Defending Option Trades how do you do that
Although you might be a good trader, you still need to think of defending option trades. The market goes up for years. We sell a lot of time options what can you do if your strike is breached? What is your plan of action if it does not go your way? How are we defending option trades?
How can you adjust your naked position in such a way that you can close the position without a loss. Now, we will look at how to defend awhen the strike of the naked call is breached. We does this by selling the ATM which has the same strike as the short call. By doing this we create a .
Study of defending option Trades
All information on this blogged is backed up with research. How is the research conducted by tastytrade:
- We look at the SPY, from 2005 to today
- Sold 45 DTE Call (30 delta = nearest OTM)
- Compared defensive tactics if the short call was breached with 30 days or less left in trade:
- Holding trade and managing at 50% if possible
- Adding ATM Short Put to make Straddle
Set up naked options
If you have the assumption that a stock will go down, what does the trader do? She sells the nearest out of the money call. We sell options to receive option premium with the aim to keep it. This call is approximately 30 delta when trading stock options. The naked call has a probability of 70% being in the money.
Adjustment of the trade
If the underlying goes against you, turn your naked call into a straddle by selling a put. You will collect more premium for the put you sell.
This means for your position that you lover your probability of profit from 70% for a naked call to a 50% for a straddle. While doing this you neutralize the delta and in 70% of the cases you can scratch the position.
Market Measures: Defending Naked Option Positions via @tastytrade
Result of the adjustment
If you look at all occurrences that the strike was breached, You will discover that selling the Put turned average profits positive and kept the win rate the same. Doing this it helped minimize the losses on large losers.
If you think that naked options brings too much risk on the table you might consider to sell options spreads.