Strategies for gain in binary options

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To learn more about options, check out this module on Varsity. In the previous postwe discussed the Option Greeks and got option option stock trader caller tunes perspective on what they are. An understanding of the previous article is important for this article. In this article we will attempt to help you understand the practical uses of Option Greeks, and how you can use the Greeks to trade options more option option stock trader caller tunes. Option Greeks are also called the option sensitivities, as each of the Greek is sensitive to a particular market variable.

Sensitivity represents option option stock trader caller tunes in some form or the other. To give you perspective, imagine a juggler, trying to juggle 5 different balls while standing at the edge of a mountain cliff. This is what happens, when you trade options! The 5 different balls are equivalent to the Greeks, and the cliff itself option option stock trader caller tunes the markets! As we know, the delta helps the trader understand the rate at which the option premium is likely to change based on a change in the underlying price.

Hence delta is highly sensitive to the price change in the underlying. Any naked option position has a non zero for all practical purpose delta value. Before we proceed, let us revisit some basics. We know the delta varies between 0 and 1 for a call option, and -1 to 0 for a put option.

Also, the delta of futures is always This is because the future always move magnitude and direction in option option stock trader caller tunes with the underlying. A trader is long 3 lots of Nifty CE while the spot is trading at Clearly, the option is OTM out of the moneyhence the delta should be less than Let us assume the delta as The intention is to hold the option position open for 2 weeks. However, after initiating the long call position, the trader is now worried about a potential selloff in markets maybe over the next two dayshence would like to hedge the open option position.

The hedge ratio helps determine the number of futures lots one needs to short in order to be hedged against the anticipated fall in the market. The hedge ratio is simply option option stock trader caller tunes ratio of the option delta to the futures delta.

Remember, the futures delta is always Hence, going back to the example, the delta of the option is 40 and futures is ; hence the hedge ratio would be:. This means to hedge 1 option position with 40 delta, the trader need to short 0. Since there are 3 lots of option, it would be 0. Obviously one cannot short 1. The trader now has 3 lots of CE long, and 1 short futures position. In other words, a delta of indicates option option stock trader caller tunes for every 1 point move in underlying, the option premium varies by 1.

By adding the short futures position, the trader has now neutralized the delta by option option stock trader caller tunes, leaving a total delta exposure of The combined position 3 lots of CEand 1 lot of short futures yield 0 delta [ delta from call option minus delta from futures]. When we have a delta neutral position, the total delta of the combined positions is 0. This means for every 1 point change in the underlying, the position moves by 0 points.

When one establishes a delta neutral position, the direction does not matter — the market can go up or down but the position will not get affected.

In other words, the direction no longer matters! In a straddle strategy, you buy both ATM at the money call and put option expiring at the same time. Keep the following two points in mind. Traders usually underestimate the effect of vega, and the massive influence it has on an options position.

Understanding vega and its implication on an option position is one of the keys to successful options trading. In the previous articlewe stated that the options premium both call, and put increases with increase in volatility. Let us explore this a bit deeper. The chart below shows the behavior of a call option premium with regards to increasing volatility, when there are.

The graph below shows what would happen to the options premium, if volatility were to increase when there are 5 days to expiry. As you can see, irrespective of how many days are left to expiry, the option premium always increases with respect to increase in volatility. However, on a closer observation there are few other things that come to light.

Let us summarize these observations into action items. The following points hold good for a simple, plain vanilla 1 leg option trade. A slightly more mature option trader who trades in option spreads may wonder how would the volatility impacts the strategy cost, of let us say a 2 leg spread position such as the bull call spread or a bear put spread.

To understand the effect of volatility or the vega on the strategy cost of the spread position, have a look at the following chart. Looking at the above graph, it is clear— increase in volatility increases the cost of strategy. On further inspection, it is also quite evident that at the start of a new series blue line even with an increase in volatility, the strategy cost does not increase much.

However, volatility seems to have a massive effect on the strategy cost when there are fewer days to expiry red line. Translating this to an action item, when you intend to initiate a spread position bull call, bear putalways have a view on volatility, and therefore the Vega. For Vega to work in your favor:. One can develop visualizations to analyze the effect of vega vs time vs premium strategy cost on any strategy. However, the rule of thumb is the same — for a net buyer of an option, increasing vega benefits, and for a net seller of an option, decreasing vega helps.

Time has a decreasing effect on the premium. In fact for this reason options are considered a depreciating asset. Previously, we learnt about the option option stock trader caller tunes decay factor. However, there is another interesting and important angle to theta. It helps the trader identify the right strike to trade under a given circumstance. To help you develop a perspective with respect to strike selection methodology we will first deal with a long call option we will set up few practical trading scenarios that we regularly come across.

Given this target expectation, the objective is to select a strike in such a way that it gives the trader maximum bang for the buck. Now, here is the situation, we are at the start of a new series maximum number of days to expiry.

Which strike of call options would you choose to trade, given the following expectation? Have a look at the following graphs. It represents the profitability on Y axis, and strike on the X axis. Look at the first block of chart. In the backdrop of the stock moving to within 5 days this chart is telling us what would be the profitability of each strike starting from ITM to OTM.

In other words, it looks like the best strike to choose in terms of profitability, would be OTM. However, the same strike would have lost option option stock trader caller tunes in the 2 nd scenario, notice, actually made a small loss, even though the market moved in the right direction. Also, the graphs suggest that the best strike to choose when one anticipates the target to be hit in 15 days would be the ATM option.

You may have heard of traders say that they lost money on call option, even though the markets moved up. Now you know why this happens — they simply choose the wrong strike! Look at the 3 rd and 4 th graph blocks, option option stock trader caller tunes are really interesting. The graph is suggesting you choose an ITM or at the best an Option option stock trader caller tunes option when you expect the target to be hit towards the end of the expiry. All other strikes lose money!

Now remember, this is with respect to initiating a position at the start of the series. What if you want to initiate a fresh long call trade when we are half way through the series? Let us assume the same movement of points from tobut slightly different scenarios:.

Notice, when we expect the target to be hit on the same day, selecting an OTM option makes most sense. You may have heard of stories where traders doubled their money on the same day trading options, this is because they have selected the right strike for the right situation. The same logic can be applied to Long Put option. Here are the various scenarios:.

Clearly, the same inference can be drawn as we did while analyzing the call option at the start of the series. The graph below shows the profitability trading put options when we are half way through the series and expect. The strike selection methodology irrespective of long call or long put are the same; hence we can generalize it with the following table.

First of all, if you have read through the entire article, kudos to you as I can imagine application of Greeks can be a fairly complicated topic, especially for a person new to this topic. I've been trading and investing in the Indian markets for over a decade. I strongly believe that trading is not a gift that you are born with but a skill that you can option option stock trader caller tunes over time.

Hi I think this may be the wrong place to post my question, sorry for that. Is there any plans for Zerodha to provide its own demat accounts instead of depending on third party. Is there any plans in the future for Zerodha owned demat accounts. Thank you very much for you reply Nithin. Other than the demat account opening I see zero issues with zerodha so I thought I a Zerodha owned demat could solve this. I talmost takes days for a demat account to open with ILFS where as trade account opens in one day.

Looking forward for the zerodha owned demat account. Iam a brand new user of kite.

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