Hi
OI will be looked at when arriving at subject number seven: Choosing the strike levels.
Now subject number five: Choosing the strategy.
The universe of option trading strategies is huge. So where to start and how do I choose any of this strategies? How do I know I did the right thing?
I am very clear, that this subject could easily fill a full thread with many posts. Have a look once at the book:The bible of option strategies from Guy Cohen and you will see how many strategies are only explained in that book. I can tell you for sure: There are many more option strategies around.
The biggest option industry exists in the USA, as the possibilities offered from the Exchanges there to the option traders are incredible. Many strategies are not possible to trade in India because of the limited offers from the Bombay Exchange to the Indian option traders and so let us stay with what can/could be done.
Now choosing the strategy we want to implement:
Main thing to look at is the Vega (HV or SV) in the market. There are different ways to do so. We can use specific volatility indicators like Bollinger Bands, Option volatility indicator, ATP which is Average Traded Price or Standard Deviation Channels and some other tools. All this are indicators which visualize volatility in the market. Do not confuse these volatility indicators with other indicators. As I made once a thread about indicators, you will see in the following link a list of indicators which are used most from this trading community and I specified them for what to use: http://www.traderji.com/technical-a...nly-one-indicator-one-would-9.html#post632987
An other way to spot vola: If we are very familiar with one market, we should be able to see the change in vola in the chart. As told in this post http://www.traderji.com/options/66266-option-trading-danpickup-3.html#post641417, volatility is shown in each bar. If they get longer and longer, you know that volatility in your traded market is getting bigger and if they get smaller and smaller, you know that vola is low. If you have a problem to spot that, measure the price range. If the price range in a certain time frame gets bigger, you know that vola rises and if the price range gets smaller, you know that the vola declines. Very simple, isnt it?
Now let me stay simple and give you these fixed rules:
Low vola in the market means buying strategies.
High vola in the market means selling strategies.
What does this mean? Can I not buy an option when market has high volatility? In India I not can sell naked options so what should I do?
Buying just an option is no strategy! Even than, we will have a look at that in the next post.
With strategy we mean an option trade which includes more than one leg. In strategically option trading we speak many times from legs instead of options. It is the same. So if some one says: I leg in she/he says: I enter the trade option by option. That technique is for more advanced option traders as it needs a good understanding of the current market situation and in some case a very precisely planning of each step from this strategically trade.
Now what are buying strategies?
Buying strategies are strategies in which we mainly go long. Pure directional traders would just buy a call or a put. Strategically traders could buy a long strangle or a long straddle. If you are not familiar with those terms, use in the future this link: http://www.investopedia.com/dictionary/#axzz1lbpPh6W0
Keep this link in your browsers bookmark list. It is a dictionary about financial terms. Just type in the word you not understand and in most cases you are leaded to the right explanation.
Now why do we buy option when vola is low? As you know as I already explained it: Vega has a direct impact of the price of an option and low vega means in general the pricing of the option is cheaper. If we buy an option, we take a certain risk and if we can buy the option with a cheaper price, we lower our risk. That is the main reason why we divide in buying and selling strategies.
Follow up post will be made on the subject.
DanPickUp
OI will be looked at when arriving at subject number seven: Choosing the strike levels.
Now subject number five: Choosing the strategy.
The universe of option trading strategies is huge. So where to start and how do I choose any of this strategies? How do I know I did the right thing?
I am very clear, that this subject could easily fill a full thread with many posts. Have a look once at the book:The bible of option strategies from Guy Cohen and you will see how many strategies are only explained in that book. I can tell you for sure: There are many more option strategies around.
The biggest option industry exists in the USA, as the possibilities offered from the Exchanges there to the option traders are incredible. Many strategies are not possible to trade in India because of the limited offers from the Bombay Exchange to the Indian option traders and so let us stay with what can/could be done.
Now choosing the strategy we want to implement:
Main thing to look at is the Vega (HV or SV) in the market. There are different ways to do so. We can use specific volatility indicators like Bollinger Bands, Option volatility indicator, ATP which is Average Traded Price or Standard Deviation Channels and some other tools. All this are indicators which visualize volatility in the market. Do not confuse these volatility indicators with other indicators. As I made once a thread about indicators, you will see in the following link a list of indicators which are used most from this trading community and I specified them for what to use: http://www.traderji.com/technical-a...nly-one-indicator-one-would-9.html#post632987
An other way to spot vola: If we are very familiar with one market, we should be able to see the change in vola in the chart. As told in this post http://www.traderji.com/options/66266-option-trading-danpickup-3.html#post641417, volatility is shown in each bar. If they get longer and longer, you know that volatility in your traded market is getting bigger and if they get smaller and smaller, you know that vola is low. If you have a problem to spot that, measure the price range. If the price range in a certain time frame gets bigger, you know that vola rises and if the price range gets smaller, you know that the vola declines. Very simple, isnt it?
Now let me stay simple and give you these fixed rules:
Low vola in the market means buying strategies.
High vola in the market means selling strategies.
What does this mean? Can I not buy an option when market has high volatility? In India I not can sell naked options so what should I do?
Buying just an option is no strategy! Even than, we will have a look at that in the next post.
With strategy we mean an option trade which includes more than one leg. In strategically option trading we speak many times from legs instead of options. It is the same. So if some one says: I leg in she/he says: I enter the trade option by option. That technique is for more advanced option traders as it needs a good understanding of the current market situation and in some case a very precisely planning of each step from this strategically trade.
Now what are buying strategies?
Buying strategies are strategies in which we mainly go long. Pure directional traders would just buy a call or a put. Strategically traders could buy a long strangle or a long straddle. If you are not familiar with those terms, use in the future this link: http://www.investopedia.com/dictionary/#axzz1lbpPh6W0
Keep this link in your browsers bookmark list. It is a dictionary about financial terms. Just type in the word you not understand and in most cases you are leaded to the right explanation.
Now why do we buy option when vola is low? As you know as I already explained it: Vega has a direct impact of the price of an option and low vega means in general the pricing of the option is cheaper. If we buy an option, we take a certain risk and if we can buy the option with a cheaper price, we lower our risk. That is the main reason why we divide in buying and selling strategies.
Follow up post will be made on the subject.
DanPickUp
