The Strategy is based on the Options Chain data.

Pair Trading for the Pair with MAX OI.

Other Options Strategies based on

- Volatility
- MAX CHG in OI
- MAX OI
So here we go on the understanding of the Options Chains data for those who were
not following my Previous thread. For the Experts it might see as baby steps. So
the experts please forgive.
Understanding the Options Chain Data correctly : Forget what you know
already about the market and the Option Chains data. The Future and Options are
traded in the Secondary market. So the primary market is Equities. So without
equities(cash market), Futures and Options do not exist. So for those who are
trading purely in F&O, Look at the Futures and Options as someway to Protect your
Stocks (Cash).
For the F&O market to exist, we need the Market Makers. And Market makers are
also here to make some money.
Now going to Options Chain data. Let us take the Options Chain of NIFTY. Hope
there are so many links for getting the Options Chain data. But I use the following
link
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/option
Keys.jsp?symbol=" & NSECode & "&date=" & ExpiryDate
For example to get the NIFTY Options data for the month expiring Jul-13, the link
would be
http://www.nseindia.com/live_market/...date=25JUL2013
So there are so many Columns and Values. What we are interested is the Following
OI - Open Interest
Chng in OI - Change in Open Interest
IV - Implied Volatility
Volume - Volume and Of course the
Strike Price
What do we need to make the decisions
1. Find out the Strike Price
2. Find out the Strike Price
MAX_OI_CE
3. Find out the Strike Price
PE - MAX_CHGOI_PE
4. Find out the Strike Price
in CE - MAX_CHGOI_CE

and OI, where we have the MAX OI in PE - MAX_OI_PE

and the OI, where we have the MAX OI in CE and CHG in OI, where we have the MAX Change in OI in
abnd CHG in OI, where we have the MAX Change in OI

Intraday day trading would be based on Change in OI

Positional/Swing trading would be based on OI.
Rule 1: If the MAX (CHG in OI) @ PE > MAX (CHG in OI) @ CE, then it is a
Bullish market.
Why MAX (CHG in OI) PE will be a Bullish signal?
For the Market to exist we should be Have Bears and Bulls. Market is always
trading in a specified range for any day. So we have to assume that BULLs will try
to Protect the Bottom of the Range and Bears will Try to Protect the Top of the
Range (Not let the market beyond the Range). BULLs have LONG Positions in the
market. So to protect their LONGs they take the Opposite positions in the Options
market by Selling the PUTS (PE) to hedge their positions, so that if the market goes
in the opposite direction of their Longs they can make money using Options. But
normally the market makers make money both in the Equities and in the Options
market. When They build a Huge volume around a Strike Price, they are basically
sending a signal to the BEARS saying "This is our area - We will not let you go
below this level". So BULLs normally control a Lower Strike and BEARS normally
control a Upper Strike. For a given day this Range would act as the Intraday Range.
Rule 2: If the MAX (CHG in OI) @ PE < MAX (CHG in OI) @ CE, then it is a
BEARish market.
Same explanation as the Bullish market
Rule 3 : For Postional/Swing Trading use the OI instead of the CHN in OI and the
same rule as Rule 1 and Rule 2 will follow.
Rule 4: Does Volume in the Options Chain data play any role in our decision
making?.
Yes. Use the Volume data to decide whether it is STRONG BULL or a STRONG
BEAR.
Let us say at 6100 we have the MAX CHG in OI @ CE - Say 6L Postions
Let us say at 6000 we have the MAX CHG in OI @ PE - 11L Positions
Now 11L > 6L and PE > CE, so it is a BULL.
Now let us look the Volumes @ 6100CE and 6000PE
Volume @ 6100CE - 5.5L
Volume @ 6000PE - 17
Now compare the CHG in OI and Volume @ 6100CE.
Volume (5.5L) < 6L - So it is not a Strong BULL. Had the Volume been greater than
the "CHG in OI" then it would have been a STRONG BULL.
And same logic for the STRONG BEAR also....
Another Observation : So go for Naked Long in CE/PE only when the Volume at
the Strike Price > CHG in OI.
What if the Volume does not indicate like above?
Then most probably the market is Range bound.

Rule 5: Can we always go with this logic on the MAX(OI) and MAX(CHG in
OI)?
NO. This might not work during the last week of Expiry when the Market makers
are closing their positions. So during the last week of Expiry better to stay away
from the market or Play the market using the Implied Volatility
Rule 6: In the CHG in OI, what if we get Negative values? What signals
does it give?
If we get the Negative values in "CE", that means Market makers (BEARS) are
squaring off the Call Positions (The SHORT Positions). So heavy squaring off in CE
is a BULLISH signal and we have to expect a BREAKOUT if there is a sudden spike
in the squaring volume. There is a panic situation. Normally this will happen all of a
sudden in say 10-20 minutes and we have to exit the Shorts immediately and can
GO LONG.
It is the Vice versa if we get Huge Negative Values in "PE".
If we get Negative Values both in PE and CE, then blindly SELL the OI pair

Small negative values indicate the normal profit booking.

Rule 7: OK. For Intraday trading, based on the "CHG in OI" I got the
Bullish or Bearish signal. Can I go and BUY the Options? How do I decide
whether to BUY/SELL the option?.
Important and a Difficult question.
Unless if it is a Strong BULL or a STRONG BEAR, the Safe strategy would be to SELL
the pair so that it is less risky. I mean if we get the Range as 5800PE and 6000CE.
Then Sell 5800PE and 6000CE.
Rule 7B: No I don't want to do Pair Trading. I want to take more risk and
do some naked Calls / Puts. How do I decide whether to BUY/SELL.
Use the Implied Volatility. I normally take the top (most traded) 5 Strikes and
calculate the Average PE and CE volatility.
Also find out the Historic Volatility of the underlying Futures.
Let us take NIFTY and say we have
Historic Volatility HVOLT= 21.18% (Get it from the NSEindia.com - FOVOLT.csv)
Average PE VOLT - 18.78%.
Average CE VOLT - 19.4%.
So the observations are
PE VOLT < HVOLT - Low Volatile market
CE VOLT < HVOLT- Low Volatile market
So in a Low volatile market, and if the signal is Bullish, then instead of the Buying
Calls, SELL the Puts and vice versa.

Note : I am still discovering and learning about the Volatility. So will give more
details when it comes. But in summary, if the Volatility is Low, then it is a Buying
market and if the Volatility is High it is a Selling market. Experts should be able
to throw more light on volatility
Rule 8: Respect the Strike Price where the MAX Pain is situated
The Strike where the MAX Pain is like the Centre of Gravity. So especially during
the Expiry the market will try to move and will try to expire around the MAX Pain.
So in the last week of expiry one should avoid any OTM call around the MAX Pain
because the OTM calls around the MAX Pain will expire worthless.

For Example in Jul13 Expiry the MAX Pain on 22-Jul-13 is at 6000. So any 6100,
6200,... Calls will expire at Zero value. Similarly for 5900PE, 5800Pe, etc,,,
For Expiry, the important observation or the learning is the MAX Pain
theory. The 6000 pair which was trading at around 110+, today is trading
half the value of 55. Tomorrow it might even become Zero if market
expires exactly around 6000

Pls clarify me.

we have to consider Max Volume also when we choose Max CHNG_OI OR only Max
CHNG_OI ?
Max CHNG_OI with Volume pair 5900PE-6000CE. combine@181
Max CHNG_OI pair 5400PE-6000CE. combine@101
angira...

For a Particular Strike if the Volume is Greater than the CHG in OI then it can be
considered as a Strong trend.
For example if you take the 6000 PE strike.
6000 PE - Negative value of -45200
6000 PE volume is - 40K
So you can surely Trade Long on 6000 PE. This is not the Right example because
the 6000 PE CHG in OI is negative. But if you have a scenario where the CHG in OI
< Volume then it is strong signal of Bearish. Same hold true for CE also.
So simple rule is the value in Volume - I consider it as Long
The Value in CHg in OI - I consider it as Short.
So whichever is greater , you trade in that direction.
So if CHG in OI > Volume - Better to Sell the strike
If CHG in OI < Volume - Better to Buy the strike.
This is purely based on my observation based on initial thought from
Option.Trader.
So observe the Volume and CHG in OI - You will get an idea.

One more observation is that if the Volumes are not that great, that also indicates
FLAT market
OK. It is my own logic. It need not be 100% Fool proof.
When Market was trading around 5930, I always take the 5 strikes for my
calculation. So it would be ATM strike, 2 ITM strikes and 2 OTM strikes.
So it was 5700, 5800, 5900, 6000 and 6100.
For Each strike, I find what is the Trend, It could be either BULL, BEAR or FLAT.
I calculate the overall Trend using the Overall "CHG in OI:. Here the "Overall"
means only my 5 strikes. So i don't consider what is happening below 5700 or
above 6100.
The Trend came as "Bear". Then I count the number of "Bear". If it is more than 2
then I take it as a Strong Bear.
So today closing had
5700
5800
5900
6000
6100

Bull
Bull
Bear
Bear
Bear

At the time I wrote as "Weak Bear", 5900 was indicating as "Bull" and you saw the
market coming UP from 5908 to 5960...
That is when I asked to close the positions at 5945 and the market finally closed at
5927.
Today the CHG in OI at CE being added above 5900 (in 6000, 6100) was 19L.
Today the CHG in OI at PE being added Below 5900 (in 5700, 5800) was 16L.
The Overall CHG in OI at CE was 24L
The Overall CHG in OI at PE was 15L
MAX at the individual Strike level,
11.77L added at 6000CE
8.63L added at 5800PE
So base is being built at 5800PE, which would be anyway Tested.

1) 5600PE Volume 107,297 > COI - 96,000.

What does this indicate ?
2) The below data is calculated considering NIfty from 5500 to 6400.
PCR 1.040395511

But Change in PC OI - 0.65

Call OI addition - 2,857,300
PUT OI addition - 1,861,250
Does this indicate Bearish call writing or Bullish Call addition ?
TIA.

5600PE Volume 107,297 > COI - 96,000 - When Volume is more than COI, then
normally as per my understanding you can GO Long on this 5600PE. Accordingly if
you see 5600PE which opened at around 21 closed at 26.2.
PCR - I normally use it as a indicator for Reversal. If you see a PCR of say 1.25-1.3.
Then you can see profit booking. Same is true if PCR is around .75

(-chgoi ), unwinding taking place at that strike level as previous writers are nervous.
Volume < chgoi as pointed out indicates fresh shorting at that level

Now at 5800 Ce
OI = 21,00,050
COI = 3,37,050
Volume = 43,475
Since COI > Vol, it means big players are having open positions as short at this strike.
When COI starts decreasing and will become -Ve it will show that they are covering their
shorts. Am I right in understanding this ??
Regards
Taiki

My view is to use the Volume to go LONG on the Option. Otherwise generally I

suggest to SELL option.
So when do we go Long? When the Volume > CHG in OI.
Accordingly we could have gone Long on 5900PE or 6000PE which would have given
the max profit in Long.
When choosing the Strikes for CE to Short, the best strike was 6000CE where the
MAX OI and MAX CHG in OI is present.

While Volume > CHG in OI we can Go Long on the strike, If Volume < CHG in OI the
Reverse of Going Short should be True ? Not necessarily. So always choose the Best
strike to Go LONG or go SHORT.
General Rule
Never go LONG on the strikes where the MAX OI or MAX CHG in OI is present
because they are the candidates being Short.

Originally Posted by healthraj

5700-6000 Pair is trading at a loss of 10 points - Still holding the pair. I will hold with a
stoploss of 20 points.

Another way of deciding S/L is to close positions when the losing leg ( in this case
PE) reaches total premium collected, corresponding price of the other leg being the
loss to be borne.

For the Real reversal we have to see the following...

A much larger Negaitve volume in PE (Ultimately we should see positive number in
PE - to confirm that the market is UP)
CE positions should come also down.
Fresh Long should have a Positve Value in PE.

In trending market playing pairs is unprofitable. The swings are killing all strike
levels. Also on good times you might make 10-20 points but you are missing on
huge swings of 200-300 points that say for eg Jamit is able to reap in by being
directional. So do we have to rethink on pairs in a trending market. This year is
really weird, we have had 300 point swing every month

How'd one interpret

Volume @ 5900CE > COI At 5900CE

Originally Posted by sabhlok_r

volume @ 5700PE > COI in 5700PE
Raj...what to make out of this ?

As per my rule and understanding,

5900CE - Best strike to Go Long on CE
5700PE - Best Strike to Go Long on PE

You wrote: Direction is Bearish and VOLT is low. So the Strategy is to sell the ATM Call.

As vola is low, prices of options are low. So why sell a low priced call instead of buying a
cheap put which will, when market jumps down, increase in value very quickly. As in a drop
vola also will rise, this will be an other help to the puts price increase. Further will you not
block much money for a naked sold position. You even could use some of that money for
the long leg and increase the amount of lots you trade long. If market really drops further,
as suggested from you, your profit on the long put would be higher compare to the sold call.
Just some thoughts from my side and if I missed the point or did miss interpret any of your
post's, just let me know. It is your system and you know what you do. So do not take it
personal. It may gives some more room for further discussions.
Take care and good trading / DanPickUp
@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.

@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

My take on this... and i think it may be peculiar to the Indian markets. In Indian
markets, liquidity exists only in near month contracts... hence the premiums on
near month contracts are comparitively higher. Now the way to make money in
long options is a) it is a trending market b) the trend continues strongly for a
period of time. As pointed out by Raj's study earlier, Indian markets trend only
20% of time. And in the four weeks you get to make profit out of your options, it is
a battle of diminishing returns. The time decay hits heavily and even in trend,
options starts loosing value. This leaves only 1 option to trade longs, you uncover
the trend before it happens to really get the 2x-3x return from longs, which is a hit
and miss strategy.
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?