Options strategies anyone?

Forums Trading General Trading Options strategies anyone?

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  • #205786
    wysiwyg
    Member

    A friend of mine has had success with selling 2-week-dated iron condors and consistently profit from collecting the credits.
    He would based the levels for the top and bottom legs on 20% delta (eg. 80% chance the market won’t reach a certain price).
    It just hit me that I can do the same thing week after week, but with LC’s market breadth analog forecast instead.
    Has anyone tried this strategy with options?
    Please feel free to discuss any other option strategies using LC’s day-trading bias data.

    Thank you.

    #206418
    Minty415
    Participant

    I do various strategies with ES options for swing plays. The same can be done with SPY options which are more liquid, but ES has better margin relief (SPAN), favorable tax treatment in the US (Sec 1256), and extended hr trading.

    I’m not surprised your friend has been making money with Iron Condors, as the market has been fairly calm the past couple years and particularly sideways this year. ICs and strangles (same like ICs but with undefined risks) are short vega, long theta strategies and the VIX has been getting smashed every time it pops to 20-30. We know this will not last forever. If we have another 2008-2009 crisis or even 2011 this strategy can suffer big losses especially if you are over-leveraged. You will be short gamma and a swift move down (or up) will challenge your short strikes fast, especially if they are 20 deltas or more which is less than a 1 std move for each side. Trying to exit or roll an iron condor is also a PITA because you have to deal with the slippage of having 4 legs to manage.

    I personally don’t trade iron condors as I prefer to trade with a directional assumption most of the time and I don’t like dealing with 4 option legs along with increased cost in commissions. My general strategies are buying call or put spreads (the latter especially when VIX is low and I think there are good odds of a selloff), put and call ratios, and selling naked calls (after multi-day rallies w/ no pullback) and puts (after strong selloff) at times.

    Here are a few scenarios:

    If based on market breadth and other support levels I think we are due for a bounce or at least consolidation after a selloff, instead of going long ES futures at times I would just sell puts (naked) or put spreads instead. This is especially favorable when we go down since the VIX spikes and it juices up the option premium. You can sell it at a support level you don’t mind getting assigned to go long if it expires in-the-money. Most often though if my assumption was right, after a few days the option will be crushed and I can just exit for 60-70+% profit already.

    Another strategy in the middle of a selloff I like doing is to enter a 1×2 put ratio for a credit, for example going long one 2000 put and short two 1960 puts that expires in one week if I think there’s more selling left but it’ll likely be overdone at 1960. Jackpot is if we land and expire at 1960 which will give you max payout, otherwise if above 2000 you’ll just collect the credit received. Depending on the credit received you start losing money if we are below 1940 or so.

    If I think market will rally 1.5-2% in a week, instead of going long ES I can buy a call spread which has defined risk. I generally buy one call ITM so I’m paying less extrinsic premium, and sell one call OTM where I think it will land. As days past and we don’t rally you will lose from theta decay, but you lose less than if you were just long a call.

    You can do these strategies with both calls and puts and even mix it up with futures, but just understand due to option skew put options will almost always be richer in premium.

    #206419
    wysiwyg
    Member

    great information, Minty. Much appreciated.

    #206421
    wysiwyg
    Member

    for Minty and others,
    What would be a good option play for gap close tendencies?
    For example, once a gap is created and goes unfilled the following day, I would like
    to put on an option to profit when the market comes back to close the gap.
    I was thinking of a butterfly option but in cases where the gap gets filled the very next
    day, I would not receive much profit from exiting (many days before expiration).
    Is there an option strategy where we don’t get hurt by time decay and still receive good
    profit when price comes back to test a specific level (ie. could take anywhere from 1 to 8 days)?

    #206422
    Lawrence
    Keymaster

    Multiple day gap fill is not that reliable due to the fact that gap fill statistical biases have been in decline these several years.

    #206423
    wysiwyg
    Member

    I agree with you LC.
    I’m really looking for option plays for mean-reverting strategies where price would come back to retest a previously left behind level. But since it could take anywhere between 2 and 10 days for price to come back, I’m having a hard time coming
    up with option schemes that can maximize profit regardless if it took 2 or 10 days (for a level to be retested).

    #206424
    Lawrence
    Keymaster

    There are several VIX based models that has been working like since the creation of the index futures.

    The core idea is very simple – VIX cannot stay at one end for a long time, it will induce snap back actions which are best captured by simply countering the direction with selling spreads.

    The key to the success of such strategy is consistency, as in a mechanical model. You cannot play an edge of this kind with discretionary approach.

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