What Is Stock Option Trading?
Technical Analysis refer to the study of price, volume and open interest data with the help of Japanese Candlestick Chart, Patterns, Tools and Indicators, Open Interest, Option Chain Analysis and study of Options Greeks.
What is the Importance of Option Trading in Stock Market?
Option plays a vital role in your trading strategies as it gives some key edge by analyzing the open interest of futures and options.
Future Open Interest Interpretation:
Volume Price Open Interest Inference
1: UP UP UP Fresh Long Position are created in the Market.
Bullish Trend Long Buildup
2: Down Down Down Long Covering/Long Unwinding.
Long Profit Booking (Not Bearish Trend)
3: UP Down UP Fresh Short Position Buildup
4: Down UP Down Short Covering.
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Importance of Greeks in option Trading:
The Greek measures the sensitivities of options for change in price movement of underlying, time decay, volatility, and interest rates. Let’s start discuss on them
The Greeks are as follows:
Rate of change of option premium for the change underlying stock position when the market is in your favour or against your favour. Also, delta gives us an indication of the speed at which the option strike price position moves relative to the underlying stock position price change. However, ATM options have a standard Delta of 0.5 for calls and –0.5 for puts, meaning that ATM options strike price move half a point for every 1 point gain in the underlying asset price . For ex: If you purchase 10000 ATM strike price Call option @ 180 and if spot price moves 100 point in your favor than 10000 strike price call value will increase to 230. Delta shows the probability of an option strike price chance expiring ITM because an ATM call option having a Delta of 0.5 means there is a 50% chance or probability of ATM strike expiring ITM. Also deep ITM have 0. and Deep OTM have . However, greek traders sometimes tend to neutralize the delta with combinations of different strike price.
1: ATM Delta 0.45 to 0.55
2: ITM Delta 0.55 to 0.99 (more the ITM option higher the delta)
3: OTM Delta 0.45 to 0.01 (more the OTM option lower the delta)
Gamma is considered as the second derivative of the change in underlying asset or the first derivative of Delta which can be expressed as: rate of change of delta w.r.t the change in underlying spot price or as the change in probability of the option strike price position expiring ITM. Although gamma is an early warning sign of the fact that Delta is about to change when the spot increase/decrease. Gamma is positive for both call and put. Extreme deep OTM and extreme deep ITM option have near zero Gamma as the probability of change in Delta is very low. Gamma tends to accelerate/deaccelerate around the strike price.
Theta stands for the time decay (no of days). Long Options have negative theta as the time decay, and it favors the writer (short options have positive theta).
However, Vega stands for the option strike price sensitivity with respect to the change in the volatility. Options premium tend to increase/decrease in value when the underlying stock’s volatility increases/decreases. The Increase in volatility helps the buyer of an option and hurts the writer of an option and vicaversa. Vega is positive for long option position and negative for short option position. However, vega is the most important Greek for advance option traders who play with volatility skew for profitable trades with low risk.
Rho stands for the change in option strike price position’s sensitivity w.r.t change in interest rates. Although, it hardly have a negligible impact on stock Options given the fact that cost of carry interest rate by central bank is minimal.
Also option Strategies are combination of futures and options, different strike price combination like two leg, three leg and four leg strategy by analyzing option chain position with the anticipation whether the market is bullish, bearish and neutral.
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Some of the basic option strategies:
Long Call and Put
Short Call and Put
Covered Call and Put
Synthetic Call and Put
Bear Call and Put Spread
Bull Call and Put Spread
Long Straddle and Strangle
Short Straddle and Strangle
Long and Short Condor
Long and Short Butterfly
The strategies are executed given the anticipation of trader view about market and the risk reward Ratio:
Strategy Can be expressed with the risk reward ratio as follow:
Limited Profit and Limited Loss
Limited Profit and Unlimited Loss
Naked Call and Put Buying and Writing
The most important point for option traders is that they can analyze option chain position, open interest and greeks which help them to execute trade with maximum efficiency and give them an edge over other traders who execute trade only with the help of candlestick patterns. However an efficient trader needs to have proper tools, rules and every strategy to execute trade with perfection.
Option is highly leveraged instrument and it can generate enormous profit if executed with perfection. Although Combination of strategies also help an option trader to hedge the position to minimize risk and can trade bullish, bearish as well as neutral position. It means option trader can make money in consolidation phase too which cannot be done in cash and future market. Further option traders can hedge the position by neutralizing other greeks and can earn theta, vega with negligible risk.
Option market is consider as the weapon of mass destruction if not handled with care as it can wipe out entire capital however it a boon for the master traders who with their craftiness can make enormous gains with low cost.
Important Information About Best Share Market Institute in Delhi
National Institute of Wall Street in Delhi is the best institute for stock Market Course Which offer tailor made course for students, traders and investors. It offer courses ranging from beginners to advance level for traders. We have Courses ranging from Elliot Wave Theory, Harmonic Trading, Neo Wave Theory and WD GANN Square of 9 for professional traders. also conduct live trading sessions for professional traders in option greeks and volatility skew on greek software which help them to learn and earn in advance option courses on a daily basis.
The trade are executed in live market on our proprietary desk which gives the student the practical feel on simulations and live market option trading. Also we train our students in option scalping and jobbing. This gives the student a right platform when they have multiple option to choose from be it intraday and swing trading as well as high frequency trading in small time frame in options.
However, this article will be very helpful for students who want to trade in options from beginners level to advance option trading with calculated risk and will help to to earn decent income on their capital with low drawdown risk in option trading, option writing, combination strategies, greek trading, volatility skew, delta neutral strategy, gamma squeeze, butterfly strategies, iron condor, short straddle and strangle, condor. It will also cover open interest analysis of futures and option chain open interest which them to maximise profit making large trades. All the strategies will be deploy in live market on our proprietary desk with our own fund.