Why Theta is important for Option Traders?

Why Theta is important for Option Traders?

Options Theta is one of the important options Greeks and it can be used to help you predict how the prices of options change in relation to various factors. The theta value is the Greek which indicates how the price of an option changes as the expiration date gets closer and closer.

How Theta is helpful for option traders?

Neutral Strategies

Theta is especially important for traders who use trading strategies for a neutral market, because those strategies are typically used to profit from the effects of time decay. When employing these strategies, it is critical that the overall theta value of your … Read the rest

Advice for Option traders for success?

First Advice:

Plan your trade and trade your plan. Nifty Market preys on peoples’ fear and greed, and these two emotions can be detrimental to your portfolio. With flexibility, it is easy to change your mind or strategy, and then you end up chasing the market constantly.

Second piece of advice?

Diversify your options portfolio into different strategies. Option trading is a business and it needs to be treated as such. When creating a stock portfolio, it is important to diversify. There are times in the market when it makes sense to buy options and there are times when selling options is a better decision. Become a buyer and seller of options depending on market conditions.

… Read the rest

How to plan a Bear Call Spread? When to plan Bear Call Spread?

How to plan a Bear Call Spread? When to plan Bear Call Spread?

For Example, say SBICARD is going to give some back in the short term with some of the uncertainty surrounding the release of various card regulations/interest rates and some profit takings. On the technical side, the 20 day MACD is diverging to the down side and RSI is indicating an overbought condition.
We had some technical indicators and some fundamental uncertainty we thought would lead skittish traders to take some profits off the table. The Commit Criteria is short, sweet and it made sense. Little did we know at the time but this was a turning point for SBICARD and it is off about 20% since this … Read the rest

Option Buyer or Seller ? What makes things work?

Option Buyer or Seller ? What makes things work?

Option buyer

Why would a trader elect to take the risk the money on buying options or selling options for premiums.

The main Greeks that work against Option buyer is Theta / Time Decay.

Next comes with owning negative-Gamma positions. For the option owner to earn a profit, the underlying stock must move in three ways.

Move in the right direction (up for calls, down for puts)
Move quickly to prevent the loss of too much money to Theta (time decay)
Move far enough to overcome the cost of buying the option
That is a lot of movement and most traders have a difficult time predicting market direction without a time … Read the rest

Options Cheatsheet with Greeks

Options Cheatsheet with Greeks

Option basics explained

1. Open Interest

  • How many options exist in totality.

2. Implied Volatility

  1. Represents the expected volatility of the price of the stock.
  2. Used as a proxy of market risks.
  3. Increases when bearish, declines when bullish.
  4. Directly proportional to the demand of the asset, time left for option expiry.

Option Volatility Vs Stock/Index Valuation for picking strategies

  1. When valuation is under priced than there is scope of price coming up by buying.
  2. When valuation is Fair priced than there is scope of price coming to a range bound.
  3. When valuation is Over than there is scope of price coming down by selling.

Above compared to Volatility or IV we can plan strategies

For example

… Read the rest

Option Strategies – Bear Call Spread

Spreads versus naked positions

Most professional options traders prefer initiating a spread strategy versus taking on naked option positions. There is no doubt that spreads tend to shrink the overall profitability (max profits), but at the same time spreads give you a greater visibility on risk (max loss).

Always remember “Professional traders value ‘risk visibility’ more than the profits.”

It’s a much better deal to take on smaller profits as long as you know what would be your maximum loss under worst case scenarios.

Another interesting aspect of spreads is that invariably there is some sort of financing involved, wherein the purchase of an option is funded by the sale of another option. In fact, financing is one of the … Read the rest

Option Strategies – Bear Put Spread

Options Strategies – Bear Put Spread

Spreads versus naked positions

Most professional options traders prefer initiating a spread strategy versus taking on naked option positions. There is no doubt that spreads tend to shrink the overall profitability (max profits), but at the same time spreads give you a greater visibility on risk (max loss).

Always remember “Professional traders value ‘risk visibility’ more than the profits.”

It’s a much better deal to take on smaller profits as long as you know what would be your maximum loss under worst case scenarios.

Another interesting aspect of spreads is that invariably there is some sort of financing involved, wherein the purchase of an option is funded by the sale of another option. In … Read the rest

Option Strategies – Bull Call Spread

Spreads versus naked positions

Most professional options traders prefer initiating a spread strategy versus taking on naked option positions. There is no doubt that spreads tend to shrink the overall profitability (max profits), but at the same time spreads give you a greater visibility on risk (max loss).

Always remember “Professional traders value ‘risk visibility’ more than the profits.”

It’s a much better deal to take on smaller profits as long as you know what would be your maximum loss under worst case scenarios.

Another interesting aspect of spreads is that invariably there is some sort of financing involved, wherein the purchase of an option is funded by the sale of another option. In fact, financing is one of the … Read the rest

Option Strategies – Bull Put Spread

Options Strategies – Bull Put Spread

Spreads versus naked positions

Most professional options traders prefer initiating a spread strategy versus taking on naked option positions. There is no doubt that spreads tend to shrink the overall profitability (max profits), but at the same time spreads give you a greater visibility on risk (max loss).

Always remember “Professional traders value ‘risk visibility’ more than the profits.”

It’s a much better deal to take on smaller profits as long as you know what would be your maximum loss under worst case scenarios.

Another interesting aspect of spreads is that invariably there is some sort of financing involved, wherein the purchase of an option is funded by the sale of another option. In … Read the rest

What is short strangle? Why so famous?

What is short strangle? Why so famous?

Short strangle is very famous for nifty and secondly banknifty. It Involves selling options at two points at a distance from Spot Price.

How to select our selling strike price in our strangle?

1. Go for technical analysis and draw resistance/vah(value are high) and support/val(value are low)

Sell strikes at these support and resistance drawn.

 

2.  Go for monthly chart and draw high and low, now draw last few weeks high and low. Now select points of support and resistance using the high and low’s

 

3. Option chain analysis to figure out the sellers perspective of highest OI(active contracts) and change in OI(market participants) ande volume for liquidity.

Now select the … Read the rest