How to trade fading option?

[TradingYoga 0]

An option price on expiry day, is at daily high $12 and expected to go down to $4 or maybe to zero.
Q - What option strategy can be used to take advantage of price decline, without owning the underlying instrument?

Thanks
 

[TrustyJules 3,028]

You sell the option, post the margin for it and wait for the decline to happen and then close near the bell for 4$ or 0$ as the case may be.

Note that selling options opens you up to theoretically unlimited losses if you are wrong on your expectation so you may want to hedge your position for risk and to reduce required margin. Outside of a real context of a stock its really hard to give sophisticated strategies because too much depends on the stock in question and any risks associated with it or the general market in the interim.

[TradingYoga 0]

 

Appreciate your quick response TrustyJules.

Now, the question is how to hedge selling option to reduce risk (without owning underlying instrument)?
 

 

[TrustyJules 3,028]

7 minutes ago, TradingYoga said:

 

Appreciate your quick response TrustyJules.

Now, the question is how to hedge selling option to reduce risk (without owning underlying instrument)?
 

 

Well you buy a further out option in the same (or later) expiry or you buy a same strike on a much later expiry. An option with 0 DTE and 12$ value that could go to zero is not very common - again without a concrete example it is hard to give anything but platitudes in response.

[Sunshine25 18]

10 hours ago, TradingYoga said:

An option price on expiry day, is at daily high $12 and expected to go down to $4 or maybe to zero.
Q - What option strategy can be used to take advantage of price decline, without owning the underlying instrument?

Thanks
 

Hey trading yoga,

 

I would recommend that if you want to do this type of one day swing, I would buy an individual option 7 days out roughly (plus of minus) as oppose to try and doing the debit trade. For the anticipated move.  

I will elaborate what type of security your trying to collect the same day credit for though.

I will use the SPY on today's chart if I were to do this as I nice simple example.

Today's high on the SPY is 519.15, and that's about the price I would want to enter this trade.  I will sell the 519 call, and buy the 520 call, today's expiration. I will collect roughly .60 cents credit.  Thus my max gain is hypothetically 60% on risking a dollar, and the security will not be assigned. My max loss is .40 or 40 cents. (I am going to ignore cost of trade for this example, and a few other things).  

Maybe that answers your question in a bit more detail?

 

 

 

[Marco 221]

21 hours ago, TradingYoga said:

 

Appreciate your quick response TrustyJules.

Now, the question is how to hedge selling option to reduce risk (without owning underlying instrument)?
 

 

Trade spreads, selling 0DTE options outright is a risky game. Selling options outright you have limited upside (the premium) and unlimited downside (for calls) and near unlimited downside for Puts. So best is to limit that buy buying an option with a strike further away (say you sell the 100 call, buy the 102 or 105 call against that). That reduces the premium you sell for but at the same time you know you max loss. If you sell the 100/102 cll spread, then you max loss is 2 dollars less the premium received. That lets you manage your risk much better and allows you to trade in bigger size as you know your worst case scenario and can size your position accordingly. The other way to spread is against a maturity further out. So if you sell the 100 call expiring today you can buy the 100 call expiring in a week against it. Not as easy to determine you max loss here as they have different expiries but it will still limit your losses. 

[Ashish0490 5]

Can I ask a question here? It’s a good topic. TrustyJules, I would appreciate your inputs on how to manage a losing  Call/ Put Spread? When the Short side is tested. This is specially true for weekly Iron Condors . 
 I couldn’t find anything in the Educational section of SO. 
Thanks! 

[TrustyJules 3,028]

2 hours ago, Ashish0490 said:

Can I ask a question here? It’s a good topic. TrustyJules, I would appreciate your inputs on how to manage a losing  Call/ Put Spread? When the Short side is tested. This is specially true for weekly Iron Condors . 
 I couldn’t find anything in the Educational section of SO. 
Thanks! 

It depends on the length of time to expiry - there is a lot that can be done on solving IC positions as long as there is still time. The silent killer of ICs is gamma - a greek mostly overlooked but which will rip your IC position to threads in minutes if you are less than a week from expiry. In such a case perhaps best to close - suck up the loss and move on. When a short side is only challenged a few possibilities exist:

 

- buy an option a month out ATM in the direction of the challenged side (put or call as the case may be). You can do so in a lesser ratio than the amount of ICs you have open - how many depends a bit on delta of your challenged position. Try and neutralise some or all of the delta and once the crisis passes sell your hedge option and wait for your IC to bring home the bacon (premium).

- if you move the position - move as far as you can whilst still remaining near 0% profitability - half measures dont help and you will be able to move only inches for every yard you give on the unchallenged side. Look carefully at option calculators to determine the chance of your short or break-even being breached and move as far as you can from that.

[Sunshine25 18]

1 hour ago, Ashish0490 said:

Can I ask a question here? It’s a good topic. TrustyJules, I would appreciate your inputs on how to manage a losing  Call/ Put Spread? When the Short side is tested. This is specially true for weekly Iron Condors . 
 I couldn’t find anything in the Educational section of SO. 
Thanks! 

The discipline to exit at your pre-determined loss levels, in my humble opinion, is the best way to have repeatable long-term trading history that is positive.  It's not sexy, but "managing" a trade often involes both an increase in risk and capital to mitigate a loss.  

Your asking about Iron Condors, so I will give general thoughts for management. 

1) close the opposite short if there is little credit

2) Is there intraday support/resistance at where the short put/call that is being tested?  If you are confident in the intraday support/resistance then you can consider rolling up/down the short put/call farther into the money, and/or rolling the long put farther out of the money.  Your new thesis of this trade is you are now betting the trade WILL BOUNCE off this support/resitance to mitigate your loss.  UNDERSTAND you have INCREASED your max loss by NEW WIDTH of the wing of the condor.  DO NOT BE GREEDY if you get your bounce.  EXIT if it back trades halfway in the current day swing your are hoping happens.  You are trying to ideally get a smaller loss, break even, or maybe a small gain.  Most often, just a smaller loss.  3) If your support or resitance breaks, exit immediately realizing that you turned a 5-7% loss into a 10-20% loss, and you would probably loose less at a blackjack table over time lol.  But exit immediately, and very seriously.

 

This is just general.  Time in trade, and to expiration matters.  I stand by my first comment just to exit early at your pre-determine loss and move on as the best long term stragety.

[Ashish0490 5]

Thanks a lot for your advice!

[Ashish0490 5]

On 5/10/2024 at 5:58 PM, TrustyJules said:

It depends on the length of time to expiry - there is a lot that can be done on solving IC positions as long as there is still time. The silent killer of ICs is gamma - a greek mostly overlooked but which will rip your IC position to threads in minutes if you are less than a week from expiry. In such a case perhaps best to close - suck up the loss and move on. When a short side is only challenged a few possibilities exist:

 

- buy an option a month out ATM in the direction of the challenged side (put or call as the case may be). You can do so in a lesser ratio than the amount of ICs you have open - how many depends a bit on delta of your challenged position. Try and neutralise some or all of the delta and once the crisis passes sell your hedge option and wait for your IC to bring home the bacon (premium).

- if you move the position - move as far as you can whilst still remaining near 0% profitability - half measures dont help and you will be able to move only inches for every yard you give on the unchallenged side. Look carefully at option calculators to determine the chance of your short or break-even being breached and move as far as you can from that.

1. "buy an option a month out ATM in the direction of the challenged side (put or call as the case may be)". Yes, I do this, maybe not a month out but 2-3 weeks out.

2."Try and neutralize some or all of the delta and once the crisis passes sell your hedge option and wait for your IC to bring home the bacon (premium)".

Can you please elaborate a bit what you meant if for example my Call side is now being tested? I have moved my Puts ( untested side) down to earn some extra premium, same expiration and around the date of expiration I want to roll over my tested Call side to a further expiration, OTM strike for a debit and to compensate this loss sell equal number of Put OTM spreads, same expiration. But overall this will generate a loss, although not a big one. Thanks. 

[TrustyJules 3,028]

14 hours ago, Ashish0490 said:

1. "buy an option a month out ATM in the direction of the challenged side (put or call as the case may be)". Yes, I do this, maybe not a month out but 2-3 weeks out.

2."Try and neutralize some or all of the delta and once the crisis passes sell your hedge option and wait for your IC to bring home the bacon (premium)".

Can you please elaborate a bit what you meant if for example my Call side is now being tested? I have moved my Puts ( untested side) down to earn some extra premium, same expiration and around the date of expiration I want to roll over my tested Call side to a further expiration, OTM strike for a debit and to compensate this loss sell equal number of Put OTM spreads, same expiration. But overall this will generate a loss, although not a big one. Thanks. 

What you describe is not hegding but digging the hole deeper and exposing yourself to more losses. If you are looking to role the expiry of your IC itself then you are effectively taking a new position with additional losses possible. Not something I recommend. My example is, STOCK XYZ @ 100 and you have an IC:

 

10 SHORT PUTS XYZ June 21 60

10 LONG PUTS XYZ June 21 50

10 SHORT CALLS XYZ June 21 100

10 LONG CALLS XYZ June 21 110

 

So your call side is obviously challenged - buy 1 month out or further a call 1 CALL XYZ July 19 100. The reason to be ATM and a month out is to have maximum delta effect and still not lose too much to theta if the stock retreats as was your original expectation. If XYZ continues to advance then your hedge will help against the loss - mind that if the call delta rises too much more drastic measures are needed like moving the whole operation a strike or so up. In the above scenario if you are lucky you might for no cash outlay be able to get to:

 

10 SHORT PUTS XYZ June 21 80

10 LONG PUTS XYZ June 21 90

10 SHORT CALLS XYZ June 21 105

10 LONG CALLS XYZ June 21 115

Always mind that you want the shorts delta to be below 30 certainly if you are getting close to expiry - which is not quite the case above.

 

 

[Ashish0490 5]

Thanks a lot! I get your point. Basically you mean to roll the losing Short (Credit) Call Spread to an higher Strike, same Expiration for a net debit and additionally buy (as a hedge) Long ATM Calls, 1 month further.              
  If XYZ rises then these Long ATM Calls will generate some profit.
And to compensate this additional investment roll the Put (Credit) Spread to a higher Strike. Maybe the whole new setup will be for not a big net debit. I’ll try this. 

Edited May 12 by Ashish0490

[TrustyJules 3,028]

14 hours ago, Ashish0490 said:

Thanks a lot! I get your point. Basically you mean to roll the losing Short (Credit) Call Spread to an higher Strike, same Expiration for a net debit and additionally buy (as a hedge) Long ATM Calls, 1 month further.              
  If XYZ rises then these Long ATM Calls will generate some profit.
And to compensate this additional investment roll the Put (Credit) Spread to a higher Strike. Maybe the whole new setup will be for not a big net debit. I’ll try this. 

I wasnt saying to combine the two strategies - but one can. There are other ways to neutralise some of the delta too. The time to expiry plays a role in what is best, I was just giving you some options.