Sunday, May 17, 2009

Managing an Options Straddle

Rishi writes:
Quote
Thanks for the call to buy 3600 long straddle.
Now the Q is how to square off postion on Monday.
1. If Nifty opens up gap up of 200 points.
2. If the gap is more than 200 points.
3. If it opens flat with just gap up of sat 50 points.
4. Last but not least if, Madam (M) creates some problem and we open flat to negative.
Please advise how to reap max profit out of 3600 Long straddle.
Unquote

My Notes:

Method#1: Since the straddle has been taken to take advantage of the news event, we should sell both legs on Monday.

Method#2: We can sell the PUT and wait for three more days, in anticipation of further rallies.

Method 1 is useful if Nifty opens 200+ above. Method 2 may be appropriate if the opening gap is less than 200 points. Why should we expect the Nifty to open negative when there is favorable news?

5 comments:

Junaid said...

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http://traderfeed.blogspot.com/2009/05/ten-weekend-thoughts-from-dr-brett.html

S S Cheema said...

I have a suggestion Rishi: If you do get at some stage - Profit for both put and call then take and you have a doubt in your mind that reversal is imminent then take out only the profitable position and wait. The whiplash in the other direction can sometimes increase your profits a lot.

Anonymous said...

"Sell on news" as a reason to see a selloff in the morning ?

-sm

VIKAS said...

Sir, I have interacted with you earlier also.I am from Ludhiana & a fan of you since long(when you visited Ludhiana Stock Exchange). I have just started trading(10 days back) on technicals. My entry & exit levels are decided by Macd. But i realise that in this indiactor, i am not able to book profits at the Tops/Lows. Can you please suggest what additinal indicator(leading indiactor) can i use to exit to gain maximum. Sir, pl do reply.

Dinesh Rishi said...

Thanks Sir :D