Selecting the Strike Price

SGM · #1 15th April 2008, 10:48 AM

Hello Swagat

Plz find attached the screenshot of todays open, with comments.

Regards
Sanjay

kkseal · #2 15th April 2008, 02:42 PM

Thanks Sanjay.

Regards,
Kalyan.

SGM · #3 15th April 2008, 04:01 PM

Hello Swagat

By EoD fortunes reversed. But the impact of SP selection still clearly visible, higher delta gives better realization. Impact of low liquidity, also visible on deep in the money call options.

On the flip side, on the losing trades (long puts, today) you will also lose less in % terms, if you had selected a SP with higher delta.

All said and done, the main thing is the directional bias but once you are sure about your directional bias, selecting a proper SP can give you a small edge.

Hope this answers your query.

Hello Kalyan

If you do this exercise for a few days, i.e just observe the change price % of the option chain wrt nf close to open and then open to close, you would worry less about the greeks and develop a feel for how the pricing model actually works. Yes, knowing about the greeks is not optional, we also need to know the theory.

Regards
Sanjay

uasish · #4 15th April 2008, 06:27 PM

Thks Sanjay,a recapitulation of what you discussed in kolkata.

rkkarnani · #5 15th April 2008, 06:29 PM

Quote:

Originally Posted by SGM

Hello Swagat

By EoD fortunes reversed. But the impact of SP selection still clearly visible, higher delta gives better realization. Impact of low liquidity, also visible on deep in the money call options.

On the flip side, on the losing trades (long puts, today) you will also lose less in % terms, if you had selected a SP with higher delta.

All said and done, the main thing is the directional bias but once you are sure about your directional bias, selecting a proper SP can give you a small edge.

Hope this answers your query.

Hello Kalyan

If you do this exercise for a few days, i.e just observe the change price % of the option chain wrt nf close to open and then open to close, you would worry less about the greeks and develop a feel for how the pricing model actually works. Yes, knowing about the greeks is not optional, we also need to know the theory.

Regards
Sanjay

Sanjay, I am quiet new to options , hence my observation may not be entirely correct (I very frankly do not know anything about Greeks): The change price % of option wrt to nf close to open shall also depend on the time of the month when you are checking the same. i.e. The variation shall be different in the last week of the derivative closing than in the first week.
Regards
-R K Karnani

kkseal · #6 15th April 2008, 07:52 PM

Sanjay, i had noted down this stats (along with bid/Ask) for sometime and subsequently discarded the stupid (only in hindsight though

) bias towards towards ATM/OTM contracts (for buying).
Two more things i have noted about OTM contracts

i) Although they appear to have a lower absolute cost they are actually more expensive (by certain parameters i use)
ii) They 'whither' faster close to expiry
I am not sure though whether this is in keeping with classical option theory. However, going by common sense, these characteristics make them better candidates for Selling.

Please correct me if i'm wrong.

Regards,
Kalyan.

swagat86 · #7 16th April 2008, 12:16 AM

Quote:

Originally Posted by SGM

Hello Swagat

Plz find attached the screenshot of todays open, with comments.

Regards
Sanjay

Quote:

Originally Posted by SGM

Hello Swagat

By EoD fortunes reversed. But the impact of SP selection still clearly visible, higher delta gives better realization. Impact of low liquidity, also visible on deep in the money call options.

On the flip side, on the losing trades (long puts, today) you will also lose less in % terms, if you had selected a SP with higher delta.

All said and done, the main thing is the directional bias but once you are sure about your directional bias, selecting a proper SP can give you a small edge.

Hope this answers your query.

Hello Kalyan

If you do this exercise for a few days, i.e just observe the change price % of the option chain wrt nf close to open and then open to close, you would worry less about the greeks and develop a feel for how the pricing model actually works. Yes, knowing about the greeks is not optional, we also need to know the theory.

Regards
Sanjay

Hi Sanjay,
Thanks a lot for that explanation. Looks interesting.

SGM · #8 16th April 2008, 09:26 AM

Quote:

Originally Posted by rkkarnani

The change price % of option wrt to nf close to open shall also depend on the time of the month when you are checking the same. i.e. The variation shall be different in the last week of the derivative closing than in the first week.
Regards
-R K Karnani

Yes thats quite true. The impact of decaying time value in not linear, but in bursts, more aligned with sentiment however the nett effect is as per your observation.

Yesterday as the price turned after opening low, they had stalled in the region of 4755-75, that was around previous days closing. The impact of time value was quite clearly visible, everything (both puts n calls) in the option chain went -ve (5-15%). It showed 2 things, the loss of time value over the long weekend and the price returning back to the bracket (ranged).

I chunk first 2 weeks and last 2 weeks (in the month of expiry) seperately for considering the impact of time value.

Regards
Sanjay

SGM · #9 16th April 2008, 09:36 AM

Quote:

Originally Posted by kkseal

However, going by common sense, these characteristics make them better candidates for Selling.

Hello Kalyan

Right, only with a small caveat the directional bias has to be correct. Normally this is the theory around which we build a strat using Debit Spreads

Regards
Sanjay