Option trading with DanPickUp

[sanjosedesi]

Any way, I will continue with the thread as promised and I will do it the way I started it. The readers here finally may still be able to use some of the stuff which is posted here about my option trading at the CME and the knowledge needed to survive in that huge option market.

By the way: Thanks to the PM sender for this very detailed information about the option trading situation in India.

DanPickUp

Dan, please do continue. Even if a market has radically different parameters, the concepts still apply to the options as they still expire and as they still move with the price and as they are still affected by the volatility. It is for a person to figure out how to tweak the model. I must (re-) appreciate your clarity of explanations and these will go a long way in better understanding.

Also, if your PM friend does not mind, would you mind sharing the note on differences between Indian options and your options ... you can remove any personal information ... maybe the PM sender just did not want to clutter the thread. Anyway, good to know this delta.

 

[DanPickUp]

Dan, please do continue. Even if a market has radically different parameters, the concepts still apply to the options as they still expire and as they still move with the price and as they are still affected by the volatility. It is for a person to figure out how to tweak the model. I must (re-) appreciate your clarity of explanations and these will go a long way in better understanding.

Also, if your PM friend does not mind, would you mind sharing the note on differences between Indian options and your options ... you can remove any personal information ... maybe the PM sender just did not want to clutter the thread. Anyway, good to know this delta.

Hi sanjosedesi

As told, I will continue with the thread and thanks for the (re-) appreciate .

About the notes: I first have to ask the person about if it is ok if I post here any more details about what was sent to me. In the mean time, you and others have a look at the following:

Some body else showed me that and I really was wondering if you do make such trades, as I am always told, that there is no OI on such strikes far out of the month in India and that the bid ask spread is very bad on such options in India. If you do such trades, this would be nice.

Selling a strangle today with June expiry:

Margin 30'000 Rp

Symbol / Expiry/ Opt Type / Strike Pr /Qty /Best Buy / Best Sell / Sell Qty / Last Traded Price

NIFTY / 28-Jun-12 / CE / 5900 / 5000 / 133 / 160.4 / 200 / 130
NIFTY / 28-Jun-12 / CE / 5800 / 50 / 178 / 197.35 / 200 / 253.45
NIFTY / 28-Jun-12 / PE / 5400 / 100 / 200 / 219.95 / 100 / 200
NIFTY / 28-Jun-12 / PE / 5300 / 50 / 173 / 190 / 50 / 171

Thought from my side would be:

- Bid/Ask spread in this option series or for the whole strategy?
- Quantity of OI on this strikes, as I want to be sure that I at any time get out of the trade.
- Risk Reward Ratio
- Expected profit compare to the margin which is blocked. If I have to block 30'000 Rp to make a few hounder t, what sense does it make?
- Implied Volatility in the market and in the options, as it is a selling strategy?
- Order execution with Indian platforms?

Your ( means every bodies ) comments are asked and welcome.

DanPickUp

 

[jagankris]

Dear Dan,

Please find attached the 90 days Time Value versus Intrinsic Value chart of NIFTY12Feb5300CE.
Starting date - 28-Nov-2011.Underlying Value - 4851.

Till Today.

Please explain the increase in Theta value for an OTM Option with respect to Market movement.

From 09-Jan-2012 the theta was increasing till Feb-02 and again it started decreasing.

In theory Theta is explained as decay of time value.

But the time value component again depends upon the distance of the strike from the underlying Value.

What is the relation ship between Delta and Theta ?

TIA.

Best Regards,
Trader Jagan

Hi

I got PM and it seems that time decay is not understood. Let me make one more post about it as I am clear about how confusing this can be.

DanPickUp

 

[DanPickUp]

Hi JG

Thanks for your input. I will answer your queries as soon as some body has given some inputs to my last post ( 72 ).

Why?

For a long time now, all Indian option traders told me that such ideas from post 72 ( Far out of the month option strategies ) are not tradable in your market, compare to the CME market and now I got question with data about if a trade like that should be token and implemented in the Indian market.

Now it is to the Indian live option trader which can answer this question which was pointed to me as CME option trader.

DanPickUp

 

[dashr]

To enter such a trade on a given day, one will pay with slippages as we will not find much dumb money there. I am not sure if I am right because never done that.

 

[nelsonite]

Hello,

This is just fantastic or maybe it should be Dantastic. People pay thousands to learn such stuff and yet do not get clear and simple explanation like the brilliant way Dan has explained.

I feel privileged:thumb: to learn about options here.:thumb::clap:

 

[jagankris]

Dear Dan / Sanjosedesi,

I could be wrong in uttering the below views - may be seniors pls correct if I am wrong.

Option buyers are historically proven winners in the Indian Markets.
Writing Far month OTM strangles are very risky in the Indian Markets.
One bad event could wipe out the entire money made out of writings in 2 or 3 years.

Any economic events affecting the globe would affect the Indian markets.
Or in other words FII withdraw money market falls.

There is no effective hedging allowed for the MF's countering the derivative positions of FII's. (As I have never seen MF's derivatives positions for Nifty).

100 + gaps are not unusual.

There have been one or twice down freezes and one upper freeze :rofl:.
Fully options manipulated markets.

Indian markets are more volatile.

1) Liquidity will be very low.
2) Bid-Ask spread will not be in favor.
3) Since liquidity is less covering the position will not be that easy.

My questions

1) Past 3 months Monthly average range of Nifty being 500 points ?
2) Coming month budget/5 state election results ?
3) Margin requirements of 60,000 RS - depends upon the broker.

There is no GTC sl here in Indian markets.

Indian markets shows strong moves every quarter.
Why should one go for far month OTM strangle - 4 months?

TIA.

 

[sudris]

Hi Dan,

a slightly off topic post, but as we are discussing options so thought to have it posted right here.

I'm yet to read this thread thoroughly with patience, so I don't know how far the series you prefer to look into as per your own experience.

I was just trying to go far in the series of next year, Jun-13 for Nifty.
As one can see in the pic below, Jun-13 5300 Call and Put show an equal addition of 0.2 Millions in OI today. The Call Option had some earlier OI while the Put OI was entirely added today.

(direct link if you are able to view it before the next session of friday begins)


How does one analyse this kind of data? It sure sounds to be some hedged contracts. But if an institution wish to hedge this far, who could be the one giving it this opportunity in the first place? another institution?.....any comments

 

[bpr]

Dan
if I got it correct this is what you suggested.

Upper protection 6192.35
Lower protection 5007.65

Looks good to me at least on paper covers a very wide range
but don't know how it will pan out if the volatility in nifty will continue
No idea of bid ask spread as i never looked so far in series.

Margin req may be somewhere around 200k or more
Looking at a max profit potential of 34k
Max loss is infinity as usual.

OI
CALL 5900 50,700
CALL 5800 1,50,350
PUT 5400 1,500
PUT 5300 15,800

IV is at around 29% for CALLs
and at around 19% for the PUTs as shown in above diagram.
so should i say good candidate for selling strategy...

over to you...

 

[DanPickUp]

Hi

Jagan you asked two nice questions.

1. Please explain the increase in Theta value for an OTM Option with respect to Market movement. From 09-Jan-2012 the theta was increasing till Feb-02 and again it started decreasing. In theory Theta is explained as decay of time value. But the time value component again depends upon the distance of the strike from the underlying Value.

My answers to your questions, as post 68 do not explain about this. I do not know, if you have a specific option strike in your mind. Even than, the following you can apply to your knowledge about Theta:

Theta can be very high for otm options if they contain a lot of implied volatility.
Theta is typically highest for atm options.
Theta will increase sharply in the last few weeks of trading and can severely undermine a long options holders position, especially if implied volatility is on the decline at the same time.

2. What is the relation ship between Delta and Theta?

Delta also can be thought of as the probability the option will finish in the money. Delta by it self shows the sensitivity of an options price to the change in the price of the underlying instrument it is based on.

If the option is itm, it has intrinsic value and time value. Depending how many days to go until expiry and how vola is, time value will be greater or smaller. This time value has a negative effect to any kind of option (itm, atm, otm / post 27), what ever delta they have.

All of the options greeks are in one or the other way with each other connected and if one of them changes in value, the value will change in the other Greeks. It is a bit like a scourge. You tweak it a little bit at the end which is near to you and at the other end it can beat out very strong.

By the way: Not an easy topic to explain in public.

DanPickUp