Ambitious question about a tricky conflict

[Sunny1]

Naked itm have advantage..... compare to future

1. Market goes in our direction... profit
2. Market stays .... Profit
3. Market goes against ...it will be no loss or minor as option value is reduced...

only concern is big movement against us...but then even future contract are not safe from this....

Beside there is advantage of hedging ...and other option strategy

I am not a option geek...so this is my layman reply

 

[rkkarnani]

Hi rkkarnani

Thanks for your participation here. Some thoughts from my side to your comment, as I think, the question points more to a short time frame :

Directional trading with itm options is best done on a short time frame. Directional trading with itm options on a big or long time frame makes only sense, when the volatility is very high. So market will move quick. But even than, he would need some special strategies to manage that comfortable.

If the volatility is small, it takes to much time for the market to move from A to B and then theta ( Time ) comes in to play against us. That is what you mentioned and you are right with that. There are other strategies to play such time frames, but this strategies are not built directly on market direction.

DanPickUp

Thanks for your thoughts on this.
Dan, I am probably not able to explain much becoz of lack of in depth knowledge about options, but from my own expirience I can say that in Indian Market scenarion "Time Value" is of prime importance unless market moves vertically(as u said Volatality). As I said in my earlier post, "time of the Derivative Month" can be a prime factor in deciding whether you are entering an Option or an underlying!
Here the TF has to be maybe max at next 20 trading sessions.. there is almost no liquidity in Next month options and the spread is simply too big so the TF has to be within 20 sessions max be it short TF or Long TF.

 

[DanPickUp]

Naked itm have advantage..... compare to future

1. Market goes in our direction... profit
2. Market stays .... Profit
3. Market goes against ...it will be no loss or minor as option value is reduced...

only concern is big movement against us...but then even future contract are not safe from this....

Beside there is advantage of hedging ...and other option strategy

I am not a option geek...so this is my layman reply

Hi Sunny

Nice to see you here. It is an open thread and so every persons knowledge is welcome. May I make some comments to your post :

1 : This view does not include the volatility and the time. Most beginners fail on those two very important facts. So become familiar with those facts. After that, you will over think point one.

2 : To make profit with an option when market stays is not easy ! You sure you considered all the facts, when posting this comment ? Here you have to consider again volatility and time and you even have to consider if you long or short with the itm option. Being short with a naked itm options is as risky as being short with a naked underlying. Doing so, I strongly recommend to have a worked out trading plan which is profed. If you are short and volatility stays at the same level like at the time you bought the option, time will play in your favor. If vola falls, you make money on the time and you lose money on the vola. If vola rises, you make money on the vola and on time. That have been some explanations on the short option.

Now to the long option, which we talk about in the first post. If you are long, and market stays, you lose money on the time side and you can lose money on the vola side. You only could make money, when volatility for certain reasons makes a big jump, which could bring you bigger profits than the money you lose on the time side.

3 : If you understand point one and two more sensible, you will see clearer about that statement. Depending on how much you paid for this itm option, you can have substantial loss, when market moves against you.

You are right about the advantage of hedging strategies. But this needs again more knowledge about how to do it and it needs the necessary understanding, when and under what circumstances to use each one of this
derivatives.

DanPickUp

 

[DanPickUp]

Thanks for your thoughts on this.
Dan, I am probably not able to explain much becoz of lack of in depth knowledge about options, but from my own expirience I can say that in Indian Market scenarion "Time Value" is of prime importance unless market moves vertically(as u said Volatality). As I said in my earlier post, "time of the Derivative Month" can be a prime factor in deciding whether you are entering an Option or an underlying!
Here the TF has to be maybe max at next 20 trading sessions.. there is almost no liquidity in Next month options and the spread is simply too big so the TF has to be within 20 sessions max be it short TF or Long TF.

Hi rkkarnani

You explain very well ! Do not worry about that. If you allow, I will make some comments on that statement :

"time of the Derivative Month" can be a prime factor in deciding whether you are entering an Option or an underlying!

Right. As you clearly say, the rules in India on option trading are different compare to other places because of liquidity problems on the next months option series and of the big bid/ask spread. I got that point clearly and thanks to bring that in here.

Even than : What about trading itm options from this month and hedge it with the future from next month or vise versa ? But here we come in fields, which are not questioned in the first post.

DanPickUp

 

[stoch_guy]

Dont know much about Options, but do understand the "Time Value" plays a vital role. One thing that can change the scenario is the time of the month when you wish to decide whether to go for Futures or ITM Option!!

I have seen ur posts in different threads. Kai haa keh, I think you have good observation. I would say try OPTIONs. You may loose at first in the beginning. But once u catch hold of one, u can make fortune, and soon stocks will be boring to trade

 

[DanPickUp]

Hi Stoch_guy

I may post here, that Rkkarnani already trades options very well. If he says, he doe's not know much about options, he means, that he very well understand to trade options in Indian market, but has little experience trading options overseas.

See his option trading here and read the following posts in that thread :

http://www.traderji.com/technical-a...gy-how-use-if-effectively-288.html#post541759

Tc

DanPickUp

 

[mukeshpatil82]

I wud like 2 take a different view here...just 2 confirm if my view can sustain intense scrutiny of the pros out there..if no I will change my opinion..

1.""Why do you use naked itm options for directional trading instead the future or the share ?""

I will prefer stocks(never traded futures..as they are only 4 the month) to DITM options anytime.

Delta: DITM:0.80(assuming),Stock:1,for directional plays 1 will be always better than 0.80/0.85,(ATM Delta :0.5, very high time component,never will trade it),

Gamma: balanced 4 both,

Vega:
DITM:very high,stock:0, with stocks u can BUY w/o worrying abt volatilty,especially if ur wrong in predicting it.., and u get more opportunities even in high IV environment..

Theta:
DITM: Rapid -ve value as approaches expiry,at expiry u will lose ur entire option value if wrong, with stock u dont lose anything due to theta and hold right to expiry...AND BEYOND THE MONTH if NEED BE..u will never be right about the direction but short of time....



With stock ur only worried abt Delta, with options(especially DITM) u lose from Delta,Gamma(adverse),Vega and Theta...

Disdavantages of stocks:

1.No leverage,
2.Faster movement( bad if against u),

My choice is stocks,if someone is so sure of predicting direction,and can also predict Vega and balance the Theta, then he is GOD...then u shld also be able to predict the magnitude of the move and select the correct OTM strike..more bang 4 the buck...

This applies only 2 stocks, with futures options r better for leverage...

Kindly correct me if I'm wrong...just cant digest DITM buying..u dont trade options directionally like shares..u hedge or u sell them IMHO...

 

[mukeshpatil82]

Another way 2 look at this:

1.DITM: U can get the direction right and still loose from the decrease in Vega(4 calls..does not apply 4 puts generally) and the thate,

2.Stock: U only have 2 get the direction correct..and forget the rest,

What u lose if wrong will be ur money management and will generally be the same for both cases...

Ofcourse,u must be able to short stocks( assuming delivery based trades)..and if i ever buy options I will always buy puts..if Im bullish I will replace the DITM call with stock..

Comments requested...