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Vertical spreads

What is probability and how it works in Stock Market?

Probability theory:

A field of mathematics concerned with the examination of random processes is known as probability theory. A random event’s outcome cannot be predicted before it occurs, although it could be any of multiple possibilities. The final result is said to be dictated by chance.

Now how does that apply to stock market?

A Stock/index has three probibilities that is

  1. it can go up that is increase
  2. it can go down that is decrease
  3. it can remain around same price

So, there is 33.33% probability of a event above happening.

Now, how does this apply to stock/index options?

Call option and put option have 33.33% of success, so that is very clear to anyone.

Stock remaining around same price … Read the rest

Why do options buyers fail? Why naked buying is so hard?

Why do options buyers fail? Why naked buying is so hard?

 

Main villain for option buying / buyers is theta/time decay. It is much higher on weekly options compared to monthly Options. Even on weekly options it’s higher towards weekend/ Thursday comes closer that is expiry.

 

How to overcome the hurdles for naked Option buying?

Option strategies are best for reducing the affect of theta / time decay. Here you buy one option at a strike price and sell another at another strike price. Here greeks cancel each other.

So effectively it is defined by fixed profit vs fixed loss mostly by vertical spreads available. There are some strategies with unlimited profits or losses but they are used … Read the rest

Checklist for Option trading for Nifty BankNifty

Checklist for Option trading for Nifty BankNifty

1.Check Sensibull for Option chain data for major Resistance and Support

Below you can see more big red bars compared to green bars. The red bars on Call side(left side) are various resistances formed. From sellers perspective Calls selling has more OI which means Sellers are betting than index is not going up tomorrow beyond these resistances which are 17100,17200,17300 and 17500. They are also strong on markets not falling beyond 16500 support.

https://web.sensibull.com/option-chain/?expiry=2021-12-30&tradingsymbol=NIFTY

Checklist for Option trading for Nifty BankNifty 6

 

 

2. Check for Option chain data on NSE Site for PCR Ratio

https://www.nseindia.com/option-chain

Check PCR Ratio in Nifty option chain on weekly expiry

Checklist for Option trading for Nifty BankNifty 5

 

Checklist for Option trading for Nifty BankNifty 4

In above pcr ratio is 12,79,526/14,70,186= 0.87 which is below 1 slightly which … Read the rest

Limited Risk Option trading strategies

What are the most used limited Risk Option Strategies ?

Below are the Limited Risk Option trading strategies with links for most famous ones of all on Quick Hack.

Limited Risk Option Strategy Cheat Sheet
Option Strategy
Price Outlook
Volatility Outlook
Profit Potential
Risk
Long Calls(Naked Call Buy)
 Bullish Rising Unlimited Limited
Long Puts(Naked Put Buy)
 Bearish Rising Unlimited Limited
Protective Put
 Bullish Stable Unlimited Limited
Bull Put Spread
 Bullish Rising Limited Limited
Bear call Spread
 Bearish Falling Limited Limited
Bull Call Spread
 Bullish Rising Limited Limited
Bear Put  Spread
 Bearish Falling Limited Limited
Iron Condors Neutral Falling Limited Limited
Iron Butterfly Spreads Neutral Falling Limited Limited
Calendar Spreads
 Neutral Rising Limited Limited
Double Calendars
 Neutral Rising Limited Limited
Long
… Read the rest

Secret of Weekly Option Strategy?

Secret of Weekly Option Strategy?

This is due to the general characteristics of options. The greatest time decay occurs at the end of an option’s life. Prior to the availability of weekly options, the benefits of accelerated time decay could only be obtained once a month. There is now a continuous ability to benefit from accelerated time decay. This is due to the general characteristics of options.

Secret of Weekly Option Strategy

Price of option is affected by Theta Greek everyday till expiry but its affect is more near to expiry.

If we divide our Price of option per day then Price per day decay/decline is most near to expiry.

Always remember that price movement can negate the time decay arbitrage, which is why it … 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 – 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 – 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