Transitioning from an Option Seller to an Option Buyer. Help me realign my money management. I would like to deploy much lower capital, due to a change in Risk/Reward. Also, do not need collateral. What do I do with undeployed capital? Some ideas:
- Continue option selling with low-delta strategies - not preferred due to friction with core option buying trading
- Buy T-bills/SGBs/G-Secs
- Park in FDs
Do share your opinion, please.
Any particular reason with this transition?
Drawdowns. Took 6 months to move from a non-directional trader to a directional one. A lot of effort and time. Option buying requires significantly more skill, albeit of a different kind. However, now that I have made the switch - there’s no going back - atleast until a very high VIX.
This is what I do
Avoid exposure per trade to less than 5% of overall capital. Size capital to keep absolute draw downs at comfortable level relative to capital.
Keep 50% of funds in liquid cash equivalent instruments. Then pledge it for extra returns. I prefer Liquid BeES or Gilt funds. T-Bills cannot be pledged. SGBs/G-Secs may have liquidity issues. So getting in and out when I want at a fair price may be a challenge.
Thanks I agree with your suggestion for position and cash capital sizing while option buying.
Do you mean that you also utilise the non-cash capital (cash + non cash collateral) for option selling to generate additional return?
With my broker I can use the pledged margin for option buying too. Also with balance margin amount I do option selling on expiry days also now.
Nice! How do you balance the option buyers mindset with option selling? Do you trade the same instruments and direction?
Option buying and some part of option selling is automated. I fire and forget.
For discretionary part of option selling I typically trade with a close hedge and 1x stop mostly. Again once the trade is in doesn’t think too much about it. I typically re evaluate around 2 pm on expiry day and change things if need be.
So am mostly at peace while trading.
Thanks a lot for sharing. Appreciate you helping others learn. You mentioned building in both a hedge and a stoploss into the selling? Doesn’t it risk getting triggered on spikes?
Also keen on understanding if you sell the same instrument, direction and expiry as your buying or do you look for a totally different setup?
The purpose of a hedge is to reduce margin and cover against risk like tech failures. The purpose of stop is to get out when price moves against my position for whatever reason. Price is the most leading indicator and I rely on it.
Trading is a simple game of chance. As long as my accuracy is above 50% with a reward - risk slightly greater than 1:1(cover for transaction charges) am making money. So while stops may get hit on volatile days it doesn’t happen too often. The key for me is to form a directional view for the day and get into a position at a good price.
Completely different set up.
Besides trend following with option buying execution strategy provides most of my profit. Option selling is done with the goal of generating few % extra returns.
Awesome, this sounds like a winning formula! Do you also try to ensure that the two setups are not correlated? Or does it not matter as much?
I don’t try to keep this correlated or non correlated. OS is a completely different setup to exploit theta decay on expiry day. OB is for trend following using a directional system.
It doesn’t matter to me.
Thanks so much for sharing