introduction: Many people want to trade in option for intraday due to its low capital requirement and huge profit potentiality. However it is being experienced that the option buyers used to lose money very often. The reason is quite simple traders jump into the option trade without knowing the answer of the following questions. I will request you to find the answer of these questions then jump into the option trade for intraday. Certainly i will give you the valid mathematical answer for the below mentioned questions.
A. Which strike option to trade for intraday in nifty?
B. When to trade in options and when not to trader in options for intraday?
C. Use our binomial option calculator (only free tool available in web till date)?
D. How to initiate option positional strategy?
Let us start the discussion from the 1st point which strike option to trade for intraday in nifty? this method is not limited to nifty option it is useful to all stock options too.
While making a choice of strike to trade in option we often find the following problem.
A. Just in the money and at the money call options of nifty used to have high time value and has greater risk to trade for intraday.
B. Deep out of money options have less chance to appreciate in comparison to the just in the money options. Hence it is not suitable for intraday trade.
Simple mathematical approach to choose a right strike for trade:
A. Go to the
www.nseindia.com
b. Click on the get quote under the future column
c. Get the quote for nifty
d. In the bottom find the daily volatility
e. For 12th january it was 1.04
f. 11th closing price was 5256.10 as per the volatility principle explained by me in the article trade in nifty future intraday for making sure profit.
G. The high to low range will be 54.66 for the day.
H. Hence i will see nifty at 5310 or at 5201 for 12th january 2011.
I. Hence 5200 and 5300 strike options either call or put is important for me as a trader. For intraday trading point of view.
J. The midpoint of 5310 and 5201 is 5255.50 will decide the trend. Price above 5255.50 will scale maximum till 5310 and below 5255.50 will scale till 5201 under this volatility condition.
When to trade in options and when not to trader in options for intraday?
As per the above discussion i will have maximum price range 54.66 for intraday.
1. If current high, low difference is less than 27.33(54.66/2) point then time has not come for trading in the chosen strike options.
2. If the current price is above 5310 or below 5200 then strike chosen by me to trade in options is not correct.
3. If current opening is above 5255.50 but below 5310 then good time to trade in 5300 ce option
4. If current price is below 5255 but above 5201 good time to trade in 5200 put option
5. If the current price is above the 1.618% growth retracement level of last settlements high and low then do not trade in call options for intraday.( to know why 1.618 revisit the fibonacci principle)
6. If the current price is below the 1.618% decay retracement level of last settlements high and low then do not trade in put options for intraday.( to know why 1.618 revisit the fibonacci principle)
how to use binomial option calculator?
Now i have following information
i will do intraday trade only in 5200 or 5300 strike call or put option.
Nifty has a chance to go up to 5310 or to 5201
price above 5255.50 trends is in favor of the buyer
price below 5255.50 trends is in favor of the sellers.
Price range set for the day based on volatility is approximately 54.66 points
i need to calculate the trend confirmation point: Just use the price point 5255.50 in the binomial option calculator it will give you the buying entry point and selling entry point.
I will buy 5200 call option if nifty cross above 5270.30(0.272 % retracement from 5255.5 to 5310) and buy 5300 put option if nifty fall below 5240.70 (0.272 % fibonacci retracement drawn from 5255.5 to 5201)
why so? Since it is the option which is just becoming deep in the money it will have less time value component.
Now i need 3 things.
1. Price of 5200 call option at 5270.30 (this is my entry price)
2. Price of 5200 call option at 5240.70 (this is my stop loss)
3. Price of my call option at 5310(this my maximum target)
similarly i need the 3 things for the put option.
1. Price of 5300 put option at 5240.70 (this is my entry price)
2. Price of 5300 put option at 5270.30 (this is my stop loss)
3. Price of my put option at 5201(this my maximum target)
now i will use the following information in the binomial option calculator:
Current price is mid point 5255.50,
strike price 5200
i will input the current option premium (this will be used to calculate the actual volatility in the option and actual volatility will be used to calculated the target and stop loss for the option) 105 when nifty was trading at 5250 on 12th january 2009.
I will choose the call option.
In volatility field i will entry any positive number >50. (this will be used only once for reference to calculate the actual volatility). I have entered 50
days till expiry will be the number of calendar days. I have entered 17
it has given me the following out put ( i have got 5267.70 and 5243.30 since i am using the gann angle proportion instead of the fibonacci proportion. However gann proportion is more accurate as compared to the fibonacci proportion)
buy 5200 ce at 111 when nifty will be at 5267.70 for target 119@5180, 127@ 5293, 144@5316. Since i know nifty in upside can scale to 5310 i will keep my final target below 144. Stop loss for the call option is 88
now keeping all other information as same i will change the strike to 5300 and will select 5300 put option. This too has given us the information buy 5300 pe at 111 when nifty will be 5243.30 for target 118 @5231-125@5219-139@5195. Since i know nifty may scale max till 5200 i will keep my final target below 139. Stop loss will be 92 for this entry.
Currently both strike options at 105 and nifty is at 5250. I will wait for my entry to come in order to initiate the position.
From the above i know to buy nifty 5200 ca at 111 for target 144 stop loss 88 and 5300 pe for target 139 and stop loss 92.
If you wish to buy 2 call and 1 put then your maximum profit at 5310 will be (144-111)x100-(111-80)x50=1750
max loss (111-80) x100+ (139-111) x50= 1700 at 5200 level.
By simulating other option strategy with different strike one can make wonderful money using this calculator.
Other benefit of this binomial option calculator:
13th january: Intraday volatility 1.03. Previous day close 5208.90. Hence price range set for the day is 55.26. Upside target are 5264.10, down side target 5153.64. Mid point is 5209. 5200 call and 5200 put will be best choice. Since nifty has less chance to go to 5100 or 5300. At that time nifty was at 5190.
I have used current price as 5209, strike as 5200, selected call option, entered the call premium as 86.
I have been advised to buy 5200 ce at 93 @5221, stop loss 74 @ 5196.75 target 100 at 5233, 106 at 5245,121 at 5269.
I have been advised to buy 5200 pe at 96 @5196, stop loss 80 @ 5221 target 101 at 5184, 107 at 5173 and 119 at 5149.
Since the current price of 5200 ce and 5200 pe are 86 and 90 respectively 5190 this says it is mispriced. As per the calculation call option must trade below 74 and put must above 96. Hence buying 2 put and 1 call at this moment is advisable. .
Hence binomial option calculator of smart finance will also inform you the miss pricing of the option.
