Options Trading Guide

How do you price an option?

A very high level introduction that touches on put-call parity and the Black-Scholes-Merton formula.

Read: Trading Options

Quantifying factors that affect option premiums

An introduction to option greeks and how they interact to produce changes in option premiums.

Read: Trading Options, Know your Greeks

Implied Volatility(IV)

Using NIFTY options to understand Implied Volatility.

Read: Forensics: NIFTY Options – Implied Volatility(IV)

Vega(κ)

Using NIFTY options to understand Vega.

Read: Forensics: NIFTY Options – Vega(κ)

Gamma(γ)

Using NIFTY options to understand Gamma.

Read: Forensics: NIFTY Options – Gamma(γ)

Delta(δ)

Using NIFTY options to understand Delta.

Read: Forensics: NIFTY Options – Delta(δ)

Theta(θ) Decay

Using NIFTY options to understand Theta.

Read: Forensics: NIFTY Options – Theta(θ) Decay

Charting ATM NIFTY Options

A kitchen-sink chart to show all that can be shown about ATM Nifty options, greeks, volatility, etc…

Read: Forensics: NIFTY Options

The simplest options strategy: The Bull Call Spread

Suppose you are moderately bullish about a stock/index and you feel that it has room to run but its not going to be gangbusters. What you could do is buy the call and then sell a call at a higher strike to mitigate the cost of your (moderately) bullish outlook.

Read: Long Call Spread

Spare a few minutes to liquidity

Monitoring liquidity risk is as important as checking your deltas and P&L and can often make or break a trade.

Read: Options Liquidity

The normal distribution

Almost all asset pricing models are built on the assumption that asset returns are normally distributed. This allow mathematically precise models to be constructed, but often at the cost of accuracy.

Read: The most important assumption

Betting on volatility

If you are sure that the underlying stock/index is going to move strongly before expiration, then this is the option strategy for you.

Read: Long Straddle

Collecting carry

If you can keep your head when all about you are losing theirs… or if you think volatility is going to ebb, then this is the option strategy for you.

Read: Short Straddle

Volatility distribution

Before trading options, try and get a grasp of how the underlying volatility behaves.

Read: Understanding Nifty Volatility

Strangle

Straddles can be expensive. A slightly less expensive, but more aggressive strategy is the strangle.

Read: Long Strangle

Butterflies

Avoiding the unlimited risk of straddles and strangles and settling for a lower max. profit.

Read: Butterflies

Condors

Less riskier than butterflies, cast a wider net.

Read: Condors

Beyond Pay-off Diagrams

The payoff diagram, only shows the P&L at expiry. The underlying can take a completely random path towards that payoff.

Read: Beyond Payoff Diagrams

 
 

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