General Trading Chat

[timepass]

Dan, i think that it is right up your street. As for me, i am not doing options these days.

I guess nobody was interested in my earlier query , so here I present my case more comprehensively.

A look at Hero Moto Co's stock price movement post quarterly results announcements in last 7 quarters :

Clearly, a minimum of 3% happens post results. At the current market price of 2357, this movements translates into 70 points.

A look at the ATM option prices :

One can expect a movement of about 40-50 points atleast if underlying moves by 70. Going long on a 2350 straddle and putting SLs of around 15-20 points below for both the options should ensure a gain of about 20-35 points.

What say? Any critique is welcome

 

[Somatung]

@TP

As I do not trade this stock, I only can comment on his post and the numbers shown.

Now: If some body wants to take a trade with a long "Straddle" on this data on this share, it is his wish and his risk. A long "Straddle" needs movement in a certain time and direction and if some body feels this will happen, fine. Still, the strategy must be understood in details and not because only some body posted it.

Going long a "Straddle" is fine when Vola in the underlying and in the IMV of the options is low and we expect an increase in it. The increase in general will happen when a bigger move is expected in either direction.

But the problem in this case: As this is an event trade, the market in most cases has already implemented such increases in vola in any way in the option prices before event day. This means the long option strategies do face in many cases loss at the end on such events if not entered enough early.

As I do not know the exact day when the event is happening this year, only see that in 2014 it was on the 28. May, I would suggest to enter the trade a few days before the event happen. If you trade the options from this share day by day for a longer time, you will know when the increase of IMV on those options start before any such event and here you take the trade if you want.

Hope that clears your question, if even any.

Take care / Dan

 

[timepass]

@TP

As I do not trade this stock, I only can comment on his post and the numbers shown.

Now: If some body wants to take a trade with a long "Straddle" on this data on this share, it is his wish and his risk. A long "Straddle" needs movement in a certain time and direction and if some body feels this will happen, fine. Still, the strategy must be understood in details and not because only some body posted it.

Going long a "Straddle" is fine when Vola in the underlying and in the IMV of the options is low and we expect an increase in it. The increase in general will happen when a bigger move is expected in either direction.

But the problem in this case: As this is an event trade, the market in most cases has already implemented such increases in vola in any way in the option prices before event day. This means the long option strategies do face in many cases loss at the end on such events if not entered enough early.

As I do not know the exact day when the event is happening this year, only see that in 2014 it was on the 28. May, I would suggest to enter the trade a few days before the event happen. If you trade the options from this share day by day for a longer time, you will know when the increase of IMV on those options start before any such event and here you take the trade if you want.

Hope that clears your question, if even any.

Take care / Dan

This reminds me, Infy options - there have been instances when the options were overpriced till a day before the results, and then on the result day both the CE and PE lost money. The volatility does peak out just before the results and tends to crash immediately thereafter.

My advice would be to avoid trading the scrip in anticipation of the result day, or trade with throwaway money only.

Meanwhile, does anyone here do arbitrage ? Reliance futures are trading at about 5-6 Rs. discount to the spot value. There was a similar opportunity in SBIN some months ago. I don't do arbitrage, but just curious.

 

[arsh22g]

@TP

As I do not trade this stock, I only can comment on his post and the numbers shown.

Now: If some body wants to take a trade with a long "Straddle" on this data on this share, it is his wish and his risk. A long "Straddle" needs movement in a certain time and direction and if some body feels this will happen, fine. Still, the strategy must be understood in details and not because only some body posted it.

Going long a "Straddle" is fine when Vola in the underlying and in the IMV of the options is low and we expect an increase in it. The increase in general will happen when a bigger move is expected in either direction.

But the problem in this case: As this is an event trade, the market in most cases has already implemented such increases in vola in any way in the option prices before event day. This means the long option strategies do face in many cases loss at the end on such events if not entered enough early.

As I do not know the exact day when the event is happening this year, only see that in 2014 it was on the 28. May, I would suggest to enter the trade a few days before the event happen. If you trade the options from this share day by day for a longer time, you will know when the increase of IMV on those options start before any such event and here you take the trade if you want.

Hope that clears your question, if even any.

Take care / Dan

Thanks for this

The principle of IMV being priced in long before the event is theoretically correct, but in my experience with Indian equity, it doesn't hold fully. The prices are driven majorly by the prices of the underlying, maybe because the OI is too low for institutionals to have any position worthy of their effort (on assumption that IIs will calculate the theoretical option value using IMV and make the market). In absence of IIs, it's the retails who drive the market.

I have observed this in some other major tickers I had tracked, like Infy, Wipro and Reliance etc. But I agree that it's better to enter the trade before to get better prices where IMV vs Time Value trade-off gives a good price. But then, you are essentially blocking the trading capital and hence low rotation/turnover of the capital. 2-3 days blockage should work for some quick gains.

 

[arsh22g]

This reminds me, Infy options - there have been instances when the options were overpriced till a day before the results, and then on the result day both the CE and PE lost money. The volatility does peak out just before the results and tends to crash immediately thereafter.

My advice would be to avoid trading the scrip in anticipation of the result day, or trade with throwaway money only.

Meanwhile, does anyone here do arbitrage ? Reliance futures are trading at about 5-6 Rs. discount to the spot value. There was a similar opportunity in SBIN some months ago. I don't do arbitrage, but just curious.

Yeah, need to have a look at the option premium build up before entering the trade. Options usually crash if the movement is pretty subdued, happened to me a couple of times. That's why past trend in movements is important.

Regarding arbitrage, won't you need to hold it till expiry?

 

[Somatung]

Thanks for this

The principle of IMV being priced in long before the event is theoretically correct, but in my experience with Indian equity, it doesn't hold fully. The prices are driven majorly by the prices of the underlying, maybe because the OI is too low for institutionals to have any position worthy of their effort (on assumption that IIs will calculate the theoretical option value using IMV and make the market). In absence of IIs, it's the retails who drive the market.

I have observed this in some other major tickers I had tracked, like Infy, Wipro and Reliance etc. But I agree that it's better to enter the trade before to get better prices where IMV vs Time Value trade-off gives a good price. But then, you are essentially blocking the trading capital and hence low rotation/turnover of the capital. 2-3 days blockage should work for some quick gains.

Did you try alternatives like: Take one leg two weeks before the event happen and manage that leg into profit and on the day before the event you implement the other leg? This just to give you just one idea how you can play around with options and prepare your self for such days. Many ways to do so.

Take care / Dan

 

[arsh22g]

Did you try alternatives like: Take one leg two weeks before the event happen and manage that leg into profit and on the day before the event you implement the other leg? This just to give you just one idea how you can play around with options and prepare your self for such days. Many ways to do so.

Take care / Dan

I haven't tried this specifically. But aren't we taking a directional bet here rather than betting on the event vol? (a different strategy)

I have tried something else though. Closing the profitable leg on the event, selling twice the non-profitable leg and buying the next month non-profitable leg (maybe adjusting the strike a bit). Essentially taking a calendar spread on the non-profitable leg and betting the price to return to normalcy post the event.

But I don't particularly like doing this, because it blocks the capital for a long period and returns aren't that great, hurting my monthly ROIC.

 

[Somatung]

I haven't tried this specifically. But aren't we taking a directional bet here rather than betting on the event vol? (a different strategy)

I have tried something else though. Closing the profitable leg on the event, selling twice the non-profitable leg and buying the next month non-profitable leg (maybe adjusting the strike a bit). Essentially taking a calendar spread on the non-profitable leg and betting the price to return to normalcy post the event.

But I don't particularly like doing this, because it blocks the capital for a long period and returns aren't that great, hurting my monthly ROIC.

- Yea, you can start to prepare your self for the event with directional leg in or you do start with a more complex option strategy and then convert the implemented strategy through leg out or leg in into an other option strategy depending what market and vola does.

- What you talk about is a "Calendar back spread" which is also a nice one. Problem here in your market: High Margins which is not the case over here with such strategies.

Any way: Was nice to talk with you and all the best in your trading.

Take care / Dan

 

[arsh22g]

I just did some monthly vol calculations for Titan Company (Oh...how I miss the Bbg HVT ). The red circled areas are for the vol spike on the result day. Clearly, vol does get spiked.

 

[Tlahuicole]

Guys somehow the dispute starts again and again, cool down and lets have a good day tomorrow. Nifty trade, humble request is to share any of your techniques so that most of us can learn and try to implement as a part of our strategy. Xray, ST, saint and many others have done so, if you wish you can share, it will reduce the plateau time of many traders.

We had a lot of tipsters trying to suck in beginners recently and thats why you had got such attention. As an experienced trader hope you know how everyone gets tempted at the beginner stage for easy money in equity and derivative market. Have a good night everyone.

Stock 72 for that budget please try hero impulse bro.