The Giant thread of options

[kkseal]

ok continuing ...

As far as ITM/ATM/OTM is concerned, here's the (albeit crude) scheme i follow as of now

When WITH THE TREND *
i) ATM or (just) OTM w.r.t. spot ( the latter would normally still be ATM or ITM w.r.t. Futures price)

When COUNTER TREND **
i) ITM w.r.t. Spot or Futures (whichever is deeper)

But a recent 'narrow escape' makes me feel that perhaps a bit too aggressive especially when mkts are in an 'uncertainty zone'.

So i was thinking how about changing the reference lvl in rule i to the SL in Spot i.e. rule1 would now read

ATM or (just) OTM w.r.t. SL in spot

Assuming i know nothing of Delta (which isn't too far from the truth) & am just seeking a logical change to my rules for reducing my risk without forfeiting too much of the reward, would the aforesaid change actually give me a good enough Delta?

Regards,
Kalyan.

* I use a volatility based definition of the trend for Options, even if such a 'trend' is very short term
** Haven't done much - too scared

 

[kkseal]

And risk i presume can be given some leeway when conditions are highly favourable. Like say with 3 lvls of volatility based stops in place would it be fair to use the highest lvl stop for rule1 (which'd still be ITM w.r.t. spot prc) during a volatility expansion/strong momentum phase (instead of the, lower, 2nd lvl that i'd normally use)?

Regards,
Kalyan.

 

[kkseal]

I am not sure off course - but i have the gut feeling that the IV-HV pair, their ratio & it's variance can provide a better model for Options trading than the greeks alone. (After all volatility is the 'crucible' for options, isn't it - so why not deal with Mr V directly to get a more holistic picture than dealing with bits & pieces of it with the Greeks? Off-course Greeks can continue to provide the supplementary fodder - but the problem is how to get the IV in a charting s/w).

Regards,
Kalyan.

 

[kkseal]

Now, after a series of crazy posts, will wait for you guys to clear up my stupid misconceptions.

Regards,
Kalyan.

 

[SGM]

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).

Regards,
Kalyan.

Hello Kalyan

The gamma of an option indicates how the delta of an option will change relative to a 1 point move in the underlying asset.

Once you know / have taken into account delta will keep decreasing / increasing as we go away / in the money, Gamma is already accounted for.

Anyway for an odd lotter like me, its more of "Mota Hessab" that works. Rather than trying to grapple with complex calculations for theta, i would look at how much value an option will loose in a day for no change in other things, ek din hold karne se kitana points kaam hooga? (btw, thats called Himmatt ke Kimmat, for the options writer

Frankly if one is trading using options mainly as a directional play, he is better off buying in the money options, keeping an eye out for expected liquidity of the chosen SP around your target and stop exits. And get out fast if it does not work out. (hmm sounds like a broken record ...)

Edit: The reason/signal /trigger is totally irrelevant, its about payoff model, so if you are buying with the trend, counter trend or because someone else said so... is not an issue.

Another rule of thumb, can use options for low probability High RR plays, whatever that means...

But if ur strat involves volatility projections or ratios etc, then u already know it and have accounted for it

Another thing as BAV has already pointed out, many a times the sentiment will force your hand and .....

Regards
Sanjay

PS: Here's one more defination for you.

Option Charm: Option Charm indicates how much the delta will change as one trading day passes. Charm is more commonly referred to as "Delta Decay".

 

[dr_tejas_shah]

Hi Guys, Just wondering where can the information about option prices - Various strike prices and corresponding Premium, OI changes etc. be found?

I tried to look on NSE website, but didn't find it.

 

[Saint]

Good to see this thread active,and bav back in action.......

Saint

 

[kkseal]

Hello Kalyan

Once you know / have taken into account delta will keep decreasing / increasing as we go away / in the money, Gamma is already accounted for.

Anyway for an odd lotter like me, its more of "Mota Hessab" that works. Rather than trying to grapple with complex calculations for theta, i would look at how much value an option will loose in a day for no change in other things, ek din hold karne se kitana points kaam hooga? (btw, thats called Himmatt ke Kimmat, for the options writer

How can that be determined without Theta? (TheoryPrc + Delta +Charm??)

Frankly if one is trading using options mainly as a directional play, he is better off buying in the money options, keeping an eye out for expected liquidity of the chosen SP around your target and stop exits. And get out fast if it does not work out. (hmm sounds like a broken record ...)

Again how to determine this 'expected liquidity'?

Edit: The reason/signal /trigger is totally irrelevant, its about payoff model, so if you are buying with the trend, counter trend or because someone else said so... is not an issue.

This is the most baffling (& alarming) statement in your post - could you elaborate a bit on that one please, what exactly is this payoff model you refer to & (more importantly) how does it make reasoning/signal/trigger totally irrelevant? Does this mean i'm playing around with an instrument in which the price (premium) movement is completely random & without appropriate strategies (the strangles & dangles or whatever) a gain or loss is pretty much a coin toss??

Another rule of thumb, can use options for low probability High RR plays, whatever that means...

But if ur strat involves volatility projections or ratios etc, then u already know it and have accounted for it

Oh God & I thought i was using them to determine high probability situations!

Another thing as BAV has already pointed out, many a times the sentiment will force your hand and .....

Oh yeah, that must be the 'Sentiment Decay' (the mother of all decays

Regards,
Kalyan.

 

[kkseal]

Hi Guys, Just wondering where can the information about option prices - Various strike prices and corresponding Premium, OI changes etc. be found?

I tried to look on NSE website, but didn't find it.

At the NSe site -> F&O -> Mkt Today -> Get Quote

 

[beginner_av]

Oh yeah, that must be the 'Sentiment Decay' (the mother of all decays

Regards,
Kalyan.

Sentiment decay is very transient. mother of all decay is lack of available bids/offer at all.

buy full version of peter hoadley. if you buy do me a favour by sending a copy to CV. If you dont want expected payoff/probability cones etc and just want position diagrams, use the free one.

rest i'll answer later as generic as possible.