NIFTY Options Trading by RAJ

Rule 6: In the CHG in OI, what if we get Negative values? What signals does it give?

If we get the Negative values in "CE", that means Market makers (BEARS) are squaring off the Call Positions (The SHORT Positions). So heavy squaring off in CE is a BULLISH signal and we have to expect a BREAKOUT if there is a sudden spike in the squaring volume. There is a panic situation. Normally this will happen all of a sudden in say 10-20 minutes and we have to exit the Shorts immediately and can GO LONG.

It is the Vice versa if we get Huge Negative Values in "PE".

If we get Negative Values both in PE and CE, then blindly SELL the OI pair

Small negative values indicate the normal profit booking.

Rule 7: OK. For Intraday trading, based on the "CHG in OI" I got the Bullish or Bearish signal. Can I go and BUY the Options? How do I decide whether to BUY/SELL the option?.

Important and a Difficult question.

Unless if it is a Strong BULL or a STRONG BEAR, the Safe strategy would be to SELL the pair so that it is less risky. I mean if we get the Range as 5800PE and 6000CE. Then Sell 5800PE and 6000CE.

Rule 7B: No I don't want to do Pair Trading. I want to take more risk and do some naked Calls / Puts. How do I decide whether to BUY/SELL.

Use the Implied Volatility. I normally take the top (most traded) 5 Strikes and calculate the Average PE and CE volatility.

Also find out the Historic Volatility of the underlying Futures.

Let us take NIFTY and say we have

Historic Volatility HVOLT= 21.18% (Get it from the NSEindia.com - FOVOLT.csv)
Average PE VOLT - 18.78%.
Average CE VOLT - 19.4%.

So the observations are

PE VOLT < HVOLT - Low Volatile market
CE VOLT < HVOLT- Low Volatile market


So in a Low volatile market, and if the signal is Bullish, then instead of the Buying Calls, SELL the Puts and vice versa.

Note : I am still discovering and learning about the Volatility. So will give more details when it comes. But in summary, if the Volatility is Low, then it is a Buying market and if the Volatility is High it is a Selling market. Experts should be able to throw more light on volatility

Thanks for detailed explanation, till now options market was bit of mumbo-jumbo for me, this will help :thumb::clap::clapping:.

You just open up multiple blank post (albeit a placeholder)and since you have initiated it you can modify it as we go along... i see that you have already done that with 7 rules... maybe you can keep the rules in these seven posts going forward so that these are easily accesible.

this is a much cleaner way to discuss only on the strategy.. i think we surely have something going here.. also encourage you to actually track the pairs that you suggest so that it gives an idea of P/L in terms of points...

Rule 8: Respect the Strike Price where the MAX Pain is situated

The Strike where the MAX Pain is like the Centre of Gravity. So especially during the Expiry the market will try to move and will try to expire around the MAX Pain. So in the last week of expiry one should avoid any OTM call around the MAX Pain because the OTM calls around the MAX Pain will expire worthless.

For Example in Jul13 Expiry the MAX Pain on 22-Jul-13 is at 6000. So any 6100, 6200,... Calls will expire at Zero value. Similarly for 5900PE, 5800Pe, etc,,,

I second the suggestion

Please exlain the concept of MAX PAIN

The below link has chart on Option Pain. It also has the Options Chain data. However I do not follow this link. Just for your information.

http://www.traderscockpit.com/?pageView=futures-and-options-chain-analysis

Definition from Investopedia
http://www.investopedia.com/terms/m/maxpain.asp

How do you decide MAX PAIN, if not following the chart on Option Pain?
BTW max call pain on the chart is @6280 for Call and @5830 for Put. Total max pain is @6280. How does one interpret this?
Rest of the rules and concept are absolutely clear but for this one.

Just checked total OI at different strike prices:
5900 :133.90

6000 :137.85

6100 :100.19

Max Oi is @6000. So max pain is @ 6000. Is that the correct way to decide max pain?

gmt900, Based on assumption NIFTY gonna close on expiry, anything above is max pain for CALL and anything below is max pain for PUT.

For this month, my best bet is NIFTY will not cross above 6200 and will not go below 5800, so anything above 6200 is max pain for CALL and any thing below 5800 is max pain for PUT as of now. As we come close to expiry day, things will be much clear.

So as of now, do not trade any CE above strike 6200 and any PE below 5800.

Raj, hope my understanding is correct and this is what you also what to convey.

Happy Trading.

Regards,
Escape