Low Risk Options Trading Strategy - Option Spreads

[summasumma]

hi aw10,

One clarification needed in my learning path:

Like to know the effect of significance of INCREASE in OI in options:
If OI is increased in a particular CALL option strike price(say 5300) of Option, how we should read that activity?
- Is it like there is a strong support creating for 5300 level as many people are buyng that option.
- Or is it like market is very much expected to go down below 5300 because as many as ppl have SHORT that option expecting going down.

Can u plz clarify on it?

For example:
today nifty closed @ 5317 and
i saw INCREASE in OpenInterest in 5300 July Call by 525,400 contracts.
Question here:
can we say that there is a good support creating @ 5300 in nifty? Or
it is expected to go below 5300 as same no of ppl short it?

Also, i saw there is a increase in OpenInterest in 5200 July PUT by 1,122,750(almost DOUBLE that of the above call) contracts.
Question here:
Same as previous ques (vice versa as its PUT).

Can we relate these increase in 5300CALL/5200PUT and arrive @ saying market is expected to rangebound btwn 5200-5300 for a short time????

Thanks,
...Summa

 

[AW10]

Summa, Plz refer to post 5 of this thread.. There are few links regarding OI under point 4.

http://www.traderji.com/options/305...ading-strategy-option-spreads.html#post333545

IMO, it is too narrow a focus to interpret Option OI as at has been discussed at most of the places.. and used by many people. Cause options trading has many dimensions.

To keep it simple, u can assume that Number of Call OI means # of Call writers at that strike.. and hence the resistance
And Put writer = Support.

As market is dynamic, and options writers are agile.. So it doesn't take time for them to shift their positions if there is any change in the price. But if things remains normal without any surprise.. (which is almost 70% time), then this interpretation works.

so, your interpretation of range between 5200 to 5300 is right.

(but by the way, do u really needs to see OI data to tell that xx00 and xx00 is support /resistance level).
Without looking at any OI, I will be more then 70% write in calling xx00 numbers as support/resistance level.. )

Happy Trading

 

[summasumma]

(but by the way, do u really needs to see OI data to tell that xx00 and xx00 is support /resistance level).
Without looking at any OI, I will be more then 70% write in calling xx00 numbers as support/resistance level.. )

Happy Trading

Thank for the clarification AW10,

Actually, yes its easy to say support/resistance level without OI just by seeing the chart.
But the thing i wanted to know is that,
suppose we already know that 5200/5300 are support/resistance level respectively(by charts) and in current month if we see a increase in OI for 5300 CALL(while spot is > 5300).
Then can we say that ppl are trying to pull the nifty down below 5300 as large number of call writers increased?
That is, using OI i am trying to guess the movement direction(and not level) in next 3-4 days.

...Summa

 

[AW10]

Summa, that is one way of looking at OI.
But you can also see that equal number of people are buying the 5300 calls too.
So just by knowing the change in OI, it is difficult to make any interpretation.
Maybe the buyers are professionals and they are just hedging their prev short call positions, or NF shorts, or next months short positions.
Or some speculator are buying the lottery ticket in 30 rs.. and expecting that expiry will take mkt to 5400 ..

Change in OI also does not say which calls are getting closed and which one are new coming back. Maybe the 5300 calls sold at 150 rs, are getting closed hence professionals are booking profit while others are hedging or speculating.

There are way to many combinations that can come here.. hence it is difficult to judge.
And proximity to expiry brings different dimension all togather.

That is why, with improved knowledge of option strategies (or maybe still lack of understading OI), I don't use OI to identify S&R level.
Maybe it is better to judge the balance of bullish/bearish sentiment at a particular strike by observing PCR or OI of put and call there. Or focus only on the major change in OI (i.e. >30% change), to adjust your open options positions..

Just my views. Hope this helps.
Happy Trading

 

[vssoma]

dear,
after one unsuccessful trade......
bought tatasteel 520 CA - july- @ 12 and 460 PA - july @ 9.8
my view is bullish with this stock.
please, comment on this trade......is it ok or not.

 

[AW10]

dear,
after one unsuccessful trade......
bought tatasteel 520 CA - july- @ 12 and 460 PA - july @ 9.8
my view is bullish with this stock.
please, comment on this trade......is it ok or not.

If you are bullish, then why do you have PUT ? This is going to drag down your return, even when u are correct.
Or similarly, if you are proven wrong, then Long call will drag your returns down.

And with two long options in hand, you have accepted double the time decay everyday.
This will certainly eat away your profit every day.. irrespective of whether you are right or wrong.

Now plz refer to first 2/3 posts of this thread and see the benefits of SPREAD trade.. and feel free to post your view, if this is right trade OR you could have traded you bullish view more smartly with less risk, more contract, and lower time decay impact..

Happy Trading

 

[nimish_rulz]

dear,
after one unsuccessful trade......
bought tatasteel 520 CA - july- @ 12 and 460 PA - july @ 9.8
my view is bullish with this stock.
please, comment on this trade......is it ok or not.

If I were you would have bought tata steel futures 1 lot and shorted a 520 call. If the stock fell 4% below the futures buy price will buy a put with the premium I got by selling the call. Hope it helps. The 4% is a random number If I were you will buy a put on close below 485. Long futures short call 520.

 

[simple_trader]

dear,
after one unsuccessful trade......
bought tatasteel 520 CA - july- @ 12 and 460 PA - july @ 9.8
my view is bullish with this stock.
please, comment on this trade......is it ok or not.

Without commenting on whether it is correct trade or not. I would suggest, whenever you see total price in 520 call, i.e. 12+9.8=21.8 (may be 24-25 range), then exit the call and hold PUT for expiry.

 

[summasumma]

Summa, that is one way of looking at OI.
But you can also see that equal number of people are buying the 5300 calls too.
So just by knowing the change in OI, it is difficult to make any interpretation.
Maybe the buyers are professionals and they are just hedging their prev short call positions, or NF shorts, or next months short positions.
Or some speculator are buying the lottery ticket in 30 rs.. and expecting that expiry will take mkt to 5400 ..

Change in OI also does not say which calls are getting closed and which one are new coming back. Maybe the 5300 calls sold at 150 rs, are getting closed hence professionals are booking profit while others are hedging or speculating.

There are way to many combinations that can come here.. hence it is difficult to judge.
And proximity to expiry brings different dimension all togather.

That is why, with improved knowledge of option strategies (or maybe still lack of understading OI), I don't use OI to identify S&R level.
Maybe it is better to judge the balance of bullish/bearish sentiment at a particular strike by observing PCR or OI of put and call there. Or focus only on the major change in OI (i.e. >30% change), to adjust your open options positions..

Just my views. Hope this helps.
Happy Trading

Thanks excellent view.
It really helps.

 

[ksesha]

Having CMP @ 498, you will be making a profit only if the price moves above 543 ( ie 9%) or below 438 (ie 12%)

Instead shorting would have been a very good strategy.

dear,
after one unsuccessful trade......
bought tatasteel 520 CA - july- @ 12 and 460 PA - july @ 9.8
my view is bullish with this stock.
please, comment on this trade......is it ok or not.