Sitting on your hands

Trading Discussion
3

That sounds like sound advice. I Have decided to adjust that an experiment with a partial close. For example if I enter a long trade of 1 Lot with an SL of 30 pips and my trade moves favourably 15 pips; I will close 0.5 Lots and leave the remaining 0.5 lots to run.

I will leave the SL in its original place throughout. If the trade does move 15 pips in my favour and then swings back to knock my out at the SL, the risk or net PnL will be £0 (break even)

In that case, for the first part of the trade my R:R is 1:2 and so the probability of hitting my “TP” before SL will be roughly 67% assuming a random market. That would be hopefully mean that 67% of my trades will at least break even - which is peace of mind.

At the same time the other 0.5 Lots can be free to run to the upside potential.

4

My little brain is bit confused here, sorry @ropunzel

If you are receiving premiums then you are selling options, which not only limits your gains to the premium received but also leaves you with an unlimited potential downside risk if price moves in the opposite direction to your puts/calls?

Does your model therefore attempt to keep yourself with neutral exposure risk by selling options in both directions and adding to these progressively as the market moves?

If this is how your model is working how are you then comparing this with trading spot, where you are compelled to seek exposure to gain rather than trying to avoid it and maintain overall neutrality and gaining from time decay on the premium income?

Sorry if I have totally misunderstood what you are doing here!!! :slight_smile:

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5

isn’t that known as a trailing stop? You have to adjust it manually every time?

6

@anon46773462

Thank you for the reply. I did not go into the approach in detail so not to distract from the main question.

The Options strategy is writing/selling Call and Put options for a premium in the opposite direction to break outs. If I think the market will break out long then I will sell a Put option and if I think the market will break out short I sell a Call option, in both cases just one option per pair trade.

As you mention there is potentially unlimited downside risk in options selling, so to hedge that risk I use a pending order in the spot market. My approach is a variation of the standard Covered Call and Covered Put strategies with Options.

For example, if GBPUSD were at 1.30000 exactly and the premium for a 1 week Put Option was 35 pips. Assuming I think GBPUSD will break out long, then I would sell the put option (at 35 pips) and hedge the option trade with a pending sell market order in the spot at 1.293 (70 pips away from the option strike). From that point I gain on the Spot whatever I lose on the Option if the market goes down.

The hedge in my example gives me a 35 pip exposure (70 - 35 pips), I prefer that than a zero exposure hedge (Delta Hedge: 35 - 35 pips) because it gives me more room for temporary market volatility.

That is the option sale and the hedge. In addition to that I would enter a long market order with an R:R 1:2. This is because I want the market order profit to potentially cover my 35 pip exposure on the Option trade. The SL & TP parameters of the market order would not necessarily depend exactly on the Option Strike and Hedge prices but on market conditions.

The idea with the spot trade is to cover my option exposure with a high probability, or double the effective premium on a successful trade, although the risk does jump up as well (if the market moves straight-to-loss on both trades).

I am now incorporating a Monte Carlo Simulation before getting in on trades, to make sure the particular configuration/set of values for strike rice, option hedge price and spot trade SL & TP has Edge. In that case I am assuming a completely random market with no drift. I believe the nature of Option sells builds natural edge into your trades.

If you imagine an option trade with a limited window to expiry of x bars. There are only so many paths the price can take in that time frame. If you sold Put; any path one step to the upside is 100% profit. Any path to the downside is a loss, but that loss starts off by eating into your options premium, so you have to travel some distance until your losses have eaten into all your premium and you starting ‘really’ losing and on a sliding scale.

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7

Time decay is not so important for me because I use European style options and always wait to expiry, so I am not trading the volatility using the Greeks as such. The comparison is in selling the option for a premium with a spot trade ‘top-up’ versus just getting in on the direction of the break out and letting it run.

2 Likes
8

As far as I can remember, a trailing stop adjusts the SL automatically, but only once…

9

Fascinating @ropunzel!

This is one of the most fascinating and interesting topics I have seen here for a long, long time! :slight_smile:

I confess that it is some decades since I used to deal in options and that was as a dealer in the bank dealing room. I have never traded forex options, though . and never as a retail trader.

Being responsible for the bank’s short term interest rate exposure at that time, we used mainly exchange traded options in 3-month eurodollar and some longer term t-bond options on some yield curve plays. The basic position was to cover, or at least limit, exposure arising from customer transactions and interbank loans, interest rate swaps, etc, as well as maturity mismatches. Some of the principles were similar to what you are outlining here.

I have never looked into such OTC type options in forex, maybe you have sparked my interest to look into this more. I must admit, there was something very different and yet appealing about shepherding a short option portfolio into expiry. But it did get very rocky sometimes when interest rates got a bit wild, like they did in those days…:slight_smile:

Thanks for the explanation! :slight_smile:

10

Maybe I am wrong, but in my opinion a trailing stop is any stop that is adjusted as price moves, whether it is manually or automatically adjusted, continually or in steps, and regardless of how many times.

The idea being to either reduce the risk of loss as the price moves progressively in one’s favour towards a target or as a means to gain more out of a major trend by letting the position run until it is eventually stopped out.

Or are you thinking of something else, here?

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11

yea, a trader I follow said that it adjusts its stop like every number of pips, something like that

12

What I read stated that the option on MT4 will advance the SL after a certain number of pips, but it will do it for you only once, so I was speaking in that context, but I agree on the general term trailing stop which you have provided

13

The thing that helped me deal with my anxiety the most was gaining experience. The more I traded, the less anxious I felt for two reasons. The first reason is that I got used to trading, the second reason is that with experience came knowledge and I gained more confidence in my own abilities to trade.

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14

exactly, you have to keep on practicing. The more hours you put in and the more consistent you are, the more you’ll learn and the better you’ll get

15

Another advice I could give to lower your anxiety is to open smaller positions if the ones you are opening now are causing too much distress. Risk less and worry less.

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16

Nice idea, the anxiety comes when I’m waiting to exit; the opportunity cost of cashing in now versus letting it run.

17

So far so good I would highly recommend them, particularly for selling.

18

I think most traders suffer from the same anxiety. What other ways have you found to lessen it?

19

I haven’t. I think shop around all markets and products for a best fit. I just don’t like the relative uncertainty of only spot FX.

20

What other trading instruments do you prefer?

21

FX Spot, FX Options and Equity Indices. I think the VIX volatility index has potential, the auto correlations of volatility are usually very high so Price Action trading might be more reliable here.

22

It has never occurred to me to trade that index, but I may look into it now.