Low Risk Options Trading Strategy - Option Spreads

[Capricorn]

Thanks AW10

Not really, I dont consider always that market will remain sideways. but I keep in mind two things while going in to short strangle of +&- 100/150 stike price i.e
(1) I want to earn TV of option.. where my target of both option TV is 100 to 150 pts while selling. (not the full profit of 100 to 150.)
(2) I cover this stangle with either future buy/sell or option buy for any one side movement.

Hope I am clear.

what do you mean by "advanced trader"? If somthing special about this term. please educate me.

also I am expecting your views/ reply for my other questions. (ofcourse at your time)

regards

When you hedge delta keep in mind the charm and vanna. May be 2nd order derivative greeks but essential for hedging. Cheers.

 

[AW10]

hi,
I have a dout in options excersise .As index options are excersied only at the end of the contract period .
for eg iam buying 5000 ca @ rs 100 and at the time of expiry .Nifty went 5300 now my 5000ca would be rs 300.
suppose my system fails or some other problems rasied and i could not trade on expiry when should i excersise .
whether it will be automatically excersied or i have to tell the broker to excersise the option .

Normally we can get the right price ,and i dont have a chance for excersise .but still i want to know the procedure for excersise .
regards
bala

bala during final settlment on expiry day, all In-The-Money option are forecefully excercised by exchange. So even if you can't close it, this will be excercised anyway. You don't need to
give any instruction/order for it.

You always have chance to close it before this by squaring -off your position.
As mentioned by nac, that settlement has higher brokerage hence better to settle early. I would suggest maybe one day early to get fair sell price for your long position..
Otherwise, on the last day, buyers are not fool.. and their bid price takes care of higher brokerage charge and hence place their bid at lower price.

Happy Trading

 

[rrmhatre72]

Quote:
2. OI for options are very well understood... that writing increases the OI. but how to evaluate the OI for future..and estimate market movement accordingly. it can be long or short...?

I don't know what do u mean by writing increases OI. If I place order to sell 1lac strike 6000 May Call at 100 rs., that means I am writing so many options.. Will it change the OI of 6000 CAll ? Absolutely not.. cause I need some buyers at 100 rs to take these written piece of paper.. So OI is increased only when txn takes place and asked price.

Similarly, if I try to sell NF may contract at limit price of 5500 when mkt is at 5140 (same as I am trying to write a contract). My order remains in queue and OI has not impacted.

I don't think there is any difference in interpretation of OI for a particular strike of option or OI of futures . Difference is mainly due to strike prices.. In NF, you can trade contract only at current price, whereas in options you can trade contracts at various other strikes. Otherwise, in simple terms, OI is nothing but amount of Sum of (all open Long positions buy positions + all open short position ) in the market /2).

Hi AW10,

Thanks for explaination.
Pls help me in understanding following. This may sound very basic query.

1. You have indicated OI= (All long+All short)/2
a. Is there way to find out what are long & short position in perticular OI?
b. OR Long & Short positions are always equal in the market.

 

[MaxX]

@rrmhatre72, Long & Short executed positions are always equal in the market.. Each executed contract has a party on either side of the transaction... thats how the market works

OI is just the total number of contracts that are not closed or delivered at any particular point of time.

 

[rrmhatre72]

@rrmhatre72, Long & Short executed positions are always equal in the market.. Each executed contract has a party on either side of the transaction... thats how the market works

OI is just the total number of contracts that are not closed or delivered at any particular point of time.

Thanks Buddy.
I was confused by formula as it was indicating to take avg of long & short position.
Now formula is clear OI=Long=short.

 

[AW10]

Quote:
Hi AW10,

Thanks for explaination.
Pls help me in understanding following. This may sound very basic query.

1. You have indicated OI= (All long+All short)/2

Lets assume we are only 2 peole in mkt.. You sell 1 contract, and 1 buy that. At EOD, in the market, there is one person (me) having 1 long contract open, and other person (you) have 1 short position.
hence OI is = (1 + 1)/2 = 1.

Tomorrow,
If you sell you short position in the mkt, and I also sqaureoff mine (assuming there is no new person), then we both have close our contract. .At EOD tomorrow, in the mkt, still there is one person (me) having 0 long contract open, and other person (you ) have 0 short position. hence OI is = (0 + 0)/2 = 0..

If you sell you short position in the mkt, but I don't sqaureoff mine. I.e. some new person has enterd mkt. At EOD tomorrow, in the mkt, still there is one person (me) having 1 long contract open, and other person (not you but someone who took Short trade against you) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both close our position and 2 new people take it from us. We both are out of mkt. but still there is one person (Mr X) having 1 long contract open, and other person (Mr Y) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both hold our position as it is...But 2 new people come up and execute a successful trade. In that case at EOD tomorrow, in the mkt, still there is TWO person holdng 2 long contract open, and other two person holding 2 short position. hence OI is = (2 + 2)/2 = 2..

Hope it is clear now.

Happy Trading.

 

[jaywings007]

Lets assume we are only 2 peole in mkt.. You sell 1 contract, and 1 buy that. At EOD, in the market, there is one person (me) having 1 long contract open, and other person (you) have 1 short position.
hence OI is = (1 + 1)/2 = 1.

Tomorrow,
If you sell you short position in the mkt, and I also sqaureoff mine (assuming there is no new person), then we both have close our contract. .At EOD tomorrow, in the mkt, still there is one person (me) having 0 long contract open, and other person (you ) have 0 short position. hence OI is = (0 + 0)/2 = 0..

If you sell you short position in the mkt, but I don't sqaureoff mine. I.e. some new person has enterd mkt. At EOD tomorrow, in the mkt, still there is one person (me) having 1 long contract open, and other person (not you but someone who took Short trade against you) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both close our position and 2 new people take it from us. We both are out of mkt. but still there is one person (Mr X) having 1 long contract open, and other person (Mr Y) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both hold our position as it is...But 2 new people come up and execute a successful trade. In that case at EOD tomorrow, in the mkt, still there is TWO person holdng 2 long contract open, and other two person holding 2 short position. hence OI is = (2 + 2)/2 = 2..

Hope it is clear now.

Happy Trading.

Hi AW10,

If say 5400CE OI increases by some %, then why market consider it as a resistance or for PE as a support? equal no of people are happy/ unhappy if market reach 5400 and equal no of trade take place as profit booking or stop loss.

Pls clarify.. your views always make sense.

Regards,

 

[DanPickUp]

Lets assume we are only 2 peole in mkt.. You sell 1 contract, and 1 buy that. At EOD, in the market, there is one person (me) having 1 long contract open, and other person (you) have 1 short position.
hence OI is = (1 + 1)/2 = 1.

Tomorrow,
If you sell you short position in the mkt, and I also sqaureoff mine (assuming there is no new person), then we both have close our contract. .At EOD tomorrow, in the mkt, still there is one person (me) having 0 long contract open, and other person (you ) have 0 short position. hence OI is = (0 + 0)/2 = 0..

If you sell you short position in the mkt, but I don't sqaureoff mine. I.e. some new person has enterd mkt. At EOD tomorrow, in the mkt, still there is one person (me) having 1 long contract open, and other person (not you but someone who took Short trade against you) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both close our position and 2 new people take it from us. We both are out of mkt. but still there is one person (Mr X) having 1 long contract open, and other person (Mr Y) have 1 short position. hence OI is = (1 + 1)/2 = 1.. no change in OI..

If we both hold our position as it is...But 2 new people come up and execute a successful trade. In that case at EOD tomorrow, in the mkt, still there is TWO person holdng 2 long contract open, and other two person holding 2 short position. hence OI is = (2 + 2)/2 = 2..

Hope it is clear now.

Happy Trading.

Hi

What about that :

OI still has one problem at the end of the day.

We do not see how many hedged positions are in the market ( Mostly from the big boys ), because this is not shown in OI.

Hedged positions are so far closed for OI, but if we only think, we can make our decisions build on OI and where it is biggest, we can be led to the wrong idea.

On certain strikes can be huge volume of such hedge positions, because the insiders know where the markets can go in advance and there they hedge them self, but we as outsiders do not see that.

Take care

 

[AW10]

Hi AW10,

If say 5400CE OI increases by some %, then why market consider it as a resistance or for PE as a support? equal no of people are happy/ unhappy if market reach 5400 and equal no of trade take place as profit booking or stop loss.

Pls clarify.. your views always make sense.

Regards,

I fully agree with you.. and hence I don't believe it on the face of it. IMO, This is theoratical definition. Only logic behind this is that Options writer are smarter then buyers i.e. smart money.. and hence people attach amount of OI/ change in OI to action of option writer i.e. smart money's action and hence give this interpretation of identifying support and resistence from OI.

In my view, above assumption is faulty for following reasons
- now-a-day, many big account, novice option trader (not so smart money.. i.e. HNI, private fund mangers etc, ) also jump into option writing. Big account size does not make them smart trader.
- Real smart money is really smart and they know it very well that there is time to buy options and there is time to sell. they know trading and risk mgmt lot better then CNBC presenters. If they are selling options then most of the time, it has other leg as well which we can't know.
- Options are very flexible and there are many multi-legged strategies people use by using other strike, other months, other instrument like stock or Futures.. Hence above interpretation is prone to error
just as an example, if I buy June 5200 Put and sell May 5200 put, what is my view on 5200 level ? Basically I am bearish as per my bigger timeframe view, which might look like short term bullish cause
I sold 5200 put. But in essence, I am just trying to pocket inflated premium at 5200 near mnth contract due to recent volatilty, If I am collecting 125 rs for this.. the I am not worried even if mkt falls to 5100.

So, is my position bullish or Bearish at 5200 ?

I leave it to you to figure it out. (maybe you already know the answer) ?

Happy Trading.

 

[tushar.shiva]

Hi,
if you leave contract open exchange will exercise it, but charges are very very high.
For index option contracts which are in-money with difference more than 200 don't have much time value therefore for such contracts its better to exercise 3-4 days before expiry.

bala during final settlment on expiry day, all In-The-Money option are forecefully excercised by exchange. So even if you can't close it, this will be excercised anyway. You don't need to
give any instruction/order for it.

You always have chance to close it before this by squaring -off your position.
As mentioned by nac, that settlement has higher brokerage hence better to settle early. I would suggest maybe one day early to get fair sell price for your long position..
Otherwise, on the last day, buyers are not fool.. and their bid price takes care of higher brokerage charge and hence place their bid at lower price.

Happy Trading