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.
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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.
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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.
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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.