Option trading with DanPickUp
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Hi LT
Volatility is reflected in smaller or bigger ranges in which the market trades during a specific period.
If your time frame is one day, you will get one day bars (I always will talk about bars, as I do not trade much on candles and many of the chart setting I use do best work with bars and look horrible with candles) and if your setting is one hour, you will get one bar for one hour.
This bars reflect the volatility in the purest way, as the lowest price and the highs price from the market are shown in it and as longer such bars are, as bigger the vola in the market is.
As the settings from the low MA and high MA are set to one time period, which is one bar, it reflects the vola in conjunction with the whole bar. To have a divergence for the visual effect, I set the time period from the middle MA to three, which means that the last three bars are used in the math calculation to show a point on the main bar. What ever time frame bar you use, it stays like that and as explained, vola is shown on each bar we use in our chart and the MA settings are fixed to this bars.
DanPickUp
Volatility is reflected in smaller or bigger ranges in which the market trades during a specific period.
If your time frame is one day, you will get one day bars (I always will talk about bars, as I do not trade much on candles and many of the chart setting I use do best work with bars and look horrible with candles) and if your setting is one hour, you will get one bar for one hour.
This bars reflect the volatility in the purest way, as the lowest price and the highs price from the market are shown in it and as longer such bars are, as bigger the vola in the market is.
As the settings from the low MA and high MA are set to one time period, which is one bar, it reflects the vola in conjunction with the whole bar. To have a divergence for the visual effect, I set the time period from the middle MA to three, which means that the last three bars are used in the math calculation to show a point on the main bar. What ever time frame bar you use, it stays like that and as explained, vola is shown on each bar we use in our chart and the MA settings are fixed to this bars.
DanPickUp
Dear Sunny,
pls add it to formula....am just played with elh afl...
..and taken it from there...
eh = MA(H,1);
el = MA(L,1);
Plot(eh,"",colorRed);
Plot(el,"",colorGreen);
Or you can edit formula ..Periods = Param("Periods", 15, 2, 300, 1, 10 );
add 0.5 to it as Periods = Param("Periods", 15, 2, 300, 0.5, 1, 10 );
pls add it to formula....am just played with elh afl...
..and taken it from there...eh = MA(H,1);
el = MA(L,1);
Plot(eh,"",colorRed);
Plot(el,"",colorGreen);
Or you can edit formula ..Periods = Param("Periods", 15, 2, 300, 1, 10 );
add 0.5 to it as Periods = Param("Periods", 15, 2, 300, 0.5, 1, 10 );
Last edited:
Hi
We now have an idea about the direction of the market and we now have an idea about Vega (Volatility) in the market. When we look at the volatility in the market we automatically look at the historical volatility or statistical volatility and we do not look at implied volatility, as implied volatility only is used in context with options. For simplicity I will use in the future only SV when I talk about market volatility and I will use IV when I talk about specific option volatility.
Again: SV is what you look at when analyzing Vega from your current traded market and IV is what you look at when analyzing/comparing Vega from specific option prices/strike levels. So, do not confuse that two subjects.
Now let us look at the next subject number four which is: Time frame of our option trade.
Why could or is this important to plan or at least to have an idea about it?
Time will be the second option greek you will be confronted with in this thread. It is called: Theta. We now also slowly will go in to specific terms you have to understand when any body talks about options. That is all still very basic knowledge
Definition of Theta:
Options Theta measures the daily rate of depreciation of a stock, future or ETF option's price with the underlying remaining stagnant. With other words: Theta tells you how much any option you trade with will lose on a daily basis with out any move in the underlying.
As you know, any options has a price or let us speak about the value. This value is composed through two different calculations which are named: Time value and intrinsic value.
Time value is the value an option losses over time and intrinsic value is the value which an option can add to. Let me make an example with put option and remember that call options are vice versa. So do not confuse them:
Current market price of what ever is 1000.
1. OTM. You now can buy a put option from strike 900. This option is out of the money as market still is at 1000.
2. ATM. You also can buy a put option from strike 1000. This option would be an option at the money, because its strike has the same level like the current market price of 1000.
3. ITM. Finally you also could buy an option with strike level 1100. This option would be an option in the money, as your strike level is higher compare to the market level.
Now what about the value of each of this options:
OTM = Only time value and no intrinsic value
ATM = Time value and little bit of intrinsic value
ITM = Lot of intrinsic value and less time value.
Follow up post on the subject will be made, as it other wise gets too much.
DanPickUp
We now have an idea about the direction of the market and we now have an idea about Vega (Volatility) in the market. When we look at the volatility in the market we automatically look at the historical volatility or statistical volatility and we do not look at implied volatility, as implied volatility only is used in context with options. For simplicity I will use in the future only SV when I talk about market volatility and I will use IV when I talk about specific option volatility.
Again: SV is what you look at when analyzing Vega from your current traded market and IV is what you look at when analyzing/comparing Vega from specific option prices/strike levels. So, do not confuse that two subjects.
Now let us look at the next subject number four which is: Time frame of our option trade.
Why could or is this important to plan or at least to have an idea about it?
Time will be the second option greek you will be confronted with in this thread. It is called: Theta. We now also slowly will go in to specific terms you have to understand when any body talks about options. That is all still very basic knowledge
Definition of Theta:
Options Theta measures the daily rate of depreciation of a stock, future or ETF option's price with the underlying remaining stagnant. With other words: Theta tells you how much any option you trade with will lose on a daily basis with out any move in the underlying.
As you know, any options has a price or let us speak about the value. This value is composed through two different calculations which are named: Time value and intrinsic value.
Time value is the value an option losses over time and intrinsic value is the value which an option can add to. Let me make an example with put option and remember that call options are vice versa. So do not confuse them:
Current market price of what ever is 1000.
1. OTM. You now can buy a put option from strike 900. This option is out of the money as market still is at 1000.
2. ATM. You also can buy a put option from strike 1000. This option would be an option at the money, because its strike has the same level like the current market price of 1000.
3. ITM. Finally you also could buy an option with strike level 1100. This option would be an option in the money, as your strike level is higher compare to the market level.
Now what about the value of each of this options:
OTM = Only time value and no intrinsic value
ATM = Time value and little bit of intrinsic value
ITM = Lot of intrinsic value and less time value.
Follow up post on the subject will be made, as it other wise gets too much.
DanPickUp
Hi Dan, this is a wonderful thread. While I have seen your posts in either Sudoku's or Paul's threads, I did not look up all your threads until now. You bring forth a simplicity in your explanations which is great for readers like us. Will get our of your way for now. Also, no questions on your topic as of now.
Hi
Now we have a simple idea about how an OTM, ATM and ITM option is priced. It is important to know that when we will choose the strike levels we want to use for our option trades. If you want to go deeper in to the subjects of pricing of options, you will find a link at the end of this post for your self studies. (*)
As we still spot on Theta, we have to know some more facts about it. Every option has an expiry day (**) and as nearer we come to this day, as faster the option looses time value. This is very important to know. Why? If you trade an option near expiry day and market not moves in your favor, you quickly will be in loss with your option trade as the time decay eats away value from your option in a rapid way. So be very careful when you try to trade with such short before expiry options.
You now may ask your self: Is there a way to ship around this higher risk with this fast option time decay? Yes there is. First have a look at the following picture:
That blue line visualizes the risk and as you see; in the last 30 days the blue line rapidly starts to fall and at the end it falls like a stone to the earth. If we now choose options with a longer life time for our trades like 30 days and more, we can ship around the highest risk and lower the risk we have from time decay. There are other ways to ship around this risk and we will look at this subject again when choosing the strategy and the strike levels. There then we also will start to combine Vega with Theta.
This was now a small excursion in to the world of options theta. Some of you may ask why he did that as the subject is:Time frame of our option trade?
I first wanted to be sure, that you have some kind of understanding what time means in pure option trading. In future trading you do not deal with that problem as a future not will lose from time decay.
When we plan our time frame for our option trade, we mainly have a look at our chart to spot this time frame. If we are in a side way market and want to play the support and resistance lines with a certain strategy, we count how much time the market needs to finish this swings. If we recognize a time frame of five days and we choose an option with a time frame of three days, we never will be able to finish this strategy. Sounds very logically but how many do really look at such things in option trading?
If we are in a trendy market and we want to have an idea about our exit point, we check how long the market needed in the past to make a move for example of 200 points.
These observations do not take much time. They are just one more little stone in the whole mosaic and for those of you, which plan to be pure directional option traders on a shorter time frame like a few hours or one day, these little observations also will be very helpful for the exit strategy. For strategically option traders it is of use for choosing certain strategies and in more advanced levels for the leg in strategies.
Now let me give you an example with the crude oil chart. It is done on a daily chart and you can do that on any time frame you like to trade.
http://i39.tinypic.com/iz4vp1.png
As you see, the daily chart shows a downtrend with a clear range game. If we now plan an option trade, we have many ways to do so. Let me show just two easy to understand trades. One is for the pure directional option trader and one is for the strategically option trader. Please read the risk disclaimer before continuing. (***)
For the pure directional trade we count only the days from Resistance to Support. Trend is down and we only trade in the direction from the trend. That is why from R to S and not from S to R! We could do that with a put. We recognize that the market needs between two and four days for the distance from R to S. If we would plan a trade for the full distance, we would take an option which at least would have a five day and longer live. So we know: Time frame of our trade is around one week.
As a strategically trader we could count the days which are needed from R to S and back to R. Why? A strategically trade could be a long strangle. If we want to implement it leg by leg, we need to be aware of how long it takes to finish the whole strategy. We could start with the put buy at R and if market is at S, we could buy the call. As it takes the market between four and six days to close this range, we would need a put which has a live of at least seven days and more.
http://i40.tinypic.com/25tjcd4.png
Hope you get a bit an idea about this subject.
Fourth subject closed.
DanPickUp
(*) http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp
(**)http://financial-dictionary.thefreedictionary.com/Expiration+Date
(***) Risk disclaimer: The ideas are only shown for academically purpose and are in no way meant as any recommendations. If you trade any of these ideas, the risk you take is fully on your side.
Now we have a simple idea about how an OTM, ATM and ITM option is priced. It is important to know that when we will choose the strike levels we want to use for our option trades. If you want to go deeper in to the subjects of pricing of options, you will find a link at the end of this post for your self studies. (*)
As we still spot on Theta, we have to know some more facts about it. Every option has an expiry day (**) and as nearer we come to this day, as faster the option looses time value. This is very important to know. Why? If you trade an option near expiry day and market not moves in your favor, you quickly will be in loss with your option trade as the time decay eats away value from your option in a rapid way. So be very careful when you try to trade with such short before expiry options.
You now may ask your self: Is there a way to ship around this higher risk with this fast option time decay? Yes there is. First have a look at the following picture:
That blue line visualizes the risk and as you see; in the last 30 days the blue line rapidly starts to fall and at the end it falls like a stone to the earth. If we now choose options with a longer life time for our trades like 30 days and more, we can ship around the highest risk and lower the risk we have from time decay. There are other ways to ship around this risk and we will look at this subject again when choosing the strategy and the strike levels. There then we also will start to combine Vega with Theta.
This was now a small excursion in to the world of options theta. Some of you may ask why he did that as the subject is:Time frame of our option trade?
I first wanted to be sure, that you have some kind of understanding what time means in pure option trading. In future trading you do not deal with that problem as a future not will lose from time decay.
When we plan our time frame for our option trade, we mainly have a look at our chart to spot this time frame. If we are in a side way market and want to play the support and resistance lines with a certain strategy, we count how much time the market needs to finish this swings. If we recognize a time frame of five days and we choose an option with a time frame of three days, we never will be able to finish this strategy. Sounds very logically but how many do really look at such things in option trading?
If we are in a trendy market and we want to have an idea about our exit point, we check how long the market needed in the past to make a move for example of 200 points.
These observations do not take much time. They are just one more little stone in the whole mosaic and for those of you, which plan to be pure directional option traders on a shorter time frame like a few hours or one day, these little observations also will be very helpful for the exit strategy. For strategically option traders it is of use for choosing certain strategies and in more advanced levels for the leg in strategies.
Now let me give you an example with the crude oil chart. It is done on a daily chart and you can do that on any time frame you like to trade.
http://i39.tinypic.com/iz4vp1.png
As you see, the daily chart shows a downtrend with a clear range game. If we now plan an option trade, we have many ways to do so. Let me show just two easy to understand trades. One is for the pure directional option trader and one is for the strategically option trader. Please read the risk disclaimer before continuing. (***)
For the pure directional trade we count only the days from Resistance to Support. Trend is down and we only trade in the direction from the trend. That is why from R to S and not from S to R! We could do that with a put. We recognize that the market needs between two and four days for the distance from R to S. If we would plan a trade for the full distance, we would take an option which at least would have a five day and longer live. So we know: Time frame of our trade is around one week.
As a strategically trader we could count the days which are needed from R to S and back to R. Why? A strategically trade could be a long strangle. If we want to implement it leg by leg, we need to be aware of how long it takes to finish the whole strategy. We could start with the put buy at R and if market is at S, we could buy the call. As it takes the market between four and six days to close this range, we would need a put which has a live of at least seven days and more.
http://i40.tinypic.com/25tjcd4.png
Hope you get a bit an idea about this subject.
Fourth subject closed.
DanPickUp
(*) http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp
(**)http://financial-dictionary.thefreedictionary.com/Expiration+Date
(***) Risk disclaimer: The ideas are only shown for academically purpose and are in no way meant as any recommendations. If you trade any of these ideas, the risk you take is fully on your side.
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