Nifty: Daily Price Analysis

[simple_trader]

These are my views and analysis for next a few days of the new series (5-6 days). Do not have much change with my last view though.

- Over all I think NIFTY has more up side (5500-5550 range) and if it has to fall, we have not seen any price action which suggests we are headed for bigger for as yet. Seems to be more of price consolidation.

- 5300 PUT has highest OI and NF gap, hence proper support is at 5300 for now.

- Over all PUTs are adding more OI than calls, confirming some bullishness.

- However, I guess after long time, in this series PUTs are not over priced. This should be some point interesting for option buyer.

- Better not to be heavily long for this (possible) last up move. It can always reverse from some level, but it is to be patient for shorting.

Happy Trading

 

[PGDIMES]

These are my views and analysis for next a few days of the new series (5-6 days). Do not have much change with my last view though.

- Over all I think NIFTY has more up side (5500-5550 range) and if it has to fall, we have not seen any price action which suggests we are headed for bigger for as yet. Seems to be more of price consolidation.

- 5300 PUT has highest OI and NF gap, hence proper support is at 5300 for now.

- Over all PUTs are adding more OI than calls, confirming some bullishness.

- However, I guess after long time, in this series PUTs are not over priced. This should be some point interesting for option buyer.

- Better not to be heavily long for this (possible) last up move. It can always reverse from some level, but it is to be patient for shorting.

Happy Trading

Hi Simple Trader,

How can you determine whether an option is overpriced? Is it based in B-S model, binomial model, premium or something else?

 

[simple_trader]

Hi Simple Trader,

How can you determine whether an option is overpriced? Is it based in B-S model, binomial model, premium or something else?

Hi PGDIMES,

I have said based on current month PUT and CALL premium comparison and current month and last a few months PUT premium comparison ( I am an illiterate in conventional TAs, so do not know which method it is )

Happy trading!

 

[DanPickUp]

Hi PGDIMES

""How can you determine whether an option is overpriced? Is it based in B-S model, binomial model, premium or something else?""


IMV is one answer. I will go here a little bit more into details.

When looking to buy or sell single options, one must look for value as with any purchase.

Two main gauges are used to value options: mathematical pricing formulas (namely, the black scholes formula) and implied volatility.

Simpler methods of measuring options prices include dividing an at the money option by the underlying price getting a percentage. The higher the percentage, the more overpriced the option is.

The most commonly used method to value options is the Black Scholes Options Valuation formula developed in the seventies.

The valuation requires the following: Underlying Price, option strike price, option premium, historical volatility, expiration date, interest rate, and dividend rate.

Based on these inputs, you can get a value for any option in an underlying's chain. Next, you would compare the black scholes value to the actual options premiums. The greater black scholes price is in relation to the actual price, the more overpriced the option.

The second method used to value options is Implied volatility. Implied volatility is the volatility in the black scholes equation if you use the actual options price as the black scholes valuation.

Basically, you would enter in the actual options price into the black scholes formula and algebraically solve for volatility.

The higher the implied volatility, the more overpriced the options are.

Some of the good option software programs will show you the Implied Vola.

Here two examples. One to find out the most overpriced option and one to find out the most underpriced option.

http://img831.imageshack.us/img831/9901/93757302.png

http://img838.imageshack.us/img838/6071/96910564.png

Take care and have a nice weekend

DanPickUp

 

[PGDIMES]

Hi PGDIMES

""How can you determine whether an option is overpriced? Is it based in B-S model, binomial model, premium or something else?""


IMV is one answer. I will go here a little bit more into details.

When looking to buy or sell single options, one must look for value as with any purchase.

Two main gauges are used to value options: mathematical pricing formulas (namely, the black scholes formula) and implied volatility.

Simpler methods of measuring options prices include dividing an at the money option by the underlying price getting a percentage. The higher the percentage, the more overpriced the option is.

The most commonly used method to value options is the Black Scholes Options Valuation formula developed in the seventies.

The valuation requires the following: Underlying Price, option strike price,
option premium, historical volatility, expiration date, interest rate, and dividend rate.

Based on these inputs, you can get a value for any option in an underlying's chain. Next, you would compare the black scholes value to the actual options premiums. The greater black scholes price is in relation to the
actual price, the more overpriced the option.

The second method used to value options is Implied volatility. Implied volatility is the volatility in the black scholes equation if you use the actual options price as the black scholes valuation.

Basically, you would enter in the actual options price into the black scholes formula and algebraically solve for volatility.

The higher the implied volatility, the more overpriced the options are.

Some of the good option software programs will show you the Implied Vola.

Here two examples. One to find out the most overpriced option and one to find out the most underpriced option.

http://img831.imageshack.us/img831/9901/93757302.png

http://img838.imageshack.us/img838/6071/96910564.png

Take care and have a nice weekend

DanPickUp

Hi DanPickUp,

Thanks for the nice explanation. But as far as I know, B-S models only hold good for the European options. All the American options will be shown overpriced by these models and hence the need of something like Binomial models or other newly developed ones.

 

[DanPickUp]

Hi DanPickUp,

Thanks for the nice explanation. But as far as I know, B-S models only hold good for the European options. All the American options will be shown overpriced by these models and hence the need of something like Binomial models or other newly developed ones.

Hi PGDIMES

The Cox-Ross-Rubinstein-Model, also known as Binomial model, is simpler to use as the black and scholes formula. You also can input the smooth pasting conditions, to calculate your options.

PGDIMES, I do not know, what you do. You may have to program a software or what ever. You then should read or know about the math of financial derivatives. If you want to go in the deepness of that stuff, here it goes: http://www.scribd.com/doc/10055859/Finance-The-Mathematics-of-Financial-Derivatives.

I trade American Style options on the 30 year US treasury bond. If I go for over and under priced options I only have a quick look at the Implied Volatility which is shown in OpVue6. Very simple and very quick.

Take care

DanPickUp

 

[simple_trader]

These are my views and analysis for next a few days of the new series (5-6 days). Do not have much change with my last view though.

- Over all I think NIFTY has more up side (5500-5550 range) and if it has to fall, we have not seen any price action which suggests we are headed for bigger for as yet. Seems to be more of price consolidation.

- 5300 PUT has highest OI and NF gap, hence proper support is at 5300 for now.

- Over all PUTs are adding more OI than calls, confirming some bullishness.

- However, I guess after long time, in this series PUTs are not over priced. This should be some point interesting for option buyer.

- Better not to be heavily long for this (possible) last up move. It can always reverse from some level, but it is to be patient for shorting.

Happy Trading

Just one point to add here - if we open as per SGX NF today and if we manage to trade above 5400 NF whole day today, then I think NF will touch 5500 this week. In anyone carries long, can maintain some trailing SL and watch a bit how things develop.

Happy trading!

 

[rrmhatre72]

Just one point to add here - if we open as per SGX NF today and if we manage to trade above 5400 NF whole day today, then I think NF will touch 5500 this week. In anyone carries long, can maintain some trailing SL and watch a bit how things develop.

Happy trading!

What is ideal stoploss as per you?

 

[simple_trader]

What is ideal stoploss as per you?

This will be something dynamic and depending on market situation, we need to review it continuously. If I say xyz level, it may not work for you. Broadly NF maintains above 5400 is a good sign for the up move. But remember, as per me this would be last up swing, hence maintain lesser quantity longs in index.

Happy Trading!

 

[SwingKing]

Agree with you ST.

Another 50 -60 points move from this point looks very much possible. But beyond that, things would only get clear as time progresses. Such is the predicament of the market. Ironically, this is also something traders enjoy the most.

Tc