some copy paste on options
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SYSTEM DEVELOPMENT HINT
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market condition trend UP or DOWN........use simple 2 MA cut ,5/20 very good
market condition TRADEZONE........use stockastic/%r
market condition volatile......USE EOD break out/ momentum scanner...... play for intra day.........dont worry on confirmed direction bias ..If u r not earning , then simply this market volatility/unpredictiveness DONT SUIT U.GET OUT FROM MARKET,join only at low volatility directional break.(i have studied/prepared about 2yr for this condition , in other market actual simulated past data , in a software OMNITRADER, where u can hIde data of right side/predict bar by bar & can see /compare vs. price actual blossoming)
CAUTIONARY NOTE:
any personal disturbance /other priority .......dont trade.
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TO solve it ,i am giving 2 variables....market condition and trade set up.
Third where u fit , u should do yourself.
Market condition : 1] slowly up moving.......see 50dma uptrend, buy and hold easiest to play.normally country economic condition upswing
2] After continous upmove for some yr, media hype straight line index projection,analyst suggests 3yr projection ,forward looking p/e ,big enterpreneur r confident of capex and plans growth rate geometrically, WHILE economy moneyflow sustainability NOT possible,bear market starts.......shrewd traders join short in intermediate term downtrend.
Tool...10dma rapidly cuts down 100dma .
3] Market is rational , fluctuate within range, ......small target swing traders earn heavily,,,,
TREND is your friend... TREND TRADER goes back to market as snake oil vendor and teach the fools 'buy low sell high' ; ta ' dcf, cagr, They sell ...once upon a time....but fact is THEY dont suit in PRESENT market.
4 ] Market is efficient ........haha...present market,
a suffiently knowledgable -flexible with objective mind can earn here.HE knows to programme but takes trade what he likes, a strong filter .may be advance/decline signal & moneyflow .
By the way......market reversal at pivot a major right set up bias for intra day candidate.
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2]TRADE SET UP
a] flow with trend ....as per ur suitable tactics, see HIGHER HIGH in price
b] a pre determined reversal pt , confirmed by reversal bar
c] break out of certain narrow range, supported by 2 x av traded volume
d] unsustainable parabolic rise , so distribution started with higher sell volume..........short candidate
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scanner - pattern seach - volatilty study .........this r extra, basically confidence build up measure.
HOPE it helps to right initiation
Just for a thought
...........A stock in a persistent downtrend is providing a feedback signal that investors overlook when they go bargain hunting among stocks. The downward trend in price indicates that the majority of participants in that stock are voting negatively about the stock. They believe that the future financial performance of the company is, or will be, in decline.
Sophisticated investors are always looking to the future and their expectations about the fundamental performance of the company will shape their decisions to buy or sell the stock. The major holders of a stock and the other members of the inner circle know what the downtrend is forecasting. The members of the inner circle surrounding the market for the stock are more knowledgeable about the company and its financial performance and they are probably more sophisticated investors. The belief that the market is efficient and that all participants in that stock get the same information at the same time and correctly evaluate that information, just does not hold up in the real world. The sophisticated investor knows that the major trend of the stock price is very important. He tends to rely on the signals generated by the major trend of the stock price in the market. He is always alert for indications that the trend may be changing direction or strength.
It is especially important to consider how the financial media tends to reinforce the feedback loop. A stock that is going down in price will call forth explanations for the decline by the media because the media knows that their users want to know why the decline is taking place. These explanations may be delivered as established fact when they are nothing more than educated guesses.
Experience shows that downward price trends are usually more dramatic and volatile than the up trends. It is also true that both up trends and downtrends are the result of a random process. This does not diminish the value of watching the price trends of a stock. A stock’s price trend is actually a summation of the votes by buyers and sellers. In order to get the true meaning of the major trend it, is necessary to dump out the short-term noise in stock prices.
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what price is telling
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Price low.........telling to buy; price high telling to sell. Problem is howmuch high is too high..........so far momentum exist,greed exists.......price shall move up.So study momentum at TOP ,to guess right side of chart.
FOR low,........unless HOPE is coming, low shall go down to further low,Saucer formation is Important.
If u know valuation, valuation + sentiment = price, Problem starts with future growth .........believe me after studying 4yr on this financial model, ithink .........its gimick to get job of analyst, to prepare buy side report.So far one is NOT in industry........his value of assumption is O.Its just like 8 yr old girl telling on childbirth & pregnency.with the same data, with similar model they spoonfeed to calculate.........with O knowledge on Enterpreneurship, comments BUSINEES HOUSE,without understanding........most business strategy r hidden from public eye. In the language of Auditor,..........its the transfer of money...decides the result/statement .........not vice versa.Corporate moral is a bookish word..........have u seen comment on phonetapping?
Its luck...........our work ethic is good,........a man Raunak.........thinks Right..........and spread knowledge.
So use all ur judgement ;......what price is telling ? simple MA 1week tells a lot.Trend VS random factor
Pl use 2MA...........suddenly u may get a BIAS,............u can decipher 3 candle.........further visibility.In top or bottom search for change.........and its probability,........in between.........only for momentum.PL use only this much for price.
Price also suggest...........presently greed driven or not.
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So u have to see tick chart-real time-see nifty future current month.
Any std trading platform have it.
Do anybody know reversal coming ? ..........only after seeing 2 bear fall on screen .......one can feel the pain at the start of bear move,..........so similar conditioning 3rd time onwards one can play based on hindrance.
Yes its not available in any trading books/not even in spl bear market course for pro by Hedge fund trainer.
...........so next time onwards take trade against your feeling , its probably big winner.
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Role of media
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Media normally we consider for INFO.............is basically a tool for marketing in finance industry.Normal gullible people dont understand abc of finance...........so get attracted by it on its AD,sometimes after being cheated ..........create bloc against it.
IN marketing technique...........interest has to be hyped also repeated.............after sometime,..........those who READ,..........may make believed by it......A powder can not change ur colour,a shampoo can make a little outshine to hair,.........all knows it,it is the food + natural color.........MORE IMP.
ALL CINE STARS,use wiggs /make up...........as per requirement of role,.............but fashion may be created.........by hype .........and young boys & girls(read NOVICE/FAN) may follow it ....Director/make up decides casting/role play.Role demand as fix....... make up, looking original. Similarly ur thorough knowledge on market may only TRAIN u to understand..........what is HYPE , by financial media.
Another case, not understanding NEWS...In normal news , is info of past considering current affairs, but in gossip.............of a company buy back, take over, a new product successfully tested.............now to be launched...ibasically NEWS.
So in rumor state.........if u could get,.........decipher it, based on your experience with higher chance of happening is REFER as NEWS,
Since stock market forward looking,..........thats why RESULT is meaningless,.........but forward guidance is NEWS.
Since operators /MF makes money out of new comers MISTAKE, heavily advertise before SELL......all things look excellent future..............READ forward earning of 3yr.
AND similarly when they BUY....suggest market is too risky,............U should WATCH and WAIT(they tell in media)......actually let me complete my buy)Many a times CEO also join in them by lure of making easy money ......and cycle goes on as if eternal truth.
So form part of system- around market top.....excessive hype by media,........ pl sell PORTFOLIO.
Businessline /Business std...........certain publish better economic report and ET sometimes write company sp RUMOR.
TV channels........r worst type,.............infact very easily opp. direction play is possible ,if u have RIGHT skill of execution.
Unfortunately in INDIA ,most technical analyst coming in MEDIA , are not passed CMT,(they r hype type- get paid for it) so ethics dont apply to them(quacks). We create hulla-bulla in media for........forgy DOCTORS/ pilots/food adultration...........but not against TA/media hype,.........and operators use them as per game plan.
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A simple search of 3%up + double volume.............search shall give u 2% candidate for next day.........
A known resistance pt, last higher top........coinsidence with bear -engulf by candlestick..........a good candidate for short.
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Most imp thing in market..........for you ....its U. nobody else.
Question first What u want from Market,..........what u want in life.........
Next.........how much Priority u give to learn to trade....... initially it should be100%..
Slowly when baby trader is born....allow it survive.........with min FRICTION with other part of LIFE/dream.Slowly it must grow as per your COMFORT level,
A routine schedule....to search for oppurtunity,.....a Time to relax, stress free....
......A time to write Tradelog.......analysis ..........Discipline to isolate u-the newborn trader..........from others .
To stop distraction.....use of shield must be practiced.
Actual trading ie. execution should be LESS ...Follow ACE...
Analyze .....Confirm by price.......Execute .......
Be independent.........that is natural structure in YOU,....its a solo game.
Be keen observent,.....react with deadly accuracy. Understand probability and least risk concept,.........get out of media hype.
do u ask anyone for market condition,what to do now..............DONT TRADE
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What are options?
An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date).
The underlying may be equity stocks/ stock index.
Important Terminology
Underlying - The specific security / asset on which an options contract is based.
Option Premium - This is the price paid by the buyer to the seller to acquire the right to buy or sell
Strike Price or Exercise Price - The strike or exercise price of an option is the specified/ pre-determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day.
Expiration date - The date on which the option expires is known as Expiration Date. On Expiration date, either the option is exercised or it expires worthless.Normally last Thursday of a month.
Exercise Date - is the date on which the option is actually exercised. In case of European Options the exercise date is same as the expiration date .
Open Interest - The total number of options contracts outstanding in the market at any given point of time.
Option Holder: is the one who buys an option which can be a call or a put option. He enjoys the right to buy or sell the underlying asset at a specified price on or before specified time.On theory , His upside potential is unlimited while losses are limited to the Premium paid by him to the option writer.
Actually in a month(due to poor liquidity)- a particular amount move is possible.
Option seller/ writer: is the one who is obligated to buy (in case of Put option) or to sell (in case of call option), the underlying asset in case the buyer of the option decides to exercise his option. His profits are limited to the premium received from the buyer while his downside is unlimited.(Actually because of less life the move against him is practically limited)
Option Series: An option series consists of all the options of a given class with the same expiration date and strike price.
What is Assignment?
When the holder of an option exercises his right to buy/ sell, a randomly selected option seller is assigned the obligation to honor the underlying contract, and this process is termed as Assignment.
What are European Style of options?
The European kind of option is the one which can be exercised by the buyer on the expiration day only & not anytime before that.But like stock its tradable.
What are Call Options?
A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.
The seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.
Example: An investor buys One European call option on Infosys at the strike price of Rs. 3500 at a premium of Rs. 100. If the market price of Infosys on the day of expiry is more than Rs. 3500, the option will be exercised.
The investor will earn profits once the share price crosses Rs. 3600 (Strike Price + Premium i.e. 3500+100).
Suppose stock price is Rs. 3800, the option will be exercised and the investor will buy 1 share of Infosys from the seller of the option at Rs 3500 and sell it in the market at Rs 3800 making a profit of Rs. 200 { (Spot price - Strike price) - Premium}.
In another scenario, if at the time of expiry stock price falls below Rs. 3500 say suppose it touches Rs. 3000, the buyer of the call option will choose not to exercise his option. In this case the investor loses the premium (Rs 100), paid which shall be the profit earned by the seller of the call option.
What are Put Options?
A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date.
The seller of the put option (one who is short Put) however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell.
Example: An investor buys one European Put option on Reliance at the strike price of Rs. 900/-, at a premium of Rs. 25/-. If the market price of Reliance, on the day of expiry is less than Rs. 900, the option can be exercised as it is 'in the money'.
The investor's Break even point is Rs. 875/ (Strike Price - premium paid) i.e., investor will earn profits if the market falls below 875.
In another scenario, if at the time of expiry, market price of Reliance is Rs 920/ - , the buyer of the Put option will choose not to exercise his option to sell . In this case the investor loses the premium paid (i.e Rs 25/-), which shall be the profit earned by the seller of the Put option.
How are options different from futures?
The significant differences in Futures and Options are as under:
Futures are agreements/contracts to buy or sell specified quantity of the underlying assets at a price agreed upon by the buyer and seller, on or before a specified time. Both the buyer and seller are obligated to buy/sell the underlying asset.
In case of options the buyer enjoys the right and not the obligation, to buy or sell the underlying asset.
Futures Contracts have symmetric risk profile for both buyers as well as sellers, whereas options have asymmetric risk profile.
In case of Options, for a buyer (or holder of the option), the downside is limited to the premium (option price) he has paid while the profits may be unlimited.
For a seller or writer of an option, however, the downside is unlimited while profits are limited to the premium he has received from the buyer.
The futures contracts prices are affected mainly by the prices of the underlying asset.
Prices of options are however, affected by prices of the underlying asset, time remaining for expiry of the contract and volatility of the underlying asset.
It costs nothing to enter into a futures contract whereas there is a cost of entering into an options contract, termed as Premium.
Moneyness of an option can be Explained in 3 terms- In the Money, At the Money and Out of the money Options.
An option is said to be 'at-the-money', when the option's strike price is equal to the underlying asset price. This is true for both puts and calls.
A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. For example, a nifty call option with strike of 6900 is 'in-the-money', when the spot nifty is at 7100 as the call option has value.
The call holder has the right to buy nfty at 6900, no matter how much the spot market price has risen. And with the current price at 7100, a profit of 200/- can be made by selling at this higher price.
On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of Sensex call option, if the Sensex falls to 6700, the call option no longer has positive exercise value. The call holder will not exercise the option to buy nifty at 6900 when the current price is at 6700. He rather loses premium.
A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, a nifty put at strike of 7400 is in-the-money when the nifty is at 7100. When this is the case, the put option has value because the put holder can sell the nifty at 7400, an amount greater than the current Sensex of 7100.
Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. the buyer of put option won't exercise the option and allow to lose premium.
Options are said to be deep in-the-money (or deep out-of-the-money) if the exercise price is at significant variance with the underlying asset price.
What are Covered and Naked Calls?
A call option position that is covered by an opposite position in the underlying instrument (for example shares, futures etc), is called a covered call.
Writing covered calls involves writing call options when the shares that might have to be delivered (if option holder exercises his right to buy), are already owned.
On theory, A writer writes a call on Reliance and at the same time holds shares of Reliance so that if the call is exercised by the buyer, he can deliver the stock.
Covered calls are far less risky than naked calls (where there is no opposite position in the underlying), since the worst that can happen is that the investor is required(may think alike) to sell shares already owned at below their market value.
What is the Intrinsic Value of an option?
The intrinsic value of an option is defined as the amount by which an option is in-the-money, on the immediate exercise value of the option .
For a call option: Intrinsic Value = Spot Price - Strike Price
For a put option: Intrinsic Value = Strike Price - Spot Price
The intrinsic value of an option must be a positive number or 0. It cannot be negative
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Explain Time Value with reference to Options.
Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative.
What are the factors that affect the value of an option (premium)?
There are two types of factors that affect the value of the option premium:
Quantifiable Factors:
underlying stock price,
the strike price of the option,
the volatility of the underlying stock,
the time to expiration and;
the risk free interest rate.
Non-Quantifiable Factors :
Market participants' varying estimates of the underlying asset's future volatility
Individuals' varying estimates of future performance of the underlying asset, based on fundamental or technical analysis
The effect of supply & demand- both in the options marketplace and in the market for the underlying asset
The "depth" of the market for that option - the number of transactions and the contract's trading volume on any given day.
Explain the Option Greeks?
These Option Greeks are:
Delta: is the option Greek that measures the estimated change in option premium/price for a change in the price of the underlying.
Gamma: measures the estimated change in the Delta of an option for a change in the price of the underlying
Vega : measures estimated change in the option price for a change in the volatility of the underlying.
Theta: measures the estimated change in the option price for a change in the time to option expiry.
Rho: measures the estimated change in the option price for a change in the risk free interest rates.
What is an Option Calculator?
An option calculator is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying and its volatility, time to expiry, risk free interest rate etc.
It also helps the user to understand how a change in any one of the factors or more, will affect the option price.
Why do I invest in Options? What do options offer me?
Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one's investment strategy dictates.
Some of the benefits of Options are as under:
High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value.
known maximum risk for an option buyer
Large profit potential and limited risk for option buyer
One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.
How can I use options?
If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity.
The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish).
If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value (premium paid).
Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential.
Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect with limited risk.
Individual investors might wish to capitalize on market opinions (bullish, bearish or neutral) by acting on their views of the broad market or one of its many sectors.
The more sophisticated market professionals might find the variety of index option contracts excellent tools for enhancing market timing decisions and adjusting asset mixes for asset allocation.
Investors of equity stock options will enjoy more leverage than their counterparts who invest in the underlying stock market itself in form of greater exposure by paying a small amount as premium.
Investors can also use options in specific stocks to hedge their holding positions in the underlying (i.e. long in the stock itself), by buying a Protective Put. Thus they will insure their portfolio of equity stocks by paying premium.
What are the risks involved for an options buyer?
The risk/ loss of an option buyer is limited to the premium that he has paid,the buyer of the option will pay premium to the options writer in cash at the time of entering into the contract.
How can an option writer take care of his risk?
Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets
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1] option can be used for leverage
2]option can be used for hedge
3] complicated ( mathematical)option can be used for arbitrage (due to greed value of option reached a unsustainable value- typical optiontrading software r used to find return)
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At resistance holding , for reversal trade ,we can simply underwrite call, also we can buy PUT , if we find high probability of price reversal.
similarly At support breaking , for breakdown trade ,we can simply play with put option.At support holding ,we can simply underwrite put.
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However before doing anything following steps r must , say BUY CALL.
♣ Buy Call -Break Even Analysis
♣ Buy Call - Risk & Return
♣ Buy Call - Entry & Exit
♣ Sell Call - Payoff & Graph
yes without doing this not do even a paper trade.
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Similarly all 4 case , buy put/call or underwrite put/call to be seen at appropriate level , when high probability exists.
Next u add , interpretation of open interest & VIX.
Remember basic:Bullish option strategy-Buy a Call=Strongest bullish option position.
Loss limited to premium paid.
Sell a Put =Neutral bullish option position.
Profit limited to premium received.
Bearish option market trading strategy-Buy a Put =Strongest bearish option position.
Loss limited to premium paid.
Sell a Call =Neutral bearish option position.
Profit limited to premium received.
