NIFTY Options Trading by RAJ
- Thread starter healthraj
- Start date
- Tags nifty options chain raj oat
@Dan,
First of all thanks for writing. Please do not have any second thoughts about your comments/suggestions. I will always take it the right sense. The only way we will learn more is with the help of selfless Experts like you.
Coming to the Strategy
- First of all the Tool is not able to dedect a Reversal.
- So if the VOLT is Low and Direction is Bearish, then it suggests a SELL ATM Call. When the VOLT is low(and assuming it will go further down), the SELL will give more profit than buying a PUT.
- If the VOLT is High and Direction is Bearish, then it would have suggested a Bear Spread - SELL ATM Put + Buy OTM Put.
- One more important thing why I always want to Sell is so that indirectly I will not be able to take more position and so that my risk is also Low.
- As suggested by you, If we go Long we can buy more quantities and so my risk also will be high. So I am consciously avoiding this out of Fear... May be I will have to get out this slowly when my confidence goes up.
May be the problem is also on the logic of calculating the Volatility. Correct me If my logic is wrong. I take historic Volatility from the NIFTY Futures which is at 21.3%.(I will use this to find out if the VOLT is high or low). The average IV for PE @ 18.32. The Average IV for CE @ 17.32. Since both the IVs are smaller than the HVOLT, the tool concludes the VOLT as low.
First of all thanks for writing. Please do not have any second thoughts about your comments/suggestions. I will always take it the right sense. The only way we will learn more is with the help of selfless Experts like you.
Coming to the Strategy
- First of all the Tool is not able to dedect a Reversal.
- So if the VOLT is Low and Direction is Bearish, then it suggests a SELL ATM Call. When the VOLT is low(and assuming it will go further down), the SELL will give more profit than buying a PUT.
- If the VOLT is High and Direction is Bearish, then it would have suggested a Bear Spread - SELL ATM Put + Buy OTM Put.
- One more important thing why I always want to Sell is so that indirectly I will not be able to take more position and so that my risk is also Low.
- As suggested by you, If we go Long we can buy more quantities and so my risk also will be high. So I am consciously avoiding this out of Fear... May be I will have to get out this slowly when my confidence goes up.
May be the problem is also on the logic of calculating the Volatility. Correct me If my logic is wrong. I take historic Volatility from the NIFTY Futures which is at 21.3%.(I will use this to find out if the VOLT is high or low). The average IV for PE @ 18.32. The Average IV for CE @ 17.32. Since both the IVs are smaller than the HVOLT, the tool concludes the VOLT as low.
@Healthraj
Thanks for your detailed answer.
Here some more numbers to the used margin. The concept is even used for smaller option traders account with Think or Swim broker. The second point is about your bear spread and the third point is the IV on options.
- Margins: Shorting options will block 25'000 in your account. That money not works. On the other hand: Going long will cost you under 250, depending what option you take (otm, atm, itm / this months series, next month series). Looking at the possible reward we get with the long position and the money which is blocked and looking at the possible reward we get with the short position and the blocked money, it favors long.
Looking at it from that perspective, the reward you will get in the long run on the short positions in your market with that margin rules looks far worse compare to the longs, as you always have huge amount of money blocked you could work with.
Lets assume you take 10 longs with 250, you then have invested 2'500 = blocked money or margin or just the money you have to bring on the table to pay them. No further money needed. This is still only 10% from 25'000 which is blocked for one position. If you now could make 250 with that one position or 250 with the 10 position, what would be your answer (readers of this post)compare to the blocked money? Each persons choice, but surely worth a deep thought.
- An other point to spot on: If the VOLT is High and Direction is Bearish, then it would have suggested a Bear Spread - SELL ATM Put + Buy OTM Put. Why? Market down and high vola = Sell atm call and buy otm call. That at least is for me the right spread in that situation. But as always: Personal choice.
- About calculating vola. I think you do fine with that. Puts have in some markets under certain conditions a higher IV compare to calls and in other markets the calls have always a higher IV compare to puts. Have posted about the subject in the thread of Columbus. And that is why option trading is not random. Put takers (if short or long) in Nifty take at the moment a slightly higher risk, but have a slightly higher reward for that.
Take care / DanPickUp
Thanks for your detailed answer.
Here some more numbers to the used margin. The concept is even used for smaller option traders account with Think or Swim broker. The second point is about your bear spread and the third point is the IV on options. - Margins: Shorting options will block 25'000 in your account. That money not works. On the other hand: Going long will cost you under 250, depending what option you take (otm, atm, itm / this months series, next month series). Looking at the possible reward we get with the long position and the money which is blocked and looking at the possible reward we get with the short position and the blocked money, it favors long.
Looking at it from that perspective, the reward you will get in the long run on the short positions in your market with that margin rules looks far worse compare to the longs, as you always have huge amount of money blocked you could work with.
Lets assume you take 10 longs with 250, you then have invested 2'500 = blocked money or margin or just the money you have to bring on the table to pay them. No further money needed. This is still only 10% from 25'000 which is blocked for one position. If you now could make 250 with that one position or 250 with the 10 position, what would be your answer (readers of this post)compare to the blocked money? Each persons choice, but surely worth a deep thought.
- An other point to spot on: If the VOLT is High and Direction is Bearish, then it would have suggested a Bear Spread - SELL ATM Put + Buy OTM Put. Why? Market down and high vola = Sell atm call and buy otm call. That at least is for me the right spread in that situation. But as always: Personal choice.
- About calculating vola. I think you do fine with that. Puts have in some markets under certain conditions a higher IV compare to calls and in other markets the calls have always a higher IV compare to puts. Have posted about the subject in the thread of Columbus. And that is why option trading is not random. Put takers (if short or long) in Nifty take at the moment a slightly higher risk, but have a slightly higher reward for that.
Take care / DanPickUp
@Healthraj
Thanks for your detailed answer. Here some more numbers to the used margin. The concept is even used for smaller option traders account with Think or Swim broker. The second point is about your bear spread and the third point is the IV on options.
Looking at it from that perspective, the reward you will get in the long run on the short positions in your market with that margin rules looks far worse compare to the longs, as you always have huge amount of money blocked you could work with.
Take care / DanPickUp
Thanks for your detailed answer.
Here some more numbers to the used margin. The concept is even used for smaller option traders account with Think or Swim broker. The second point is about your bear spread and the third point is the IV on options. Looking at it from that perspective, the reward you will get in the long run on the short positions in your market with that margin rules looks far worse compare to the longs, as you always have huge amount of money blocked you could work with.
Take care / DanPickUp
But for the same reasons mentioned above, 80% of the time, nifty is in a range and by going with Max OI, you have a safety barrier which more or less remains unless something catastrophic happens and even with that you can come safely out with min stop loss.
So which is a more probabilistic trade.. taking the 80% route or 20% route?
Along with the max pain theory, we know that 90% of options loose their value, so would you be a buyer or a seller and eat the premiums?
Last edited:
@Option.Trader
Thanks for your input. A very interesting post, very informative and pro founded. As you trade the Indian market you surely know much about it in dept. No need for me to contradict your post.
Only thing left: Span Margin. That at least would be a way that your money still works when being blocked by the broker house.
Is "Span Margin" a topic in your broker houses?
DanPickUp
The Key Advantage of SPAN (http://www.investopedia.com/articles/optioninvestor/02/091802.asp)
The margining system used by the futures options exchanges provides a special advantage of allowing Treasury bills to be margined. Interest is earned on your performance bond (if in a T-bill) because the exchanges view Treasury bills as marginable instruments. These T-bills, however, do get a "hair cut" (a $25,000 T-bill is marginable to the value between $23,750 and $22,500, depending on the clearing house). Because of their liquidity and near-zero risk, T-bills are viewed as near-cash equivalents. Because of this margining capacity of T-bills, interest earnings can sometimes be quite sizable, which can pay for all or at least offset some of the transaction costs incurred during trading - a nice bonus for option writers.
SPAN itself offers one key advantage for option traders who combine calls and puts in writing strategies. Net option sellers can often receive favorable treatment. Here's an example of how you can acquire an edge. If you write a one-lot S&P 500 call credit spread, which has the near leg at about 15% out of the money with three months until expiry, you will get charged approximately $3,000-$4,000 in initial SPAN margin requirements. SPAN assesses total portfolio risk, so, when/if you add a put credit spread with an offsetting delta factor (i.e. the call spread is net short 0.06 and the put spread is net long 0.06), you generally are not charged more margin if the overall risk is not increased according to SPAN risk arrays.
Since SPAN is logically looking at the next day's worst-case directional move, one side's losses are largely offset by the other side's gains. It is never a perfect hedge, however, because rising volatility during an extreme limit move of the futures could hurt both sides, and a non-neutral gamma will change the delta factors. Nevertheless, the SPAN system basically does not double charge you for initial margin on this type of trade, which is known as a covered short strangle because one side's risk is mostly canceled by the other side's gains. This basically doubles your margin power. An equity or index option trader does not get this favorable treatment when operating with the same strategy.
Thanks for your input. A very interesting post, very informative and pro founded. As you trade the Indian market you surely know much about it in dept. No need for me to contradict your post.
Only thing left: Span Margin. That at least would be a way that your money still works when being blocked by the broker house.
Is "Span Margin" a topic in your broker houses?
DanPickUp
The Key Advantage of SPAN (http://www.investopedia.com/articles/optioninvestor/02/091802.asp)
The margining system used by the futures options exchanges provides a special advantage of allowing Treasury bills to be margined. Interest is earned on your performance bond (if in a T-bill) because the exchanges view Treasury bills as marginable instruments. These T-bills, however, do get a "hair cut" (a $25,000 T-bill is marginable to the value between $23,750 and $22,500, depending on the clearing house). Because of their liquidity and near-zero risk, T-bills are viewed as near-cash equivalents. Because of this margining capacity of T-bills, interest earnings can sometimes be quite sizable, which can pay for all or at least offset some of the transaction costs incurred during trading - a nice bonus for option writers.
SPAN itself offers one key advantage for option traders who combine calls and puts in writing strategies. Net option sellers can often receive favorable treatment. Here's an example of how you can acquire an edge. If you write a one-lot S&P 500 call credit spread, which has the near leg at about 15% out of the money with three months until expiry, you will get charged approximately $3,000-$4,000 in initial SPAN margin requirements. SPAN assesses total portfolio risk, so, when/if you add a put credit spread with an offsetting delta factor (i.e. the call spread is net short 0.06 and the put spread is net long 0.06), you generally are not charged more margin if the overall risk is not increased according to SPAN risk arrays.
Since SPAN is logically looking at the next day's worst-case directional move, one side's losses are largely offset by the other side's gains. It is never a perfect hedge, however, because rising volatility during an extreme limit move of the futures could hurt both sides, and a non-neutral gamma will change the delta factors. Nevertheless, the SPAN system basically does not double charge you for initial margin on this type of trade, which is known as a covered short strangle because one side's risk is mostly canceled by the other side's gains. This basically doubles your margin power. An equity or index option trader does not get this favorable treatment when operating with the same strategy.
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