Stocks To Keep A Close Eye On

[rajeabc]

Sirji ,

Which broker you use most frequently ? And which one you will reco.

Thanks

 

[enygma]

EO (sorry if that sounded like Tusshar Kapoor in Golmaal ... ),

The way I look at things (maybe option experts can comment on how far from the truth I am) is as follow ...

Premium value = Intrinsic value + "Zing" factor

Intrinsic value is the std definition - how much in the money the option is right now. It is 0 for out of money options.

"Zing" factor is simply the probability of this option being ITM anytime before expiry.
Now this probability has many of the variables you listed out but the main ones are
- The measured volatility of the stock/index. This implies how much it typically "travels" in a day.
- The measured volatility prevailing currently in the market as a whole. This is available on NSE called India VIX. This take cares of factors like events coming like RBI announcements, the fear factor etc.
- How far off the strike price is from the current price
- The current "acceleration" of the price towards the strike price.

Now assuming these variables dont change, the socalled "time value" or "zing" factor of an option is a function of days to expiry. The extra premium you are paying besides the intrinsic value divided by number of trading days to expiry should give you the "time decay".

Take our favourite SBI 2800 call. It closed around 61. It is not yet ITM but nearly there. So intrinsic value is 0. If the stock price stays around the current closing, you can expect it to decay by 61/9 (around 6.75) the next day. (9 trading days remaining). This is my very simplistic approach to time decay.

The things to consider are

- "Acceleration" towards the strike price is a very important consideration for just OTM calls. You are almost always better off dumping options during a price surge. I dumped this SBI call at 67 during the first surge after the RBI announcement. The option price peaked out at 68 that time, the news settled and then the stock retraced and again made another run. This time the option price peaked out at around 72. For intraday players, the end of these surges are good place to dump options.

- I like to divide by trading days since I think anyway everyone knows about trading holidays. The theoretical calculators may treat this differently.

- Theory tells that options decay at the speed of square root of time remaining. Hence the decay will be faster as we come closer to expiry, it will not be constant at 61/9 in the above example.

- Keep a watch on India VIX. Buying options when it is very high (above 23 or so in the recent year or so) may mean that we are paying very high price because of the market conditions and if the news that the market is awaiting comes (whether it be good or bad) , the volatility will dampen off.

Finally, if you really want to get into calculating option greeks, then Option Oracle is a pretty good software. The "theta" calculated by that software is the "time decay" in theory. But hoping we get our hands on SG's Excel soon.

All the resident option experts, please correct me !

Regards,
E.

My question is: how do I corelate all (or some) of these variables (please point out if I missed something), so as to calculate the Time Decay on fly in order to safely figure out my exit point?

 

[beegee]

EO (sorry if that sounded like Tusshar Kapoor in Golmaal ... ),

The way I look at things (maybe option experts can comment on how far from the truth I am) is as follow ...

Premium value = Intrinsic value + "Zing" factor....

Many thanks Mr E. As a total newbie, what I understand (most still went over head because of option terms etc) is that those who want to sell options will look to have time (fewer days till expiry) as well as volatility(high volatility so more cost) in their favour while those who buy would look to have larger time (more days) as well as lower volatility to play with.

Am I thinking right ??

Best,
B.G Maxine

 

[enygma]

Yes, you are right :clap:

Many thanks Mr E. As a total newbie, what I understand (most still went over head because of option terms etc) is that those who want to sell options will look to have time (fewer days till expiry) as well as volatility(high volatility so more cost) in their favour while those who buy would look to have larger time (more days) as well as lower volatility to play with.

Am I thinking right ??

Best,
B.G Maxine

 

[amit_15]

Mr E,

This is another great post from you full of practical information. I had a few questions.

a) If we assume that a particular option like SBIN will decay by 6.75 tomorrow, does this mean that it will happen first thing in the morning(when markets open) or will this decay be slowly seen during the trading day?

b) During which hour are markets generally more volatile? Is there a specific time period during the day (like 9.15-10AM) during which we should avoid buying options because of high volatility. Similarly, during which time period is volatility low?

Thanks.

Amit.

Take our favourite SBI 2800 call. It closed around 61. It is not yet ITM but nearly there. So intrinsic value is 0. If the stock price stays around the current closing, you can expect it to decay by 61/9 (around 6.75) the next day. (9 trading days remaining). This is my very simplistic approach to time decay.
.

 

[MurAtt]

Mr E,

This is another great post from you full of practical information. I had a few questions.

a) If we assume that a particular option like SBIN will decay by 6.75 tomorrow, does this mean that it will happen first thing in the morning(when markets open) or will this decay be slowly seen during the trading day?

b) During which hour are markets generally more volatile? Is there a specific time period during the day (like 9.15-10AM) during which we should avoid buying options because of high volatility. Similarly, during which time period is volatility low?

Thanks.

Amit.

Depends ...
a. if stock opens lower .. expect the drop at open as well as more reduction bcoz of distance from strike price
b. if stock opens higher .. you may simply have the same price ... then from thereon .. price movement will dictate premium
BUT REMEMBER
upwards movement ... premium will be like climbing a vertical wall
downwards ... premium will be like falling over a vertical wall

Money is made in selling options towards expiry BUT its a risky affair in the sense that our markets now have a wide trading range .. selling far range (not deep) OTM is much safer but less paying

Selling OTM at weekends is much much safer

 

[SavantGarde]

There is no better way to learn than to Practice with real money with calculated risk parameters...

If one is frozen stiff about 'Writing' aka Selling aka Shorting Option... good practice considering where we are poised at the moment in the market...would be Writing NF 6200 PE JUNE 2011 CMP is 535.05

I know a lot of folks would raise eyebrows on this naked Shorting of a Strike.... Counter Safety Net.... doesn't Kick in Yet...

There are many who would rather take on a hedged position immediately.... but that is not How I do things.....but then I have never done things the way it is meant to be in the real world......

Happy & Safer Trading

SavantGarde

 

[prst]

there is little difference.. Sirji , perform when team need him..Sachin when he needs record ..(Now please don't jump on me )

disagree with sachin point..
He is the GOD of cricket

 

[MurAtt]

disagree with sachin point..
He is the GOD of cricket

BUT it is generally seen, statistically (other than exceptions AND I am not accusing) that when he performs .. team lost ...

Not that he is not GOD of cricket .. yes he is Class & Style personified ...



Also note that in India .. it is custom that GODS (as in higher rankings and not to be taken literally ) are the most corrupt (politicians, elite business class, higher middle business class, babus, govt officials, corporate higher rankings and sometimes even lower rankings ... ) and I have experienced and know 1st hand abt these people in general ... via personal experience, friends' experience etc.

BUT sometimes WE ourselves are promoting it by giving bribes to complete our work faster .. without questions etc ... though I disapprove of this BUT majority of the times it cannot be done without this and 'we the people' have no option but to opt for this practice ...

When will this filth called corruption get filtered

 

[SavantGarde]

Where is all this discussion leading to comparing me to Sachin....I have said before my benchmark is my higher self...thats it...

If you guys have no better things to discuss...then troll around in the Chit chat thread

SavantGarde

PS: All posts on this discussion will be deleted in 30 minutes