There are at least two types of options traders. There are the punters who love the leverage and the excitement of large gains and large loses too. Another type is the more mathematical trader who is looking for the perfectly hedged, can’t lose trade. This latter type will trade nothing less complicated than a condor – a strangle with wings.
There is nothing wrong with condors and limiting loss is the most important thing that you can do in trading. But the fact is, there is no trade that is without risk that can earn more than the risk free rate. The risk free rate now is one half of one percent at the short end of the yield curve.
If there was a trade that earned more than the risk free rate, arbitrageurs would borrow at the risk free rate and put on the trade locking in a profit. Then the trade would go away since they would do the trade in size.
Delta neutral trades are a favorite with the mathematicians. That is, trades where you either buy a put and a call at the stock price or near it or sell the same. The problem is that delta neutral trades do not stay neutral. The stock underlying it moves and the trade is out of whack. No longer neutral.
What to do?
Recognize that you will have to fix the trade. With that in mind, start the trade small. If you were going to sell 30 puts and 30 calls, first sell 10 of each. Then when the trade goes bad, close it out and redo it larger to make up for the loss on the first smaller trade.
This brings us to position size. No trade should be more than one to two percent of you r account. That way, you do not damage your account with a small loss. This is a whole treatise in itself.
0 Responses
Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.