A Question to AW10 and other Option Spreads Maestros

[OptionQuant]

I have. Just moved to Zerodha. Saalaa, spreads karna hai, then we end up paying brokerage over and over again.

 

[AW10]

AW10,

I have been trying to develop a trading strategy for a large part of today. I am trying to test 20 day breakout rule. Man it is difficult and tedious. Will keep everyone posted on my progress

All the best.
Just 2 cents from me on your strategy -
1) life of active options in our mkt is 30 to 40 days (mainly near series), so select the timeframe / foundation of strategy which will be able to give you signal in time and still have time left for stock to move and give you the result.

2) When breakout happens, volatility is already high, volume picks up, interest in stock goes up. And soon after the breakout, stock sleeps /retraces for next few days.
As a result of this price behavior, options become costly during breakout time, and as stocks goes calm, the premium also drops. Though as a spread trade, this effect is partially nullified due to buy and sell legs of spreads if strikes are selected properly.

hope these pointers help. Happy trading.

 

[OptionQuant]

Thanks. Got it!!!:thumb:

 

[OptionQuant]

A Possible Trading Strategy

I am trying to develop a strategy. I was thinking about the following trading signal.

Market : Nifty Option

Data: Look at OI buildup.

Method : Look at 4-5 levels around Present Nifty Value (if Nifty is near 100's mark, look at 5 levels. Else looks at 4 levels). Find out the Puts and Calls around this level. If Puts > = 1.25 Calls, BUY signal. If Puts <= 0.9 Call, SELL Signal

Stop Loss - on 50% loss or 7 days to maturity, whichever is earlier

Profit Booking - on 50% profit or 7 days to maturity, whichever is earlier

Series - If Current Date <= 16, Go for Near Month. Else go for Next Month.

This is tentative strategy. What do you think??

 

[rkkarnani]

AW10,

I have been trying to develop a trading strategy for a large part of today. I am trying to test 20 day breakout rule. Man it is difficult and tedious. Will keep everyone posted on my progress

I am nowhere near AW and others in TA, but still posting my view. Strategies successfully implemented aborad in US or European markets "will not" work here as the Options are totally mispriced here!! By the time you get a 20 day breakout move , maybe the present Series is about to end and the next month would be priced too steep and moreover my suggestion is concentrate on Nifty options or very liquid stock options which are a rare commodity on NSE!
My feeling is that till date people who write covered options are the ones who are consistently making money in India.
All the best!

 

[columbus]

I am nowhere near AW and others in TA, but still posting my view. Strategies successfully implemented aborad in US or European markets "will not" work here as the Options are totally mispriced here!! By the time you get a 20 day breakout move , maybe the present Series is about to end and the next month would be priced too steep and moreover my suggestion is concentrate on Nifty options or very liquid stock options which are a rare commodity on NSE!
My feeling is that till date people who write covered options are the ones who are consistently making money in India.
All the best!

I agree with rkk concentrate on INDEX options rather than STOCK options.

 

[OptionQuant]

I am nowhere near AW and others in TA, but still posting my view. Strategies successfully implemented aborad in US or European markets "will not" work here as the Options are totally mispriced here!! By the time you get a 20 day breakout move , maybe the present Series is about to end and the next month would be priced too steep and moreover my suggestion is concentrate on Nifty options or very liquid stock options which are a rare commodity on NSE!
My feeling is that till date people who write covered options are the ones who are consistently making money in India.
All the best!

I plan to be in NIFTY only

 

[AW10]

Re: A Possible Trading Strategy

Sharing my views on it..

I am trying to develop a strategy. I was thinking about the following trading signal.

Market : Nifty Option

Perfect for our market. Has enough liquidity.

Data: Look at OI buildup.

Personally, I use OI data to support my trading decision. Main decision comes from the underlying's price action.

Method : Look at 4-5 levels around Present Nifty Value (if Nifty is near 100's mark, look at 5 levels. Else looks at 4 levels). Find out the Puts and Calls around this level. If Puts > = 1.25 Calls, BUY signal. If Puts <= 0.9 Call, SELL Signal

Check it out for few days of data and see, if it really works or not. To keep it simple, maybe you can always take 5 strikes around current nifty and calculate PCRatio.

You also need rules regarding selection of strike, how frequently you are going to check this data i.e. daily, weekly etc. What if PCR is between 0.9 to 1.25?
Say in current mkt condition if you get a buy signal when nifty is at 5050, which spread will you go for 4900-5000 /5000-5100/ 5100-5200 /5200-5300 spreads?

Stop Loss - on 50% loss or 7 days to maturity, whichever is earlier

Profit Booking - on 50% profit or 7 days to maturity, whichever is earlier

i.e you are looking for Reward:risk ratio (RRR) of 1:1. To just breakeven in this, your trade selection should be CORRECT roughly above 55% or so. Generally, people prefer to have RRR >2. For some systems where hit rate is high 85 to 90%, then RRR < 1 can also give profitable system.

Series - If Current Date <= 16, Go for Near Month. Else go for Next Month.

Good enough.

Plz chk this post from my NR7 thread, which gives decent template for writing a trading system. You will have to customise it to add option related points.

Hope this helps.
happy trading

 

[tanewbie]

One shd look at intraday INDIAVIX charts too before you trade options in nifty
(ignore vols in the chart)

 

[OptionQuant]

Thanks AW10.

I was thinking about buying/selling Just In the money Calls. Which means that if the price is 5050, I buy 4900 Call and Sell 5000 call.

I wouldn't do that right now, because premiums are way too high. But the Max gain/max loss ration would typically be 0.8

Maybe I should look at changing the Exit position/stop loss position to Make RR as 2/1. The problem of backtesting is OI historical data is not available.

I did go thru your NR7 system, before you wrote this post. I found it from link in yur signature. I made an excel sheet from Jan 2003 to last month and marked the signals - simple formula really, no fancy programming was required.

After that I got stuck. From your thread, I gathered two things -

a) If it is a NR7th day (you can guess by 3:00 pm), go for a straddle. Next morning, sell the losing side. Keep the winning side open, or hedge it (partly)

b) If it is NR 7 day, on 8th day see the way the market goes. If it pierces the earlier day's high, Buy Call. Wait. If it pierces the low (from above) sell call and buy put.

I got a lot of dates on my spreadsheet as NR7 days and NR4 days. But after that I am stuck. The signals are confusing. Sometimes it works, sometimes not. Not yet able to give a clear picture about it.

About Using OI, I would like to calculate PCR myself rather than one by NSE. NSE PCR considers Puts and Calls for ALL Strikes including way off strikes. I would like to consider only serious strikes.

If current price is 5050, I would take 4900,5000,5100 and 5200 strikes. If it is 5100 as current price, I would take 4900-5300 strikes (5 levels)

Another good indication is Nifty Futures. A Very High premium or even a small discount tells the way money is pouring in.

PCR and Nifty Future Premium/Disc only tells about market expectations and buildup. If the market goes contrary to that signal, it will continue to go contrary, because its momentum is assisted by entities hastily trying to square off their positions. Somehow, there has to be a way to find out whether the bears/bulls are trapped and are about to cover up or not. Yet to find it though.