The Giant thread of options

[beginner_av]

Hi Kalyan,

Pretty ordinary boring answers from me.

How do i determine what the SL for an option would be BASED ON THE SPOT/FUTURE PRICES. (As of now i just fix a level in Spot/Future below or above which i'll get out, but is there any way of determining what the corresponding option price is likely to be at these levels?)

kk - the same old story. i really dont know. but this time i have a reason for not knowing.
1. if u r using options to replicate buy and sell positions, ur SL would depend on ur MM factors. But again, the way the option loses value would depend on a host of factors including ATM, OTM or ITM, the greek and in India - sentiment.
2. if u are using to hedge, the sl would be different.
3. If u are using simple spreads, the difference between the spreads - narrowing or widening would determine where you would square off both.
4. If you are trading volatility, you may see in india IV doesn't do a thing and each one is selling at strange prices. So your sl would be upto you.

but i was reading some stuff in some thread. square off when cash market hits certain price. Well if cash mkt is going down, you may get some of the worst possible quotes at that moment. so if you try to put an auto square off, you would lose much more.

& the general one:-
What if someone wants to start of with a relatively small capital (say 2 lakhs) & wants to limit his trades to BUYING Puts & Calls - is there any simple strategy for him to follow? Is simple pyramiding (treating it a like a cash or futures trade) a good option (pun unintended )?

Thanks & Regards,
Kalyan.

P.S. Another thing BAV how do you get the daily IV value for a contract? Is it possible to automate the calculation in Ami ?(actually i want to create an indicator out of the IV values).

Ya it is, but keep an eye on the time factor too. and take profits based on options investments return, not cash market price returns. And in situations like this deep ITM is better (i.e. higher delta).

as for IV, anything is possible in Ami, but you need to write lot of code in C/C++. Excel is a much better choice. Or you can buy Peter Hoadley, or subscribe to Quotecenter.

 

[basab19]

Here I go...after seeing some requests on options related stuff...I start this thread with a dramatic name.

What this thread is not...
1.IT WILL NOT GIVE ANY TIPS EVER ON BUYING AND SELLING OPTIONS.
2.IT WILL NOT REPEAT THEORY AVAILABLE IN BOOKS ALL AROUND YOU...IF U CANT READ THAT...DONT BOTHER TRADING OPTIONS..send your money to me, I'll give u lot of blessings or send to some charity with 80G benefits
3.IT WILL ELIMINATE ALL THE MATHEMATICS REQUIRED TO TRADE OPTIONS and hence by following this thread you will never be able to become an OPTIONS EXPERT.

DISCLAIMER - This is for educational purposes ONLY. This is not to get you attracted to options trading so that your broker can buy an alpha romeo next.

Why I am doing this? NOT ALTRUISM...to keep my brain from rusting.. and collecting my thoughts together...u can always add reputation points.

So here I start

Some practical ones that noone will tell you
1. Start with more than one broker, so when one is down...u are not down with him..you can always square off or adjust your position
2. Unless you are scalping, DO take a look at weekly and monthly charts
3. Somethings that you may not look when doing TA are extremely essential for options trading - Volatility both IV and Historic. Open Interest. Put-Call ratio
4. Trade only in very liquid stuff...else when the market turns you will be stuck..traders disappear at the drop of a hat
5. Make sure your broker is well capitalized...else brokerwide limit will be reached..you will be sucking your thumbs while the world will make merry
6. Make sure that marketwide limit is not reached...then everyone will suck their thumbs while traders in the cash market will make merry. You will NOT be able to adjust your position

More depending on response

Sir, I need your help if you please clarify the Point(6) above regarding "Market wide limit". I find this thread very interesting one.

 

[uasish]

Abhijeet,

I am OK in taking a Directional call,mainly working in Futures & Cash mkt.To get a grasp on Options can you specify as per the Priority which i should Read first.

Asish

 

[beginner_av]

asishda, read any of mcmillan's book as an introductory text. then definitely read options as a strategic investment by mcmillan. to get a good idea read cottle's options - perceptions, deceptions.....
for theoretical idea read kolbs book and rubenstein's book.

 

[beginner_av]

Sir, I need your help if you please clarify the Point(6) above regarding "Market wide limit". I find this thread very interesting one.

from BSE
The Market Wide Position Limit in the Stock shall not be less than Rs 50 crores (Rs 500 Million). The Market Wide Position Limit is valued taking into consideration 20% of number of shares held by the Non Promoters (i.e free-float holding) in the relevant underlying Security(i.e free-float holding) and the closing prices of the stock in the underlying cash market on the date of expiry of contract in the month. Market Wide Position Limit is calculated at the end of every month.

as new contracts are added, the mktwise position limits increase. as it crosses 95% of the permissible mkt wide limit, further NEW positions are banned. Traders can continue to square off old positions held.
Now if you are stuck with a position and need to ADJUST your position, not simply square off, then you are trouble, for you wont be able to enter into the new contract.
*this is applicable to stock futures and options only. not on index.*

 

[uasish]

asishda, read any of mcmillan's book as an introductory text. then definitely read options as a strategic investment by mcmillan. to get a good idea read cottle's options - perceptions, deceptions.....
for theoretical idea read kolbs book and rubenstein's book.

Thks,will do so.

 

[kkseal]

Thanks BAV. Will badger you with more in the evening. I'm glad the thread has revived.

Regards,
Kalyan.

 

[kkseal]

BAV, my question was quite simple actually

Suppose i'm trading stk X (CMP 100) in cash. My entry say is at 100, tgt 115 & SL 95. Now say i want to do an options trade instead. I choose a Call option of X for which the SP is 100 (ATM) Prem 20 & 10 trading days till expiry.

Now what i want to determine is
i) if the spot price moves down & hit my SL, what would be the corresponding option premium (lower off course) at the time my (spot) stop is hit.

ii) if the spot price moves up & hits my tgt, what would be the corresponding option premium (higher hopefully) at the time my (spot) tgt is hit.

In other words how do i determine (at the time of entry) what my Stop & Tgt would be for the Call Option (the instrument i'm actually trading).

As of now what i'd do is just watch the spot prices & as soon as my tgt or stop is hit i'd square off the call. (This is like trading in cash with the option as a proxy, which i doubt is the right way of doing things).

Regards,
Kalyan.

 

[kkseal]

An approximation can be made using Delta, but the Delta itself is a dependent of Gamma & there's Theta & Vega to contend with, both of which can have a big effect on price (particularly Vega - Theta i guess can be kept within acceptable limits with a time stop).

And wouldn't each of these Greeks change everyday (while the trade is on)? Which means they have to recalculated everyday & tgt, stop etc. would change. (Looks like the recipe for a highly complicated & time consuming mess - & if things get too complicated one can be pretty sure the approach is wrong; it isn't the path of least resistance).

Regards,
Kalyan.

 

[kkseal]

Hello Kalyan

To start with just focus on delta for the option pricing model, assume that all other things are equal. Then it would be possible to model the price change in an option wrt the price change in the stock/index.

Usually the At The Money options have delta of 0.50, so the option moves at 50% gain/loss initially (Note that as it goes in the money the delta keeps increasing towards 1).

If you want to be an options buyer, as a rule of thumb, buy options that are In The Money or deep in the money for a better RR (need to look out for liquidity issues specially at projected target areas). Infact there is a small edge right here for you.

All the greeks are important, but to start with if you just focus on the change in premium as the Strike Price Moves towards / away from the CMP, you will get the big picture (Option Payoff Diagram), maybe I will compile that for NF and post it here.

First of all, thanks a lot for the Options Workbook you've provided. Provide a wonderfully concise view of the Greeks. Reading them from a book always confuses me - by the time i get to Theta i forget what delta was Haven't gone through it all yet, will digest slowly.

You've suggested staying deep ITM Question is how deep? What would be 'optimum deep' for good RR (I want a higher Reward too or else why leverage?).

Regards,
Kalyan.

... will continue