Options - Price and premiums

[lemondew]

Hi all,

Just thought I ll share a couple of things I know on options which I have been working on since last 2 years. A lot of folks here have also told me to share the same. Hopefully it will add to our knowledge. Anything you would like to point out feel free to post so that we can all benefit. I ll try to keep it brief and will update as and when I ll have time.

Assuming everyone knows the basic of options. Its available at
http://zerodha.com/varsity/module/option-theory/

 

[lemondew]

An important thing which one should keep in mind while deciding on option strategies is the Implied volatility.
High IVs mean high premiums. Options are expensive. Low Ivs mean low premiums. options are cheap.

 

[lemondew]

For example consider 31st may 2016 for this june series. Consider premiums for ATM options strike
As per this image On 31-5-2016 at 11:50 SBI futures were trading at 195.85. The premium of SBIN 195 calls =9.1 (column F) puts = 8.35(column g) Combined premium of straddle (column I) 17.45. This is 8.9% of its futures price (column J).

The combined premium of Nifty at same time was 270.6 or 3.30% of its futures price.


The image also shows the stocks in order from higher premium to lower. Here BHEL had highest premium percentage while Wipro had lowest premium percentage in stocks.Nifty had lowest. Also keep in mind some stocks tend to have higher premium while others dont. Nifty always have lower premiums compared to volatile stocks like tatasteel.

 

[DSM]

My view :

When there is momentum and strength in the market, high IV's are secondary.... Options prices zoom up arithmetically as well as geometrically. If only looking at IV, one may miss a good trade.

An important thing which one should keep in mind while deciding on option strategies is the Implied volatility.
High IVs mean high premiums. Options are expensive. Low Ivs mean low premiums. options are cheap.

 

[lemondew]

I track only for these stocks in image as they have relatively fair liquidity. Other stocks dont have much liquidity so I dont take any positions in them nor do I track them. Never take any positions in stocks without liquidity.

 

[lemondew]

Also if you see options chart for today. SBI 205 straddle combined premium is 14.45 much lower than what it was on 31 may. And SBI 195 straddle is worth 17.75. Even inspite of SBI 195 call being 10 points in the money 195 straddle today is worth only 17.75. This shows a fall in premiums. Basically it is worth knowing whether the premiums are pricy or not before getting into strategies.

Again short strategies are good when premiums are high 10 points higher SBI and 195 straddle is still worth the same 17.5ish which it was on 31 may as shown in excel above :thumb::thumb:

 

[lemondew]

I have seen many people doing iron condor. The best time to do iron condor is when premiums are high and the worst times to do iron condor is when premiums are low. And if the premiums are low on nifty there is no reason to run an iron condor on nifty. There are better options available

 

[lemondew]

Hopefully the SBI example explains what I am trying to say and why IVs are important. Falling IVs work in a sellers favour. We are 10 points or 5% above 31 may price and still trading at more or less same price. Theta component has also worked in sellers favour in this case.

Rising IVs work in buyers favour. This may not be the best example there are times when IVS have been really high and it has fallen drastically. It is important for those who wish to do iron condors to know if the premums are high or low and also they need to track the days to expiry.

My view :

When there is momentum and strength in the market, high IV's are secondary.... Options prices zoom up arithmetically as well as geometrically. If only looking at IV, one may miss a good trade.

 

[DSM]

Lemondew,

Used to trade stock options with 'high liquidity' till I found trading index options is the best. More liquid, more safe, and still providing better fills and opportunities.... No matter how liquid a stock is, still the depth of liquidity cannot match the index..... And before/during results, stock options are better avoided in my view....

Also if you see options chart for today. SBI 205 straddle combined premium is 14.45 much lower than what it was on 31 may. And SBI 195 straddle is worth 17.75. Even inspite of SBI 195 call being 10 points in the money 195 straddle today is worth only 17.75. This shows a fall in premiums. Basically it is worth knowing whether the premiums are pricy or not before getting into strategies.

Again short strategies are good when premiums are high 10 points higher SBI and 195 straddle is still worth the same 17.5ish which it was on 31 may as shown in excel above :thumb::thumb:

 

[vagar11]

First column shows the underlying price.Other columns shows the premium of call and put options combined for the strike price mentioned in the top.

Starting row is date 30 Mar and Last row is 28 April (expiry day).

For 125 strike price, the combined premium went from 15.55 to 0.1.

For strike price 120, 125 and 130, combined premium = 47.85
and at expiry premium = 10.05.