively manage it, you automatically can get the grasp of other greeks as
well. (12/n) 

A THREAD

Topic: HOW TO TRADE IN RISING PREMIUMS SCENARIO

Option sellers specially Straddle sellers feel that rising premiums give them
excellent opportunity to make easy money. So what they are seeing is the
theta aspect of options & ignoring the delta/gamma/vega forces.

1/ 

With rising premiums come high delta moves. There is a reason why
premiums are all increasing up in the first place. High uncertainty & fear is
what's controlling the markets during such times. So a volatile 200 point
move in nifty is always on the cards.

2/ 

Adjusting during such delta moves involves high slippages. Such costs go in
our system & are irrecoverable. So if the ATM straddle is around 400 & after
200 point downmove, the next straddle is at 450 & the loss is not just
50points but compounded much more.

3/
 
Also there are chances that there is no decay throughout the day. So a
straddle seller has to take that heavy risk of carrying it forward & chances of
gap openings are high during such times. If converted into Ironfly, then the
cost of the wings is too expensive.

Thus cutting down the initial credit significantly.

4/ 

There will also be very few instances when premiums don't fall till expiry
day. So with each delta move the cost of holding a straddle gets
accumulated & pressure keeps mounting for the stubborn option sellers.

5/ 

So what should be done during such times?

Compulsive straddle sellers can keep a close SL & do quick scalping. But
such profits don't give you much satisfaction, as speculation element is high
in such trades.

6/ 

Better way is to trade directional. If you have a little sense of market

direction, then one can make good use of rising premiums.

There are many option strategies like Ratios, Ladder, even far OTM
naked/spread selling which can give good opportunity to take advantage.

7/ 

The advantage can also be taken without directional knowledge. The bias
that the premiums will fall in one direction & rise in another. Example if
premiums are rising in a downmove, then Call Ratios or OTM calls can be
sold. It's because they will not rise much in an upmove.

8/ 

All said, sometimes premiums do fall heavily during such times. But it's
better to not try to sell them speculating that the top is made. It's better to
wait it out & let the premiums settle a little. Then one can enter cautiously &
with decent gains go agressive again.

9/ 

So basic crux is to find an objective system to follow the market. There are
lot of forces at play in option selling, apart from THETA decay.

If one can find a way to forsee how volatility or direction is going to play
out, then it's a different ball game altogether.

10/ 
Idea is to not get caught up in wild moves when premiums are unstable. If
we do get caught, then we are not in a good vantage point to take
advantage of inflated premiums.

Patience is the key & being ready to let go of some premium decay. Don't
get caught up in FOMO.

11/ 

A good example is today (18/06/21). Premiums were giving repititive spikes

since morning, with a big spike at 11am. The spikes were only in the
downmove which is important observation.

In this scenario, we could have sold inflated OTM calls, which were not
falling.

12/ 

We can also use strategies like credit spreads or skewed call ratios. So we
are trading direction here with the premise that premiums will fall in the
upmove.

When market bounced back calls also fell at first. If market starts rising, we
can start neutralizing our position.

13/ 

We can do it in two ways:

• If IVs are falling then sell otm puts

• If IVs are increasing then buy higher delta calls to make Call ratios

The above example is when we want to trade directional & take advantage
of rising premiums.

14/ 

For non-directional best was to not enter till 11:30am. We can't really know
where the top will be made. So let the dust settle & premiums to start
falling. Then we can slowly build our position & ride the falling IVs.

I traded in both the ways in different counters.

15/ 

The risk was IV spike in upmove for my directional position, for which i
would have bought higher delta calls to protect.

Risk for my non-directional straddle was an IV spike at EOD, for which i

exited early (much regret), as profit received was high in short time.

16/ 

Traders are majority of times trapped in the 'hindsight bias', which is the
tendency to believe after learning the outcome, that he could have foreseen
it. This is one of the biggest decision traps & it matters because it gets in
the way of learning from our experiences.(1/6) 

The problem starts when a trader thinks he 'knew it all' & so he actually
stops finding reasons why the strategy worked in the first place. He would
specifically review data that affirms what he knew to be valid & will attempt
to make a strategy around it. (2/6) 

The result would be complecency that would later show in his trading
results. It would make the trader overconfident in the certainty of an
outcome & will view his judgements as something which is ultimately
bound to happen. A very simple example is watching a thriller movie(3/6) 
Only after the killer is revealed & we recall the sequence of events again, we
remove the initial impressions about the killer & see with clarity how it all
happened. So at the end we walk away from the movie thinking we knew it
all along, while the reality is we didn't. (4/6) 
With improvement in backtesting tools this bias has increased as well.
Backtesting is an art. Majority of times there is difference in what is
backtested & what we face in live trading. Also backtesting will only
simulate what has happened, not what can happen. (5/6) 

Hindsight bias is a big psychological issue that prevents traders from

looking at the market objectively. Know that in trading the correct decision
isn’t determined by the result of few trades. So be mindful of this bias &
don't stop your learning. (6/6)

 
FINDING EDGE IN OPTIONS

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 realized 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 behavior, 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) 
A dedicated trader can learn all this in few years & it is something which is
'obvious' to become successful. But majority can't reach this level, as this
also requires consistent hustle in live markets. All the seminar/webinar
business teaches you till this level only.(4/n) 

If you get passed this level though, the real work starts, when you have to
find your real edge. This can't be taught in a webinar. It needs serious
introspection of your trading skills, psychology & strategies in use, which
ultimately allow you to book excellent profits. (5/n) 

So you need to know when to use which strategy & use adjustments to fully
extract it's potential or if view goes wrong then minimize damage or even
come out profitable. If later happens back to drawing board, because you've
been proven wrong in the crutial first step. (6/n) 

Do this everyday, year after year & you have something. Putting all efforts in
backtesting a strategy where maximum crowd is (like a straddle) & finding
perfect entry/exits with a click of a button will not give an edge. In this
process we miss on the bigger picture. (7/n) 
Markets change so quickly that even if some strategy was doing well 2 years
ago, most likely it will stop acting soon. If a trader is making consistent
money in the same strategy year after year, his edge lies somewhere else
not in the strategy itself. (8/n) 

New option traders don't even know that there is more required other than
knowing strategies & adjustments. Webinars are sold promising of giving an
advantage, but majority of those selling can't really profit from it. Their real
edge lies in finding those who seek an edge. (9/n) 

Friday's specially after the introduction of weeklies have become very

unpredictable for option sellers IMO. Usually I'm able to foresee 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) 

Even if huge vol spikes occur on say Wednesday, there are many small
spikes before that, which can caution a good trader who has a sense of
following the markets. Some Friday's do give great theta decay, especially
when Vix is below 18. (4/n) 

But that's because there is no inherent volatility in the markets. Nowadays I

look for directional or long vega trades like backspreads on Friday. I still go
for short straddle if the IVs are falling consistently, but only late in the day
for a quick theta capture. (5/n) 

But nothing is permanent. As i said if vix goes below 18, then Friday's also
become smooth. But since there is ample theta left in the week, one can
take his time in understanding how the volatility is playing out. (6/n) 

Such posts are for option sellers who want to get into the depth of volatility.
If taking random trades through backtesting with fixed SL is working out for
you, then you shouldn't bother with such details. But in my experience there
will come a time when it would be needed.(7/n) 

OTM cals are believed to be harmless, but are used smartly to increase IVs.
Many a times when index falls, OTM cals don't fall reflecting in increase in
Vix. When index goes up then they don't increase resulting in fall in Vix.
Such phenomena is common leading upto an event.

All the anxiety that is caused due to over-leveraged, highly speculative

positions is stored somewhere in our body. You might not remember
consciously the fear that SGX nifty created for a wrong overnight position
taken, but your nervous system remembers it very well. (1/2)

The stress accumulated over a period of time due to wrong trading

methods interferes with our decisions, often blowing up accounts. If you
want to go the distance, you need to replinish the daily burn out quickly. So
the real work starts after market hours. (2/2)

If the OTM strangle is not falling (%age wise) as compared to ATM straddle,
then it's a sign of volatility coming ahead. OTMs generally tell the truth in
advance. Writers usually track a straddle or a strangle, but we need to track
both to improve our decision making.

Absolutely correct OTM options are basically used for volatility or

sometimes we can say manipulation .... Beech me sabki nazar hoti hai but
khel to door se khela jarha hai.

There's volatility in the delta moves & then there’s volatility in the IV moves.
Both are different but equally significant for option traders. While the
former is to exhaust the directional traders by hitting their SL, the latter is
the same for neutral option sellers.(1/n)

Usually the vol rise in IVs is more dangerous because it manifests in gap
openings but also gives good directional trades. High volatility in delta
moves majority of times leads to good decay but no clear direction, but an
option seller should be willing to adjust.(2/n)
@anilbalaji11

Exactly Sarang, Now a days we convert / have converted our strategy from
straddle to Iron fly /ratio spreads , Sometimes debit strategy also, If theta
decays we exit our position, If Iv rises we cut 40-50 % positions and carry
home positions straddle converted to iron fly.

On option selling vs buying: In 2009 when i was just one year into option
trading, i carried a long strangle in big quantity when Manmohan Singh was
re-elected & Nifty opened gap up. I booked a huge profit on my position,
only to give half of it away in the next 4 months. (1/5)

My problem was that i didn't have position control as I used to buy

strangles in same big quantities as i used to sell them. My learning’s were:
1) Option buying opportunity comes once in a while & it can give decent
returns in small qty as well. (2/5)

2) We can follow volatility easily while selling options, but while buying it
becomes complicated as risk/reward is huge.

3) Trading in long volatility strategies like back spreads are better as the
overnight risk of theta decay is less in them. (3/5)

4) To become a complete option trader, one needs to be good in both

buying & selling & only those who follow market volatility closely can do
that. I would say 90% times selling options is profitable, but the remaining
10% is very dangerous if you are only biased towards selling. (4/5)

So try to find the underlying pulse which manifests into gap openings or
premium decays & use good option strategies to control the risk/reward to
your advantage. (5/5)
Majority of times new traders are attracted in this profession
by the ROI of pro traders. That's the last thing they should
be looking for. Things like risk taken, capital employed,
number of profitable years, trading psychology should be
taken more into consideration. (1/4)
If your starting your trading journey, the aim should be to just stay profitable for 1st few
years while learning the intricacies of this business. Don't try to replicate pro traders returns
because they have already done their share of mistakes (many are fake as well).(2/4)

After sometime you may find consistency, but whether you can live off your profits is a
different story. Making a living through markets is not only based on consistency but on
capital. The trading psychology works better if capital employed is low. You increase it, (3/4)

and the mistakes start to happen more. So it becomes vital to not get too confident with
initial profits. Always better to grow your starting capital through profits & slowly scale up
your position size. Remember, the finest wood is produced by the slowest growing trees.
(4/4)

Nifty moves 100pts down and a strangle increases 10pts. Ways how options would react: 1)
Cal only falls 2pts, put increases 12pts. 2) Cal falls 6pts, put increases 16pts. 3) Cal increases
1pt, put increases 9pts. Same result, but all scenarios have different meaning. (1/3)

Though the meaning can change quickly, so it's best to follow the market. Interpretation: 1)
The most common outcome. Nifty will come back & the strangle would fall back. 2) Nifty
will fall more with trend downwards. 3) Nifty can move either way, with a volatile move. (2/3)

My system would also look at the ATM straddle to decide

whether to hold the strangle, convert to another strategy or
get out. It isn't complicated as it looks like. With regular
practice, the thinking process is minimised & the actions
occur automatically. Just like Zen. (3/3)
If you want to buy nifty future, then buy cal and sell put, both same strikes. It's called
synthetic future & it moves the same as future.
I have been exclusively (obsessively) tracking, objectifying,
trading volatility since last 12 yrs. My father during his prime
time in the 90s was a directional player because there were
no options back then. Volatility is hidden in the depths of
vega & delta moves combined(1/3)
Simply following Vix isn't enough. IVs will rise and then they will fall, coupled with or
without delta moves, which increase adjustment cost. As an option trader one has to be in
the know of where in the broad spectrum of option chain is the volatility manifesting.(2/3)

I strongly believe that if we can grasp it, then market direction can also be cashed in plus
theta decay which is ever present. All the media, news is used to increase or decrease
volatility, so it's wise to narrow down our focus in the present moment on how it's playing.
(3/3)