NF Options - Trading for the Outliers
- Thread starter trader.trends
- Start date
- Tags nifty options strangles
Excellent TT... liked the way you tried to analyse raw data... Problem is... our options market is in nascent stage... and this data on which you worked is mainly in a market which saw actions all the time barring a few dry months...
Taleb's main works are on Tail Risks... I don't think he was a successful trader (have many evidences)... but his works on randomness and probability are good...
I think cost of straddles on the date of beginning of a new series ranges from 230-260...
Taleb's main works are on Tail Risks... I don't think he was a successful trader (have many evidences)... but his works on randomness and probability are good...
I think cost of straddles on the date of beginning of a new series ranges from 230-260...
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PG, Thanks for the warm words.
Barring a few dry Months: Out of 55 series, 26 series did not end beyond 200 points. So perhaps a good no. of dry months.
Taleb: In the books that I read, Taleb, mentions that he profited from trading the outliers. In fact he was running a firm which gave good returns to investors, but now he does not do it anymore.
Straddles: I have looked at only Strangles, You are right that the cost of a straddle of ATM options is around 230-260.
Barring a few dry Months: Out of 55 series, 26 series did not end beyond 200 points. So perhaps a good no. of dry months.
Taleb: In the books that I read, Taleb, mentions that he profited from trading the outliers. In fact he was running a firm which gave good returns to investors, but now he does not do it anymore.
Straddles: I have looked at only Strangles, You are right that the cost of a straddle of ATM options is around 230-260.
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What you are doing is classic BLACK SWAN strategy. Using Outliers.
Here is the way I am thinking. This is like buying a lottery ticket every month, hoping that one day you will make MEGAPROFITS. There is a difference though. For a 1 lac lottery, you will have to (on an average) buy 1.3 lac tickets, because the game is AGAINST you.
In far-off-strangles, the game is IN YOUR FAVOR.
The issue is cash management. Suppose you have 1 lac Rs. Every month you put in 10,000. However, what happens if after 10 months you do not see a winner? Clearly, you are out of the game. So we need a better cash management rule. We CANNOT PUT A FIXED AMOUNT EVERY MONTH.
We have to use KELLY CRITERION to decide how much money to bet to avoid ruin. (see net)
On this weekend, I'll do some simulations and post results here. OK?
Here is the way I am thinking. This is like buying a lottery ticket every month, hoping that one day you will make MEGAPROFITS. There is a difference though. For a 1 lac lottery, you will have to (on an average) buy 1.3 lac tickets, because the game is AGAINST you.
In far-off-strangles, the game is IN YOUR FAVOR.
The issue is cash management. Suppose you have 1 lac Rs. Every month you put in 10,000. However, what happens if after 10 months you do not see a winner? Clearly, you are out of the game. So we need a better cash management rule. We CANNOT PUT A FIXED AMOUNT EVERY MONTH.
We have to use KELLY CRITERION to decide how much money to bet to avoid ruin. (see net)
On this weekend, I'll do some simulations and post results here. OK?
The idea is not to look at open to close figures alone. The idea is to look how much it swung on either side of open before closing. If it went say 200pts up from open and then came back to open and crossed it downward, how far did it go? When it came back to the open after N number of days, all options would definitely be cheaper. Keep the open price of the series as a reference point to come out with a strategy.
I have given the OHLC figures of each series from 2001 onwards in the link below. I have mentioned in absolute figures and % terms how much it swung each side. I have also mentioned whether the high or low of the series was made first.
See if it helps in understanding "studying the series" better and build your strategy around it.
http://www.4shared.com/document/mnWpkR8N/NFSeries_OHLC.html
I do not mean to discourage you guys. But there is a major flow in this theory ,
It assumed that option premium remain constant for strangles. Even if you see todays premium for Oct 2011 series as on 29Sep 2011 a 200 Pt. Stangle cost about 150 almost double what has been assumed so if we punch in 150 for the 200 strangle we are actually making losses.
For a better analysis you can consider the cost also at the start of the series , if then you make profit (Which I have my doubt you will...) then Kudos to you...
Also I did a similar analysis for short strangle , i also made decent profit historically but of late my strategy was not working....
One more suggestion for a better perspective .....
Consider the day when Nifty makes high/low for the series .... find out the cost of strangle on that day and see if one can make profit by that (I know thats practically impossible to achieve but if we assume that we will sell immediate if we make 100 points on a strangle then do we make profit over a long term ? this what what we can find out....)
May be we can coordinate and work as a team .... PM me your contact no .. if you are ready ... (In fact anyone can pitch in to form a team )...
It assumed that option premium remain constant for strangles. Even if you see todays premium for Oct 2011 series as on 29Sep 2011 a 200 Pt. Stangle cost about 150 almost double what has been assumed so if we punch in 150 for the 200 strangle we are actually making losses.
For a better analysis you can consider the cost also at the start of the series , if then you make profit (Which I have my doubt you will...) then Kudos to you...
Also I did a similar analysis for short strangle , i also made decent profit historically but of late my strategy was not working....
One more suggestion for a better perspective .....
Consider the day when Nifty makes high/low for the series .... find out the cost of strangle on that day and see if one can make profit by that (I know thats practically impossible to achieve but if we assume that we will sell immediate if we make 100 points on a strangle then do we make profit over a long term ? this what what we can find out....)
May be we can coordinate and work as a team .... PM me your contact no .. if you are ready ... (In fact anyone can pitch in to form a team )...
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Jain.er
It is true that the option premium varies with volatility. My example is an illustration. I have only given a skeleton framework on which you can hang a system. I have not given a complete system.
Having said that, you make money in options when you can judge the directions correctly then any simple system would do. I wrote this piece in AW10's thread
It is true that the option premium varies with volatility. My example is an illustration. I have only given a skeleton framework on which you can hang a system. I have not given a complete system.
Having said that, you make money in options when you can judge the directions correctly then any simple system would do. I wrote this piece in AW10's thread
For all option traders, whether naked call/put buyers or spread traders, the one thing that bothers them is the direction of the market, While this bother is true for all traders is it much more for option traders as the factor of time decay is built into the instrument. When a series expires on the last Thursday of the month, we all wonder what will be the fate of the next series. Should I buy Calls/Puts. Bull spread/Bear spread? What is my best chance of making a more certain (higher probability) money?
It all depends on calling the direction right. AW10 has mentioned often that it is a 50:50 chance of calling the direction right. I just wanted to see if I could improve that. And here is what I discovered.
Here is the chart of NF as a series for the last 55 odd series. A series is different from a month. A month begins on 1st and ends on 30/31. A series begins on the day after expiry and ends on the last Thursday of the following month generally. As Future or Option Traders we are bothered about the series and not about the month but this distinction is generally lost.
Take a loot at the chart below
What does it tell you? It tells me the best estimate we can make of the next series is the performance of the current series. Today is the best indicator of what may happen tomorrow. If the current series was bullish it is more likely that the next series will be bullish. So if the current series ended higher than its open, I am better off buying calls or Call Spreads than buying Puts or its cousins.
If we are looking for low risk trades then it is even more prudent to bet on a shorter move in the direction of the expired series. The shortest move based on Strike Prices available is 100.
So how good are my chances of reaching say 5000, if the current series closed at 4900 and had a bullish close? Based on data from January 2006 till July 2011, can you believe this, you would have got it 85% of the time!! Out of 55 series, 47 would have hit the 5000 mark!!.
Whereas if I had gone contra, that is buying Puts when the current series had ended bullishly, I would have hit the -100 Mark, only 70% of the time. This is only a broad indication. It does not say how much of negative adversion you would have to suffer to get that 100 but it still is a good bet to take.
The past performance is not a guarantee for Future performance but it shows us we do not have to buy options blindly.
Those who want to look at the spreadsheet giving the analysis can pm me for the link.
It all depends on calling the direction right. AW10 has mentioned often that it is a 50:50 chance of calling the direction right. I just wanted to see if I could improve that. And here is what I discovered.
Here is the chart of NF as a series for the last 55 odd series. A series is different from a month. A month begins on 1st and ends on 30/31. A series begins on the day after expiry and ends on the last Thursday of the following month generally. As Future or Option Traders we are bothered about the series and not about the month but this distinction is generally lost.
Take a loot at the chart below
What does it tell you? It tells me the best estimate we can make of the next series is the performance of the current series. Today is the best indicator of what may happen tomorrow. If the current series was bullish it is more likely that the next series will be bullish. So if the current series ended higher than its open, I am better off buying calls or Call Spreads than buying Puts or its cousins.
If we are looking for low risk trades then it is even more prudent to bet on a shorter move in the direction of the expired series. The shortest move based on Strike Prices available is 100.
So how good are my chances of reaching say 5000, if the current series closed at 4900 and had a bullish close? Based on data from January 2006 till July 2011, can you believe this, you would have got it 85% of the time!! Out of 55 series, 47 would have hit the 5000 mark!!.
Whereas if I had gone contra, that is buying Puts when the current series had ended bullishly, I would have hit the -100 Mark, only 70% of the time. This is only a broad indication. It does not say how much of negative adversion you would have to suffer to get that 100 but it still is a good bet to take.
The past performance is not a guarantee for Future performance but it shows us we do not have to buy options blindly.
Those who want to look at the spreadsheet giving the analysis can pm me for the link.
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