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To compare different trading concepts with options (and to trade these concepts successfully) you have to have a good understanding of the Greeks.
There are numerous books on the market. Books I read regarding options include:
Carley Garner: "Higher Probability Commodity Trading", very easy to follow,
Lawrence McMillan: "Options as a Strategic Investment", more scientific,
James Cordier: "The Complete Guide to Option Selling", limited to option selling.
I liquidated this trade very soon after entering it with a loss. There was a limit up move that showed that the fundamentals - in this case the weather - were not as anticipated. As I had no idea when it would start to rain again I quit this trade. In the meantime, there was some rain in the cotton areas, and cotton prices stay in a range for the time being.
I usually do not sell options in a weather market, and this was another good example.
For the normal position size of 3% of total portfolio, is it 3% of total net liq value (which changes from time to time when market is open) or total cash (which changes only when new position is added)?
Since the writing of this text I further reduced the "Normal Position Size" to 1 - 3 %, and almost eliminated double positions. Overall profits are better now.
I take the total net liq value as a base. The order of magnitude should remain constant, if your trades are small enough and you diversify.
My risk is 1 - 3 % of total account net liq. Risk is the maximum loss I am willing to accept. (In real trading it might be a bit more as I usually only exit end of day.)
I use approx. 50 - 60 % of net liq as margin. Beyond this value, I do not enter new trades without closing an old one.
If diversification is very good, I am willing to accept 60 % (or perhaps 70 %). Otherwise it will stay at 50 %.
Currently I hold 11 trades, and I use 55 % of net liq as margin.
Thanks for sharing. Your risk is 1-3% of total account net liq. Is this risk the "Initial Margin" for this trade, or it is something else?
Normally I use 50% percent of net liq as stop sign. If only 1 trade in one future product, then the sum of all Initial margin divided by total net liq is this percentage. The margin of two legs of strangle will cancel each other. In that case, the total initial margin divided by total net liq is larger than the actual margin% in use.
Example: Account size is USD 100,000, max. risk is 1 % or USD 1000. I buy two corn futures at 3.60. For the corn future, 1 Cent corresponds to USD 50. Thus, I have to exit at 3.50 .
Thanks for the clarification. However, still something not clear.
I am more on the Options side. I understand the part that you exit each position with a loss when the loss is accumulated to 1-3% of the total net liq. How do you determine how many naked short option contracts you are going to open when you enter a trade?
The number of short options depends on the risk in USD (eg. 1 % of account value) and the amount of loss I am willing to accept per option, which again depends on entry price and stop loss.
Example:
Account size is USD 100,000, max. risk is 1 % or USD 1000.
I intend to sell corn calls for $ 400 per option. I intend to buy them back at a price of $ 600 (stop loss). The risk is $ 200 per option. Thus, I can sell 5 of these corn options. (Or, if I am careful and consider that I will buy back end of day at a higher price, I will sell 3 or 4 corn options.)
I hope I could make it clear. Otherwise please ask again.
Best regards, Myrrdin
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