NIFTY Options trade : Why and what-if...

[adityasaraf007]

@Linkon Sir....

You gave that example of Shorting ITM Put around known support...... We can also go Long on Call...... Is it just because of Time Decay or something else...

And, does Time Decay play any factor for an Intraday Options player... And as so many Strike Prices create a confusion, I am planning to trade the ones which are trading between 60-100.... Is it good enough for a beginner?

@Dan Sir....

Thank you for that post..... As far as Strategies are concerned Long Strangle after a good consolidation is my favourite...... About Greeks, I know the meaning of them and know how to use Delta while Trading.... But have little exposure to the use of other Greeks while trading

Regards

 

[linkon7]

@Linkon Sir....

You gave that example of Shorting ITM Put around known support...... We can also go Long on Call...... Is it just because of Time Decay or something else...

And, does Time Decay play any factor for an Intraday Options player... And as so many Strike Prices create a confusion, I am planning to trade the ones which are trading between 60-100.... Is it good enough for a beginner?


Regards

we first define our assumptions.

Assumption is, a known support or resistance will hold unless market proves otherwise. When price is approaching a known support, we want to want to imitate longs

we can :
1. Buy Futures
2. Buy call
3. Short put

First 2 action has no exit route. We make money if our assumption is proven right or we book minor loss.

In the case market decides to go flat around this level, buying futures will have an edge as call buyers will suffer from decay. You'll notice plenty of times when futures made a new high while call didn't break its previous high. Simple reason is, sentiments change drastically as the session progresses.

On Friday, when market was spending more time below the 5200 mark, those call buyers who believed 5170 will hold start loosing their aggressiveness. Plus week end effect kicked in. Defensive players start shorting calls.

The order flow on the buy side in call was not as aggressive and most likely, call buyer didnt gain much even if they got the direction right.

Option buyers need to get the distance and time and momentum right.

Option sellers has time on their side. When u short 5000 put at 36-37, you are playing a probability that market wont fall 4% from current lvl in the remaining 9 sessions. Option buyer is paying u that premium assuming market will fall more that 4% in the next 9 sessions.

Options premium have a habit of stretching and contracting intraday...! So when we short puts, when price is approaching a known support, we can get in near the stretch mark which might not be tested even if futures come near that low again.

On the down side, VIX plays havoc and puts tend to rise faster and once a support seems to hold, it falls faster....!

Our primary objective is to preserve capital and secondary objective is capital appreciation, All trades have equal chance of hitting stop loss no matter how strong the signal. We have to respect the market, every options trade needs a clear exit plan.

I am a defensive player and i'll opt for shorting options. My reward will be small. An aggressive player will take more risk and gain will be far more...!

 

[adityasaraf007]

we first define our assumptions.

Assumption is, a known support or resistance will hold unless market proves otherwise. When price is approaching a known support, we want to want to imitate longs

we can :
1. Buy Futures
2. Buy call
3. Short put

First 2 action has no exit route. We make money if our assumption is proven right or we book minor loss.

Why do the first 2 actions have no exit route....
1. As after shorting Put if Market breaks the Support, you suggested to Short Futures....
2. Similarly, if we Buy Futures and market starts falling, then we may Buy Put or Short Call....
3. And if we Buy Call and market starts falling, we may Short Futures...

In the case market decides to go flat around this level, buying futures will have an edge as call buyers will suffer from decay. You'll notice plenty of times when futures made a new high while call didn't break its previous high. Simple reason is, sentiments change drastically as the session progresses.

On Friday, when market was spending more time below the 5200 mark, those call buyers who believed 5170 will hold start loosing their aggressiveness. Plus week end effect kicked in. Defensive players start shorting calls.

The order flow on the buy side in call was not as aggressive and most likely, call buyer didnt gain much even if they got the direction right.

Option buyers need to get the distance and time and momentum right.

Option sellers has time on their side. When u short 5000 put at 36-37, you are playing a probability that market wont fall 4% from current lvl in the remaining 9 sessions. Option buyer is paying u that premium assuming market will fall more that 4% in the next 9 sessions.

Options premium have a habit of stretching and contracting intraday...! So when we short puts, when price is approaching a known support, we can get in near the stretch mark which might not be tested even if futures come near that low again.

On the down side, VIX plays havoc and puts tend to rise faster and once a support seems to hold, it falls faster....!

Our primary objective is to preserve capital and secondary objective is capital appreciation, All trades have equal chance of hitting stop loss no matter how strong the signal. We have to respect the market, every options trade needs a clear exit plan.

I am a defensive player and i'll opt for shorting options. My reward will be small. An aggressive player will take more risk and gain will be far more...!

Option Seller is a defensive player ... I have always heard the opposite ..... Anyways, I am a little confused about the risk.... How is it less for Option Seller..... Only Time is in his favour....

Look within quotes

 

[DanPickUp]

In a nut shell:

Support and volatility is to combine. ( Option Greeks - Vega )

Market falls to support = Vega goes up

Vega goes up = Price of options go up

As market falls to support = Puts are getting more expensive and calls are losing through lower volatility and getting more out of the money.

If you now sell around support, your put is sold with high volatility and has a higher value and at the moment market starts to turn up, volatility will fall and your expensive sold put is already cheaper and this different between the high volatility moment and lower volatility moment is already your profit.

But it is not as easy to trade as it sounds. .

 

[linkon7]

when price approaches support... we can do either of the 3 scenario with the same assumption that the support will hold.

If i am agressive, i'll buy the future but here my risk controller is my stop loss. If the support does break, then there is no way to recover my loss other than to initiate a reverse trade and HOPE that same support acts as a supply zone. Key here is, Its pure directional call. No buying puts or selling call is going to help me recover unless market obliges on the down side.

If i buy calls, i will get in at its lower stretch mark. So first bounce should be my exit for half and then balance needs to be hedged with what ever i feel prudent. But incase it does break the support, then call will fall faster as order flow on the call will be highly bearish. You'll have option sellers initiating a sell on it and call buyers who are trapped trying to exit at any price...! the sudden increase in momentum on down side cannot be compensated by initiating another leg. Incase you sell futures, then you'll need a greater distance on the down side for you to recover your losses. Plus if market decides to go sideways, then you'll take a hit...!

But my objective when i am proven wrong by the market is to recover my losses. I am not playing for gains. If market decides to go sideways, then i have more chance of recovery with short put that long call...!

 

[adityasaraf007]

Thank you Linkon Sir.... Now everything looks clear....

But a few queries:
1. Is Time Decay a factor during Intraday... Specially on Fridays
2. What do you consider for Time Value.... No. of Days Remaining till maturity or No. of Trading Days remaining till maturity
3. Because of so many Strike Prices.... I am thinking of taking the trades in Options which trade between 60-100...... Is it good enough for a beginner in Options

Regards

 

[manoharpillai]

Do not trade on option after 15th of that month may give some safety if trade taken on the next month

 

[trader.trends]

Do not trade on option after 15th of that month may give some safety if trade taken on the next month

Manohar, that statement is so general in nature. After the 15th the price of option drops down as we near expiry. If you can build your strategy correctly, then the risk reward ratio is much better.

There is absolutely no right/wrong time to trade options. It can be even traded on the day of expiry as long as the RR is in your favor and your system/strategy gives the signal to trade.

 

[linkon7]

Do not trade on option after 15th of that month may give some safety if trade taken on the next month

that is the silliest reason ever not to trade options....!

market prices in everything...! Each option is priced on its probability of getting ITM by the same participants who drive the market...!

 

[DanPickUp]

Here is a prove that you can use options very well with a very short life time:

I made this screen shot in the past as I make from all more complicated trades screen shots.

This is called a calendar condor.

On the right side, you see how many days to expiry ( 9 days ).

One thing you have to consider is always the implied volatility. It is not so dangerous as it may some times sounds. Just be sure you understand what you do.

Take care

DanPickUp

Edit:

If you Google for this strategy you will find some infos. But compare every thing you find there with this trade and you will recognize: All this trades shown in Google have long time options ! But this trade has short time options and this is not shown any where in any link or what ever you will find in the net. Why?

They are all implemented as one trade and not through leg in.

Hope you recognize the value of leg in to any option strategies.

And by the way: I am not trader Dan, which is Mr. Dan Sheridan from the United States and wants to sell his stuff.

I am DanPickUp from Switzerland.