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Currently interest rates are rising, and there might soon be the time when for some investors it is again interesting to hold bonds instead of stocks. Thus, bonds are falling, and stocks are rising.
1. Myrddin When you talk about 200-400 dollars per option premium you go for does that mean per spread? So if you are doing an equal strangle 100-200 dollars per call and put?
2. Usually on your selling option trades with your risk parameters in effect (exit at 200% of premium ). Does a 200% exit strategy give you room for price to fluctuate before you exit early. Is there an example you can provide of the last negative trade you closed of early, and at which strike price vs exit price.
I guess if you use spreads rather than naked, you have more room to fluctuate before you reach at 200%.
3. With your 200% exit strategy. Do you think further out the money options (lower premium), would be exiting trades prematurely when compared to a closer to the money option.
I keep hearing further out the money options are riskier when a trade goes sour. But from my understanding a lower delta should be less affected by underlying price movement. (Thats the whole definition of Delta). So i’m confused at the conflicting information. So a lower delta in fact would then have more room for movement before the 200% loss exit strategy is hit?
1. When selling a strangle I usually sell both options (puts and calls) at 200 - 400 USD, and, thus, the strangle at 400 800 USD. I rarely sell cheaper options, but sometimes I sell them at a higher price level.
2. I rarely use the 200 % exit strategy. Usually I exit losing trades because of changing fundamentals or the underlying moving across an important support / resistance.
I suggest to open a paper trading account and sell some short options there to find out about the size of moves of the options in relation to the underlying. There are many things to consider in this regard, and one example does not help at all. It is important to find out a risk level that is comfortable for you.
The advantage of a strangle is that on a major move of the underlying your loss is limited. It depends on the choice of the options if the 20 % rule is hit earlier or later selling an option spread.
3. If you talk about the same number of options further OTM options move slower in absolute value than closer to the money options. But many traders define risk of a trade as a percentage of the account value. Using the 200 % rule you end up selling either 5 Options with a delta of 0.2 or 20 options with a delta of 0.05. The premium for both trades is the same, and risk is the same (100 % of premium). In this case often the far OTM options hit the 200 % target earlier.
@myrrdin From 1998 til 2007 the only trading I did was long term position trades. Basically I went long in markets that were very low and rode out the dips with cash til the markets eventually took off, (rolling when necessary). As long as I had the patience to wait they were always profitable. Recently I've started paper trading the same strategy but with covered short options. I'd be grateful for any insights you could offer on how you go about your covered futures longterm trades.
Most of my sold options are naked, and I prefer to work with stops instead of riding out all dips.
To answer your question would fill a book.
You find a lot of answers to your question in Ron's thread and in this thread. Please read through these threads - it is certainly worth the time. And ask any open questions as precisely as possible.
