Swamy,
I was really happy the day NSE announced this feature on their site. It is how options price data is displayed in global markets.
Continuing from previous post on Option Chain Table..once u get the basics of option pricing right, the this table becomes important tool in your option trading. specially in selecting
right option strike price. Here are some example about how to use
1) For simple buy option trade - In a glance u will know (1) which strike prices are ITM/OTM and how far away they are from current mkt price. (2) Amount of intrinsic value and time value in each
on the strike. So that u know how what part of price you are paying for real value in the option and what is getting paid towards the air/hope surrounding the option.
eg - 500 call going in 63 when stock is 536.. i.e. it has real/intrinisic value of 36 rs. and time value of 63-36 = 27.
520 Call going at 32 has intrinsick value = 16, and time value of 32-16 = 16 rs. So it makes sense to go ahead and buy 520 call, where u pay less for time value/Air/hope. and more for real value.
If you buy 540 Call, it is OTM hence whole 20 Rs is time value.. i.e. price of air around it.
2) For comparing option spreads.. in one glance u can compare reward risk ratio of various combination.
Taking above example, if you buy 500-520 Call spread, i.e. buy 500 call, sell 520 call. Your net cost will be 63 - 32 = 31 ie Max risk. And Max reward will be 520-500 i.e. 20 rs. i.e. You are risking 31 to make 20.
Compare this to 520-540 call spread . Net cost = 32-20 = 12, Max reward = 540-520 = 20. RRRatio = 20/12 = 1.75:1. i.e you are risking 12 to make 20.
This comparision helps in making decision to pick 520-540 spread against 500-520 spread.
3) If you are short straddle (sell 1 call and 1 put of same strike price) trader, then u can quickly decide your breakeven price for straddle created at different strike price.
500 straddle will fetch u 45+10 = 55 Rs. Giving you breakeven points of 500-55 = 435 and 500+55 = 555.
520 straddle will fetch u 31+16 = 47 Rs. Giving you breakeven points of 520-47 = 473 and 520+47 = 567.
540 straddle will fetch u 20+25 = 45 Rs. Giving you breakeven points of 540-45 = 495 and 540+45 = 585.
So depending on your reading of stocks price range in next few days you can decide which straddle to short. Max profit in short straddle comes when price moves towards the strike price in your
target closing time. You start loosing in straddle only when spot moves out of the breakeven points.
don't worry even if u don't understand what I have written, U can always come back to this later. But power of using this table is enormous, provide.. your foundation is right and you know how to use it..
In my option trading, most of the decision are taken based on this table only. Once I decide the strategy to use, then I use this table to select the strike price.
Happy Trading
I was really happy the day NSE announced this feature on their site. It is how options price data is displayed in global markets.
Continuing from previous post on Option Chain Table..once u get the basics of option pricing right, the this table becomes important tool in your option trading. specially in selecting
right option strike price. Here are some example about how to use
1) For simple buy option trade - In a glance u will know (1) which strike prices are ITM/OTM and how far away they are from current mkt price. (2) Amount of intrinsic value and time value in each
on the strike. So that u know how what part of price you are paying for real value in the option and what is getting paid towards the air/hope surrounding the option.
eg - 500 call going in 63 when stock is 536.. i.e. it has real/intrinisic value of 36 rs. and time value of 63-36 = 27.
520 Call going at 32 has intrinsick value = 16, and time value of 32-16 = 16 rs. So it makes sense to go ahead and buy 520 call, where u pay less for time value/Air/hope. and more for real value.
If you buy 540 Call, it is OTM hence whole 20 Rs is time value.. i.e. price of air around it.
2) For comparing option spreads.. in one glance u can compare reward risk ratio of various combination.
Taking above example, if you buy 500-520 Call spread, i.e. buy 500 call, sell 520 call. Your net cost will be 63 - 32 = 31 ie Max risk. And Max reward will be 520-500 i.e. 20 rs. i.e. You are risking 31 to make 20.
Compare this to 520-540 call spread . Net cost = 32-20 = 12, Max reward = 540-520 = 20. RRRatio = 20/12 = 1.75:1. i.e you are risking 12 to make 20.
This comparision helps in making decision to pick 520-540 spread against 500-520 spread.
3) If you are short straddle (sell 1 call and 1 put of same strike price) trader, then u can quickly decide your breakeven price for straddle created at different strike price.
500 straddle will fetch u 45+10 = 55 Rs. Giving you breakeven points of 500-55 = 435 and 500+55 = 555.
520 straddle will fetch u 31+16 = 47 Rs. Giving you breakeven points of 520-47 = 473 and 520+47 = 567.
540 straddle will fetch u 20+25 = 45 Rs. Giving you breakeven points of 540-45 = 495 and 540+45 = 585.
So depending on your reading of stocks price range in next few days you can decide which straddle to short. Max profit in short straddle comes when price moves towards the strike price in your
target closing time. You start loosing in straddle only when spot moves out of the breakeven points.
don't worry even if u don't understand what I have written, U can always come back to this later. But power of using this table is enormous, provide.. your foundation is right and you know how to use it..
In my option trading, most of the decision are taken based on this table only. Once I decide the strategy to use, then I use this table to select the strike price.
Happy Trading
