NIFTY Options Trading by RAJ

[healthraj]

Rule 4: Does Volume in the Options Chain data play any role in our decision making?.

Yes. Use the Volume data to decide whether it is STRONG BULL or a STRONG BEAR.

Let us say at 6100 we have the MAX CHG in OI @ CE - Say 6L Postions
Let us say at 6000 we have the MAX CHG in OI @ PE - 11L Positions

Now 11L > 6L and PE > CE, so it is a BULL.
Now let us look the Volumes @ 6100CE and 6000PE

Volume @ 6100CE - 5.5L
Volume @ 6000PE - 17

Now compare the CHG in OI and Volume @ 6100CE.
Volume (5.5L) < 6L - So it is not a Strong BULL. Had the Volume been greater than the "CHG in OI" then it would have been a STRONG BULL.

And same logic for the STRONG BEAR also....

Another Observation : So go for Naked Long in CE/PE only when the Volume at the Strike Price > CHG in OI.

What if the Volume does not indicate like above?
Then most probably the market is Range bound.

This Rule is for those who want to Trade naked Options and what Strikes to Choose. The Rule is very simple. Choose the Strike where the Volume is Greater than COI. Make sure the Volume and COI is positive.

For Example if you look at 15-OCT-13 Data, you will notice that 5900 PE had two times volume than the 5900 PE COI. And when the market came down yesterday, 5900 PE would have given the MAX Profit. On the CE side 6200CE had 110% volume compared to COI and it would have given more profit compared to any other strike in terms of SELL.

So on 15-OCT-13, the ideal Candidate for BUY was 5900PE and the ideal candidate for SELL was 6200CE. So when there is not candidate with Volume greater than 100% of the COI, indicates that it is a FLAT market and it is better to avoid any naked options.

 

[healthraj]

Rule 5: Can we always go with this logic on the MAX(OI) and MAX(CHG in OI)?

NO. This might not work during the last week of Expiry when the Market makers are closing their positions. So during the last week of Expiry better to stay away from the market or Play the market using the Implied Volatility

This Rule is also Still valid because in the last week of Expiry normally the Reversal of the Positions happen. So better to avoid all the General rules on OI and COI on the last week or when there is a Major Reversal or When the market is Trading at the MAX OI @ CE or MAX OI @ PE.

 

[healthraj]

Rule 6: In the CHG in OI, what if we get Negative values? What signals does it give?

If we get the Negative values in "CE", that means Market makers (BEARS) are squaring off the Call Positions (The SHORT Positions). So heavy squaring off in CE is a BULLISH signal and we have to expect a BREAKOUT if there is a sudden spike in the squaring volume. There is a panic situation. Normally this will happen all of a sudden in say 10-20 minutes and we have to exit the Shorts immediately and can GO LONG.

It is the Vice versa if we get Huge Negative Values in "PE".

If we get Negative Values both in PE and CE, then blindly SELL the OI pair

Small negative values indicate the normal profit booking.

Yes this Rule is also Still valid. Negative Values indicates squaring Off and Reversal. Huge Values in Terms of Lakhs indicate a MAJOR Reversal. This normally happens when the market is Trading at the monthly RESISTANCE (MAX OI @ CE) or monthly SUPPORT (MAX OI @ PE).

 

[healthraj]

Rule 7: OK. For Intraday trading, based on the "CHG in OI" I got the Bullish or Bearish signal. Can I go and BUY the Options? How do I decide whether to BUY/SELL the option?.

Important and a Difficult question.

Unless if it is a Strong BULL or a STRONG BEAR, the Safe strategy would be to SELL the pair so that it is less risky. I mean if we get the Range as 5800PE and 6000CE. Then Sell 5800PE and 6000CE.

Rule 7B: No I don't want to do Pair Trading. I want to take more risk and do some naked Calls / Puts. How do I decide whether to BUY/SELL.

Use the Implied Volatility. I normally take the top (most traded) 5 Strikes and calculate the Average PE and CE volatility.

Also find out the Historic Volatility of the underlying Futures.

Let us take NIFTY and say we have

Historic Volatility HVOLT= 21.18% (Get it from the NSEindia.com - FOVOLT.csv)
Average PE VOLT - 18.78%.
Average CE VOLT - 19.4%.

So the observations are

PE VOLT < HVOLT - Low Volatile market
CE VOLT < HVOLT- Low Volatile market


So in a Low volatile market, and if the signal is Bullish, then instead of the Buying Calls, SELL the Puts and vice versa.

Note : I am still discovering and learning about the Volatility. So will give more details when it comes. But in summary, if the Volatility is Low, then it is a Buying market and if the Volatility is High it is a Selling market. Experts should be able to throw more light on volatility

Rule 1 to 6 are more general Rules. Now comes the most important Rule. With all these Rules we have to now take a position. The possible options we have are

Naked Options
Debit Spreads
Credit Spreads

I will put down my experience on the above. So use these more as an observation and not as a Rule because I am still learning.

For Naked Options and Debit Spreads we want the VOLT to increase or Stay ASIS but we definitely don't want the VOLT to come down which will hurt our positions. From My experience the VOLT increases when the Market goes down and the VOLT Decreases when the Market goes UP. VOLT is also a function of INDIAVIX. So you can use VIX and VOLT interchangeably.

So General Rule would be

- Go for Debit Spreads when you feel that the market is on DOWN TREND
- Go for Credit Spreads when you feel that the Market is on an UP TREND

So the basic assumption is on the VOLT. Now in a REAL BULLISH market, VOLT can Go UP also. Now somebody can say that Market has moved from 5100 to 6100. Will you not call it a BULL market. The answer from my point of view is NO, it is not a BULLISH market.

After all these rules, We have to finally Take a call on where the market will Go. UP or DOWN. The second thing is we also need to have an idea on Where the VOLT will go, UP or DOWN. So a combination of Market Trend and VOLT should help take the Debit Spread or Credit Spread.

VOLT UP + MARKET UP = Debit Spread = REAL BULLISH Market
VOLT UP + MARKET DOWN = Debit Spread = REAL BEARISH Market
VOLT DOWN + MARKET UP = Credit Spread = REVERSAL
VOLT DOWN + MARKET DOWN = Credit Spread = REVERSAL

So you can see that finally it is a GAME OF VOLT and we end UP predicting the VOLT

JULY-13 - Market was going UP - VOLT was flat and so Credit Spreads were profitbale
AUG-13 - Market was going DOWN - VOLT was going UP - Debit Spreads would have been profitable
SEP-13 - Market was going UP - VOLT was going DOWN - Credit Spreads would have been more profitable
OCT-13 - So far Market is going UP - VOLT is coming down - Credit spreads would have been profitable.

One more important data you have to observe is that the INDIAVIX normally is in the Range of 20-25 for the majority of the time and where all our General Rules would be successful.

 

[healthraj]

Rule 8: Respect the Strike Price where the MAX Pain is situated

The Strike where the MAX Pain is like the Centre of Gravity. So especially during the Expiry the market will try to move and will try to expire around the MAX Pain. So in the last week of expiry one should avoid any OTM call around the MAX Pain because the OTM calls around the MAX Pain will expire worthless.

For Example in Jul13 Expiry the MAX Pain on 22-Jul-13 is at 6000. So any 6100, 6200,... Calls will expire at Zero value. Similarly for 5900PE, 5800Pe, etc,,,

This rule is also still valid

 

[healthraj]

Trading in Options - My change in understanding compared to JUL-13

One obvious thing which I may be overstated and overemphasized was the Credit Spreads. I was always for Credit Spreads because it worked very well in JUL-13 and which gave good Results in JUL-13, when the VOLT was FLAT and market was Going UP (Once again not a REAL BULL).

So that is one thing I want to Take back. Credit Spreads do not work always and I also lost heavily in AUG-13 using Credit Spreads. Basically I had overlooked the VOLT and its influence on Options.

So at the end of the Day we have to be find out whether to go for Debit Spreads or Credit Spreads. I am still confused whether to go for Debit Spread or Credit Spread because it is not something to do with the Direction of the market but a function of VOLT.

To give you an Idea on AVG VOLT (I do not have the exact figures)
JUL-13 - AVG VOLT was normal around 22%. Even NIFTY HISTORIC VOLT was around 22%
AUG-13 - VOLT jumped to 50% - where we should have ideally gone for Debit Spreads.
SEP-13 - VOLT was still High around 30% but it started coming down from 50% - So Credit Spreads should have worked
OCT-13 - Came back to normal levels of 22%.

I am not talking about Naked options because that I would only suggest as a Positional trade for a week or month.

So those who are Trading with Options, you should first have view of where the VIX or VOLT is heading and correspondingly Take the Credit or Debit Spreads

 

[healthraj]

Summary of the Rules

So All the Rules are Still valid. The important point is that we did not have a Rule for VOLT or for other important Option Greeks. So we should have a Rule for at least for VOLT.

So the Rule number 9 would be on VOLT

Rule 9: If you perceive that the VOLT will go down, then go for Credit Spreads. If you feel that the VOLT will go UP, then for Debit spreads. While choosing the Credit Spreads always choose the OTM strikes. While choosing the strikes for Debit Spreads, Always go for ITM or ATM strikes.



To put the Rules in a different way, When you see that the VOLT is HIGH then go for Credit Spreads expecting the VOLT to come down and when you see the VOLT is LOW, then go for Debit Spreads expecting the VOLT to go UP. Not AN EASY THING TO PREDICT Right. YES THAT IS THE MOST DIFFICULT JOB and THAT IS WHERE MOST OF THE TECHNIQUE LIES

The important catch is how to predict whether the VOLT will go UP or DOWN or Stay FLAT. Unfortunately in the Options Chain I do not see any Traces for VOLT Trend. So we have to use the INDIAVIX and see the Trend and Trade based on that.

You must also seen some of my understanding of the VOLT and how it worked during the Results days continuously for INFOSYS.

ANYWAY Rest assured that if you keep mastering these Techniques, then one day when the market returns to Normalcy then these rules will work.

One more hard lesson is that NIFTY VOLT of 50% is a once in 5 year opportunity. So the next time if you get NIFTY VOLT going UP beyond 30% then close your eyes and go for DEBIT SPREADS.

Disclaimer: By understanding all the 9 rules, can we say that one can start trading in Options? The answer is NO. It is just some basics and good place to Start Options. The idea of the Rules was not to explain or understand the Options and do Options trading. The idea was to understand the Options Chain table. I repeat that I am in no way trying to Teach options. I am only trying to understand on how to read the Options Chain table. There is a lot of difference between understanding Options and understanding Options Chain table. And the 9 rules very much summarizes the Options Chain table and how to Read and interpret Options Chain. Trading in Options is completely different game, Which I am also learning. If people want to disagree or correct any of the Rules, then please your are most welcome. Because I also want to know, correct and learn. End of the day I have put in the public domain my understanding of the Options Chain with a Great colorful tool and I very much use the same tool. I don't have some other secret tool NOR I am an operator trying to manipulate people.

 

[healthraj]

Price Action Trading - YTC

Thanks to AVNY (Master one trick only). Avny has a thread on the Price Action Trading and daily Explains with charts. So thanks to Avny, I came across the YTC by LANCE BEGGS (Yourtradingcoach dot com). I happen to view some of the Youtube.com videos on YTC. So those who want to learn Price Action Trading, I think the YTC is a good place to learn. There are different names to the same technique. Similar techniques are our SAINT's FLOW method, 123 Wave, Elliot wave Or other Wave methods. But the edge with YTC is handling the Breakouts and the positive Expectancy he creates in your mind to "Trust the Trend".

Most probably I think I will go and invest in the materials and would be able to Automate the YTC approach.

Once again thanks to Avny. I started going through the youtube Videos.

 

[singlap]

Thanks Raj for revisiting the rules created by you. In fact, I am following your posts from last few days and had not seen those rules , earlier. When and where I had doubts, I raised them and sincere thanks to you for replying to those doubts .

I am trading in option strategies from many years and i found the rules created by you ,very useful and they go very well with the perceptions, any experienced trader have about OI , volatility & volumes.

I really appreciate the time & effort spent by you in not only documenting all these things but also sharing them in public domain.:clapping:

Looking forward for more posts/observations from you.

Regards.

 

[ss16021981]

sir i m getting some problem in oat sheet
my option chain data is not getting refresh i m adding image see in below i have mark it

and for comfermnation i have added another image

in this fut price is change but option data is same