Observations & Ideas

#21
Spent the day reading theory on options and thought of sharing one nice article called "Holes in Black Scholes Model". It can be found here.
I am not sure in the Indian context if option traders use pricing models as I have observed people trading in a fashion as if options are the leading indicators and not 'derivatives'. Perhaps this is effective in our country.

The paper is written by Fischer Black. Black states that the model is based on 10 incorrect assumptions. The two main ones which I think are relevant to the Indian context are:
1. Volatility is known and doesn't change over the life of the option
2. Price change of underlying is smooth (there are no gap ups or gap downs)
 
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amitrandive

Well-Known Member
#23
Spent the day reading theory on options and thought of sharing one nice article called "Holes in Black Scholes Model". It can be found here.
I am not sure in the Indian context if option traders use pricing models as I have observed people trading in a fashion as if options are the leading indicators and not 'derivatives'. Perhaps this is effective in our country.

The paper is written by Fischer Black. Black states that the model is based on 10 incorrect assumptions. The two main ones which I think are relevant to the Indian context are:
1. Volatility is known and doesn't change over the life of the option
2. Price change of underlying is smooth (there are no gap ups or gap downs)

descartes

Agree with the limitations of Black Scholes.This theory does not work in today's fast paced markets.Just my opinion.
Please check these links


http://seekingalpha.com/instablog/922162-thomsett/2198272-black-scholes-is-there-an-alternative
http://www.cboeoptionshub.com/2012/...ethods-by-michael-c-thomsett-2012-11-22-4-00/
 
#25
Observation Log: 12th May 2014

12 May 2014
Nifty reaches its highest ever at 7020. This is another day of election result euphoria. This is not going to last for more than a few sessions in my humble opinion but then everyone's got one. Its a safe bet to short July/August futures contract from this oversold position. FIIs are net long on futures still but the number has decreased. More importantly both FIIs and DIIs did not have long volumes today. Something is cooking and we might see a major correction in the coming weeks. Supports coming in at 6860 and 6815. Its important to stay out of the market this week.

Monthly
Long green candle indicating continuation of upward trend.

Weekly
Solid green candle with no wicks in the candle. Indicates strong bullish move.

Daily
As said this this move seems unsustainable and is a candidate for shorting, but we never know. Can't read much into the chart technically.

Hourly
Profit booking in the last hour. This might continue into tomorrow morning. The second and fourth hour also saw profit booking by the longs.

30 Min & 15 Min
The upward extension is slowing down. This indicates a weakening bullish pressure and is in our line with the oversold idea.

Overall
Another skyscraper day! A little worried that this is built on sheer emotion and expectation. Lets see what the effect of the exit polls have on tomorrow's chart. As we speak the west have all green days today. A lot of optimism the world over.
 
#26
Observation Log: 13th May 2014

13 May 2014
A 66 point gap up which was more than I anticipated after seeing the SGX in the morning. 7172 is the new record! But I think the party might be just getting over and we need to be very cautious. A classic 'Evening Star' pattern formation might come into existence. Life time high close at 7108.

Monthly
Same as the last log. Just a more stronger candle.

Weekly
Same as last log.

Daily
So this is an interesting chart. Bulls were again strong till 11 am but bears put in a good fight and tried pushing the market down. We have an 'evening star' formation in progress probably (more on this in another post). This denotes exhaustion and a trend reversal if it happens. I think we might just have reached the top.

Hourly
Second half of the day saw profit booking by the longs. Also while seeing the option chain during the day I found some curious surprises related to option values which didn't seem correct. But whatever the market says has to be correct. Period.

30 Min & 15 Min
The bullish pressure is weakening significantly in line with our evening star proposition. Very eager to see tomorrow's and day after's chart.



Overall
I was not able to figure out much sense out of the option chain but seems from the day's chart that longs have begun profit booking. We need to be very cautious.
 

amitrandive

Well-Known Member
#27
Re: Observation Log: 13th May 2014

13 May 2014



Overall
I was not able to figure out much sense out of the option chain but seems from the day's chart that longs have begun profit booking. We need to be very cautious.
For options , IV is very high ,

http://www.traderji.com/futures/91950-day-trading-futures-590.html#post967145

Infact even after around 100 points gain in Nifty, the 7000 call is almost flat with no gains and calls above that strike "like 7100,7200,7300 etc." are in red !
On the put side, the puts below 6500 have all crashed by more then 50 %, thereby making them even cheaper for the bearish view guys.
 
#28
Ideas: Three River Evening Star

Candlestick patterns emerged from rice traders in the 16th and 17th century in Japan.

A historical background: The complete name of an 'evening star' is 'three-river evening star'. Nobunaga Oda was a Japanese military figure in the late 16th century. He was trying to conquer a very fertile piece of land which had rice plantations. Rice was a sign of wealth and prosperity in feudal Japan. Oda faced difficulty in leading his army to conquer the land because three rivers ran through that area. This area was a place where many a conqueror had failed due to the difficult terrain and the trend continued. But his army finally succeeded and managed to take control of the land by overcoming the difficulties. Therefore Oda was able to change the trend and conquer the land.

What does an evening star denote?
It denotes a beginning of a reversal pattern in an uptrend.

How does an evening star look like?
It looks like this.


What are the significant points of note for an evening star formation?
A. An evening star is formed by three candles.
1. The first candle is a solid green candle.
2. The second candle gaps up and has a small real body. If the upper wick is long and the lower wick is small then more significant the star. This candle is the evening star.
3. The third candle ideally should gap down from the evening star and deeply 'pierce' the real body of the first candle.​
This is the three river evening star formation.

B. If there is light volume on the first candle and heavy volume on the third candle. The formation is even more significant.
 
#30
Observation Log: 14th May 2014

14 May 2014
A doji day. Today was a waiting day for the 16th. Nobody emerged as the winner. Its still wait and watch. Options might be indicating the direction from here on.

Monthly
Same as last log

Weekly
Same as last log

Hourly
Sideways channel. Undecided or an equipoised market

30 Min & 15 Min
A straight line!

Overall
A boring day where we had lower volumes. Most of the players sat it out it seems. Nothing much of interest today. An evening star with a doji - looks like a unique occurrence. 7130 is a resistance and 7080 is a support. Price is oscillating in this channel. A break out might happen anyways but most probably downwards. The option traders will be in a better position to take a call on this. Hope we can get some good analysis on the same on the forum.
 

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