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Rt'ers
Sometime ago I posted a short piece about trading options using the ADX. I
would like to further this discussion.
If anyone feels interested, pleae either mail me privately or via the forum.
I have done some reseach on three methods of selling options using the ADX
as the entry trigger.
The three methods I would propose are :
- Sell an option against the trend when the ADX starts turning up.
- Sell an option against the established trend when the ADX starts to turn
back down again.
- Sell straddles when the ADX starts to turn down again.
The above poses many questions not least of which include:
-Do you use a 14 period ADX , shorter or longer ?
-What time frame do you use 5 min, 30 min daily, weekly ?
-Which options do you sell, how close to the money ?
-Do you cover your naked option ?
-When do you cover or do you run to expiry ?
I can answer some of my own questions, in that my studies have shown that:
- The 14 day period seems to be as good as any other period.
- I don't like being stuck to a screen all day long so no intra day trading
for me. Daily charts will suffice.
- I reckon on a 60% accuracy which means I need to take in enough premium to
cope with the losses , which in turn means I need to sell quite close to the
money in order to generate that premium.
- I have done allot of option writing and my experience tells me that I
would always now sell a spread rather than leave a naked position. Yes this
costs me commission and slippage and the price of the option to cover but it
lets me sleep at night. I know exactly how much I can loose.
- As I have covered I believe in letting the position run to expiry or at
least when I have collected 75% of the premuim I received.
Advantages/Disadvantages.
- Disadvantage in the first method in selling against the trend when the ADX
turns up is in the implied volaitility and the premium that is received by
the option seller. As the market is only just beginning to trend then the
implied volatility and premium is liable to low. It is possible that the
market could move as planned i.e with the trend - in your favour- but due to
the volatility the option position could show a loss. This could be just
temporary - or at least until time decay had a chance to kick in.
-Advantage first method. If the option being sold is cheap then normally so
will the option being bought be cheap.
-Advantage second method. The option to be sold is liable to have a high
implied volatility and therefore a high premium.
-Disadvantage second method. The option to cover will also be more
expensive.
-Advantage third method. The straddle is liable to produce a good premium as
the implied voliatility fo both the call and put to be sold will be high.
-Disdvantage. The covering options will also have a high implied voliatility
and premium.
The above methods work over a one to three month time frame.
There is a fourth method where you wait for the price action to retract once
the ADX moves down and sell against the trend when the price action turns
again and attempts to retest the high made at the peak of the ADX.
My question is does anyone else trade like this. Have they got some years of
actual test data and records to show which methods work best. If so would
they be prepared to exchange ideas and thoughts. Additionally does anyone
have any further methods of using ADX to sell options. Any thoughts,
previous experince, advice would be welcome.
Paul Langham
artman@xxxxxxxxxxxxx
Paul.Langham@xxxxxx
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