Nov 29, 2021
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Futures and Options Analytics Platform
"NSE Live Option Chain, get Call and Put Option Quotes. Check out live NSE Nifty Option Chain, Bank Nifty Option Chain and Stocks Option Chain. Find Option Premiums & Option Vega now."
Futures and Options Analytics Platform
"NSE Live Option Chain, get Call and Put Option Quotes. Check out live NSE Nifty Option Chain, Bank Nifty Option Chain and Stocks Option Chain. Find Option Premiums & Option Vega now."
Here is a guide by Shubham Agarwal on popularly-monitored Options Greeks, their utility, and action.
Options Greeks are turned away most of the time due to their heavy mathematical calculations and not being so simple to comprehend. So, instead of trying to derive values of such Options Greeks, let us try to just define them and at least get the applied utilities of them in our everyday option trading.
If we were to calculate each and every Options Greek of our position it would not be possible unless one is a mathematician. However, there is an easy way out as there are numerous platforms available nowadays that help us with Options Greeks of our total options positions.
Why look at Options Greeks? Well, because they give an insight on the options positions. It would throw light on the fact that in an attempt to contain the unfavorable underlying price risk if we have taken any other risk that could ruin our profitability despite our view going right.
Let us understand popularly-monitored Options for Greeks, their utility, and action.
Delta
Delta is the rate of change of the options price with respect to the price of the underlying. Deltas can be positive or negative. Deltas can also be thought of as the probability that the option will be in profits upon expiring. Having a delta-neutral portfolio can be a great way to mitigate directional risk from market moves for options sellers.
Utility
Look at this number as a representation of our position in the underlying. Positive 0.50 delta means the Options position represents 50 percent of buy exposure in the underlying and vice-versa.
Action
As long as for a positive view we have Positive Delta and vice-versa nothing needs to be done.
Theta
Theta measures the rate of change in an options price relative to time. This is also referred to as time decay. Theta values are negative in buy option positions and positive in sell option chain nifty positions.
Utility
Theta number is nothing but the amount of money we will lose or gain (based on the negative of positive value) if a day passes by with all other factors like Price remains the same.
Action
In case Theta is negative and we have a trading break in front of us, it makes sense to Sell cheaper or Call/ Put against the Bought one of the farther strikes. This will reduce the negative Theta.
Vega
Vega is the Greek metric that allows us to see our exposure to changes in implied volatility (the volatility implied by option premium). Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal.
Implied Volatility is the volatility figure derived from options premium traded in the market. Higher Implied Volatility means Higher Premiums (apparently ) and vice-versa.
Typically, Implied Volatility would have a big move in times of uncertainty. Commonly Implied Volatility goes up ahead of an event, which could have any unforeseen outcomes. Once the event is passed Implied Volatility drops down as the unknown is now known.
Utility
Generally, Vega should be looked at by all of us especially when we intend to hold our option trade thru the event. A recent reading of Implied Volatility a few weeks before the event could give us a ballpark number to which the Implied Volatility can come down to post the event. So, the difference in Implied Volatility ahead of the event and that recent reading could give us a possible drop in Implied Volatility post the event.
Now Vega value multiplied by the possible fall in the Implied Volatility will let us know that in case if the price does not move, what is the kind of dent in our profitability can come if the Vega value of our positions is positive.
Action
In case such number of the dent is too big than our budgeted loss then one could explore winding up ahead of the event or at least Sell a relatively cheaper Call/Put against Call/Put whichever is bought. This added Sell option position would automatically reduce the Vega value.
There are sophisticated Option Portfolios already run utilizing this and beyond, for these Greeks would help us realize that we are in better control of our pay-offs.
If Underlying Price goes up Call Premium would go up and Underlying Price goes down Call Premium would go down.
Every once in a while it makes sense to go back to the basics and re-evaluate the mechanics of the very instruments that help us make money. So, in this discussion let us understand what impacts the options in what way and draw learnings out of them.
To understand this though, we need to first list down the key inputs used to price an option because these inputs would eventually turn into the list of determinants for change in option premium.
In NIFTY Option Chain , BankNifty Option Chain , Reliance Option Chain , etc. premium is an output of 5 inputs1. Underlying Price2. Strike Price3. Time to Expiry4. The volatility of the Underlying 5. Risk-free Rate of Interest
-- Underlying Price : The first one is rather straightforward and easiest to understand. I remember talking to many fellow traders when they were first introduced to options. The definition was quite simple - Call means Bullish Instrument and Put means Bearish Instrument.
Taking that very basic but accurate analogy forward for this one, if Underlying Price goes up Call Premium would go up and if Underlying Price goes down Call Premium would go down. The situation is exactly the opposite for Put options Other Things Being Equal (ceteris paribus).
Other Things Being Equal means this impact is accounting for no change in other factors affecting premium.
Learning: Just like trading the underlying make sure we are in the right instrument (Call/Put) while trading a directional move by buying option.
-- Strike Price: To understand the role of a strike price we would be twisting the representation a bit here. Instead of how strike price impacts premium, let us understand how premium behaves with exactly the same underlying move for two different strikes.
So, in case of Calls higher the strike, the less sensitive it would be to the underlying move. On the Put side, lower the Put strike and lesser sensitivity it turns to the same underlying move.
At the same time, Higher Strike Calls and Lower Strike Puts command fewer premiums than their counterparts.
Learning: Align the level of confidence to the Strike Price. Lower the confidence Higher would be the strike of selected Call or lower would be the strike of Put.
Remember, less sensitivity means less profits but also less losses.
-- Time to Expiry : Time to expiry is by far the most understood determinant of option premium. More the time to expiry, more would be the premium. As the time to expiry reduces the premium reduces - once again with other things being equal. This impact of time is similar for both Call and Put.
Learning: Always have a time stop loss along with stop loss in the underlying while buying options because the right direction will definitely pull option premium up but a longer holding period will start showing meaningful pushdown, making the trade unattractive.
-- Volatility : The volatility referred here is ideally a volatility figure of the underlying which would be drawn out of historical price movements. When it comes to option pricing though, there are references to the historical volatility but this input of volatility is more of an expectation of volatility.
Nonetheless, it’s a direct relationship here as well. Higher the volatility, higher would be the premium of both Call and Put and vice versa.
Learning: If there is an expected drop in volatility expect and account for a drop in premium despite no change time or underlying price. This generally happens in times of known events like corporate results, policy decisions, etc. So, if we are going through an event holding on to the option, expect and account for a fall in premium once the outcome of the event is announced.
-- Risk-free Rate of Interest: This is one factor that is least talked about and least impacting. Considering the smaller horizons (1 week to 1 month) of popularly traded options. This factor does not impact the option premiums much, so no need to account for it either.
But in case there is an inclination to participate in longer-term option, the relationship is direct in terms of Call premiums and indirect in terms of Put premiums.
Learning: Rise in interest rate would result in higher Call premium and lower Put premiums other things being equal.
These are the basic determinants of option premium. Always have these relationships of premium and its determinants at the back of the mind to trade more efficiently.
The author is CEO & Head of Research at Quantsapp.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Check Live NSE Option Chain data @ Quantsapp web
Options can be used as trading vehicles to capitalize on bargain hunting at the same time to keep oneself safe from any big damage that could create a bigger dent.
One of the most comfortable times to buy is to buy in pullbacks. That said, one must have the conviction to buy in a market that is failing to build a consensus bullish argument for the market trend. The risk here is that the ongoing pullback could convert into a reversal.
The comfort in such a market set-up is that one must not be in a hurry to buy as a tiny bit of wait could get us a better bargain amid nervousness. Again, that said, the same nervousness that could get us a better bargain can come along right after our entry into a buy trade in a pullback from a rally.
To deal with situations like these, nifty option chain can be used as trading vehicles to capitalize on the bargain hunting at the same time to keep oneself safe from any big damage that could create a bigger dent.
Following are a few trading tactics that I have been practicing in such times.
Bargain Hunting Spreads:
To avoid any negative surprise we could just go ahead and buy a call option but that would open two potential issues.
1. If we just loiter around the same levels. The reduction in premium due to the passage of time (time value decay) could ruin our economics of trade
2. Often times the price of options across go up during nervousness as the premiums led by risk observed increases. So, if we Buy a Call and we rise then the nervousness led risk premium would reduce. This could create pressure on the upcoming rise in Call premium due to the rise in the market, again ruining the economics of the trade.
So, the solution is instead of just Buying a call, buy a call and simultaneously sell a few strikes higher call. This would safeguard against both above problems by at least partially funding the possible dent and thereby improving profitability.
Keep a Mix of Long with Shorts using Options:
Many of us trade majorly in the future. However, in times like these one may diversify the directional trades by adding a few shorts in the mix.
Since the major trend has not yet reversed and we still have a conviction of it resuming (hence calling it a pullback), it is prudent to keep a few put spreads (buy a put and sell a lower strike put) in the trading portfolio of underperforming stocks in the pullback mode.
Use Covered Calls:
This is strictly for one of those boring pullbacks where the market just loses momentum and keeps moving around in a tiny range. In such markets, a bargain-hunting trade via Covered call is a good idea.
What is a covered call? Well, we would anyways trade in futures with a stop loss and a target. In case of a covered call, we would just add a sell position in the call alongside the future. Strike for such a call would be closer to our target price.
Benefit:
If the stock/index takes a little bit longer in getting to the price target, our sell position in the call would reduce due to passage in time. This would augment our profit if we were to cut out future in tiny profit or even reduce our loss if the stop loss gets triggered.
The cost of this transaction is that we will not get the benefit of the move above the strike of call in the future. However, in my experience, one would generally be out of the position around the target anyway be it traded with or without a sell position in the call.
These are some of the tactical trading strategies when the ongoing mode of the market is observed to be that of a pullback. Quantsapp web
Quantsapp is a platform focused on Options Analytics | Learning | Research Services. Leverage the best options trading tool for options trading strategies.
The vertical spread family can consist of multiple strategies, but the most popular ones are Bull Call Spreads and Bear Put Spreads. Read on to know what all parameters you need to keep in mind while adopting these strategies
One of the key benefits of trading options is that instead of a straight-line Profit & Loss curve that Futures offer, options can be customized to fit the reward and risk of a trader.
Over millions of options strategy combinations can be achieved from the options chain and one of them is vertical spread. The vertical spread family can consist of multiple strategies, but the most popular ones are nifty option chain & Bear Put Spreads.
A bull call spread is a strategy where one buys a Call option and sells a higher strike call option. The net premium outflow reduces the extent of sold options premium, yet the risk reduces as you have less to lose.
At the same time, the trade-off is that a bull call spread offers a limited upside versus a simple long call. How much risk is one willing to take and how much reward one expects varies from trader to trader but in this article, we’ll learn that being an opportunist when should one prefer a bull call spread over a long call. Similarly, the concept could be applied for anifty option chainversus a Long put.
Time
A key input for choosing an Options Trading Strategy revolves around time. If the time frame for a forecast is extremely short term i.e. 3-4 days then in most cases Long call will be a preferred strategy but, the moment the forecast is for a long time period then getting compensated for the time with a vertical spread is a good idea.
Vertical spread can improve the pay-off in terms of the reward to risk when the time frame is more positional (generally more than 4 days) and the strategy can also be carried till expiry.
Momentum
Consider a market that is oscillating within a few hundred points, it becomes a challenging task to identify stocks that may witness a directional move, in these cases, a lot of Theta is lost in expectations of breakouts which lacks due to the overall market structure.
In a market where momentum is lacking, vertical spreads can be a better bet versus buying a single reliance option chain.
Expiry Placement
Expiry placement or days to expiry, is an important input when deciding on an options strategy and where are you placed in the expiry affects the decision. From mid expiry when the options theta starts to decay faster, it is generally a better idea to resort to vertical spread over single options contract.
Most importantly, in the expiry week when options are decaying very fast it might always be a good idea to resort to a vertical spread for any trades being carried for more than a day.
Risk Aversion
Many investors look forward to options to build their portfolio and to make returns from medium-term moves. Since deploying a vertical spread is far cheaper than trading futures, it naturally restricts the risk.
A vertical spread with one OTM as buy and few OTMs as sell strike typically offers a 3:1 reward to risk. It means that if you succeed you make 3 times more profit than the risk you take and for strategies with a medium-term approach, this helps in reducing risk yet providing a handsome profit potential.
Strategic Forecasts
In many cases traders do forecast probable targets of underlying equity and trades for them. Vertical spreads are a good way to trade if you are confident that the target will act as a resistance. If your forecast suggests that the underlying equity may not move above those levels, then in those cases you may not want to pay a high premium that a single option brings to the table. Instead, selling the strike of the target reduces your premium outflow and optimizes your trade to customize to your forecast.
Here is a guide by Shubham Agarwal on popularly-monitored Options Greeks, their utility, and action.
Options Greeks are turned away most of the time due to their heavy mathematical calculations and not being so simple to comprehend. So, instead of trying to derive values of such Options Greeks, let us try to just define them and at least get the applied utilities of them in our everyday option trading.
If we were to calculate each and every Options Greek of our position it would not be possible unless one is a mathematician. However, there is an easy way out as there are numerous platforms available nowadays that help us with Options Greeks of our total options positions.
Why look at Options Greeks? Well, because they give an insight on the options positions. It would throw light on the fact that in an attempt to contain the unfavorable underlying price risk if we have taken any other risk that could ruin our profitability despite our view going right.
Let us understand popularly-monitored Options for Greeks, their utility, and action.
Delta
Delta is the rate of change of the options price with respect to the price of the underlying. Deltas can be positive or negative. Deltas can also be thought of as the probability that the option will be in profits upon expiring. Having a delta-neutral portfolio can be a great way to mitigate directional risk from market moves for options sellers.
Utility
Look at this number as a representation of our position in the underlying. Positive 0.50 delta means the Options position represents 50 percent of buy exposure in the underlying and vice-versa.
Action
As long as for a positive view we have Positive Delta and vice-versa nothing needs to be done.
Theta
Theta measures the rate of change in an options price relative to time. This is also referred to as time decay. Theta values are negative in buy option positions and positive in sell option positions.
Utility
Theta number is nothing but the amount of money we will lose or gain (based on the negative of positive value) if a day passes by with all other factors like Price remains the same.
Action
In case Theta is negative and we have a trading break in front of us, it makes sense to Sell cheaper or Call/ Put against the Bought one of the farther strikes. This will reduce the negative Theta.
Vega
Vega is the Greek metric that allows us to see our exposure to changes in implied volatility (the volatility implied by option premium). Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal.
Implied Volatility is the volatility figure derived from options premium traded in the market. Higher Implied Volatility means Higher Premiums (apparently ) and vice-versa.
Typically, Implied Volatility would have a big move in times of uncertainty. Commonly Implied Volatility goes up ahead of an event, which could have any unforeseen outcomes. Once the event is passed Implied Volatility drops down as the unknown is now known.
Utility
Generally, Vega should be looked at by all of us especially when we intend to hold our option trade thru the event. A recent reading of Implied Volatility a few weeks before the event could give us a ballpark number to which the Implied Volatility can come down to post the event. So, the difference in Implied Volatility ahead of the event and that recent reading could give us a possible drop in Implied Volatility post the event.
Now Vega value multiplied by the possible fall in the Implied Volatility will let us know that in case if the price does not move, what is the kind of dent in our profitability can come if the Vega value of our positions is positive.
Action
In case such number of dent is too big than our budgeted loss then one could explore winding up ahead of the event or at least Sell a relatively cheaper Call/Put against Call/Put whichever is bought. This added Sell option position would automatically reduce the Vega value.
There are sophisticated Option Portfolios already run utilizing this and beyond, for these Greeks would help us realize that we are in better control of our pay-offs.
Quantsapp is a platform focused on Options Analytics | Learning | Research Services. Leverage the best options trading tool for options trading strategies.
If Underlying Price goes up Call Premium would go up and Underlying Price goes down Call Premium would go down.
Every once in a while it makes sense to go back to the basics and re-evaluate the mechanics of the very instruments that help us make money. So, in this discussion let us understand what impacts the options in what way and draw learnings out of them.
To understand this though, we need to first list down the key inputs used to price an option because these inputs would eventually turn into the list of determinants for change in option premium.
In NIFTY Option Chain , BankNifty Option Chain , Reliance Option Chain , etc. premium is an output of 5 inputs1. Underlying Price2. Strike Price3. Time to Expiry4. The volatility of the Underlying 5. Risk-free Rate of Interest
-- Underlying Price : The first one is rather straightforward and easiest to understand. I remember talking to many fellow traders when they were first introduced to option chain. The definition was quite simple - Call means Bullish Instrument and Put means Bearish Instrument.
Taking that very basic but accurate analogy forward for this one, if Underlying Price goes up Call Premium would go up and if Underlying Price goes down Call Premium would go down. The situation is exactly the opposite for Put options Other Things Being Equal (ceteris paribus).
Other Things Being Equal means this impact is accounting for no change in other factors affecting premium.
Learning: Just like trading the underlying make sure we are in the right instrument (Call/Put) while trading a directional move by buying option.
-- Strike Price: To understand the role of a strike price we would be twisting the representation a bit here. Instead of how strike price impacts premium, let us understand how premium behaves with exactly the same underlying move for two different strikes.
So, in case of Calls higher the strike, the less sensitive it would be to the underlying move. On the Put side, lower the Put strike and lesser sensitivity it turns to the same underlying move.
At the same time, Higher Strike Calls and Lower Strike Puts command fewer premiums than their counterparts.
Learning: Align the level of confidence to the Strike Price. Lower the confidence Higher would be the strike of selected Call or lower would be the strike of Put.
Remember, less sensitivity means less profits but also less losses.
-- Time to Expiry : Time to expiry is by far the most understood determinant of option premium. More the time to expiry, more would be the premium. As the time to expiry reduces the premium reduces - once again with other things being equal. This impact of time is similar for both Call and Put.
Learning: Always have a time stop loss along with stop loss in the underlying while buying options because the right direction will definitely pull option premium up but a longer holding period will start showing meaningful pushdown, making the trade unattractive.
-- Volatility : The volatility referred here is ideally a volatility figure of the underlying which would be drawn out of historical price movements. When it comes to option pricing though, there are references to the historical volatility but this input of volatility is more of an expectation of volatility.
Nonetheless, it’s a direct relationship here as well. Higher the volatility, higher would be the premium of both Call and Put and vice versa.
Learning: If there is an expected drop in volatility expect and account for a drop in premium despite no change time or underlying price. This generally happens in times of known events like corporate results, policy decisions, etc. So, if we are going through an event holding on to the option, expect and account for a fall in premium once the outcome of the event is announced.
-- Risk-free Rate of Interest: This is one factor that is least talked about and least impacting. Considering the smaller horizons (1 week to 1 month) of popularly traded options. This factor does not impact the option premiums much, so no need to account for it either.
But in case there is an inclination to participate in longer-term option, the relationship is direct in terms of Call premiums and indirect in terms of Put premiums.
Learning: Rise in interest rate would result in higher Call premium and lower Put premiums other things being equal.
These are the basic determinants of option premium. Always have these relationships of premium and its determinants at the back of the mind to trade more efficiently.
The author is CEO & Head of Research at Quantsapp.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Check Live NSE Option Chain data @ Quantsapp web