Two way option trade on volatile stokcs: good or bad

[mangalorebull]

dear desi123,
BUYINGa call or a put does not call for margins and your losses if any are limited to the initial premium paid.
regards
mb

 

[srikanth_kandalam]

Let us remember this

The Stock price being volatile- is ONE component that goes into Option pricing- Every asset that trades has a certain measure of volatility ( called statistical or historical Vol).

When you buy or sell options - the Implied volatility is what you need to be careful about. IF you buy wen the IV is high- which inflates the option price, if the underlying never changes and IV settles down- you will see a significant drop in option prices.

I am amazed that a lot of people buy options without regard to IV levels and not understanding atleast Delta and Theta!

You will be surprised that a lot of the breakeven calculations posted will go awfully wrong if IV ( which is invisible when you trade or look at prices) changes- it basically pulls the rug under your carpet literally.

You may get lucky- but you still are gambling!

 

[ramakant.singh]

Hi folks,
After seeing sky and sea changes in market last week. How do experts see trends this week (initial 2-3 days).
Would it be worth keeping a lot future-bharti-aug30 (bought at 831) and wait for it do touch highs of 845-850, or sell it off at little profit and shot a lot of Nagarjuna Fert-30Aug (as it being currently quite high) and book profit later in the day.

Thanks
//Ramakant

 

[yoogi]

Let me try this delta neutral once again on Nifty. (paper trade)

OPT-NIFTY-25-Oct-2007-4250-PE for 181 rs
OPT-NIFTY-25-Oct-2007-4400-CE for 180 rs

Nifty about 4368.

As of today 12:45 pm

Invested 9050 + 9000.

If we sell it before Friday, the time to expiry is still not affected greatly. If nifty does not move 75 points from here on either way within this week I would certainly loose. If it moves today itself, I would gain a lot.

This is based on the concept that if Delta netural sellers loose on one single trade, I will win on this single trade. Its a zero sum game isnt it?

 

[yoogi]

Todays close had the prices around


OPT-NIFTY-25-Oct-2007-4250-PE for 200 rs
OPT-NIFTY-25-Oct-2007-4400-CE for 181 rs

Surprisingly the Nifty has moved up. But call option hasn't moved while and put option is up.

 

[ranj_2k]

Dear Yoogi,

I do not agree with your calculation. You have taken call and put with same premium at different strike price. You are expecting that market should move either way more than 75 points. If it is up than you you will gain in call option premium and simultaneously loss in put option as its price will fall once market is up. I am assuming that you will square up both the position jointly. You may gain if you square up call when market is up and when market is down you can square up your put position. Please correct me if I am wrong.

Secondally I have heard of delta position only with stock vs f&o. where you can make your position and zero level and would gain either way.

I am not very expert on the matter. If I am wrong please correct me and if you are gaing from above trading, please share your trading gains from this position in this thread.

 

[loosingstreak]

Todays close had the prices around


OPT-NIFTY-25-Oct-2007-4250-PE for 200 rs
OPT-NIFTY-25-Oct-2007-4400-CE for 181 rs

Surprisingly the Nifty has moved up. But call option hasn't moved while and put option is up.

I haven't looked but probably the volatility crush working against the long call.

 

[loosingstreak]

Oops , I just noticed , you are trading the oct series. count in lack of liquidity as well.

 

[yoogi]

Dear loosingstreak, yes. So we need to win by more than 60 rs per nifty to call it a clear winnning, against lack of liquidity. I chose October series because time decay from 73 days to 68 days is very minimal compared to 17 to 12 (almost 25% here).

I haven't looked but probably the volatility crush working against the long call.[\quote]. That also is very much possible. If perceived volatality increases, we gain smartly on both sides.


ranj_2k,
On expiry date, either call or put exeeds by 112 points, we will earn.
But on any day before that, if volatility increases or one side swing becomes large, we will gain more on that side and loose only little on the opposite side. You use any calculator for option pricing and change the days-remaining from 73-68. You wont see a sharp drop/increase in prices. But change the current value by 75 points, you will see a sharp increase in prices.

May be my concept [If Delta netural sellers loose on one single trade, I will win on this single trade. Its a zero sum game isnt it?] is not that correct. I depend on volatility rather than anything else.

I'm hoping for a bounce back if there is no negative news or a steep fall if there is a negative news. Only problem is a calm and flat market. Who knows I might gain on opening trade of today itself, if there is a 60+ gap up.

 

[srikanth_kandalam]

Dear loosingstreak, yes. So we need to win by more than 60 rs per nifty to call it a clear winnning, against lack of liquidity. I chose October series because time decay from 73 days to 68 days is very minimal compared to 17 to 12 (almost 25% here).

I haven't looked but probably the volatility crush working against the long call.[\quote]. That also is very much possible. If perceived volatality increases, we gain smartly on both sides.


ranj_2k,
On expiry date, either call or put exeeds by 112 points, we will earn.
But on any day before that, if volatility increases or one side swing becomes large, we will gain more on that side and loose only little on the opposite side. You use any calculator for option pricing and change the days-remaining from 73-68. You wont see a sharp drop/increase in prices. But change the current value by 75 points, you will see a sharp increase in prices.

May be my concept [If Delta netural sellers loose on one single trade, I will win on this single trade. Its a zero sum game isnt it?] is not that correct. I depend on volatility rather than anything else.

I'm hoping for a bounce back if there is no negative news or a steep fall if there is a negative news. Only problem is a calm and flat market. Who knows I might gain on opening trade of today itself, if there is a 60+ gap up.

Just to let you know- what you are trading is on the Asset ( in this case stocks I presume) volatility- now that is a very different animal than option's volatility- where it does NOT refer to volatility as in price volatility- but the pricing of the option itself! ( not sure If I conveyed the essence)