Options - My way of looking at it

[Options_Trader]

I use mainly ITM options for trend following. I am not an expert on various option strategies. The idea of this thread was to look at option basics and understand it in a different way.

So the thread is open to discussions as I said before to all

Dear Sir,

Thanks for a lovely thread. Many famous traders use options for swing trading. However, for doing that, one should be comfortable with trends.

Suppose you are holding a long call. What is your approach if the market falls? Do u use stop losses or do u hedge? I am new to TA and not comfortable taking trend positions. Plus, I am not comfortable following herd mentality.

Just to illustrate, I would not buy an ATM option if the underlying is not in a strong trend. For a VIX of around 22 (guess this is the nifty mean), for near month option, time decay will be around 3-3.5 rs per day at the start of the series (decay will increase as expiry nears). Considering a delta of 0.5, underlying will have to move by at least 7 points daily (more for near term expiry) all the while maintaining volatility to maintain the option value.

Please advise if this is correct thinking.

 

[Options_Trader]

1. I know people who trade options chart. if you assume that you want to get out a prev pvt low and if that pvt low is broken because Vega went down, then why not....but I don't have options chart in my data feed so never looked into it

2. by end of month I would say that most decay is time decay only. comparing VIX at he time you bought and time you sold could give you some idea whether there was a Vega (volatility) component also

It should be noted that VIX calculation involves the following:
1. Call and put options with 6 strikes above and below ATM.
2. Near, and mid month options (with 3 days to expiry, mid and far month options).

So it might me possible that call IV goes down but VIX increases due to an increase in put IV. Hence, need to be careful while interpreting results.

 

[toughard]

Is max pain a reliable indicator. What is the probability of success using max pain?

one more to add

Is max OI a reliable indicator. What is the probability of success using max OI? out of 10 times how many time market closed closely around MAX OI?

 

[pratapvb]

Is max pain a reliable indicator. What is the probability of success using max pain?

maxpain keeps changes as per the dynamics of the mkt during the month....but it is a good indicator in the last hour of where potential expiry might happen

 

[pratapvb]

Dear Sir,

Thanks for a lovely thread. Many famous traders use options for swing trading. However, for doing that, one should be comfortable with trends.

Suppose you are holding a long call. What is your approach if the market falls? Do u use stop losses or do u hedge? I am new to TA and not comfortable taking trend positions. Plus, I am not comfortable following herd mentality.

Just to illustrate, I would not buy an ATM option if the underlying is not in a strong trend. For a VIX of around 22 (guess this is the nifty mean), for near month option, time decay will be around 3-3.5 rs per day at the start of the series (decay will increase as expiry nears). Considering a delta of 0.5, underlying will have to move by at least 7 points daily (more for near term expiry) all the while maintaining volatility to maintain the option value.

Please advise if this is correct thinking.

that is why I said ITM....the option I use is where the intrinsic price is 70-80% of total value....this way only 30% of the value is subject to time decay.....and as I mentioned in that post.....when mkt moves 100pts in favour I shift the strike also locking in some profit

 

[pratapvb]

one more to add

Is max OI a reliable indicator. What is the probability of success using max OI? out of 10 times how many time market closed closely around MAX OI?

max OI tells you the range of the expected near term....however if there is a BO / BD of that level.....things will change

 

[toughard]

max OI tells you the range of the expected near term....however if there is a BO / BD of that level.....things will change

how you track the MAX PAIN live?

 

[pratapvb]

how you track the MAX PAIN live?

I have created my own xls file based on nse option chain

 

[bunti_k23]

Thank you pratap sir for this informative posts though i didnt understood the strategy and calculation part .too complication for my small mind

 

[rocky01]

Thanks..gr8 work.

I will be starting from scratch so this thread can stand on it's own

Options are derivatives (price changes as underlying stock/index changes

Two type of Options
1. Calls - its price increases as underlying increases
2. Puts - its price increases as unlerlying decreases

Buyer of options - has a right to purchase the undelrying at a future date (expiry date)

Seller of option - has an obligation to pay the buyer at a future date, if the buyer exercises the options

European / American options - dynamics of how exercising can be done is different and is beyond the scope of this thread