NIFTY Futures Mechanical Trading

[nadodav]

NIFTY FUTURE For February 8,

Current position : NIL

Nifty Fut Closed at : 5100.00

Net Profit / (Loss) since thread started : +926

Support : 5082
Resistance : 5268

All new members visiting first time are requested to read all messages start from first one before going ahead.

Happy Trading.

Vinod

 

[marcus]

marcus, can you elaborate on these ITM Options/Delta near one as I completely don't understand options. Or may be point to a resource where I can help myself.

tks
nitesh

sure i can nitesh this forum is all about sharing from one another and growing together,see its best you read a book but I try to tell u briefly. You know that an option is a derivative as its value is derived from an underlying asset, in this case the nifty. So if the nifty goes up by a point how much would price of nifty option go up by? Would it also go up by a point? Well not necessarily it depends on what we call the value of the greeks. The greeks are so called coz they are mathematical characteristics of the Black Sholes option pricing model named after greek alphabets which the represent in the equation. They are ratio's which measure the sensitivity of the price of the option with respect to 5 factors, the change in price of underlying asset (delta), change in volatility (wega), time to expiration (theta), risk free interest rate (rho), and rate of change of delta (gamma)

The greek which affects the price of the option the most is delta, u can also define it as a ratio (no units) the change in price of the option for a change of one unit in price of the underlying asset. Delta varies from 0 to 1, if its 0 then for a change in one point of the asset there will be no change in the option price and if its 1 for a change of 1 point in the asset the option price wi change by 1. Its imp to note delta isn't constant it also changes with option price and that is determined by gamma. Delta also represents the probability of the option expiring ITM. So an option with delta 1 has 100% chance of not wxpiring worthless, option with delta 0.5 has 50% chance and delta 0 has 0% chance of not expiring worthless. So now you know what deta is (this is only very brief ok)

Options have 3 basic states ITM/ATM(this is only theoretical practical ATM is very rare)/OTM. In the money means the option price has intrinsic value, it will not expire worthless you can exercise it at expiration to buy the asset at a price lower than the prevailing market price or sell the asset at a price higher than the prevailing market price. So by definition ITM call options have strike price below prevailing market price, (in prder to have intrinsix value) ATM has same strike and CMP, and OTM call option has strike price above CMP. So this explains ITM concept.

Lastly ur question of why ITM and delta near 1. This actually is not necessary, but I said it for simplicity sake only. You can also buy ATM or OTM option what you have to do is calculate the delta of your futures position and buy an equal but opp delta option quantity. For eg if total delta is say +5 then you can buy 10 ATM options of delta (0.5*10) or if you like 25 OTM option of delta (0.2*25), the basic idea it to delta neutral hedge. But if you do this gamma also come into play and changes delta. Gamma is max for ATM options (delta 0.5) and decreases to 0 as the option becomes deeper ITM or farther OTM. So to make Gamma 0 we have either far OTM option or deep ITM option. So its best to buy ITM option as gamma is zero and delta is naer 1 its simple and no need for laborious calculation. It also has its drawbacks like being expensive and having least % profit but we are hedging and not interested in profit.

Hope this helps somewhat

 

[nadodav]

NIFTY FUTURE For February 11,

Current position : NIL

Nifty Fut Closed at : 5090.15

Net Profit / (Loss) since thread started : +926

Support : 5040
Resistance : 5169

All new members visiting first time are requested to read all messages start from first one before going ahead.

Happy Trading.

Vinod

 

[jayeshvd]

Thank You Very Much

 

[zeekid]

Thanks a lot marcus....sure it helped!

but, can I ask for more? marcus, can you explain with a practical example of how we (vinod) cud have protected the erosion of abt 200+ pts. in nifty on Feb 7? You hv also mentioned :

purchasing in the money option of delta near one at the close of each day and close your position on the first half an hour of trading to protect your profits

and, what wud be the cost of this (i.e. hedging with the help of options?

And, I do hope Vinod does not mind, as I am using his thread for different subject (but related).

Nitesh

 

[ravalsb]

This is out of the scope of Mechanical Trading as it might be suitable for one of such cases, but cannot be applied as a rule for all trades that we take.

Marcus, can options stragety be incorporated in mechanical trading by rule of thumb. If yes, then only its worth the effort.

Regards

 

[tulika]

how about writing an option along with ????/

 

[niksan]

Thanks a lot nadodav!

please continue this Nifty mechanical recos.

 

[marcus]

Thanks a lot marcus....sure it helped!

but, can I ask for more? marcus, can you explain with a practical example of how we (vinod) cud have protected the erosion of abt 200+ pts. in nifty on Feb 7? You hv also mentioned :
and, what wud be the cost of this (i.e. hedging with the help of options?

And, I do hope Vinod does not mind, as I am using his thread for different subject (but related).

Nitesh

nitesh i am not able to follow the question you said erosion of 200 points profit on feb 7 but Vinay didn't take any position on feb7 there has been no claculation for feb 7 and he hasn't given any profit or loss at the end of the day he has decided not to enter a trade and stay out of the markets, do you mean feb 6th? can you clarify

 

[marcus]

This is out of the scope of Mechanical Trading as it might be suitable for one of such cases, but cannot be applied as a rule for all trades that we take.

Marcus, can options stragety be incorporated in mechanical trading by rule of thumb. If yes, then only its worth the effort.

Regards

I don't believe hedging is out of the scope of mechanical trading but this is my personal opinion, see it depends on your trading philosophy, my philosophy may be different from Nadodav, Vinod may believe it is better not to hedge against gaps as gaps can be profitable or detrimental and maybe in his experience in the past they have proved to be more profitable than detremental, only he can tell us that.

I believe one should follow the rule in trading which states conservation of capital and never let a profitable trade turn into a losing trade. The reason I believe this is because I first came across it in Elders book and then when I read the three market wizards book the only thing I found all the wizards agreed on was never letting a winning trade turn into a loss (this is different from setting an initial stop), they disagreed on everything else, techniques, analysis, theories et. I found all good systems do not have more than a 25% drawdown at the maximum this is rare generally they are well within 20%. If one studies the effects of drawdown one will understand why. Seeing the time, effort and dedication Nadodav has put into his system it is it is saddening to see him lose 50% of his profits. So its my personal opinion that it is better to hedge atleast against gaps, so what if we loose the chance to make more, atleast we protect what we have, and he has made a reasonable amount in a short period of time. All we have to do is buy an option just before close and sell it next morning and this will protect us from gaps which have so far proved more detremental than profitable.