Académique Documents
Professionnel Documents
Culture Documents
MK
Criteria
Low Delta (< 0.2) & High Volatility : High Delta (>0.7) & Low Volatility :
Options with low historical volatility often can be an indicator that prices in the underlying futures contract are very calm or trading in a narrow range. It can also be an indicator that a market is ready to break out of trading range and make a sizable move in one direction.
Volatility
Volatility is a statistical measure of how erratic a stock has been in the past, and how erratic its expected to be in the future. There are two types of volatility as it applies to options trading:
Historical Volatility (HV) measures how volatile or erratic the stock or commodity has been in the past. Implied Volatility (IV) measures how volatile or erratic the stock or commodity is expected to be in the future
HV is backward-looking whereas IV is forward looking and considers all the developments expected in future.
Volatility
Buy options when IV is low and sell when IV is high Everything else being equal, an option with higher volatility (and hence higher price) may result in higher profits in the short-term. Importance of volatility before major events :
In the days leading up to any major event, implied volatility is increased thereby increasing the option price. When the event finally takes place, even if the share price goes up, the option price may not go up or even go down since the IV is restated to lower levels after the event.
Volatility Skew
This is a phenomenon where each individual option within an option chain will have its own volatility value, which may or may not be different from its neighbouring option. Volatility skews can take the shape of a reverse, fl at, smiling, or forward pattern, and can be used to your advantage when initiating option spreads.
Volatility Index
Indicates the expected market volatility over the next 30 calendar days Higher the implied volatility higher the India VIX value Low VIX
Market is range bound or has a mild upside bias Call option buying generally outnumbers put option buying
OPEN INTEREST
Price Open Interest Interpretation
Rising
Rising
Market is Strong
Rising
Falling
Market is Weakening
Falling
Rising
Market is Weak
Falling
Falling
Market is Strengthening
Option Pricing
There are six determinants to a stock options price:
1. Price of the underlying stock. 2. Strike price of the option. 3. Time to expiration. 4. Volatility. 5. Interest rates. 6. Dividends.
MACD
MACD
Trading Rules
Go long when MACD line (shorter term MA) moves above the signal line (longer term MA) i.e., +ve histogram Go short when MACD moves below the signal line i.e, -ve histogram Wait for a confirmed cross above the signal line before entering into a position to avoid getting "faked out. Apply a price filter (e.g. buy if MACD breaks above the 9-day EMA and remains above for three days)
A rising MACD shows the bulls are becoming stronger When the security price diverges from the MACD. It signals the end of the current trend. When the MACD rises dramatically, it is a signal that the security is overbought and will soon return to normal levels. A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low. This is the most reliable indicator.