What are the criterias to choose any kind of option strategy?

[DanPickUp]

Hi

All of you which are in option trading know that problem: What kind of option strategy should I use or may look at. On what kind of parameters or criteria should I build up my decisions? Are there any clear guidance s around or may even an expanded guide which I could use to make a more clear decision what would be practical for me?

This thread should serve that questions a bit more. I could and did post on that subject in my thread, but thought it makes sense to open this thread in which all of you can post there ideas and thoughts about it. The other thread seems to be more a learning thread on the move and this one should be used as open discussion platform for that specific question. I already mentioned the criteria high vola and low vola in the OWDP thread. But there is more to look at and I am sure you have questions and thoughts about it.

I am clear that old option traders have solved that problem, but new option traders many times got hanged up on that question and give up trading option strategies in any way only because of that particular problem.

I will open a poll in later stages about that question, but love to wait to hear first your words about it?

Good trading

DanPickUp

 

[adityasaraf007]

Right now.... to decide on any kind of Option Strategies which would serve as a source of Monthly Income.... I am trying to observe the Open Interest Data at the beginning of a new series.... Trying to observe the kind of strategy Hedge Funds want to adopt for a particular month..... I know there are many limitations in this approach, but this proved good in this July Contract of Nifty.... Hedge Funds had adopted Long IC and kept the markets in a range of just 3% for 3 complete weeks.... Hopefully, this approach should serve well in future as well...

PS - For someone who may not know, I am a complete newbie in Option Strategies....

 

[DanPickUp]

Right now.... to decide on any kind of Option Strategies which would serve as a source of Monthly Income.... I am trying to observe the Open Interest Data at the beginning of a new series....

Trying to observe the kind of strategy Hedge Funds want to adopt for a particular month.....

I know there are many limitations in this approach, but this proved good in this July Contract of Nifty....

Hedge Funds had adopted Long IC and kept the markets in a range of just 3% for 3 complete weeks.... Hopefully, this approach should serve well in future as well...

PS - For someone who may not know, I am a complete newbie in Option Strategies....

Thanks Dear Aditya

First post was made and now first subject on the table are hedge funds. How do they trade ?

Any more specific comments to your valuable post beside OI or maybe some more comments about why you think that this are hedge funds which are responsible for the OI on certain strike levels?

Any option software or other software which makes you sure about that this are hedge funds?

It may some times has to be valued in a different way if it comes to different future markets. Don't you think so or what is your experience about that? Do the same OI numbers in currencies mean the same as they do in share indexes?

Next point would be to post the strike levels. If the strike levels you mention are clear, then the first hint is given about any option strategy which could be implemented on that specific idea.

Could you specify that levels with clear numbers here and now for beginners?

By the way: Very nice post with a very high leveld background idea.

Good trading

DanPickUp

 

[PartTime_Trader]

Hello

Very nice thread. I second the objective presented in the above post of earning regular income.

Also same disclaimer: A newbie to options trading, with just little reading on the subject


I will expand the objectives a bit more as

1. Regular Income
   
2. Minimum Risk to the Capital
   
3. Regular Opportunity for trading (maybe minimum every month)
   

I propose to create credit spreads on both sides but legging into the position based on my current bias of the market direction.

Current scenario would look at short CE-5300 / long CE-5400

Once we are back to an uptrend we can implement the spread with puts with appropriate SPs, not sure what to do with the Call spread then (i.e. when in up-trend) but i am open to booking loss/profit.

The Plan can be

1. Credit Spread using Call Options when in confirmed Downtrend or Sideways
2. Credit Spread using Put Options when in confirmed Uptrend or Sideways

I will like to learn how to incorporate the stuff mentioned in the above post like OI, IV / Historical Vola etc. into this simple strategy and make it more effective.

Thanks

 

[adityasaraf007]

Thanks Dear Aditya

First post was made and now first subject on the table are hedge funds. How do they trade ?

Any more specific comments to your valuable post beside OI or maybe some more comments about why you think that this are hedge funds which are responsible for the OI on certain strike levels?

I would be giving importance to my analysis of OI only when I feel reasonably sure about it.... I would be trying to find a Strike Price which has substantial change in OI..... Thereafter, look around for different strikes with either similar change in OI or a change with a constant ratio like 1:2 or 1:3 etc....

The reason I would believe that this change in OI is caused by a Hedge Fund Participant is only because of the amount of money involved in setting up that trade.... Only Institutional participants would put millions of dollars on a single strategy....

I would suggest you to go back and check on how I devised that Hedge Funds had implemented Long IC in July Contract of Nifty.... It had all the characteristics..... The OI on all the strikes were around 1million.... So, they had invested about Rs 1 Billion (ie; around $ 18 million) on that single strategy...

Any option software or other software which makes you sure about that this are hedge funds?

Not any software... But because of huge amount of funds invested in a particular strategy....

It may some times has to be valued in a different way if it comes to different future markets. Don't you think so or what is your experience about that? Do the same OI numbers in currencies mean the same as they do in share indexes?

Yes.... $ 18 million in Nifty might be big, but this might be very small in some of the most liquid Currency Pairs and because of large number of Hedge Fund participants (HFP).... In Nifty, the number of such HFP is definitely small.... I would assume not more than 10-15 at a time....

There was a report which came about a year ago.... It mentioned that more than 70% of the volumes in Indian Exchange happens from just about 30-40 accounts... So my estimate of 10-15 is also on a higher side...


Next point would be to post the strike levels. If the strike levels you mention are clear, then the first hint is given about any option strategy which could be implemented on that specific idea.
This is what I am trying to do.... To determine the Strike Price which has significant change in OI and then guess the Option strategy which could be implemented....

Could you specify that levels with clear numbers here and now for beginners?
I guess, above discussion covers this point....

By the way: Very nice post with a very high leveld background idea.
Thank You!!!

Good trading

DanPickUp

Answers within quote in red...

 

[PartTime_Trader]

Hello

When we say Hedge-Fund implemented these trades, what about counter-party to the trade?

Can Indian retail/small traders give so much depth to absorb all the volume on the other side of the hedge fund/s trade/strategy (IC in this case), or we just look at the nett effect with OI and try to get on the side which has strategy-wise higher probability of winning . . .

Cheers

 

[adityasaraf007]

Hello

When we say Hedge-Fund implemented these trades, what about counter-party to the trade?

Can Indian retail/small traders give so much depth to absorb all the volume on the other side of the hedge fund/s trade/strategy (IC in this case), or we just look at the nett effect with OI and try to get on the side which has strategy-wise higher probability of winning . . .

Cheers

The counter-party doesn't necessarily have to be us ie; retail traders...

It may very well be another HFP or other institutional investors..... The idea is to identify what the dominant HFP wants to do and get aligned with his strategy.... (The counter-party might as well be implementing another different strategy which uses the same Strike but in a different direction)...

If the dominant HFP gets the strategy wrong, we would also be proved wrong... But considering that HFPs are those with big pockets, loads of experience and they play on considerable amount of leverage as well, it's good to follow the dominant HFP....

BTW, I am just starting out keeping this as a BASIS, and in the course of time I might just well be proved wrong.... but probability favours my thinking (This is what I think ).....

 

[PartTime_Trader]

Hello

I agree that the SP with high OI (or the ones with rapidly changing OI) are the ones that should be looked at to consider which strategy can be best suited.

The nett effect of all the market participants is more important and that is what creates these OIs.

Thanks

On a side note, how to download option-chain back data for testing? My OptionOracle installations refuses to work have tried re-installing 3 different versions multiple times, just crashes on start-up, I am using XP-SP3 with most of the updates installed.

 

[DanPickUp]

Hello

I agree that the SP with high OI (or the ones with rapidly changing OI) are the ones that should be looked at to consider which strategy can be best suited.

The nett effect of all the market participants is more important and that is what creates these OIs.

Thanks

On a side note, how to download option-chain back data for testing? My OptionOracle installations refuses to work have tried re-installing 3 different versions multiple times, just crashes on start-up, I am using XP-SP3 with most of the updates installed.

Dear PartTime_Trader

Just in case you missed some updates until end 2011:

http://www.softwarepatch.com/windows/index.html

Starting 2012 you would have to work through that link:

http://www.microsoft.com/en-us/down...24&p=2&r=10&t=4338&s=availabledate~Descending

Any way: Let's move on with the subject. First point we can use for our decisions is posted: Open Interest.

OI are an idea and and a criteria we can use to implement option strategies and I confirm with that words the post's of Aditya. Only thing I can add is to watch at what market levels those huge volumes come in. If they come in as puts and we are on resistance, this can be a sign of a market turn.

Here an other nice post to analyzes what any change in OI can tell us:

http://www.traderji.com/derivatives/65185-trade-options-data-189.html#post706273

Now a question from my side: Doe's any one of you take strategy decision through chart analyzing? What do I mean with that? Analyzing bigger time frames like one week or a few days, pointing out S and R and using this information to decide what strategy will be implemented?

Good trading

DanPickUp

 

[adityasaraf007]

Hello

I agree that the SP with high OI (or the ones with rapidly changing OI) are the ones that should be looked at to consider which strategy can be best suited.

The nett effect of all the market participants is more important and that is what creates these OIs.

Thanks

On a side note, how to download option-chain back data for testing? My OptionOracle installations refuses to work have tried re-installing 3 different versions multiple times, just crashes on start-up, I am using XP-SP3 with most of the updates installed.

As a workaround, you may create a Virtual machine in XP and install your OS of choice on it to run OptionOracle.... I know this is not the best of solutions, but surely good enough as a workaround... You would invariably reinstall XP in the next couple of months....

BTW, Option Oracle won't help us back-test any strategy.... and to analyze past OI data of Options, you would have to eat dust..... First-of-all, you would have to download the data, then organize it either in a Spreadsheet or your Charting Software.... By the time you would reach the middle of this stage you would probably give up on backtesting and only rely on Forward Testing....