NIFTY Options Trading by RAJ
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Summary of the key posts
NIFTY Options Trading with RAJ
1 INTRODUCTION
I starting this thread to focus specifically on NIFTY Options. Those who have been following my other thread will know the details.
MY THREAD: HTTP://WWW.TRADERJI.COM/TRADING-DIARY/88670-NIFTY-OPTIONS-TRADING-RAJ.HTML
The Strategy is based on the Options Chain data.
Pair Trading for the Pair with MAX OI.
Other Options Strategies based on
- Volatility
- MAX CHG in OI
- MAX OI
For the Experts it might see as baby steps. So the experts please forgive.
UNDERSTANDING THE OPTIONS CHAIN DATA CORRECTLY
Forget what you know already about the market and the Option Chains data. The Future and Options are traded in the Secondary market. So the primary market is Equities. So without equities (cash market), Futures and Options do not exist. So for those who are trading purely in F&O, Look at the Futures and Options as some way to protect your Stocks (Cash).
For the F&O market to exist, we need the Market Makers. And Market makers are also here to make some money.
Now going to Options Chain data. Let us take the Options Chain of NIFTY. Hope there are so many links for getting the Options Chain data. But I use the following link
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbol=" & NSECode & "&date=" & ExpiryDate
For example to get the NIFTY Options data for the month expiring Jul-15, the link would be
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbol=" NIFTY"&date="30JUL15
SO THERE ARE SO MANY COLUMNS AND VALUES. WHAT WE ARE INTERESTED IS THE FOLLOWING
OI - Open Interest
Chng in OI - Change in Open Interest
IV - Implied Volatility
Volume - Volume and Of course the
Strike Price
WHAT DO WE NEED TO MAKE THE DECISIONS?
1. Find out the Strike Price and OI, where we have the MAX OI in PE - MAX_OI_PE
2. Find out the Strike Price and the OI, where we have the MAX OI in CE - MAX_OI_CE
3. Find out the Strike Price and CHG in OI, where we have the MAX Change in OI in PE - MAX_CHGOI_PE
4. Find out the Strike Price abnd CHG in OI, where we have the MAX Change in OI in CE - MAX_CHGOI_CE
Intraday day trading would be based on Change in OI
Positional/Swing trading would be based on OI.
2 UNDERSTANDING THE OPTIONS CHAIN USING SIMPLE RULES
RULE 1: IF THE MAX (CHG IN OI) @ PE > MAX (CHG IN OI) @ CE, THEN IT IS A BULLISH MARKET.
Why MAX (CHG in OI) PE will be a Bullish signal?
For the Market to exist we should be Have Bears and Bulls. Market is always trading in a specified range for any day. So we have to assume that BULLs will try to Protect the Bottom of the Range and Bears will Try to Protect the Top of the Range (Not let the market beyond the Range). BULLs have LONG Positions in the market. So to protect their LONGs they take the Opposite positions in the Options market by selling the PUTS (PE) to hedge their positions, so that if the market goes in the opposite direction of their Longs they can make money using Options. But normally the market makers make money both in the Equities and in the Options market. When they build a huge volume around a Strike Price, they are basically sending a signal to the BEARS saying "This is our area - We will not let you go below this level". So BULLs normally control a Lower Strike and BEARS normally control an upper Strike. For a given day this Range would act as the Intraday Range.
When the MAX COI PE > MAX COI CE, meaning when PEs are Shorted then the market goes UP eventually. This is an intraday rule. And COI should be used for Intraday only.
Probably what is overlooked and what need to be fine-tuned is the Range of the MAX COI. For NIFTY If the Difference between MAX COI PE and MAX COI CE is more than say 100 points then it probably indicates a FLAT market rather than Trending market for the Day. So it would be good to Sell the Spread the rather than going bullish on the spread and so it would better to avoid Debit spreads in the Range. So The Rule is valid only when the Range is close. When the Range is narrow then it indicates a Real fight. For example let us take the example of 15-OCT-13, After the market came down from 6200 to 6100, the COI range was at 6000 and 6300, which is a 300 points Range, which indicates that market would be FLAT for intraday. If the Range would have been 6000-6100 and 6100CE > 6000PE then it would indicated further bearishness
RULE 2: IF THE MAX (CHG IN OI) @ PE < MAX (CHG IN OI) @ CE, THEN IT IS A BEARISH MARKET.
Same explanation as the Bullish market
Rule 2 is the Opposite of Rule 1. Once again this rule is for Intraday only.
Probably what is overlooked and what need to be fine-tuned is the Range of the MAX COI. If the Difference between MAX COI PE and MAX COI CE is more than say 100 points then it probably indicates a FLAT market rather than Trending market for the Day. So it would be good to Sell the Spread the rather than going bullish on the spread and so it would better to avoid Debit spreads in the Range. So The Rule is valid only when the Range is close. When the Range is narrow then it indicates a Real fight. For example let us take the example of 15-OCT-13, After the market came down from 6200 to 6100, the COI range was at 6000 and 6300, which is a 300 points Range, which indicates that market would be FLAT for intraday. If the Range would have been 6000-6100 and 6100CE > 6000PE then it would indicated further bearishness.
RULE 3: FOR POSITIONAL/SWING TRADING USE THE OI INSTEAD OF THE CHN IN OI AND THE SAME RULE AS RULE 1 AND RULE 2 WILL FOLLOW.
You can see in the current month that sum of OI @ PE is greater than sum of OI @ CE and Market came from Lows of 5700 and Trading at 6100 now. The OI data should be always used for Monthly Trends or Positional Trends
RULE 4: CAN WE ALWAYS GO WITH THIS LOGIC ON THE MAX (OI) AND MAX (CHG IN OI)?
NO. This might not work during the last week of Expiry when the Market makers are closing their positions. So during the last week of Expiry better to stay away from the market or Play the market using the Implied Volatility.
In the last week of Expiry normally the Reversal of the Positions happen. So better to avoid all the General rules on OI and COI on the last week or when there is a Major Reversal or When the market is Trading at the MAX OI @ CE or MAX OI @ PE.
RULE 5: 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.
Negative Values indicates squaring off and Reversal. Huge Values in Terms of Lakhs indicate a MAJOR Reversal. This normally happens when the market is trading at the monthly RESISTANCE (MAX OI @ CE) or monthly SUPPORT (MAX OI @ PE).
RULE 6: 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 6B: 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.
Rule 1 to 5 are more general Rules. Now comes the most important Rule. With all these Rules we have to now take a position. The possible options we have are
Naked Options
Debit Spreads
Credit Spreads
I will put down my experience on the above. So use these more as an observation and not as a Rule because I am still learning.
For Naked Options and Debit Spreads we want the VOLT to increase or Stay ASIS but we definitely don't want the VOLT to come down which will hurt our positions. From My experience the VOLT increases when the Market goes down and the VOLT Decreases when the Market goes UP. VOLT is also a function of INDIAVIX. So you can use VIX and VOLT interchangeably.
So General Rule would be
- Go for Debit Spreads when you feel that the market is on DOWN TREND
- Go for Credit Spreads when you feel that the Market is on an UP TREND.
So the basic assumption is on the VOLT. Now in a REAL BULLISH market, VOLT can go UP also. Now somebody can say that Market has moved from 5100 to 6100. Will you not call it a BULL market? The answer from my point of view is NO, it is not a BULLISH market.
After all these rules, we have to finally take a call on where the market will go - UP or DOWN. The second thing is we also need to have an idea on Where the VOLT will go, UP or DOWN. So a combination of Market Trend and VOLT should help take the Debit Spread or Credit Spread.
VOLT UP + MARKET UP = Debit Spread = REAL BULLISH Market
VOLT UP + MARKET DOWN = Debit Spread = REAL BEARISH Market
VOLT DOWN + MARKET UP = Credit Spread = REVERSAL
VOLT DOWN + MARKET DOWN = Credit Spread = REVERSAL
So you can see that finally it is a GAME OF VOLT and we end UP predicting the VOLT
JULY-13 - Market was going UP - VOLT was flat and so Credit Spreads were profitable
AUG-13 - Market was going DOWN - VOLT was going UP - Debit Spreads would have been profitable
SEP-13 - Market was going UP - VOLT was going DOWN - Credit Spreads would have been more profitable
OCT-13 - So far Market is going UP - VOLT is coming down - Credit spreads would have been profitable.
One more important data you have to observe is that the INDIAVIX normally is in the Range of 20-25 for the majority of the time and where all our General Rules would be successful.
RULE 7: 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.
TRADING IN OPTIONS - MY CHANGE IN UNDERSTANDING COMPARED TO JUL-13.
One obvious thing which I may be overstated and overemphasized was the Credit Spreads. I was always for Credit Spreads because it worked very well in JUL-13 and which gave good Results in JUL-13, when the VOLT was FLAT and market was Going UP.
Credit Spreads do not work always. Basically one should not overlook the VOLT and its influence on Options. High VOLT will affect the Credit Spreads very badly.
So at the end of the Day we have to be find out whether to go for Debit Spreads or Credit Spreads. One might be confused whether to go for Debit Spread or Credit spread because it is not something to do with the Direction of the market but a function of VOLT.
So those who are Trading with Options, you should first have view of where the VIX or VOLT is heading and correspondingly Take the Credit or Debit Spreads.
SUMMARY OF THE RULES
The important point is that we did not have a Rule for VOLT or for other important Option Greeks. So we should have a Rule for at least for VOLT.
So the Last Rule would be on VOLT
Rule 8: ON VOLATILITY
If you perceive that the VOLT will go down, then go for Credit Spreads. If you feel that the VOLT will go UP, then for Debit spreads. While choosing the Credit Spreads always choose the OTM strikes. While choosing the strikes for Debit Spreads, Always go for ITM or ATM strikes.
To put the Rules in a different way, when you see that the VOLT is HIGH then go for Credit Spreads expecting the VOLT to come down and when you see the VOLT is LOW, then go for Debit Spreads expecting the VOLT to go UP. Not AN EASY THING TO PREDICT Right. YES THAT IS THE MOST DIFFICULT JOB and THAT IS WHERE MOST OF THE TECHNIQUE LIES.
The important catch is how to predict whether the VOLT will go UP or DOWN or Stay FLAT. Unfortunately in the Options Chain I do not see any Traces for VOLT Trend. So we have to use the INDIAVIX and see the Trend and Trade based on that.
ANYWAY Rest assured that if you keep mastering these Techniques, then in a normal market these rules will work.
DISCLAIMER: BY UNDERSTANDING ALL THE 8 RULES, CAN WE SAY THAT ONE CAN START TRADING IN OPTIONS? THE ANSWER IS NO. IT IS JUST SOME BASICS AND GOOD PLACE TO START OPTIONS. THE IDEA OF THE RULES WAS NOT TO EXPLAIN OR UNDERSTAND THE OPTIONS AND DO OPTIONS TRADING. THE IDEA WAS TO UNDERSTAND THE OPTIONS CHAIN TABLE. I REPEAT THAT I AM IN NO WAY TRYING TO TEACH OPTIONS. I AM ONLY TRYING TO UNDERSTAND ON HOW TO READ THE OPTIONS CHAIN TABLE. THERE IS A LOT OF DIFFERENCE BETWEEN UNDERSTANDING OPTIONS AND UNDERSTANDING OPTIONS CHAIN TABLE. AND THE 8 RULES VERY MUCH SUMMARIZES THE OPTIONS CHAIN TABLE AND HOW TO READ AND INTERPRET OPTIONS CHAIN. TRADING IN OPTIONS IS COMPLETELY DIFFERENT GAME, WHICH I AM ALSO LEARNING. IF PEOPLE WANT TO DISAGREE OR CORRECT ANY OF THE RULES, THEN PLEASE YOU ARE MOST WELCOME. BECAUSE I ALSO WANT TO KNOW, CORRECT AND LEARN. END OF THE DAY I HAVE PUT IN THE PUBLIC DOMAIN MY UNDERSTANDING OF THE OPTIONS CHAIN WITH A GREAT COLORFUL TOOL AND I VERY MUCH USE THE SAME TOOL. I DON'T HAVE SOME OTHER SECRET TOOL NOR AM I AN OPERATOR TRYING TO MANIPULATE PEOPLE.
ONE IMPORTANT OBSERVATION WHICH IS TO DO WITH PSYCH OR OUR MIND.
This is an important observation I have made. Some people or most of the people, especially the intraday traders make (quick and fast and huge) money when the market goes down. In other words they are good at Selling. It is also because when the market goes down it goes down like a Rocket. When the market goes UP, most of the time either there is a GAP UP or it goes like a Snail. And the Intraday traders that I am talking about do not have the patience to wait in the Bull market and whatever Quick Money they made in the Bear market, they lose all the money and their capital in the Bull market. In summary it is do with their mind. Their hands will be always itching to SELL, SELL, SELL... This is a very big problem...
SO HOW TO OVERCOME THIS PSYCHOLOGICAL PROBLEM?
One of Simple suggestion. Instead of Going Long and losing the money because you do not have the patience to hold your Long positions. Next time when the market is going UP, Try the Pair trading (In the pair trading you have to SELL the pair) or if you are adamant on that you want to trade naked, Then Sell the PUT. This way you will always be selling and your mind is happy that you have sold
WHEN TO USE MAX PAIN?
Please use the MAX Pain only for taking positional Trades or during Expiry.
For Positional trades if the current NIFTY value is away from MAX Pain by around 4%-5% (240-300 points in NIFTY), then take a Trade which will lead you to the MAX Pain.
Otherwise do not give much importance to MAX Pain when the Series is just now starting.
There was may be one more observation which people can use to take positions at the end of the Expiry.
HOW TO CALCULATE THE TREND USING COI?
It is my own logic. It need not be 100% Fool proof.
One simple way is the compare the MAX COI @ PE and MAX COI @ CE. The other advanced way is to combine many strikes and find out the Trend and take an average.
See if you are able to decipher this. On 17-Jul-15, Using COI data, we see that the Support is at 8450, Pivot @ 8500, and Resistance @ 8700. Using the three strikes and their COI we now compute the Trend for all permutations and combinations. We find that we have 7 UP and 3 DOWN. So for intraday we take a LONG view.
PE CE
UP UP
DOWN 199,975 8700 596,075 UP
UP 909,400 8500 24,800 UP
UP 6,350 8450 -13,050 UP
DOWN DOWN
UP 7 DOWN 3 UP
Traditional Method of calculating the Trend for a Strike
Those who Trading with the Options, and looking for a direction, it is calculated based on the traditional wisdom of reading the Options Chain.
That is
When the CE NET CHG +ve and the COI +Ve - Bullish - Long Build
When the CE NET CHG +ve and the COI -Ve - Bullish - Short unwinding
When the PE NET CHG +ve and the COI +Ve - Bearish - Long build
When the CE NET CHG +ve and the COI -Ve - Bullish - Long unwinding
I don’t use this logic. Since the price coming down or going up is not merely a function of the market Trend but also a function of volatility. Once again for Options trading we have to use the volatility effectively. For any decision always consider volatility.
HOW TO SET TARGET AND STOP LOSS USING FOVOLT?
My view on how to set the FULL Target for a Trade and Stop loss?
This is just for a discussion and debate and based on my observation. So please take your decisions accordingly.
I always notice and Read that the tips providers and the experts always provide a Target of 1% for an entry and stoploss say 20% or 40%
Why not the Target be 1.2% from the Low? If you look at the OAT you will notice that it is 1.2%.
So where is this extra .2% or 20 basis points coming from?
Can we also use the 1.2% for other stocks?
My view is that the extra 20 basis point is basically the VOLT in FOVOLT. For NIFTY the VOLT is around 20%. So you can always set the Target for the extra 20 basis points.
So next time when you set the Target look at the FOVOLT and Set your Target accordingly. Why to lose the 20 basis points?
NEVER BUY OTM CALLS / PUTS
Never buy an OTM Call or the Strike where there is Resistance or Support because those are candidates for SELLING.
For example if as per the Hourly chart if the Support is at 7250 and Resistance at 7395 and if the Bias is UP side, Then the strategy might be
SELL 7200PE/7250PE-7400CE/7450CE
Buy 7300CE / 7350CE
SOME SIMPLE NUMBER CRUNCHING TO SHOW THE PROFITS ONE CAN GET IN SELLING AND THOSE WHO BELIEVE THAT SELLING OPTIONS WILL NOT GIVE A HUGE PROFIT.
There are 4 weeks in the Expiry.
The combined premiums starts at 120 and roughly there are 20 trading days. Since we are selling we are looking for some 120/20 = 6 points to erode every day. And ideally if you have chosen the right pair in the beginning of the month, you should get the Full 120 points.
At the end of the first week, the 30 points would be lost and 120 will become 90
At the end of the second week another 30 points would be lost and 90 will become 60.
In the third week 60 will become 30
and on the day of expiry 30 will become 0.
So ideally if somebody has a Capital of 1 Lakh then they can SELL 200 quantities and ideally they can get a profit of around 200 * 120 = 24000 in a month. Even if one gets 10000 then it is a huge profit. On top of this if one can intelligently combine it with a Long Put or Call then they can make more profit.
I have been observing the Premiums and this is how it happens.... You can take a pair and watch the Premiums before you believe
For example take the Pair 6800-7300 and See the Pair's value on 26-Jun-14.
So how do we find the pair for Stocks?
For NIFTY it works like these and it should work in a similar fashion for Stocks also.
For NIFTY since you need minimum two strikes to SELL the Difference would be 100 points. Add 20% (NIFTY Historic Volatility). That would be 120 points. So ideally on Week 1 of Expiry you should be able to find a Pair with a Premium of around 120.
Let us take SBIN.
SBIN Strike is 20 points. And the HIST VOLT is now at 60%.
So we would need to find a pair whose value would be 20+20=40 + 60% * 40 = 40 + 24 = 64.
The MAX OI is at 2500-2700 with a combined premium of 120. But we would need only 64 points. So we can choose outside 2500-2700. Say 2260-2760 with a comined premium of 68.
So every day you should get around 3.2 points.
By the end of First week 64 should become 64-16 = 48
Second week 48 should become 32 and so on ...
FINALLY, A WORD OF CAUTION, PLEASE OBSERVE AND TAKE YOUR OWN DECISION TO TRADE... I MIGHT BE WRONG... BUT THESE ARE SOME OF MY OBSERVATIONS TO ENTER THE SELL POSITIONS FOR PAIR TRADING.
NIFTY Options Trading with RAJ
1 INTRODUCTION
I starting this thread to focus specifically on NIFTY Options. Those who have been following my other thread will know the details.
MY THREAD: HTTP://WWW.TRADERJI.COM/TRADING-DIARY/88670-NIFTY-OPTIONS-TRADING-RAJ.HTML
The Strategy is based on the Options Chain data.
Pair Trading for the Pair with MAX OI.
Other Options Strategies based on
- Volatility
- MAX CHG in OI
- MAX OI
For the Experts it might see as baby steps. So the experts please forgive.
UNDERSTANDING THE OPTIONS CHAIN DATA CORRECTLY
Forget what you know already about the market and the Option Chains data. The Future and Options are traded in the Secondary market. So the primary market is Equities. So without equities (cash market), Futures and Options do not exist. So for those who are trading purely in F&O, Look at the Futures and Options as some way to protect your Stocks (Cash).
For the F&O market to exist, we need the Market Makers. And Market makers are also here to make some money.
Now going to Options Chain data. Let us take the Options Chain of NIFTY. Hope there are so many links for getting the Options Chain data. But I use the following link
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbol=" & NSECode & "&date=" & ExpiryDate
For example to get the NIFTY Options data for the month expiring Jul-15, the link would be
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbol=" NIFTY"&date="30JUL15
SO THERE ARE SO MANY COLUMNS AND VALUES. WHAT WE ARE INTERESTED IS THE FOLLOWING
OI - Open Interest
Chng in OI - Change in Open Interest
IV - Implied Volatility
Volume - Volume and Of course the
Strike Price
WHAT DO WE NEED TO MAKE THE DECISIONS?
1. Find out the Strike Price and OI, where we have the MAX OI in PE - MAX_OI_PE
2. Find out the Strike Price and the OI, where we have the MAX OI in CE - MAX_OI_CE
3. Find out the Strike Price and CHG in OI, where we have the MAX Change in OI in PE - MAX_CHGOI_PE
4. Find out the Strike Price abnd CHG in OI, where we have the MAX Change in OI in CE - MAX_CHGOI_CE
Intraday day trading would be based on Change in OI
Positional/Swing trading would be based on OI.
2 UNDERSTANDING THE OPTIONS CHAIN USING SIMPLE RULES
RULE 1: IF THE MAX (CHG IN OI) @ PE > MAX (CHG IN OI) @ CE, THEN IT IS A BULLISH MARKET.
Why MAX (CHG in OI) PE will be a Bullish signal?
For the Market to exist we should be Have Bears and Bulls. Market is always trading in a specified range for any day. So we have to assume that BULLs will try to Protect the Bottom of the Range and Bears will Try to Protect the Top of the Range (Not let the market beyond the Range). BULLs have LONG Positions in the market. So to protect their LONGs they take the Opposite positions in the Options market by selling the PUTS (PE) to hedge their positions, so that if the market goes in the opposite direction of their Longs they can make money using Options. But normally the market makers make money both in the Equities and in the Options market. When they build a huge volume around a Strike Price, they are basically sending a signal to the BEARS saying "This is our area - We will not let you go below this level". So BULLs normally control a Lower Strike and BEARS normally control an upper Strike. For a given day this Range would act as the Intraday Range.
When the MAX COI PE > MAX COI CE, meaning when PEs are Shorted then the market goes UP eventually. This is an intraday rule. And COI should be used for Intraday only.
Probably what is overlooked and what need to be fine-tuned is the Range of the MAX COI. For NIFTY If the Difference between MAX COI PE and MAX COI CE is more than say 100 points then it probably indicates a FLAT market rather than Trending market for the Day. So it would be good to Sell the Spread the rather than going bullish on the spread and so it would better to avoid Debit spreads in the Range. So The Rule is valid only when the Range is close. When the Range is narrow then it indicates a Real fight. For example let us take the example of 15-OCT-13, After the market came down from 6200 to 6100, the COI range was at 6000 and 6300, which is a 300 points Range, which indicates that market would be FLAT for intraday. If the Range would have been 6000-6100 and 6100CE > 6000PE then it would indicated further bearishness
RULE 2: IF THE MAX (CHG IN OI) @ PE < MAX (CHG IN OI) @ CE, THEN IT IS A BEARISH MARKET.
Same explanation as the Bullish market
Rule 2 is the Opposite of Rule 1. Once again this rule is for Intraday only.
Probably what is overlooked and what need to be fine-tuned is the Range of the MAX COI. If the Difference between MAX COI PE and MAX COI CE is more than say 100 points then it probably indicates a FLAT market rather than Trending market for the Day. So it would be good to Sell the Spread the rather than going bullish on the spread and so it would better to avoid Debit spreads in the Range. So The Rule is valid only when the Range is close. When the Range is narrow then it indicates a Real fight. For example let us take the example of 15-OCT-13, After the market came down from 6200 to 6100, the COI range was at 6000 and 6300, which is a 300 points Range, which indicates that market would be FLAT for intraday. If the Range would have been 6000-6100 and 6100CE > 6000PE then it would indicated further bearishness.
RULE 3: FOR POSITIONAL/SWING TRADING USE THE OI INSTEAD OF THE CHN IN OI AND THE SAME RULE AS RULE 1 AND RULE 2 WILL FOLLOW.
You can see in the current month that sum of OI @ PE is greater than sum of OI @ CE and Market came from Lows of 5700 and Trading at 6100 now. The OI data should be always used for Monthly Trends or Positional Trends
RULE 4: CAN WE ALWAYS GO WITH THIS LOGIC ON THE MAX (OI) AND MAX (CHG IN OI)?
NO. This might not work during the last week of Expiry when the Market makers are closing their positions. So during the last week of Expiry better to stay away from the market or Play the market using the Implied Volatility.
In the last week of Expiry normally the Reversal of the Positions happen. So better to avoid all the General rules on OI and COI on the last week or when there is a Major Reversal or When the market is Trading at the MAX OI @ CE or MAX OI @ PE.
RULE 5: 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.
Negative Values indicates squaring off and Reversal. Huge Values in Terms of Lakhs indicate a MAJOR Reversal. This normally happens when the market is trading at the monthly RESISTANCE (MAX OI @ CE) or monthly SUPPORT (MAX OI @ PE).
RULE 6: 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 6B: 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.
Rule 1 to 5 are more general Rules. Now comes the most important Rule. With all these Rules we have to now take a position. The possible options we have are
Naked Options
Debit Spreads
Credit Spreads
I will put down my experience on the above. So use these more as an observation and not as a Rule because I am still learning.
For Naked Options and Debit Spreads we want the VOLT to increase or Stay ASIS but we definitely don't want the VOLT to come down which will hurt our positions. From My experience the VOLT increases when the Market goes down and the VOLT Decreases when the Market goes UP. VOLT is also a function of INDIAVIX. So you can use VIX and VOLT interchangeably.
So General Rule would be
- Go for Debit Spreads when you feel that the market is on DOWN TREND
- Go for Credit Spreads when you feel that the Market is on an UP TREND.
So the basic assumption is on the VOLT. Now in a REAL BULLISH market, VOLT can go UP also. Now somebody can say that Market has moved from 5100 to 6100. Will you not call it a BULL market? The answer from my point of view is NO, it is not a BULLISH market.
After all these rules, we have to finally take a call on where the market will go - UP or DOWN. The second thing is we also need to have an idea on Where the VOLT will go, UP or DOWN. So a combination of Market Trend and VOLT should help take the Debit Spread or Credit Spread.
VOLT UP + MARKET UP = Debit Spread = REAL BULLISH Market
VOLT UP + MARKET DOWN = Debit Spread = REAL BEARISH Market
VOLT DOWN + MARKET UP = Credit Spread = REVERSAL
VOLT DOWN + MARKET DOWN = Credit Spread = REVERSAL
So you can see that finally it is a GAME OF VOLT and we end UP predicting the VOLT
JULY-13 - Market was going UP - VOLT was flat and so Credit Spreads were profitable
AUG-13 - Market was going DOWN - VOLT was going UP - Debit Spreads would have been profitable
SEP-13 - Market was going UP - VOLT was going DOWN - Credit Spreads would have been more profitable
OCT-13 - So far Market is going UP - VOLT is coming down - Credit spreads would have been profitable.
One more important data you have to observe is that the INDIAVIX normally is in the Range of 20-25 for the majority of the time and where all our General Rules would be successful.
RULE 7: 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.
TRADING IN OPTIONS - MY CHANGE IN UNDERSTANDING COMPARED TO JUL-13.
One obvious thing which I may be overstated and overemphasized was the Credit Spreads. I was always for Credit Spreads because it worked very well in JUL-13 and which gave good Results in JUL-13, when the VOLT was FLAT and market was Going UP.
Credit Spreads do not work always. Basically one should not overlook the VOLT and its influence on Options. High VOLT will affect the Credit Spreads very badly.
So at the end of the Day we have to be find out whether to go for Debit Spreads or Credit Spreads. One might be confused whether to go for Debit Spread or Credit spread because it is not something to do with the Direction of the market but a function of VOLT.
So those who are Trading with Options, you should first have view of where the VIX or VOLT is heading and correspondingly Take the Credit or Debit Spreads.
SUMMARY OF THE RULES
The important point is that we did not have a Rule for VOLT or for other important Option Greeks. So we should have a Rule for at least for VOLT.
So the Last Rule would be on VOLT
Rule 8: ON VOLATILITY
If you perceive that the VOLT will go down, then go for Credit Spreads. If you feel that the VOLT will go UP, then for Debit spreads. While choosing the Credit Spreads always choose the OTM strikes. While choosing the strikes for Debit Spreads, Always go for ITM or ATM strikes.
To put the Rules in a different way, when you see that the VOLT is HIGH then go for Credit Spreads expecting the VOLT to come down and when you see the VOLT is LOW, then go for Debit Spreads expecting the VOLT to go UP. Not AN EASY THING TO PREDICT Right. YES THAT IS THE MOST DIFFICULT JOB and THAT IS WHERE MOST OF THE TECHNIQUE LIES.
The important catch is how to predict whether the VOLT will go UP or DOWN or Stay FLAT. Unfortunately in the Options Chain I do not see any Traces for VOLT Trend. So we have to use the INDIAVIX and see the Trend and Trade based on that.
ANYWAY Rest assured that if you keep mastering these Techniques, then in a normal market these rules will work.
DISCLAIMER: BY UNDERSTANDING ALL THE 8 RULES, CAN WE SAY THAT ONE CAN START TRADING IN OPTIONS? THE ANSWER IS NO. IT IS JUST SOME BASICS AND GOOD PLACE TO START OPTIONS. THE IDEA OF THE RULES WAS NOT TO EXPLAIN OR UNDERSTAND THE OPTIONS AND DO OPTIONS TRADING. THE IDEA WAS TO UNDERSTAND THE OPTIONS CHAIN TABLE. I REPEAT THAT I AM IN NO WAY TRYING TO TEACH OPTIONS. I AM ONLY TRYING TO UNDERSTAND ON HOW TO READ THE OPTIONS CHAIN TABLE. THERE IS A LOT OF DIFFERENCE BETWEEN UNDERSTANDING OPTIONS AND UNDERSTANDING OPTIONS CHAIN TABLE. AND THE 8 RULES VERY MUCH SUMMARIZES THE OPTIONS CHAIN TABLE AND HOW TO READ AND INTERPRET OPTIONS CHAIN. TRADING IN OPTIONS IS COMPLETELY DIFFERENT GAME, WHICH I AM ALSO LEARNING. IF PEOPLE WANT TO DISAGREE OR CORRECT ANY OF THE RULES, THEN PLEASE YOU ARE MOST WELCOME. BECAUSE I ALSO WANT TO KNOW, CORRECT AND LEARN. END OF THE DAY I HAVE PUT IN THE PUBLIC DOMAIN MY UNDERSTANDING OF THE OPTIONS CHAIN WITH A GREAT COLORFUL TOOL AND I VERY MUCH USE THE SAME TOOL. I DON'T HAVE SOME OTHER SECRET TOOL NOR AM I AN OPERATOR TRYING TO MANIPULATE PEOPLE.
ONE IMPORTANT OBSERVATION WHICH IS TO DO WITH PSYCH OR OUR MIND.
This is an important observation I have made. Some people or most of the people, especially the intraday traders make (quick and fast and huge) money when the market goes down. In other words they are good at Selling. It is also because when the market goes down it goes down like a Rocket. When the market goes UP, most of the time either there is a GAP UP or it goes like a Snail. And the Intraday traders that I am talking about do not have the patience to wait in the Bull market and whatever Quick Money they made in the Bear market, they lose all the money and their capital in the Bull market. In summary it is do with their mind. Their hands will be always itching to SELL, SELL, SELL... This is a very big problem...
SO HOW TO OVERCOME THIS PSYCHOLOGICAL PROBLEM?
One of Simple suggestion. Instead of Going Long and losing the money because you do not have the patience to hold your Long positions. Next time when the market is going UP, Try the Pair trading (In the pair trading you have to SELL the pair) or if you are adamant on that you want to trade naked, Then Sell the PUT. This way you will always be selling and your mind is happy that you have sold
WHEN TO USE MAX PAIN?
Please use the MAX Pain only for taking positional Trades or during Expiry.
For Positional trades if the current NIFTY value is away from MAX Pain by around 4%-5% (240-300 points in NIFTY), then take a Trade which will lead you to the MAX Pain.
Otherwise do not give much importance to MAX Pain when the Series is just now starting.
There was may be one more observation which people can use to take positions at the end of the Expiry.
HOW TO CALCULATE THE TREND USING COI?
It is my own logic. It need not be 100% Fool proof.
One simple way is the compare the MAX COI @ PE and MAX COI @ CE. The other advanced way is to combine many strikes and find out the Trend and take an average.
See if you are able to decipher this. On 17-Jul-15, Using COI data, we see that the Support is at 8450, Pivot @ 8500, and Resistance @ 8700. Using the three strikes and their COI we now compute the Trend for all permutations and combinations. We find that we have 7 UP and 3 DOWN. So for intraday we take a LONG view.
PE CE
UP UP
DOWN 199,975 8700 596,075 UP
UP 909,400 8500 24,800 UP
UP 6,350 8450 -13,050 UP
DOWN DOWN
UP 7 DOWN 3 UP
Traditional Method of calculating the Trend for a Strike
Those who Trading with the Options, and looking for a direction, it is calculated based on the traditional wisdom of reading the Options Chain.
That is
When the CE NET CHG +ve and the COI +Ve - Bullish - Long Build
When the CE NET CHG +ve and the COI -Ve - Bullish - Short unwinding
When the PE NET CHG +ve and the COI +Ve - Bearish - Long build
When the CE NET CHG +ve and the COI -Ve - Bullish - Long unwinding
I don’t use this logic. Since the price coming down or going up is not merely a function of the market Trend but also a function of volatility. Once again for Options trading we have to use the volatility effectively. For any decision always consider volatility.
HOW TO SET TARGET AND STOP LOSS USING FOVOLT?
My view on how to set the FULL Target for a Trade and Stop loss?
This is just for a discussion and debate and based on my observation. So please take your decisions accordingly.
I always notice and Read that the tips providers and the experts always provide a Target of 1% for an entry and stoploss say 20% or 40%
Why not the Target be 1.2% from the Low? If you look at the OAT you will notice that it is 1.2%.
So where is this extra .2% or 20 basis points coming from?
Can we also use the 1.2% for other stocks?
My view is that the extra 20 basis point is basically the VOLT in FOVOLT. For NIFTY the VOLT is around 20%. So you can always set the Target for the extra 20 basis points.
So next time when you set the Target look at the FOVOLT and Set your Target accordingly. Why to lose the 20 basis points?
NEVER BUY OTM CALLS / PUTS
Never buy an OTM Call or the Strike where there is Resistance or Support because those are candidates for SELLING.
For example if as per the Hourly chart if the Support is at 7250 and Resistance at 7395 and if the Bias is UP side, Then the strategy might be
SELL 7200PE/7250PE-7400CE/7450CE
Buy 7300CE / 7350CE
SOME SIMPLE NUMBER CRUNCHING TO SHOW THE PROFITS ONE CAN GET IN SELLING AND THOSE WHO BELIEVE THAT SELLING OPTIONS WILL NOT GIVE A HUGE PROFIT.
There are 4 weeks in the Expiry.
The combined premiums starts at 120 and roughly there are 20 trading days. Since we are selling we are looking for some 120/20 = 6 points to erode every day. And ideally if you have chosen the right pair in the beginning of the month, you should get the Full 120 points.
At the end of the first week, the 30 points would be lost and 120 will become 90
At the end of the second week another 30 points would be lost and 90 will become 60.
In the third week 60 will become 30
and on the day of expiry 30 will become 0.
So ideally if somebody has a Capital of 1 Lakh then they can SELL 200 quantities and ideally they can get a profit of around 200 * 120 = 24000 in a month. Even if one gets 10000 then it is a huge profit. On top of this if one can intelligently combine it with a Long Put or Call then they can make more profit.
I have been observing the Premiums and this is how it happens.... You can take a pair and watch the Premiums before you believe
For example take the Pair 6800-7300 and See the Pair's value on 26-Jun-14.
So how do we find the pair for Stocks?
For NIFTY it works like these and it should work in a similar fashion for Stocks also.
For NIFTY since you need minimum two strikes to SELL the Difference would be 100 points. Add 20% (NIFTY Historic Volatility). That would be 120 points. So ideally on Week 1 of Expiry you should be able to find a Pair with a Premium of around 120.
Let us take SBIN.
SBIN Strike is 20 points. And the HIST VOLT is now at 60%.
So we would need to find a pair whose value would be 20+20=40 + 60% * 40 = 40 + 24 = 64.
The MAX OI is at 2500-2700 with a combined premium of 120. But we would need only 64 points. So we can choose outside 2500-2700. Say 2260-2760 with a comined premium of 68.
So every day you should get around 3.2 points.
By the end of First week 64 should become 64-16 = 48
Second week 48 should become 32 and so on ...
FINALLY, A WORD OF CAUTION, PLEASE OBSERVE AND TAKE YOUR OWN DECISION TO TRADE... I MIGHT BE WRONG... BUT THESE ARE SOME OF MY OBSERVATIONS TO ENTER THE SELL POSITIONS FOR PAIR TRADING.
Thanks karthik....Am now only observed you are doing opposit .
position not opposite of trend?
today its ok...but how if its trending?
position not opposite of trend?
today its ok...but how if its trending?
in a trending day (EX- UP)
8xxxCE-sell at-23.30,
8xxxPE-sell at-93.25,
in a trending day (EX- down)
8xxxCE-sell at-93.25,
8xxxPE-sell at-23.30,
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