Help Needed on options

pokrate · #11 23rd July 2008, 05:06 PM

Thanks for reply.

Does option price during market hours also depend upon Bid-Ask prices like equities ?

AW10 · #12 24th July 2008, 02:20 AM

Certainly yes. You trading is always a ASK (for Buy order) or BID (for Sell order). To keep it simple, we always get the worst price from the market. So if as a buyer, we get the highest price.. and you will always find the ASK price > BID price. And as a seller,we always get the lowest price which is the BID price..

Happy Trading.

pokrate · #13 25th July 2008, 11:58 PM

Hi !
Today IDEA 80 put (july), and RNRL 85 put(july) witnessed "Decrease in volume" and "increase in OI", and its LTP fell too.
What does this mean ? Please elaborate.

AW10 · #14 26th July 2008, 01:29 AM

What is your source of this info?
It is difficult to interpret OI and Volume data in isolation because
1) options are not stocks where Volume means a lot
2) different people use options for different reasons, buy futures and sell options, buy stocks and sell options, buy next month option and sell current month option, buy and sell options at two diffrent strike prices.. etc.. So the volume and OI of a particular option strike price does not give u any strong information to take trading decision

There could be many reasons
1) As we approach expiry, traders will be closing current month options
2) They might be shifting their position to other strike price options as the price stock price moves (for OTM stock options, liquidity is very poor in Indian market)
3) They might have used this option as one part of their trade strategy, so when they close the trade, they would be sqauring off all the legs of it.
etc etc..

As far as I am concerned, I don't bother about OI and Volume in my options trading.
For a trader, the PRICE is of most importance, so I would rather spend my time on getting the control on option pricing and determining the change in price based on Option Greeks, Volatility and stock movement.

Though there are people who use this info.. So, wait for their reply here..

Happy Trading

pokrate · #15 26th July 2008, 11:57 AM

Quote:

Originally Posted by AW10

Certainly yes. You trading is always a ASK (for Buy order) or BID (for Sell order). To keep it simple, we always get the worst price from the market. So if as a buyer, we get the highest price.. and you will always find the ASK price > BID price. And as a seller,we always get the lowest price which is the BID price..

Happy Trading.

Thanks for the reply !
But I want to ask wheather option prices will increase / decrease 'coz of BID/ASK, or BID/ASK gets adjusted coz of option prices.
ie; option price during the day is calcualted using some calculator (black schole's, etc) or it can change due to BID/ASK prices too. I hope u got my query.

skarpio · #16 26th July 2008, 06:11 PM

At any point of time during market hours, calculate the price of an option using the BS/Binomial model. Now check the actual bid/ask prices. The difference you see is the effect of buying/selling. Does that help?

pokrate · #17 26th July 2008, 07:31 PM

Quote:

Originally Posted by skarpio

At any point of time during market hours, calculate the price of an option using the BS/Binomial model. Now check the actual bid/ask prices. The difference you see is the effect of buying/selling. Does that help?

Still you are not clear

.
But I think what you are trying to say is Option price has nothing to do with Bid/Ask, and Bid/Ask changes with price. ie; buyers and sellers, or liquidity has nothing to do with option prices, unlike stocks.

skarpio · #18 26th July 2008, 08:24 PM

Bear in mind that when we are trying to analyze option pricing, we will assume the greeks to be constant (e.g: intraday trading would keep the time-value fixed). What I am trying to say is simply this -- without any transaction, the price of an option will be what your model-based calculator tells you. Now, every transaction changes the bid-ask rate. For example, if there is a seller and very low volume (little or no liquidity), he would, at the first sign of a buyer, sell his option off (way below what his model would have told him to be a fair value). The new price would then be way off the theoretical limits. That is what I would call the effect of bid/ask on option pricing. However, the greeks are more influential than the bid/ask for high volume options.

pokrate · #19 26th July 2008, 11:15 PM

Quote:

Originally Posted by skarpio

Bear in mind that when we are trying to analyze option pricing, we will assume the greeks to be constant (e.g: intraday trading would keep the time-value fixed). What I am trying to say is simply this -- without any transaction, the price of an option will be what your model-based calculator tells you. ...

Now i understand, thanks a tonne.

pokrate · #20 27th July 2008, 02:50 PM

How to get benefitted with Call writing ?
Lets say I can predict that nifty will reach 5000 on 12 December 2008. Now what are the ways I can use this to my advantage ?

The Following User Says Thank You to AW10 For This Useful Post:
pokrate (26th July 2008)

The Following User Says Thank You to skarpio For This Useful Post:
pokrate (26th July 2008)