13.1 – My experience with Option Pain theory
In the never ending list of controversial market theories, the theory of ‘Option Pain’ certainly finds a spot. Option Pain, or sometimes referred to as ‘Max Pain’ has a significant fan following and probably an equal number of people who despise it. I’ll be honest; I’ve been in both camps! In the initial days of following Option Pain, I was never able to make money consistently. However, overtime I found methods to improvise on this theory to suit my own risk appetite, and that yielded a decent result. Later in the chapter I will discuss this as well.
Anyway, now this is my attempt to present you the Option Pain theory and talk to you about what I like and what I don’t about Max Pain. You can take cues from this chapter and decide for yourself which camp you want to be in.
Option Pain theory requires you to be familiar with the concept of ‘Open Interest’.
So, let’s get started.
13.2 – Max Pain Theory
The origins of Option Pain dates back to 2004. So, in a sense, this is still a very young theory. As far as I know there are no academic/scholastic papers on it, which makes one wonder why the academia has ignored this concept.
The theory of options pain stems as a corollary to the belief – “90% of the options expire worthless, hence option writers/sellers tend to make money more often, more consistently than the option buyers”.
Now if this statement is true, then we can make a bunch of logical deductions –
- At any point only one party can make money i.e either the option buyers or option sellers, but not both. From the above statement, it is clear that the sellers are the ones making money.
- If option sellers tend to make maximum money, then it also means that the price of the option on expiry day should be driven to a point where it would cause least amount of loss to option writers.
- If point 2 is true, then it further implies that option prices can be manipulated, at least on the day of expiry.
- If point 3 is true, then it further implies that there exists a group of traders who can manipulate the option prices, at least on the day of expiry.
- If such a group exists then it must be the option writers/sellers since it is believed that they are the ones who make maximum money/consistently make money trading options.
Now considering all the above points, there must exist a single price point at which, if the market expires, then it would cause least amount of pain to the option writers (or cause maximum amount of pain to option buyers).
If one can identify this price point, then it’s most likely that this is the point at which markets will expire. The ‘Option Pain’ theory does just this – identify the price at which the market is likely to expire considering least amount of pain is caused to option writers.
Here is how optionspain.com formally defines Option Pain – “In the options market, wealth transfer between option buyers and sellers is a zero sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the markets, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group”.
13.3 – Max Pain Calculation
Here is a step by step guide to calculate the Max Pain value. At this stage, you may find this a bit confusing, but I recommend you read through it all the same. Things ill get clearer once we take up an example –
Step 1 – List down the various strikes on the exchange and note down the open interest of both calls and puts for these strikes.
Step 2 – For each of the strike price that you have noted, assume that the market expires at that strike.
Step 3 – Calculate how much money is lost by option writers (both call option and put option writers) assuming the market expires as per the assumption in step 2.
Step 4 – Add up the money lost by call and put option writers.
Step 5 – Identify the strike at which the money lost by option writers is least.
This level, at which least amount of money is lost by option writers is the point at which maximum pain is caused to option buyers. Therefore this is the price at which the market is most likely to expire.
Let us take up a very simple example to understand this. For the sake of this example, I’ll assume there are only 3 Nifty strikes available in the market. I have made a note of the open interest for both call and put options for the respective strike.
| Strike | Call Option OI | Put option OI |
|---|---|---|
| 7700 | 1823400 | 5783025 |
| 7800 | 3448575 | 4864125 |
| 7900 | 5367450 | 2559375 |
Scenario 1 – Assume markets expires at 7700
Remember when you write a Call option, you will lose money only if the market moves above the strike. Likewise, when you write a Put option you will lose money only when the market moves below the strike price.
Therefore if the market expires at 7700, none of the call option writers will lose money. Which means call option writers of 7700, 7800, and 7900 strikes will retain the premiums received.
However, the put option writers will be in trouble. Let’s start with the 7900 PE writers –
At 7700 expiry, 7900 PE writers would lose 200 points. Since the OI is 2559375, the Rupee value of loss would be –
= 200 * 2559375 = Rs.5,11,875,000/-
7800 PE writers would lose 100 points, the Rupee value would be
= 100 * 4864125 = Rs.4,864,125,000/-
7700 PE writers will not lose any money.
So the combined money lost by option writers if the markets expire at 7700 would be –
Total money lost by Call Option writers + Total money lost by Put Option writers
= 0 + Rs.511875000 + 4,864125000 = Rs.9,98,287,500/-
Keep in mind that total money lost by Call Option writers = money lost by 7700 CE writer + money lost by 7800 CE + money lost by 7900 CE
Likewise the Total money lost by Put Option writers = money lost by 7700 PE writer + money lost by 7800 PE + money lost by 7900 PE
Scenario 2 – Assume markets expires at 7800
At 7800, the following call option writers would lose money –
7700 CE writers would lose 100 points, multiplying with its Open Interest we get the Rupee value of the loss.
100*1823400 = Rs.1,82,340,000/-
Both 7800 CE and 7900 CE seller would not lose money.
The 7700 and 7800 PE seller wouldn’t lose money
The 7900 PE would lose 100 points, multiplying with the Open Interest, we get the Rupee value of the loss.
100*2559375 = Rs.2,55,937,500/-
So the combined loss for Options writers when market expires at 7800 would be –
= 182340000 + 255937500
= Rs.4,38,277,500/-
Scenario 3 – Assume markets expires at 7900
At 7900, the following call option writers would lose money –
7700 CE writer would lose 200 points, the Rupee value of this loss would be –
200 *1823400 = Rs.3,646,800,000/-
7800 CE writer would lose 100 points, the Rupee value of this loss would be –
100*3448575 = Rs.3,44,857,500/-
7900 CE writers would retain the premiums received.
Since market expires at 7900, all the put option writers would retain the premiums received.
So therefore the combined loss of option writers would be –
= 3646800000 + 344857500 = Rs. 7,095,375,000/-
So at this stage, we have calculated the total Rupee value loss for option writers at every possible expiry level. Let me tabulated the same for you –
| Strike | Call Option OI | Put option OI | Loss value of calls | Loss value of Puts | Total loss |
|---|---|---|---|---|---|
| 7700 | 1823400 | 5783025 | 0 | 998287500 | 998287500 |
| 7800 | 3448575 | 4864125 | 182340000 | 255937500 | 438277500 |
| 7900 | 5367450 | 2559375 | 7095375000 | 0 | 7095375000 |
Now that we have identified the combined loss the option writers would experience at various expiry level, we can easily identify the point at which the market is likely to expire.
As per the option pain theory, the market will expire at such a point where there is least amount of pain (read it as least amount of loss) to Option sellers.
Clearly, from the table above, this point happens to be 7800, where the combined loss is around 438277500 or about 43.82 Crores, which is much lesser compared to the combined loss at 7700 and 7900.
The calculation is as simple as that. However, I’ve used only 3 strikes in the example for simplicity. But in reality there are many strikes for a given underlying, especially Nifty. Calculations become a bit cumbersome and confusing, hence one would have to resort to a tool like excel.
I’ve calculated the option pain value as of today (10th May 2016) on excel, have a look at the image –
For all the available strikes, we assume market would expire at that point and then compute the Rupee value of the loss for CE and PE option writers. This value is shown in the last column titled “Total Value”. Once you calculate the total value, we simply have to identify the point at which the least amount of money is lost by the option writer. You can identify this by plotting the ‘bar graph’ of the total value. The bar graph would look like this –
As you can see, the 7800 strike is the point at which option writers would lose the least amount of money, so as per the option pain theory, 7800 is where the market is likely to expire for the May series.
Now that you have established the expiry level, how can you use this information? Well, there are multiple ways you can use this information.
Most traders use this max pain level to identity the strikes which they can write. In this case, since 7800 is the expected expiry level, one can choose to write call options above 7800 or put options below 7800 and collect all the premiums.
13.4 – A Few Modifications
In the initial days, I was very eager to learn about Option Pain. Everything about it made absolute sense. I remember crunching numbers, identifying the expiry level, and writing options to glory. But shockingly the market would expire at some other point leaving me booking a loss and I wondering if I was wrong with my calculations or if the entire theory is flawed!
So I eventually improvised on the classic option pain theory to suit my risk appetite. Here is what I did –
- The OI values change every day. This means the option pain could suggest 7800 as the expiry level on 10th of May and may very well suggest 8000 on 20th of May. I froze on a particular day of the month to run this computation. I preferred doing this when there were 15 days to expiry.
- I identified the expiry value as per the regular option pain method.
- I would add a 5% ‘safety buffer’. So at 15 days to expiry, the theory suggest 7800 as expiry, then I’d add a 5% safety buffer. This would make the expiry value as 7800 + 5% of 7800 = 8190 or 8200 strike.
- I would expect the market to expire at any point between 7800 to 8200.
- I would set up strategies keeping this expiry range in mind, my most favorite being to write call options beyond 8200.
- I would avoid writing Put option for this simple belief – panic spreads faster than greed. This means markets can fall faster than it can go up.
- I would hold the options sold up to expiry, and would usually avoid averaging during this period.
The results were much better when I followed this method. Unfortunately, I never tabulated the results, hence I cannot quantify my gains. However if you come from a programming background, you can easily back test this logic and share the results with the rest of community here. Anyway, at a much later stage I realized the 5% buffer was essentially taking to strikes which were approximately 1.5 to 2% standard deviations away, which meant the probability of markets moving beyond the expected expiry level was about 34%.
If you are not sure what this means, I’d suggest you read this chapter on standard deviation and distribution of returns.
You can download the Option Pain computation excel.
13.5 – The Put Call Ratio
The Put Call Ratio is a fairly simple ratio to calculate. The ratio helps us identify extreme bullishness or bearishness in the market. PCR is usually considered a contrarian indicator. Meaning, if the PCR indicates extreme bearishness, then we expect the market to reverse, hence the trader turns bullish. Likewise if PCR indicates extreme bullishness, then traders expect markets to reverse and decline.
To calculate PCR, all one needs to do is divide the total open interest of Puts by the total open interest of the Calls. The resulting value usually varies in and around one. Have a look at the image below –
As on 10th May, the total OI of both Calls and Puts has been calculated. Dividing the Put OI by Call OI gives us the PCR ratio –
37016925 / 42874200 = 0.863385
The interpretation is as follows –
- If the PCR value is above 1, say 1.3 – then it suggests that there are more Puts being bought compared to Calls. This suggests that the markets have turned extremely bearish, and therefore sort of oversold. One can look for reversals and expect the markets to go up.
- Low PCR values such as 0.5 and below indicates that there are more calls being bought compared to puts. This suggests that the markets have turned extremely bullish, and therefore sort of overbought. One can look for reversals and expect the markets to go down.
- All values between 0.5 and 1 can be attributed to regular trading activity and can be ignored.
Needless to say, this is a generic approach to PCR. What would really make sense is to historically plot the daily PCR values for say 1 or 2 years and identify these extreme values. For example for Nifty value such as 1.3 can indicate extreme bearishness, but for say Infy something like 1.2 could be extreme bearishness. So you need to be clear about this, hence back testing helps.
You may wonder why the PCR is used as a contrarian indicator. Well, the explanation to this is rather tricky, but the general opinion is this – if the traders are bearish/bullish, then most of them have already taken their respective position (hence a high/low PCR) and therefore there aren’t many other players who can come in and drive the positions in the desired direction. Hence the position will eventually be squared off which would drive the stock/index in the opposite direction.
So that’s PCR for you. You may come across many variants of this – some prefer to take the total traded value instead of OI, some even prefer to take the volumes. But I personally don’t think it is required to over-think PCR.
13.6 – Final thoughts
And with this, I’d like to end this module on Options, which has spread across 2 modules and 36 chapters!
We have discussed close to 15 different option strategies in this module, which I personally think is more than sufficient for retail traders to trade options professionally. Yes, going forward you will encounter many fancy option strategies, perhaps your friend will suggest a fancy option strategy and show off the technicalities of the strategy, but do remember – ‘fancy’ does not really translate to profit. Some of the best strategies are simple , elegant and easy to implement.
The content we have presented in both, Module 5 and Module 6, is written with an intention of giving you a clear picture on options trading – what is possible to be achieve with options trading and what is not possible. We have thought through and discussed what is required and what isn’t. Frankly these two modules are more than sufficient to answer most of your concerns/doubts related to options.
So please do take some time to read through the contents here, at your own pace, and I’m certain you will you will start trading options the way it is supposed to be done.
Finally, I hope you will enjoy reading this as much as I enjoyed writing this for you.
Good luck and stay profitable!
Key takeaways from this chapter
- Option Pain theory assumes that the option writers tend to make more money consistently compared to option buyers.
- Option pain assumes that option writers can influence the price of options on the day of expiry.
- One can use the theory of option pain to identify the price at which the stock/index is likely to expiry.
- The strike at which the option writers would experience least amount of loss is the strike at which the stock/index likely to expire.
- The PCR is calculated by dividing the total open interest of Puts by the total open interest of the Calls.
- The PCR is considered as a contrarian indicator.
- Generally a PCR value of over 1.3 is considered bearish and a PCR value of less than 0.5 is considered bullish.
respected sir, please update all module up to this and future also in GUJARATI language from module no. 1 to continue………. i m too pleaser i have no word how can i explain my happiness to see translation in GUJARATI so please update all your module in GUJARATI thanks a lot………….
Thanks Nishu 🙂 We just started our work on translation. We are working toward the same, please stay stunned here for regular updates.
Wonderful materials. Why there is no pdf version for option strategies. Would be great if you could put content in major Indian regional languages like Telugu, Tamil etc., Would have great audience for these materials.
We are working on it Guru 🙂
Sir I am trying to make the Max Option Chart on Excel sheet but the calculation of Cumulative Call & Put, I am not able to find it’s formula.
Could you please help me with it…..?
Have you looked at the excel sheet which I’ve uploaded? I guess it has all the details you need.
Sir, I have gone through the excel sheet, And on the cumulative call on 18th columns, the formula starts extending to =R18*B2+R17*B3+R16*B4+R15*B5+R14*B6+R13*B7+R12*B8+R11*B9+R10*B10+R9*B11+R8*B12+R7*B13+R6*B14+R5*B15+R4*B16+B17*R3.
And the data I have made for strike is exact up to 44 Strikes for analysis purpose so as the strike extents the above calculation becomes complicated, as well as one minor error, could lead to completely wrong data
That’s the reason I am asking you for the solution / formula
Ah, I get your point. It does complicated with too many sum product kind of calculations. Here is what I think you can do – try and break up the calculations into smaller bits leading to the main formula. When you do this, the chances of going wrong is also lower.
sir,
option writing is better tools to get return on investment..I think this should explain to people who can’t spend more time for observations and chart reading..Request you conduct any kind of finance programms, shows, investor progrmms frm zerodha
Thank you! We would probably have a session sometime soon. Thanks.
Hi Karthik, We will get very low premium if 5% beyond the max pain.
May be even less than 10,Sometimes as less as 5.
Though premium will be less , Success rate will be high.
What was your experience?
It has always been low premiums but high probability of retaining the premiums!
Dear sir, I’m looking for FUTURES STRATEGIES, please upload as soon as possible.
Thank for everything, Really it was awsome journey from Module 1 to Model 6.
Cheers! The next module is on Trading Systems 🙂
Bhai, you can use Google translate..
Gujarati: bhai, tame google translate use kari sako 6o for translation ( bhashantar)
Maja karo mota bhai
Can you please upload PDF files of module no. 6 for download ? This would make it easy for everyone to access the module on the go. Thanks for wonderful work you all are doing.
Sure, we will do that shortly.
Namasthe Sir
Plz update all modules in telugu language and coming modules also.
Thank u for your great work.
Namasthe! Will surely try and do that 🙂
hi kartik
very very thanks for this module. is now this module finished??
Yes, its all done from our side 🙂
why this module couldn’t be downloaded in PDF format
We are working on it, should be out soon.
Hi,
In Nifty option chain the strikes start from 5450 to 9500, should we calculate all the strikes OI of both Call and Put to calculate option pain?
and when should start to calculate from the starting of the contract or after 15 days?
Technically you should calculate from the start (5450) to end (9500)…but then we know the liquidity is not much, hence we could ignore these strikes. You can calculate the Max Pain value on any day…but I just prefer when there are 15 days to expiry.
Hi,
In Nifty option more OI built in 8000 CE and in 7800 PE and PCR is 0.94 in this case will Nifty expire below 8000 in this may series?
Suggest you also use volatility and SD approach to this.
Sir, Thanks a lot for the simplified option course.
I think few more things may be added to make it complete. Items like Call butterfly, strip strap, covered call etc as you promised may please be included. When we will get detail;ls on pair trading.
Thanks again.
R P HANS
Sure, we will certainly add as supplementary notes as and when possible.
can u provide excel sheets regarding OI analysis, moving averages etc,,,or any link regarding the same
Every chapter has an excel model attached which shows the working. Suggest you scroll down to download the link.
Sir,
I hv opened a zerodha account recently. I want to know does zerodha hv any software of updating OI of banknifty option different strike price where live data of OI for calculating option maximum pain in the excel sheet .
No, nothing of this sort for now.
When will zerodha bring order in kite???
Kite is in order, anything that worries you? 🙂
I mean Bo order type
That should be up and running in new kite.
Hi kartik
I use new 2.0 version of kite. It has Co order but not Bo. Where it is???
Suggest you speak to support for this.Thanks.
Hi,
Based on option pain calculation if we write the Nifty call option keeping 5% safety buffer before 1 day expiry, What is the accuracy ratio from your trading experience? can we make consistent profit?
Well, accuracy is quite high but the money you make is very very little. Someone once said…its like picking up a dime in front of a road roller!
Karthik bro can you start commodity,currency module and pause this option strategy module. Eagerly waiting for your modules on those chapters.
In fact the module on options trading is done. Starting Commodities by last week of this month.
Hi,
FII and DII activity data indicate anything if we watch everyday?
It generally gives a sense of where the smart money sentiment lies, nothing beyond that honestly.
Hi,
Nifty PCR is below 1 from last 4,5 days like 0.90,0.85,0.78. what it indicates? will trend reversal by expiry?
PCR beyond 1.3 or below 0.5 is what I really consider worth noting, none of the other values signify anything much.
lol what a coincidence 🙂
But you got to wait for the first chapter to come out, at least till the first week of the next month!
ah ok thanks for the information bro 🙂
Welcome.
Dear Sir, Any chance of Trading Strategies with Hedging with Nifty Futures in this module will be expected in the near future because this is continuation of options strategies or if it takes much more time kindly give your most valuable reply advice for my personal guidance. Kind Regards, Sastry
We plan to have a module dedicated to Delta hedging and Pair trading, probably sometime by this year end.
HI,
Very Good ready made data for the learners & professionals
keep it up Sir,
i really thanks to Zerodha Team…
Good Luck
Cheers!
Hi,
We are confusion about Nifty trend now, from which level is good for go long or short and reason please suggest me?
I always prefer to trade Nifty only.
PCR above 1.3, look for shorting opportunities…PCR below 0.3 look for buying opportunities.
Hi karthik
i’m a bit confused about PCR
The article says it’s a contrarian indicator.
so a PCR value above 1.3 is be a buying opportunity i.e the underlying will rise.
am i reading it right?
Yes, in fact in the article, I have discussed the rational as well as to why its considered a contrarian indicator.
Karthik, You said <<<>>>>
Mr.Ravi asked <<<<<<<>>>>>>
your reply to him <<<<<<<<>>>>>
isn’t it contradictory? PCR above 1.3 is buying opportunity or shorting opportunity after all?
Secondly, I checked today’s PCR https://goo.gl/RCIeZp which is 51,042,500/40,376,700 = 1.26.
According to your first statement it should be shorting opportunity, right? hence either buying Put or writing Call. but surprisingly how come Nifty is making high day by day?
Thirdly, i have calculated option pain at today’s close of 15th June,2016 and Strike price 7800 comes as a strike price for max pain.
This all sounds confusing.
Shreya – posting this extract from the chapter, hopefully this should clarify –
“You may wonder why the PCR is used as a contrarian indicator. Well, the explanation to this is rather tricky, but the general opinion is this – if the traders are bearish/bullish, then most of them have already taken their respective position (hence a high/low PCR) and therefore there aren’t many other players who can come in and drive the positions in the desired direction. Hence the position will eventually be squared off which would drive the stock/index in the opposite direction.”
Hi,
Should we always check PCR if it is below 0.5 or above 1.3 while taking entry in Nifty?
Yup, you could give this a shot.
Any plans to start a module on Elliott Wave, Neo Wave , Time Cycles and Gann Theory
Not anytime soon.
Dear Sir, Is short strangle at an equidistance of 400 points from ITM Nifty options strike With delta neutral nifty options strategy in the current month series and next month seriesbetter for a full time trader who can monitor the total deltas to zero as per direction of the market for conservative returns on the investment capital after 15 days of series start. Please advise me as I have waited till now for delta hedging trading strategies. Thanking you, Regards, Sastry
As long as you can manage the positions to ensure delta neutrality, it should be alright. I’d suggest you stick to current month series as liquidity is better.
@Karthik Bro.. can you give any idea that how much time you take for updating commodity module.. can i expect it updated in middle of june month..
actually i am trading in equity from last 2 years.. but i tried in commodity markets 3 months ago.. and Burnt my Fingers so badly…
so, i want to gain knowledge about commodity markets.. so, that i can re-enter and cover up my losses..
I guess the first chapter of the module should be out in the next 10 days.
Please mention the path for downloading the data for STRIKE CALL OI PUT OI for the available strikes which you have shown in the module
Check this – https://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm
Dear Sir out of 15 strategies which you have explained to us, out of your good experience , which you consider more less risk for constant monthly even for conservative returns or whether hedging get strategies are more less risk for conservative constant returns to play nifty index options with help of Greeks. Thanks
Each strategy is different and should be used under different circumstances. I personally prefer the short strategies – short strangles and straddles, short ratio spreads etc.
Hello Sir, from where can we get the PCR on a daily basis for stock options and NIFTY ?
Not sure of any reliable source Ashish. Will let you know as soon as I come across one. Thanks.
DearSir,
Is it safe and conservative to play short strangle Delta Neutral Strategy in Bank Nifty options recent modified weekly series wef 27-05-2016 in your view. If so at what Delta and at what equidistance, just like nifty 400 points, from ITM strike price of Bank Nifty option strike, I can play Bank Nifty Short Strangle Delta Neutral strategy and also please advise the disadvantages if any. Thanks
The weekly options are not very liquid. If there is enough liquidity then a short strangle 1000 points either ways would probably make sense. But you should wait and watch how this plays out.
Dear Sir,
Also please advise me what could be the reasonable range from ITM strike in bank nifty monthly options contracts just like 400 points in nifty current month. Thanks
Sorry, dint get that. Can you please elaborate?
Dear Sir, To play short strangle in bank nifty monthly options current month contracts, at what equidistance from ATM strike of call and put of bank nifty, we can trade with DELTA NEUTRAL strategy. Please advise me. With best regards, Sastry
Check this chapter – http://zerodha.com/varsity/chapter/volatility-normal-distribution/
Hi kartik
How can I know the expiry date of future contracts of mcx i.e. commodity markets
MXC website has all the info, check this – https://www.mcxindia.com/market-data/top-gainers
Dear Karthik,
It’s great pleasure reading all these articles and gives deep insight on option trading. I would love to see more complex strategies like iron condor or mouse ear condors which one can use for monthly income generation.
Are you planning to write on any such strategies ? Or can you let me know source of knowledge where I can understand such strategies for monthly income generation ?
Thanks.
Thanks you. I will be discussing this at a later stage I guess…as supplementary notes. For now we shifted focus on Currencies 🙂
Please Add Download PDF link
We are working on it, should be available soon.
hi karthik,
can u give us excel sheet for pcr calculation? otherwise any site regarding d same.
Its in the same excel sheet.
When will other modules on trading systems and currency be updated.
Waiting for them eagerly.
We are working on the Currency module, the first chapter will be out in a day or 2.
Dear Sir,
I guess that Delta Hedging with Future strategy means buying Nifty future assuming total DELTA as ONE and buying ATM strike of call or put options with total Deltas of ONE this side vice versa. Please advise me whether my understanding is correct or wrong. Thanks & Regards, Sastry
You are kind of right here. Delta Hedge works on a similar idea.
Dear Sir, Thank you very much for your replly to my query on Delta Hedging with Future. But I could not understand your reply telling that ” You are kind of right here.” Can you tell me in detail please. I feel so sorry for repeating same query. Kind Regards, Sastry
I just meant to say you are thinking in the right direction 🙂 However, the exact steps of Delta Hedging will involve a bit of daily adjustments, we will be discussing this step by step when we take up this topic.
Hi, sir
when can we get this option strategy module in PDF ?
Will try and put this up soon.
sir make video s fo this subject.or webinar session.last 6th option strategies not download page.pl.help.
What is the problem? I can help you with your query. Please do feel free ask.
Sir,
Please could you suggest a strategy or two that is based on margins ( premiums ) instead of one in which we have to wait till expiry??
In fact all the strategies can be implemented for intra day or for overnight positions. You need not even have to hold them to expiry.
what is the use of the helper column in Option Pain computation excel table ?
That was to hold all the calculations, if you double click on the formula cells, you will know the exact steps.
Nice learning, thanks Karthik & others for their Qs…
Cheers!
Could you please elaborate on the use of helper column? I mean that if you could please clarify that if the helper table in the excel sheet can be used in real life estimation of max pain point? And also, do you consider a certain range for put call ratio?
Ah, no…I used the helper column to just help myself with ease of calculations. No range as such.
Karthik,
MaxPain theory can we also apply to stocks ?
Do we need to see liquidity in that particular stocks too ?
Yes Amit, Max pain is applicable to stocks as well.
sir
If I bought nifty call option eg Nifty30June8400CE @ 100 rs one lot (25) . If I hold till expiry. At the expiry nifty at 8700 then can I exercise the option at the expiry.? is there any switch for exercise like square off..? how it works?
And from above example how much profit I made..?
You can hold this to expiry. You’d make (8700 – 8400)-100 =200
=200*25
=5000/-
Hi Karthik, Tried Max pain on July 16 option nifty data and max. loss is being indicated for 7500 strike of about minus 917 million. Considering Nifty today is approx. 8200 and the nearest strike price points with losses ( much smaller losses ) are wide apart, I AM UNABLE to interpret this result in today’s situation. Can you assist . Thanks
Do you have an excel with the calculations?
Sorry, withdrawing my comment. I inverted my logic and computed max pain rather than min pain. Ignore my comment. Thanks
🙂
Hi Karthik,
Do we need to update all values manually in the excel to calculate pcr ratio ? cant we automate it ??
please advise
I suppose you can write a simple macro to do this or use Kite Connect APIs, check this – https://kite.trade/
Hi karthik, your modules are awesome, actually can pay for the quality,
I have a doubt regarding futures trading types,
Do we have trailing stoploss feature for NRML type product,
Or they just limit to only BO or anything only intraday,
In module 4, page 78 in table regarding trailing stop loss, you have shown the days column, by which it meant NRML product, or if it limits to only intraday, how come the days column?
Hope you get my point,
Wish clarify my doubt
Thanks Uday 🙂
No there is trailing SL for NRML, its available only for BO. For your second query, can you please help me with the chapter number?
Today when PCR is calculated, it shows 1.4 which indicates market is oversold and will be bullish soon. When I calculate the Max Pain, 8100 is the value where the market is likely to end. Is it wise to exercise 8500/8600 call option?
By exercise you mean call writing?
That’s correct, is it a good idea for 8500/8600 call writing?
I cant comment on that 🙂
Dear sir, when we calculate pcr and derive an expiry value and we keep cusion of +5% of that derived value, what r u the chances that the market may expire in a range of -5% of that derived expiry value. (i am asking this questions in regards of your personal experience).
thank you in advance.
As far as I remember 1 in 5 trades would go wrong…and the loss trade would take away at least 25% of total profits. But I’d suggest you back test this yourself to get a fair idea.
ok, thank you sir.
Welcome.
Hi Karthik,
Can you please also explain cross calendar options strategies.
Thanks,
Raja
Will add that as a supplementary note at a later stage.
hello sir,
there are so many contracts being traded on the exchange. is there any way so that we can fetch data from NSE india or any other website directly into excel sheet to automatically calculate the total loss value?
thank you
You can download the bhavcopy as a CSV from NSE India and automate these calculations.
Hi,
what is the logic behind option pain theory?
why there is high probability of market expiring at that strike where there is minimum pain to option writers?
Regards
Rohan
Rohan – have explained the logic in the chapter itself 🙂
Hi Karthik,
Great work on Option strategies!! But I didn’t find any PDF download option in Option Strategies Module as I usually read the modules in travelling!! Please provide as it is a useful feature !!
Thanks Amar. Sure, we are working on it, will put it up as soon as possible.
Hi Karthik,
One more question. In the above calculation for Max Pain the value comes to 7800.
5% buffer is approx 400 points. You have take 5% in upper range.
Shouldn’t we take range as 7600 to 8000 (+-200 points)
Technically yes, but I’m quite uncomfortable shorting Put options.
Hello Sir,
Thank you very much for the tutorial and yes, I have thoroughly enjoyed reading the same. I am not clear on this point… .You have mentioned “I would set up strategies keeping this expiry range in mind, my most favorite being to write call options beyond 8200”. Does this mean you, wait until nifty goes beyond 8200 and then write calls? What should be the scenario if nifty doesn’t even touch 8200? Please shed some more light. Sorry if my question sounds naive.
Beyond 8200 – by this I mean strikes beyond 8200…like 8300CE or 8400CE.
Sir this is very very imp for trading
Hence the chapter 🙂
Karthik,
I am a newbie to trading. Varsity has provided me with necessary primer knowledge – thanks for that. I have the following query:
I have started following stars in OpenTrade. I do not see any of the stars trading options. Also the most successful stars that I have followed seem to do intra day trading only. On top of the theoretical knowledge from Varsity, the practical application I see appears to be the strategy of trying to gauge the price movement in very short term – exit with profit, if correct or exit with loss, if incorrect.
Could you please elaborate if my perception is wrong. Could you please also comment on the need of including a chapter on intra day trading in Varsity. Also is there any guideline as to how to become a full time trader?
Thanks and regards,
Samir
Samir – I cannot comment on what the stars are doing in Opentrade!
There are no set guidelines on how to become a full time trader simply because there are so many styles and strategies the the trader can adopt. But yes, we do plan to write about few strategies going forward.
Hii Karthik,
You have written wonderful modules in easy language. I am currently trading a mean reversion strategy on Banknifty futures. Although, I have been successful at it, I want to know which option strategy is best for trading short term mean reversion strategies. Also , one of my rules is I scale in to positions if the signal still suggest oversold scenario. My strategy stats are: winners 85%, holding period on average is about 5-7 days, Monthly about avg 2 trades. Please let me know of options strategies where I can use the leverage at the same time reducing my max risk. Thanks
Hardik – this really depends on when your signals occur. For example if an overbought signal (therefore expecting a decline) occurs closer to expiry, then you should be shorting strangles to exploit time decay. However if you get an oversold signal (therefore expecting a rally) half way through expiry then you should be looking at buying slightly OTM options. Of course you can calibrate based on many such parameters.
Dear Sir,
What is a mean reversion strategy? Can you please explain in brief please. thanks & Kind Regards. R V N Sastry
Assume the average price of a stock is 100, and it now shot up to 110, then you expect the stock to revert to its mean which is 100. In other words you expect 10 points correction. Alternatively if the stock is down to 90, then you expect the stock to go up 10 points to 100.
Hello Karthik,
This Options Strategies module is explained well with easy to understand (especially to those who are new to trading options strategies) examples. Appreciate your efforts on this. I have enjoyed reading Options Theory chapters as it has a lot of excellent content for intermediate or even expert options traders (as a refresher). My suggestion to you is to cover at least 4 more important strategies (Covered Call/Put, Collar, Condors and Butterflies) to make Options Strategies module complete. I believe it will be very useful for retail options traders to know about these strategies. Once again great effort from you and Zerodha team in coming with such a great education offering.
Thanks again! Will try and add these topics sometime soon.
Hello Karthik Bro,
At first, many many thanks to you and zerodha to initiate to varsity module. You are my mentor. I appreciate your effort. I learn many new concepts of trading from these chapters . Is these module complete or new chapter introduced (for option strategies) in near future? To calculate option stock or nifty, any tools or software available like MAXPAIN & PCR RATIO? Please suggest me some suitable tools to calculate and implement option strategy? Is option oracle help in this regard?
Amit, thanks for the kind words 🙂
For now we consider this module done, maybe at a later stage we will add some supplementary notes.
I’m not really sure of good reliable tools to do this, will certainly keep you posted as soon as I get to know myself 🙂
Hi Karthik,
If there is no tool for plotting the max pain graph, can you suggest any way to fetch the required data so that I can manually plot it?
It would be better if I can make some API call to fetch data in real-time.
Thanks,
Aditya
Nothing that I’m aware of Aditya. However, we will make few announcements around options platform in a month or two. Watch out for that. Thanks.
Can you add pdf version to it for better reading of this module
thanks
We will do that sometime soon. Thanks.
Can you please mak the module in pdf version so that it can be downloaded to read offline.
thanks
over here http://zerodha.com/z-connect/queries/stock-and-fo-queries/open-interest-maxpain-put-call-ratiopcr , nithin has mentioned that if PCR is above 1 means put has been written and hence, it would be bullish and vice versa.
Yes, PCR is a contrarian indicator.
sir,iam from INDIA a big follower of u ,with all u people inspirations&10yrs of hardwork,knowledge&littlebit dicipliene&due to my health&wealth conditions.i have opened a trading off where in iam asking clients to deposit a small amount of 22000rs in THEIR ACC&i will trade on behalf&promise them to pay 1100(5%)per month by trading their acc%i will charge 2200(10%)this strictly i trade only 1lot of NIFTY OPTIONS&wait having lot size of 75 my premium in buying will never increase 100rs/lot(this is begining as i get good results iwill say clients to increase)now the question is iam not consistent sometime i make money&give it back how can i be professional&trustworthy ple guide me with quick reply
Narsimha – please get yourself one of the following licences SEBI-
1) Investment Advisor
2) Research Analyst
3) PMS manager
Without any of these you cannot trade/advice on behalf of clients. Also, this is a very risky business (trading and assuring returns to clients), I’d suggest you think about this thoroughly before acting.
sir,actually i dont want to go in that big way,people around me want to invest in mkts but they dont know athing 7&i want to make livelyhood(anyway trading is my life&passion)and mover iam promising only 5%&iam operating from home no labour no etc only 5 computers&cbill iam little bit handicapped&i dont want to open off,shop at any point of time,my logic is if i do anything rathen trading(which idont believe even thogh i own a saree shop bcozover heads rent,keb,labour exceeds 15%&we will never take home athing in this competative&uncertain economic world)so what i want to say is when RISK IS PART OF LIFE why i cant i go with small risk&create my world of 40 clieents&trade proffessionally&win their trust ofcourse i know the uncertnitys of trading so iam stritly operating as hedge fund means some win some loose my querry to u is iam able to make wins but not huge enough to support loosers GUIDE
Well, the choice is entirely yours!
To begin with stick to stoploss, where the SL is based on logic. Here is a chapter which explains how to place logic based SL – http://zerodha.com/varsity/chapter/volatility-applications/
This I think is the Best conversation in varsity…. Enjoyed it a lot !
I have an advice for Narasimha. What you are planning to do, in simple words, is to take a LOAN from fellow clients and give them a monthly interest of 5% (i.e. annualized interest of 80%)… and you are planning to use that LOAN to trade in stocks. So you have to earn 100% to make this business profitable. If you understand this math, I think you should be very very cautious. I can only see a collapse as no business in the whole world has achieved such high level of returns ever. Besides, every great person has always advised us not to borrow any money for investment in market.
Very true Sudipta! Sustaining such high rate of returns is not only difficult, but almost impossible to achieve in the first place (year after year that is). Besides, borrowing to trade can be disastrous!
sir,whenever we check fair values of options call option premiums will be below current mkt prices&it will be trading cheaper then put options even though many people will be trading call options why? ELABORATE DETAILY
Its not like people trade only call options. They trade both CE & PE in equal measure.
you said you will add supplementary note for reaming strategy such as calendar spread …when you will add ….???
Pravin, will add this whenever possible. Cannot commit a timeline as such.
Hi Karthik!
When are you adding pdf version. Please do so, It will be highly convenient for me.
AS I’ve mentioned, we are trying to get this done. If its urgent, please use the convert to PDF option from your Chrome browser.
Is it like max pain is lowest for ATM strikes and it gets higher as we go far from ATM strike??
This really depends on how the OI changes…cant really generalize.
pls……upload PDF
Guru ji…..
Working on it.
I want to share a excel sheet here. but I can’t. please provide to upload files
Cant really upload excel here, but what is it about?
Wonderful material. Looking for a pdf version for option strategies. Thanking you sir.
Very soon the PDFs will be available.
Hi Everyone, I am new to trading. I have a question, may be very basic one: where do we get news related to corporate qtly/yrly results announcement s or RBI policy announcements at the earliest? I mean is there any particular site(s)? Bcoz by the time it comes to google news it’s bit late from trading perspective, I think. Please reply.
Dear Mr.Karthik you are doing a fabulous job. Study Materials on varsity are simply great, especially for people like me who are in elementary school. Very insightful and lucid writing. Keep it up.
Getting real time news is a bit tricky, we have tried to aggregate all the news into a single page, check this – http://pulse.zerodha.com/ , lots of traders find it useful.
In fact we do have a Chrome extension for Pulse, which I think is really cool. Check this – https://chrome.google.com/webstore/search/zerodha
Btw, thanks for your kind words 🙂
Dear Karthik, thanks for the info, i will definitely check it out 🙂
My account opening with Zerodha is in process (submitted signed form with all documents to Zerodha), hopefully it will be done in a day or two (working days). When is the “Trading Strategies & System” Module is expected?
Are there any demo videos of Pi, Quant & Kite on Zerodha Site or YouTube?
That module will take some time 🙂
I’d suggest you check out the user manual for Kite – https://kite.trade/docs/kite/
And this for Q – https://q.zerodha.com/dashboard/
And this videos on Pi – https://www.youtube.com/watch?v=Hg5iZzvBV1A
Good luck with your new Zerodha account, and of course – Welcome to the family 🙂
Thanks a lot. ?
Welcome!
Can you please upload PDF files of module no. 6 for download ?
By next week.
The PCR for Sep16 is 1.02 whereas PCR for DEc 16 is 0.88. Looking at these numbers, Is there any possibility to enter in some kind of Calendar spread ?
Ah! Not sure, I’ve not explored calender spreads via PCR route. Maybe worth the try.
Hi Karthik,
Can you give some theoretical knowledge about diagonal spread? also want to know that is diagonal spread and calendar spread are same or are different.
Regards
Haridas.
Sure, will try and add that as a supplementary note sometime soon. Thanks.
Hi Karthik, Put and call options OI includes long and short positions. Then, how can we say whether it is bullish or bearish just based on the OI while calculating PCR.
PCR does not read much into positions…but just the number of contracts open in the market.
Exactly… That is what i’m asking, open contracts may have buy and sell both…So how can interpret bullishness or bearishness using PCR
Yes, open contracts include both buy and sell. Think about it this way – for example if the number of Put contracts are increasing, it means that there are more people willing to buy Put options, implying that people are bearish. The same way for Call options.
Very sorry Sir,
But, concept is still blur for me.
1. Even bulls can choose (write) Put options to benefit & bears can choose (write) call options to make profit. We can’t clearly say that more Put option OI indicates people are buying put options,hence they are bearish.
2. Put option OI of 200 would indicate that 200 new contracts have been introduced today. Means, 200 people opened long put positions (they are bearish) & 200 people opened short put positions (they are bullish), hence making put market contracts (someone buy+someone sell=market). So, even if PCR is 1.3 that only means that more people (both bulls & bears) are involved in Put instead of Call. It does not show bears activity because contracts would also have been shorted by bulls at the same time.
Please clarify the flaws in (both of) my understandings as PCR might be a supplementary confirmation input in my trading system.
Thanks in advance
Regards
James
Ohh !! sorry, I was in little hurry to post my query regarding OI PCR. I got all clear answers by Honorable Nithin Sir at http://zerodha.com/z-connect/queries/stock-and-fo-queries/open-interest-maxpain-put-call-ratiopcr.
Please ignore my query now. Sorry again!! 🙁
Thanks Z-Team for such a kinetic ocean of dynamic thoughts on markets.
Regards
James
Awesome 🙂
upload the PDF sir………….. its already lots of week passed away
Please email – [email protected] for the PDFs.
is there a site where we can get last 1 year pcr value for stock options
I’m not sure Praveen.
hi karthik, please tell me some strategy so that i can earn money daily from intraday trading.
Both our quests are similar my friend!
Hi Karthik,
You have mentioned somewhere that for intraday, nacked options are better. Could you please explain bit about it. And please suggest some strategies or technics for intraday
Although you can still go ahead and use multi legged option strategies, naked options are a lot more simpler and easier to handle for intraday trades. The reason is that their payoffs are simpler compared to the complex pay off structure of multi legged options. Intraday is best done with the use of technical analysis.
hi
when we do pcr calculation, starring of the month , middle , expire day?
PCR is a dynamic ratio and can be calculated whenever you wish.
Hi Sir,
I calculated maxpain today(21-9-16) for Banknifty and the max pain is coming to 20000. Adding 5% is 1000 points. Hence 20000-21000 is a huge range. How much % can be added for Bank Nifty.
The module is a real eye opener. Thanx for the wonderful explanation.
Glad you liked the explanation Ramya.
Agreed it is a huge range, but if the premiums are good, why not write them ? Chances of retaining the premium is certainly high.
Hi Karthik, First up all many thanks for this nice material. I was trying to compute the max pain for a few stock indices over the last few days as we are very close to this month’s expiry. However, in all the cases the least pain is coming out to be somewhere around ATM. Is it by chance that I am getting this or is it expected?
Could be by chance, you will have to try this for few expires.
Sir, nice lecture in all modules,, thanks for teaching us, as per max pain strategy nifty October series expiry @ 8650-8700,, suppose if I writes 9100 CE and 8300PE, I get premium of rs 1645,, is that profit worth of my work on investment 41000 rs
Well, that depends on how you view it. If you find a 4% return over 12 days sounds attractive to you, then maybe you should consider !
Hi Karthik,
this concept of Max pain looks so simple and very powerful. Thanks for making such a understandable material. I have a doubt in the calculation. While doing the calculations, what is our assumptions in the premium paid and received by the respective parties. Are we ignoring them ? Thanks.
Premium is factored in by multiplying it with the strikes, so it is kind of factored in.
Ok thanks. One more question on the assumption that, it is always the option writers win. Is it because of the fact that you established during the introduction of options, in the options trade they(writers) have a probability of 2/3 when compared to the buyer who has the probability of 1/3 ?
Yes, the odds of making a profit is more favorable for an options writer. For reasons stated earlier in the options module.
Hi Karthik,
Have u tried max pain theory on weekly banknifty option. If yes then when one should calculate max pain.
I have not, but if I were to do this, I’d run this on Wednesday evening to take positions on Thursday morning.
Low PCR means bullish market sentiment, but today i.e. 23rd Nov’16 the PCR is 0.5 and market has gone down beyond 500 points in last one week. Is it not bearish? The PCR is showing it otherwise.
PCR of 0.5 is not really number you can consider…below 0.5 is considered bullish.
Dear Karthik
There is some confusion here. Let’s go by pain theory you have explained. Basis pain theory call and put writers are wiser people and they win the game most of the time. Going by this if they have written more calls compared to puts (PCR < 1) means they have less fear of market coming up and hence the sentiment is bearish. If the PCR is below 0.5 means sentiment is too bearish ( I am discussing these number from NIFTY prospective otherwise it could be different for other derivatives). Since most of the people have bought the put and now since very few buyers left and value wise stocks now look cheap, this trend may reverse. Probably one can look for buying calls or future at this point because the reversal is anticipated. That is how I understand it….. Please amend the article if you are convinced.
Santosh – PCR and Max pain are two independent theories. Max Pain does not really get into the details of number of call or puts written in isolation. It just identifies the point at which there are least number of options written. Further, this is purely derivative data and should not be mixed up to draw inference on spot prices.
Hi,
Thankyou for the wonderful module. Everything is beautifully explain. I wanted to know where and how to back test these strategies .
THankyou
I’m happy to know you liked the contents here. For back testing, I’d suggest you have a look at this – http://zerodha.com/z-connect/tradezerodha/pi-tradezerodha/eas-for-auto-buysell-signals-pi , good place to get started.
Respected sir as per our calculation of max pain nov-16 series expires at some where around 8200 or 8300 but this time nov-16 series expire below 8000 so how this can happen please explain me.
Sachin – Max pain is a theory…and like any theories it has its own set of pros and cons…its upto you on how to interpret it and improvise it to suit your needs. I guess I have even shared how I used to improvise it for my own trading.
sir,any article on nifty option chain ,how to read open interest and change in open interest along with volume to get direction of market.
Here you go – On Option Chain – http://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
On Volumes – http://zerodha.com/varsity/chapter/volumes/
And OI – http://zerodha.com/varsity/chapter/open-interest/
Hi Sir,
Today, for sunpharma, the PCR is 0.4 and min pain comes out to be 640 strike for expiry. future price is 629 and its underlying in at 628. It has climbed up by 14 points today. PCR suggests that it is over-bought and it will come down from 630. and max pain suggest expiry near 640.
So my question is what should be approximate view by PCR and max pain theory(both are giving kind of opposite view), whether it will go up more or come down. 29-Dec-16 is expiry..
Thanks in advance
Between the PCR and Max Pain, I would rely (if at I have too) on Max Pain. I would add few % points to the max pain point and consider it those values.
Dear Karthik Sir,
kiya aap sab modules ke sabhi chapter ko hindi me translate kar diye.. jaise option theroy hai Modules 5.
Thank you
We will try and do that. Thanks.
Hi Karthik, would it be possible for you to share a check list for options trading the way in which you shared for technical analysis? I do know that it would be complicated but please see it if you can do it. Thanks.
Preparing a checklist for options can be very tricky as there are many permutation and combinations possible. Its not as straight forward as technicals…so it may actually get misleading.
Thanks. I guessed as much!! But please see if you can give some broad bullet points. That will really help newbies like me. I find it very daunting and confusing to trade options.
Sure, will try and do that.
Hi Karthik, just trying to prepare flow of events/steps for options trading. Would the following be the right steps/thought process (have covered only one leg as i can’t paste the flowchart here.)
1. Technical analysis >> 2. outcome bullish >> 3. Say Moderately bullish >>4.check no. of days to expiry 5/10/15/25 >>5. Check Volatility >>6. Calculate Option Greeks >>7. based on it decide the strategy say bull call spread
Is the above OK? Should some of the steps need to be interchanged? Like step 6 first and then 4 or 5? Or anything else that you can think of which is missing here. Please revert.
I like your systematic approach. The flow seems right. Nothing needs to be interchanged.
Sir, will you please make a list of all the formulas & syntax used in ms-excel for calculating various stuffs mentioned in these 6 modules?? 🙂
Will try and do that sometime 🙂
Hi Karthik,
I have gone through the entire modules in varsity in last few weeks – at a stretch. I am doing trading for nearly 8 years now. I have always been a fancy trader, and never tried to be serious about it. But now I have started taking it seriously for a regular decent income and hence I thought of taking some education. I started reading these modules with that intention. Man, you are great ! The level of details you went into, still the simplicity you maintained, the way personal experiences you have shared – every bit of it is marvelous. If I ever make a remarkable success in trading, a good portion of that will be indebted to you. Really, you are an awesome teacher. You have created a master piece.
I have come across many questions and now I will be shooting them, hope you dont mind. I will start with one question as below:
In this Max Pain calculation, I can see that you have summed up only the Loss part of the option writers for various strike prices. For a particular expiry value, if an option writer is in profit, you did not include that. Only the Loss parts are summed up.
For example, let us say that the Max Pain calculation gives us Price Point A. So, if the underlying expires at this price, the total loss incurred by the option writers will be at a minimum. But, we did not talk about the profit part. Not all option writers will incur a loss for Price Point A. If we adjust the total profit of the option writers and total loss of the option writers for Price Point A, we will get the Total Impact (may be net profit or net loss). Now, there can exist another Price Point, say B, for which this Total Impact will be greater than Price Point A. That means, if the underlying expires at Price Point B, the option writers as a whole will have the highest profit. For Price Point A, the loss part may be minimum but the profit part is also not great. Hence an expiry at Price Point B is more probable.
I came to this conclusion because I started asking myself, why are we calculating the “Loss” part of the option writers, while we believe they are the one who make profit. I did not understand why the profit part is ignored and only the loss part is calculated here. Can you please explain to me ?
Thanks !
Thanks for the very kind words Sudipta. I’m really happy you liked the content here.
Max Pain theory starts with the idea of identifying a point which creates least amount of loss to option writers. The simple reason for this is that, for option writers loss can be unlimited and profits are restricted to the extent of premium received.
Thanks Karthik for your reply.
I am not sure I understood the rationale behind ignoring the profit part. Of course I acknowledge that the losses can be infinite, so they are more imp. What is was thinking is not to take profit alone or loss alone, but the sum of them. Anyway, I will take it just as a thumb rule and wont bother much on this. Let me go to the second question.
–
I have calculated the Max Pain following this formula for several Nifty scripts (Infosys, TCS, SBI, Asian Paints, Nifty itself and Bank Nifty). What I see, the Max Pain value is always close to the current market price for each of them. I have done this for 3 consecutive days. When SBI is at 245, the Max Pain is coming at 250. When it is 242, Max Pain is 245. When Infosys is at 1008, Max Pain is coming at 1000. When Bank Nifty is at 18050, Max Pain is coming at 18000. When Asian Paints is at 905, Max Pain is coming at 900. Without any exception, it is showing this behavior invariably.
–
The first thing that comes to my mind is, my calculation may be wrong. So I searched for some online sources to calculate Max Pain and I found few sites which give the Max Pain value & chart. To my surprise, the value shown in those sites is also matching close to my observation (i.e. nearest strike price w.r.t. the current market price of a script). So the calculation seems to be correct.
–
My question is, does Max Pain behave always like this ? If Max Pain is always following the current market price, there is hardly any use of it. When I thought more on this, I feel this should be true. I remember the first rule of the market which you stated in the very beginning – Market discounts everything. So, Max Pain – since it is easy to calculate or look at from any site – should be known to all traders and should be discounted already in the market price. It is hard to believe that there is a formula to predict what range a script will expire at, and still the script is at present far off from that range. At least Max Pain must be well known to everyone and if it does give a different result, the market will adjust itself to the projected point making Max Pain value again irrelevant.
–
With this background, I would request your analysis & comment on this behavior. Please help me to understand what is happening.
–
Thanks a lot in advance.
Sudipta – I’d like to thank you for sharing the results of your analysis, I’m sure many will benefit from this. What you’ve seen is very true. In fact this is the reason why, back in the days, I myself modified the Max Pain theory and adopted to a new trading strategy. I’ve discussed this in section 13.4. Remember, markets discount everything.
If you know or discover something, chances are 1000’s of people in the market already know it. You develop an edge when you add that extra (but meaningful) ingredient to your trade process. You take on general theories like Max Pain and play around with tweaks until you get good results. That’s how traders develop their systems.
Thanks Karthik for your comment. Yes, we seem to be aligned, same thought process. To be frank with you, I started for only 2 weeks and I have a positive closure everyday in the live market. The amount may be ridiculously small, but it is a positive figure even after deducting the brokerage & tax. I am happy and my first motto is to not make a big loss. I know profit will come automatically, we just need to stop the losses.
–
Everyday I am just making 4-5 trades at max. May be 2-3 are losses and 1-2 trades are only profitable. But overall it is a profit. And with this 2 weeks experience I can say 1 thing for sure, although I am trying to apply all the rules, the candle sticks, the theta, vega, MACD, support, resistance…. there is not a single thing which is sure shot. That is probably the beauty. More than often, it is the fundamental strength of a script and little bit of tactics that results the fruit. And Risk Management is a big big thing.
–
Let me ask my 3rd question, sorry if this is a lengthy one. Well, I was trading in Tech Mahindra Options today. I saw the script has gone up 8-10 points in last session and hovering around 500. I know this company’s business well so I have a rough idea what it can or cannot do. I sold 460PE and 540CE together (that is probably called a Short Strangle, anyway). My expectation was that the script wont run away so soon, and it is not going to go down too much (just yesterday they made a joint venture in Europe and in talk with another MNC for a big deal). So the script will remain range-bound and I will profit from the time decay ! I wanted to squareoff the positions by end of the day where I could gain few paisa. The 460PE was trading at 1.6 and 540CE at 2.6 when I bought. I know that we should ensure zero delta. But I deviated from that. Delta for 460PE was -0.09 and that for 540CE was +1.42 so it was positively biased. I shorted this positively biased combo because I am a hardcore believer of your sentence – “Fear spreads faster than Greed”. It is so true and I have burnt my finger earlier. So I thought, let 540CE short run little faster, I am not worried, it will come down eventually, but I cannot take much risk with the 460PE short. After this transaction was over, what happened was completely unexpected. The script started downward journey and within 40-45 minutes it came down from 502 to 492. Now imagine the options prices. 460PE quickly went up from 1.6 to 2.85 (1.25 points move) and 540CE came down to 1.8 from 2.6 (0.8 points move). As per their delta, 540CE was supposed to come down faster than 460PE going up. But the opposite happened in reality. Fortunately I had stoploss applied everywhere and hence just a marginal loss was incurred. But I could not understand why it happened so.
–
There was no other big issues in the market. Overall market was quite bullish today till the end. There was no specific bad news in Tech Mahindra or any IT company. The script ran up faster in last few days, so it was a natural retreat I believe.
–
Can you please help me to understand why the 540CE came down slower (with a higher delta) and 460PE ran faster (with a lower theta) ? The Gamma or Vega I believe does not have much to play here since the range is very short, and time frame was also just 45 minutes. Kindly help me to understand it from the theoretical perspective.
–
Thanks in advance.
I’m happy for you Sudipta. Hope this is a start of a glorious trading career for you :). Yes, Risk management is big ingredient when trading, and we will be discussing this in the next module.
I went through your entire Tech M options trade, I’d like to point out few things that you’ve mentioned, –
1) ‘I know what the company can and cannot do’ – this is a fundamental call. Effects of this roll out over a long time period. You cannot make a fundamental call and initiate an intraday trade. Timelines (and therefore the conviction) for the trade does not match
2) You are talking about benefiting from time decay withing the day – this does not happen unless and until you are close to expiry. Best to do these trade (with an expectation of benefiting from time decay) close to expiry
3) There was a fundamental event (JV, talks with MNC) – on days like this its best to avoid trades on TA. Reason is simple, FA has a greater influence on the stock compared to TA
4) Yes, fear spreads faster than greed. So when the price came down, the put gained faster than the loss in calls. I dont see any issue with this. Further, there is also the angle of volatility here which needs to be factored in.
5) Options is a completely different beasts. It has multiple forces acting upon it. The only way to learn options is to keep questioning yourself…it many not be possible to justify every move in options…but so long as you get the overall idea of whats happening (justification based on numbers and greeks) you should be good.
Correction of typo:
Delta for 460PE was -0.09 and Delta for 540CE was +0.42 (I wrongly mentioned +1.42 above). Overall a positive delta.
Thanks a lot Karthik for your reply. I am unable to see any “Reply” button in your last reply above, strange. Anyway.
—
Thanks once again for your detailed analysis. Yes, I understood the mistakes & I completely agree. I will keep these valuable points in mind next time. Everyday is a new learning 🙂 The only thing which is still puzzling me is the delta. I will closely observe their values and correlation with the price movement to better understand it over due course of time. One thing is for sure, I will be henceforth very very cautious about PE. It is safer to play with CE.
—
You may be happy to know that the loss making trade of yesterday came out profitable for me today. I had to square off the PE when stoploss triggered. But I did not square off the CE (which was making a small profit yesterday). Took a chance and last night Trump helped me with his Visa news – today I gained good profit in that CE option and still trailing.
Sudipta – You need to be indifferent to PE and CE. They are two sides of the same coin. You need to learn how to use it to your advantage.
Good luck and happy learning 🙂
Dear Sir,
I would like request you to kindly include in F&O segment live nifty options greeks scanner and portfolio greeks watch to enable to study option chain and to enter into options strategies according to greeks.
Thanks & Regards,
R V N Sastry
We are working on it, hopefully we should have something soon.
Hi Karthik
We don’t seem to have discussed the following strategies which were a part of our agenda as per the first chapter.
Call Butterfly
Straps
Strip
Long & Short Iron Condor
Long & Short Butterfly
Box
Are we going to discuss these?
Regards
Arya
I’m aware Jay, will try and put these up as supplementary notes soon.
Dear Mr Karthik Your lessons are excellent. I regularly read them. I request you to kindly clarify the following doubts.
2. I got a doubt on options chain analysis. We observe minus (-) symbol in open interest but the price of options calls or puts increasing. How to analyse it? Pl guide me by your advise.
3. Nextly we frequently see minus in price on both sides. Can we conclude that the market is sideways and rangebound. Am I right?
4. On some occasions we see minus in price say on put side and increase in call price. Can we conclude that that the stock price goes up and we can a buy a call if IV s more or sell a put if IV is less.
5. I request you to kindly clarify on my doubts.
Regards,
VAN Kumar, Vijayavada, AP
0866-2589106; 9490347419
Happy to know that you like the contents here 🙂
1) The +ve and -ve sign of IO only indicates how many new contracts have been added or reduced. Does not really impact prices
2) This happens when the volatility increases and then reduces
3) Again, this is due to volatility. I ‘d suggest you read through the chapters on volatility to get a better understanding of this.
Dear Karthik thanks for your prompt reply.
1. I have the following doubts on ATM Call and Put Charts.
2.For example if Hindustan Unilever spot price today is 865 and I want to buy a 900 March call. The charts available show only live and historical data for 860 ATM Call and Put. How to view the IV,Vega etc.,live and historical charts.for 900 call. In which site I can get option charts in a comprehensive manner, i.e., delta, gamma, theta, vega plotted in one chart for all calls and puts. Pl advise.
Regards, VAN Kumar
I personally think there is no point in looking at the chart of Options. Getting historical data of IVs etc are quite difficult, however you can look at the latest values by punching in values in a B&S calculator. Here is one that we have put up – https://zerodha.com/tools/black-scholes/
Suggest you give it a try.
Hi Karthik,
My query remains unanswered. Matter pasted below in quotes:
“AK014
February 27, 2017 at 12:39 pm
Hi Karthik, just trying to prepare flow of events/steps for options trading. Would the following be the right steps/thought process (have covered only one leg as i can’t paste the flowchart here.)
1. Technical analysis >> 2. outcome bullish >> 3. Say Moderately bullish >>4.check no. of days to expiry 5/10/15/25 >>5. Check Volatility >>6. Calculate Option Greeks >>7. based on it decide the strategy say bull call spread
Is the above OK? Should some of the steps need to be interchanged? Like step 6 first and then 4 or 5? Or anything else that you can think of which is missing here. Please revert.”
Replied.
Karthik, Thanks. I must say that with this initiative (Varsity), you, Nithin and team are doing a commendable job. Without this people like me have been shooting in the dark and doing trading/investment but mostly losing money in trading. I keep on reading about F&O in various fora but nobody has done it the way you have done. In many cases, if you act based on their “advice” you are bound to lose money consistently. Hope that you will keep on improving various aspects of this initiative. Wish that i had come across this much earlier in my life. Better late than never. Anirudh
Like you said, better late than never!
Good luck, Anirudh. Stay knowledgeable and profitable.
Hi dear karthik,
Can you please suggest further reading on Max Pain, Leveraging Greeks and anything relevant to Option Strategies that will take us to next step of options trading.
Regards
I really found this book quite useful – http://www.amazon.in/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
Dear Karthik
Thank you so much for referring the book.
Regards
Cheers!
Mr Karthik I request you to kindly guide me as to In which site I can see IV having different strikes loaded in one chart for vertical smile and skew analysis.
I’m really not sure if there are any sites which offer accurate info on IVs.
15 days are calendar days or trading days to calculate maximum pain? pls clarify
Trading days would make better sense.
it would be a bit of long gap between expiry and calculation of maximum pain price. won’t it.
Yes, I guess it makes sense to have this gap so that you can identify the right strike and benefit from higher premiums.
This is an honest job by author. it is nice to have the people like this. ok. max pain theory is definitely good clue for option trading . but this is certainly the contrarian game and one should egile enough to become contrarian to contraian and vice versa. in a nut shull,, it is a no holds bar game. march 17 sbi max pain is at 280 and it is there for all two prev. weeks amd also on 30/3/17 but sbi ended at 290…good luck guys.
Absolutely!
Dear karthik,
Greetings for the day.
I need your help.
Since one month I am tracking the nifty option chain for various strikes and different time frames on daily basis. ( both calls and puts) . And I wish to gather information for 6 months.
My question is, which would be wise to track OI or change in OI ? As I have limited space on paper.
Also I wish to discontinue tracking volumes bcos whether market is up or down, volumes only tends to increase for the particular day.
Also kindly let me know what does it mean when IV column for particular strike is empty.
Your guidance will be very helpful.
Thanks & Regards.
I guess change in OI gives you a better picture on the market sentiment. Volumes help especially when you are looking at Eq spot/Fut. IV is for Implied volatility of that particular strike.
Mr.Karthik Will you pl guide on the difference between PRICE ACTION TRADING AND TECHNICAL ANALYSIS. In this context I bring to your kind notice an excellent FREE site in my opinion HINDUSTAN BULLS.COM which gives BUY AND SELL SIGNALS, both INTRADAY AND EOD CANDLE STICK ANALYSIS which I feel is PRICE ACTION TRADING. Am I right? VAN KUMAR
I personally do not believe in any entities giving out stocktips. You need to be doing your own research.
TA is based on price action.
Generally it is seen that higher PUT writing indicates up move and high CALL writing indicates down move. But right now at a position where there are chances of war between US and North Korea. Of course, it may happen or may not but right now traders may not want to keep their positions open. So what they would do, they’ll buy PUTs to hedge their positions. And due to this higher PUT writing is seen.
Now what I want to ask is “How to interpret such data?” Does it still indicate upmove as per max pain theory?
You really need to plot the Max pain chart to know what it is suggesting. Difficult to take a call without the data points.
Hi karthik,
1) what difference does it make whether i open zerodha account directly or from the different sponsors ?
2) when implied volatility in an option chain is empty – what to conclude ?
Thanks & Regards
1) By sponsor you mean partner….you can do that no problem.
2) It means that there are no trades in that particular strike.
Hi karthik,
Thanks for the reply.
As i have been tracking the nifty LTP for varoius strikes at diff times, i got these results :
On 26/04/2017 strikes from 9000 to 9300 IV was empty but LTP kept on increasing throughout the day. As you have said there are no trades, kindly clarify.
Thanks & Regards.
Ah, in this case maybe NSE had not updated the IV;s.
Hi Karthik Can you pl guide me on the difference between Open Interest and Vol and Contracts in Option Chain analysis. And how to analyse them?
Please read this chapter http://zerodha.com/varsity/chapter/volumes/ and then this one – http://zerodha.com/varsity/chapter/open-interest/ .
hi karthik anna,
thank you very much….!!! your words are my knowledge.Really you did an awesome thing in your life.cheers.
Thalaiva you are great,enna aasirvatham pannunga…!!! 🙂
There is only one Thalaiva, and thats Kabali da…:)
hi sir,
I am a swing trader but dont hold the stock more than 5 sessions. I am using 30 min time frame and ADX indicator. can you please suggest me two more indicators and some valid candle stick patterns.. Thank you.
I’d would bother much on indicators. I’d rather look at the CS patters. Please have a look at this module – http://zerodha.com/varsity/module/technical-analysis/
hai ,whoever it is related to – i want to learn about derivative – ‘SWAPS’.so please kindly do it .
SWAPS is not a retail product in India (yet), so have not included that.
sir ,
please can you give me the link from where i can get the daily volatility of nifty .i tried to search it on nseindia .com but could not find it
Please take ViX as a proxy for Nifty’s volatility.
Hi Karthik In preopen the Indicative Equilbrium Price is shown as the probable opening price. I have read your lesson on how the price is set in Z-Connect. But at 9.15 a.m., when the market is open, high and low prices are also shown. Can you pl guide how these high and low prices are set as I could not find in any of the websites.
The prices are set by the exchanges on an logarithm which takes into consideration ‘Price and Time’. This is an exchange proprietary algorithm, and nobody has access to it 🙂
Hi Karthik I request you to kindly guide on VOLATILITY SMILE AND SKEW and how to use them. Regards, VAN KUMAR
Check this – http://zerodha.com/varsity/chapter/greek-interactions/
Sir, although the Option pain theory has strong logical piints. But the behaviour of the index and index driving stocks on the expiry day is too cumbersome to understand. There’s alwats pinning in the last 30 minutes and if we take today’s session the market openky defied the Max Pain Theory and moved above beyond everyone’s expectation. Sir, such unprecedental moves during expiry week with soo many whipsaws and volatility is not random and too many big players play an active role in it. So I guess just plain logical based thinking don’t work for derivarives. There’s more to it and there has always been more to it as on the Expiry day there is always a rush from big players to take control of the Market. I request a chapter to cover such obscured topics regarding derivatives trading.
True, exactly why I modified the Max pain theory to suit my trading requirements.
Dear Sir,
You have explained the concept of Max pain with very good manner. thanks for that.
I have one question that 5% safety buffer is added in calculated Max pain option strike. Always we have to add 5% safety buffer or depending on situation we have to subtract also? Please clarify
Thanks & Regards
Yogesh Surkutwar
You can treat it as per the situation. Sometime you may want yo extent this beyond 5%.
Hello sir
As on 23 June (strike, OI, change in OI)
Put Option
9500 58 L +2.8 L
9600 49 L -5.2 L
Call Option
9600 51.8 L +17 L
9700 82.4 L +12.9 L
The strike 9600 is crucial. As -ve change in Put and large +ve change in Call suggest that traders viewing the spot to remain below 9600.
The spot below 9600 also confirms Max Pain theory. I didn’t calculate but just by seeing the strike having noted crowd.
How is my analysis?
Thank you
Varsity student
Based on this analysis i would like to write 9650 CE @ Rs 20.80 with a margin required 46k.
Hmmm, please make sure you know all the risks involved before you take the trade. Good luck!
Ah! Remember, if calls OI has shot up, then there is an equal number of traders who believe that the markets may not go up further, hence they have written the Calls. So its just too difficult to make any sort of assessment based on plain vanilla OI information.
Yes, i am saying the same. The large increase in OI @9600 CE and decrease in OI @9600 PE confirms that there is a large section of people expecting the market to stay below 9600.
Also, there is 17 L increment @ 9600 CE means there are big players involved in writing Call as it requires margin.
I want to know your view.
Thank you 🙂
Varsity student
Well i have a strategy
Leg 1: Sell 9600 CE @39.80
Leg 2: Sell 9500 PE @16.50
Lower BEP= 9443.7 & Higher BEP= 9656.30
Reward= 56.30, Risk= uncapped
Rational
1. (TA) 2 times Nifty touched 9700 and miserably fell to 9560.
2. Last two weeks it is range bound b/w 9560 and 9650
3. For last 4 sessions it is closing on -ve note. Ans on June, 23 it closed at 21 sessions low.
4. Max pain confirms that it should close below 9600 to hurt minimum to option writers.
5. I guess to break 9700 resistance level it needs a big domestics cue and it is not going to happen before 29 June and for that matter may be after July,1.
How is it?
Please comment
Thank you
I’d suggest you put these numbers down on excel and look at the payoff. Only then will you be able to visualize the risk. Check this video for more info – https://www.youtube.com/watch?v=pVKfIxVw0Og
I would have got 56.30 had i executed this strategy. The market closed at 9504 on the June expiry date. I am feeling optimistic.
Thank you
Varsity student
Good luck!
Hmmm…17L is not really a big increase 🙂 But yes, the fact that the strike is attracting so much activity indicates that it could be a vital trigger point for market.
Thank you, sir.
Plotting a graph of P&L of a strategy on excel is very important tool of planned trading, I think.
By your teaching and always arguing to look upon the loss before entering into a trade, one thing i can say for sure, you were never been a scalper in your trading career.
Good guess 🙂 I’ve had far better success in well planned trades as opposed to scalping.
Max pain theory can be used for Stock option also or it is just for nifty option?
All options.
It is good to keep track of PCR on daily bases or it should removed once in a 15 day?
I’d suggest you look at 15 days before expiry.
Hi Karthik I am trying very hard to find what will be margin requirement for bull spread where I will buy one OTM call and sell higher strike price one , practically I should only need to pay the difference but span calculator asks me to pay 43k for nifty spread for 10500ce buy and 10600 ce sell.Could you please help me understand,thank you -Kedar
Kedar, I’d suggest you use the margin calculator available on our site – https://zerodha.com/margin-calculator/SPAN/ , when you add the positions, you will know how much margin benefit you will get for the set of positions you have.
Hello Kartik,
Thank you for the awesome explanation.
On a practival note, I was going through Yahoo Finance article “https://finance.yahoo.com/news/traders-betting-big-stock-market-101500637.html” where I saw that:
1) As per the article, VIX of S&P is at the lowest level
2) Due to this low VIX, analysts are expecting a shock in the market soon. Why? Low volatility means stability. Is it that they feel markets are at lifetime high and still VIX is low thus there will be a correction?
3) One of the traders went heavily for “Bull Call Spread” strategy and another bought “Put Options” heavily. Aren’t the expectations completely different? Former strategy is for moderate market and the latter for Bearish.
I am reading Options since few days and just saw this article and hence the questions popped in my mind. I hope questions make sense….
Regards,
Aditya Sharma
1 & 2 ) If VIX is low, then there is greed in markets and traders are happily buying. A natural counter reaction to this is a correction in markets.
3) Bull Call spread does not really involve a put option. A BCS is actually indifferent to market direction
Hi,
As for intraday option buying. Lets say if the bank nifty premium for 1 lot of Rs.7000. As soon as i buy 1 lot of bank nifty option, do Rs.7000 deducted from my account?
Or how it works?
Yes, to buy options your need to have 100% of the cash available.
hey zerodha,
earlier there used to be the pdf versions..
cant locate them know.. please guide
We will have it back soon, Promit.
hello sir
we are unable to find pdf plz provide the link….
Soon.
Sir
In PCR analysis, u wrote that if PCR is 0.5, that means call buyers r more, extreme bullish hence reverse trend (bearish) may happen.
But I think it’s reverse n we have to consider the option writers not buyers.
Pls check n confirm.
ThanQ
This is based on the opinion that extreme bullishness can lead to a correction – mean reversion.
Dear Karthick,
You’ve done a excellent Job, I still wondered how come a professional in Capital market field shared everything what he knew. Because I’ve seen only nepotists here and I learned lot from you and I am going to apply all these techniques in my trading life. I don’t know how to express my gratitude personally l’d like to have one sitting with you to discuss about your trading life with some chilled Beers.
God bless you my friend.
Arumugam.
Chilled beers should nice 🙂
Anyway, thanks for the kind words. Someone said, your own knowledge grows when you share what you already know…and as a firm, we take this advice very sincerely 🙂
Don’t know if already asked…….
For options pain calculation… does the optimum strike value (i.e. Least pain strike value for seller) always arrive as the middle (or near to middle value). If so (and since u are already applying 5% deviation) then would this calculation more or less work.
Optimum strike value = (lowest strike value in option chain + highest strike value in option chain) / 2.
Thanx.
Yes, when you plot the option pain curve, the strike at the center is where you will have the least amount of pain.
how to calculate 15 days from expiry. Trading Days or all days including non-trading days
You can include all the days in the calendar.
thx sir. also throw some light on gold options trading
Do check this – https://zerodha.com/varsity/chapter/commodity-options/
Sir,Can I use the excel page written by and replace the values as of today?If yes,
1.As Iam seeing for nifty there are many other strike prices.Can I ignore them and fixed to strike rates which are nine above and nine below the underlying?
2.You only write about the prices like 8000,8100 etc and ignored the strike prices like 8050,8150 etc.Is it okay?Me too done the same because helper column will get distance if I altered it.Is it okay?
3.Finally,I have calculated the pcr of nifty.The value is 3.70.Why the value is that much big.Is there extreme bearishness?But october series market rallied to new heights and the rally continued even today?What I can expect from 3.70 value?
I mean excel page written by you
1) Yes you can use the excel and you can stick to 9 above and below
2) Yes, use the strikes which are relevant to the current market condition
3) You can also use PCR as a contrarian indicator 🙂
Can I reversly use Max pain for buying options rather than selling sir?I mean I will buy call option which cause minimum pain to option sellers ??
Yes, as long as you can quantify and backtest the process.
In option chain, at the end the total OI of both calls and puts are provided individually.Can I simply divide put value by call value??I think it will have some credibility, since Iam taking all the strike prices into considiration.
SIR
Yup, but please do backtest this once.
Thank you sir.Please give me the link to get historical data for back testing.Iam unable to get it through nse.
You will have to do that yourself manually, Brahma 🙂
🙂
Would you please explain the “Helper Column” a bit more of the “Option Pain computation excel”.
Is it ok to use a calculation like “Current Strike – Lowest Strike ” instead of fixed values in “Helper Column”
I’ve used the helper column for data manipulation. YOu can use the formula – ‘current strike – previous strike’.
Thanks for your great initiative.
But I feel it does not give dealt of practical aspect
Please also include an example that the same like
What will be cost when you buy /write a call
what action/precaution you have do at the date of expiry
what will be extra cost when you will not take such action like increase in STT or brokerage etc.
Have you checked this, Ravi?
https://zerodha.com/varsity/module/option-theory/
1. Is risking 500 on a spread option same as risking 500 on a naked option?
2. If I quantify my risks in naked options, is it necessary to go for a spread?
3. When i am going for premiums instead of expiry, is it necessary to go for spread?
1) Rupee wise, naturally it is the same. However, in a spread, you will know that 500 is the maximum loss no matter what
2) Not really, you just need to ensure you follow a strict stop loss
3) Really depends on the trading situation. Sometimes it is better to opt for the spread rather than a naked option position. For instance, if you want to play the election news, where the volatility is invariably high -under such circumstances, playing naked options could be quite risky.
Dear Sir,
I calculated the range for Nifty for certain strikes for 28th Dec expiry as explained by you. I arrived at a value of 10500 where the option writers would lose least amount of money. But, I did not get the shape of the graph as you have in the above example. I thought that market’s upsurge after the Gujrath election result is the reason for the same. Also, if we take 5 percent above 10500, then we arrive at 11025. But the markets expired at 10477.90. I also calculated the range of nifty from normal distribution method and it landed between 10410 and 10622.
Correct me if I am wrong.
I’ve not checked the range myself, but I get a feeling these numbers make sense. Can you share more insights into your calcualtion? Max pain graphs are quite easy to generate, not sure why you’ve not got it.
Thank you for valuable lessons…
Kindly make a module on mutual funds also
In the list of things to do. Will put up MF content this year.
Karthik sir,as per max pain I have manually enter the OI of put and call strike price before 15 days to expiry and I got the max pain strike.
But my question is should I stop the OI update now? or should I continue for manual entry of OI till expiry date?
If I continue till expiry how to vary 5% buffer for calculate maxpain.
Please explain sir
I would suggest you run this 15 days prior to expiry and identify the max pain strike (which is what you’ve done), further give a buffer of 10-12% and identify the strike to write. I’d suggest you stick to just the Call option.
Sir as per max pain table 10700 was maxpain strike at exactly before 15 days to expiry after that I stopped the update of OI in table and just watching the nifty by add the 5% of buffer to 10700.
Please tell me sir is this right way or should I continue till expiry date.
Yes, you can add 5% or more for as buffer to 10700 and consider writing.
Sir what it means of additional buffer of 10% to 12% will given.
I mean on which valve you have taken for reference for additional buffer of 10 to 12%.
Its basically the strike to 10%. For example 10700 + 10% = 11770, so you may want to consider the strikes around this range. If the premiums are not attractive, then you may want to reduce the buffer. But I’d suggest you do not go below 5% buffer.
Thank you lot sir for your response.
Sir last question ,it means Are you suggesting me for stop the option pain table update after 15 days to expiry?
Actually I am bit confused about this
for calculate the option pain,that’s why I asked you sir.
Yes, you need set a cut off – either 15 days prior to expiry or 10 days prior to expiry or even 5 days prior to expiry.
The lesser the time to expiry, the more lenient you can be with the buffer. For example with 15 days prior to expiry, I may be inclined to have a 10% buffer, but with 5 days to expiry, I may choose to go with a 5% buffer. So on an so forth.
The point is to run the max pain algo, and identify a strike in a time-frequency you are comfortable with. Remember, as the markets move, so would the max pain number, but the variation may not be much and the buffer will take care of these variations. Given this, sticking to an agenda is quite important here.
Good luck.
OK sir
Thank you for your suggestions…
Welcome!
Dear Sir,
I calculated the range for Nifty a fortnight prior to expiry as suggested by you and I arrived at a range 10600-11130. Today market expired at 11069. But, as usual, I did not get the shape of the curve the right way.
Also, I calculated the range for Nifty and Bank Nifty on a daily and weekly basis using standard deviation. On certain days both the index values exceed even 2-Standard Deviation (or 95% Confidence) values.
Thank you very much for all the inputs and making us think as professional traders.
Good luck and stay profitable 🙂
Hello sir,
Thank you so much for valuable lessons…sir I would like to know your view on covered call strategy…I have 600 shares of infosys, i want to keep it for long term. Can I short OTM call option of infosys every month for additional income.
CC is a great way to make some passive income on long term holding. Give it a try, although I think the pay off may not be very impressive.
If the PCR value is above 1, say 1.3 – then it suggests that there are more Puts being bought compared to Calls. This suggests that the markets have turned extremely bearish, and therefore sort of oversold. One can look for reversals and expect the markets to go up.
Low PCR values such as 0.5 and below indicates that there are more calls being bought compared to puts. This suggests that the markets have turned extremely bullish, and therefore sort of overbought. Once can look for reversals and expect the markets to go down.
Sir Please help to understand 2nd and 4th line.
When traders accumulate a certain position (accumulate in large quantities), then there is a scope for the opposite to happen – hence I suggested look for reversals.
Karthik sir good morning.
I m novice in option trading and lost so much money.
In option trading, there are so many strategies.
My question is that , which type of strategy most probably used in option
Thanks
Ram Niwas
I’d suggest you get very comfortable with Option basic before getting into option strategies. Over time, look for market neutral strategies. Good luck, Ram.
Thanx sir for guidance
Good luck, Ram!
Am i the only one who felt upset have this module ended. :/
Options strategies can go on forever, Rushabh. You have to stop it somewhere 🙂
Dear Sir
The calculation of maximum pain on the excel chart needs some modification. At every level the cumulative open interest needs to be multiplied with a cumulative figure of notional loss. If open interest (CE) is 1 at every level and strike prices are 1, 2, 3, 4, and 5. The loss at 1 strike price would be zero. At strike price 2, the loss would be one. At strike price 3 the loss would be 3. At strike price 4 the loss would be 6. At strike price the loss would be 10 … and so on.
Hmm, let me check this again.
Hi Karthik… Great work… Amazed to learn from your knowledge…. Pls confirm if strike wise PCR has any significance in analysis. Thanks
Thanks!
I’ve explained PCR in the chapter, Akhil.
Hi Karthik,
When using the above max pain excel sheet to calculate maxpain data and graph, I got negative values Cumulative Call which was greater than Cumulative Put and hence, the total went to negative, which again represented in graph shown me a negative value for OTM strikes. I created for TCS and INFY and both graph were representing highly negative total for last OTM and decreasing from there. What can you comment about this result? I created the above with Mar 09,2018 EOD OI data. Please clarify whether it is usual at the first week and will change at the last 10 trading days.
Thanks,
Somesh
I’m really not sure about this. You cannot get -ve values. If people are cutting positions, then the OI will drop or at the most stand still at 0. It cannot really go -ve. I’d suggest you look at the excel sheet more carefully, I’m sure you;ll spot a silly mistake 🙂
Dear Karthik,
If I’am correct, I don’t find about Iron Condor strategy and spreadsheet. I would like to see about it on Varsity.
Thank You,
Jayanna
Yes, thats right. Will write about it sometime soon.
Hi karthik good job ! You make all strategies clear for reader.
I frequently trade in Banknifty so what you suggest when max pain should be calculated in weekly expire ? On Tuesday (2 days to expiry ) ?
And also suggest any strategies which can be use for day trading in weekly expiry options
I’d suggest you calculate this on Friday, the day after expiry followed by Tuesday.
In one of the chapter you mention your friends election trade and your short day in trading career.
What if similar news comes on expiry day and market makes high, upper circuit within 10 minute and close or lower circuit and close in 10 minute or less.
How the settlement will happen and at what price ?
Asking in last have gone through all the chapters and comments also. curious…. 🙂
In such an event, the last 10 mins trading would be considered.
Hi Karthik sir,
I have gone through all the modules and understood 100%, I have never seen such a wonderful content any where. Is this knowledge enough to start trading? Do I need to still need to go through any other books. If so, please suggest the books.
You are the best teacher I have ever seen.
Thanks
Satya.
Satya, to be frank, no amount of reading will compensate the actual market experience. Go ahead and place your first trade with confidence. Don’t worry about the P&L, remember this is an integral part of your learning and you have to keep learning to move ahead 🙂
Hi Karthik,
How does the margin for option seller work in Zerodha? Suppose if i sell ITM call & put option and buy slightly OTM call & put option, then my potential loss is only the difference of the option value,right(ex:- for Nifty it is 75*50=3750). Does the margin requirement also of the same logic
Thanks,
Shankar
There is a margin benefit extended to positions where the risk is minimized. Enter the legs of your option position and check for the same here – https://zerodha.com/margin-calculator/SPAN/
Undoubtedly this is the best material to learn about the options. Thank you so much sir for sharing this with us ?.
Happy to note that, Hina 🙂
Keep learning!
Namaskara Karthik,
Hope everything’s fine, have doubt with respect to the number of strikes to be considered for computing max pain value, read few questions above regarding the same
Considering Bank Nifty for analysis, there are a good number of OTM contracts(liquid) being traded.
The contracts being traded spans over 2000 points (2500 actually) that’s roughly about 1000 points above and below the current spot.
But there are contracts beyond the 2000 points range. How do we go about this? Should we consider the ones beyond this range or not?
Namaskara, Hemalatha! I’d suggest you consider 10 strikes above and below the ATM strike. So roughly 21 strikes.
Hi,
Based on the excel provided and the formula I’m arriving at option pain of 10600 as of May 4th 2018. This level is in agreement with various sites who shows this max pain data in real time. But there is a difference in total value for call and put (And of course final total) i’m arriving at versus what all other are quoting. Mine is significantly low than the number shown in these sites.
Needless to say, all other web portal data are showing exact same number. Example 10600 Call pain value from other sites is 8175615000. Based on the above formula and the excel method i have got 77860080000.
In deeper analysis, I have seen they are first calculating sum of OI from top to the current strike where i’m trying to calculate the pain (in the above example 8550 to 10600) and multiply that by 10600 the current strike. Then they subtract the sum-product from this calculated value. If I do that, I’m also getting the same value.
The formula looks something like – IFERROR($C45*SUM($A$3:A45) – SUMPRODUCT($C$3:C45,$A$3:A45),0) . I know it doesn’t make much sense looking at this formula, but why they have a different way of calculating the max pain?
Which one is correct?
I’m really not sure about why they are doing this way, Pradeep. But please do note, if they are doing this on an intraday basis then it could be a problem since intraday OI is not too reliable.
Dear Karthik,
My passion for understanding pricing dynamics interested me to traverse an out of the box thinking.How , when, and whereto the price moves with passage of time looking more into natural science theories connecting to mathematical theories than economic theories in lesser time lengths.To my limited understanding a futures index movement and the index options movement derived from it is based on the underlying motion of the combined expression in prices of the individual securities and not the other way round of normal thinking of individual underlying moving around the movement of index.So it is a natural flow based on a combination of rational calculus and irrational randomness.Derivatives are structured to tick based on the underlying motion and where do open interest play a big part in option pricing.Rather it is the velocity and the acceleration of the underlying motion that determines the option price.Combined expressions of the sigmas of the individual underlying does the noise in index and normal(Gaussian ) distribution cannot be taken as a thumb rule for writing options.Butterfly effects matters more.
Maybe you will have to simplify this a bit more for me, Najeeb 🙂
It is an interesting topic to peruse if derivative market moves the underlying market or the underlying market moves the derivative market.To my understanding futures price is mathematically structured to move by the combined dispersion of underlying stocks in index and not by mere open interest study or demand supply concentrated in the futures and options segment.A sort of dynamic market making is happening between the cash, futures and option segment and to the variations in the cash futures and options orders are structured to have trades executed in a relative manner .Put it simply derivatives just travels like the shadow of the underlying index and the underlying index too has no entity of its own It is just a sum expression of the flow of the individual underlings which can have duffing oscillations and not always standard. Could explain to you in detail if I could communicate to you direct.
Hopefully, one of these days, Najeeb 🙂
For eg if the daily volatility of say Bank Nifty is for an example sake is 250 points .from there you can calculate a one minute volatility.It ought to be 12.9 points.But in reality if bank nifty makes a random walk of 300 points a day may be 5 candles out of 375 would have walked 200 ponts and the remaining 370 minutes around 100 pointsSo the markets is all of duffing motions and the path of least resistance called butterfly effects matters more.In a nutshell market is a natural flow and not bellcurve calculations.In such a case the role of open interests are of least significance.
Najeeb, not sure how you are interpreting this. Max Pain as a concept does not consider either volatility of distribution of any sort. We use Open interest to assess the likelihood of where the option expires.
Karthik, I know what I mentioned above has no relevance with the idea of option pain but , I was highlighting my view that option pain which derived its underlying idea from open interest and PCR ratio itself seems a gibberish idea to me and hence , may be not much academic work gone into it.To my understanding options derived to be a hedge tool for the underlying. Better traders structure their trade seed capital in such away that either option as their seed and underlying as their hedge or underlying as the seed and options as the hedge. It started giving me more insights when I moved looking into the scientific price motion rather than the economic price action.
I agree with you on this – both option pain and PCR are empirical. In fact, OI itself is empirical in my opinion.
Hi Karthik,
This chapter was a nice read. I was watching trading carnival videos, there some smart traders were talking about managing premiums by writing options on other side in 1:4 ratio in last 2 days of expiry to counter volatility , specially last 3-4 hours on expiry day…can you suggest a resources from where I can look this and also get some more examples of setting up trade in different situations like you gave 4 examples in last module
Secondly, from the module it seems like there is a zerodha resource of backtesting. Can you provide me a link to that and some sample code to understand platform
Regards
Nikunj Purohit
Nikunj, if a trader is writing options on the last day especially when there are few hours left to expiry, the play is just on the rapid decline of theta. Look for any OTM option which has any residual value and write them. Usually, if you are lucky you may get 1.5 or 2 Rupees for an option which is trading 2 strikes away from ATM (on Nifty).
For backtesting, check this – http://streak.tech/
Kartik , Thanks for a prompt reply.
For Max Pain — I have been calculating it for last 2-3 days on NIFTY and BANKNIFTY. It seems like value will be lowest around spot prices only. It may give other strikes for less liquid and volatile stock options.
For PCR ratio – As option writing will be profitable 70% of time, so smart money will generally write put option so PCR will 1.3-1.5 will be bullish.
Short covering – how can I say that there is a short covering looking at change in volume and premium for put & call at particular strike price
Any particular book or blog that can be referred for improving option strategy.
Nikunj
Short covering happens when the prices have been hammered out and the system has excessively built up of leveraged trades. I think this is one of the best books out there on options trading – https://www.amazon.in/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
Hi Karthik,
Are there any strategies (combination of futures and options) which can give 1% consistent returns on monthly basis irrespective of market direction?
Thanks
Satya.
Nothing guarantees returns in the market, Satya 🙂
Kartik,
I have been looking at bank nifty and nifty for sometime for max pain during expiry days. The point is always next strike to spot price. There was much volatility last expiry of bank nifty, still OI were changing to make sure max pain is near spot. Am I missing something here?
Not really, Nikunj. I’d suggest you do this for a couple of expiries to get a full flavor of the theory.
How much data should be taken for max pain calculatation.
example1 – I have taken BANKNIFTY(expiry-28JUN2018) data on 15JUN2018 for strike price of range 22500 to 28600(62 distinct values)
Output of max pain calculation = 25100
example2 – I have taken BANKNIFTY(expiry-28JUN2018) data on 15JUN2018 for strike price of range 25000 to 28000(31 distinct values)
Output of max pain calculation = 26500
BANKNIFTY index spot is 26417.40 on 15JUN2018. First example included all strike prices available on NSEINDIA while second example included subset of all strike prices available on NSEINDIA.
Suggest how should I do analysis to get robust result.
I think its best to use Max Pain on monthly options. Use at least 15 days data.
Actually Above given example is for Monthly BANKNIFTY(28JUN18) Expiry and almost in the 2nd half data(after 15 days).
My question is that How many strike prices should I choose b/c output is different in both examples but I have taken same data(BANKNIFTY-28JUN18) with different strike prices(ex1 has 62 strikes, ex2 has 31 strikes).
Sumit, I’d suggest you take at least 5-6 strikes above and below the ITM option. If there is liquidity beyond these strikes, then take those as well.
Karthik Sir
This is a noob qn. Hence please pardon my ignorance. An OI can have 1 or more than once contract and each contract can have different lots like 75 or 40 for NF and BNF respectively. Therefore, does OI reflect how strong the quantum is viz a viz a strike price? A 7800 strike put may have say 3 OI but the contracts under it can be 240 while a 7700 strike put can hae 5 OI but the contracts can sum up to 200. Hence, would multiplying the OI with points yield a realistic picture?
Shankar, OI is usually expressed as “lot size * Number of Contracts”, so if you see an OI of 150 for Nifty, divide this by its lot size i.e 75, to get a perspective of how many contracts are outstanding in the market. So, in this case, it will be 150/75 = 2.
Thanks a lot for clarifying.
Welcome!
Karthik, you’re luring me so much into writing options. I think its time to loan 1L from my parents for margins 😀
Anyway, my question is- How does the combination of SD/ Normal distribution Upper and Max Pain (whichever is higher +5% margin ) sound like for selecting a strike to write?
Chirag, I hope I’m luring you to learn options 🙂
General advice – trading based on loan funds can be dangerous to your trading account, even if it is from your parents 🙂
I think it is one of the best ways to select strikes, but the assumption here is that there are fundamental factors affecting the market or the stock you are looking at.
Oh yes, you sure are luring me into learning to fish and not rely on fishermen.
I feel I am getting there, slowly and steadily.
“…there are fundamental factors affecting the market…”
You meant that there is nothing unusual around the corner affecting the market like quarterly/annual results or Trump’s tweets, right?
If there is- then the probability of my chosen strike price going right gets low. Correct?
Yes, thats right. If there is a fundamental play, then you should avoid trading the scrip, unless you are in a position to access the fundamental factor in great depth.
Hello Karthik..,
I was asking one of my colleagues to go through varsity for better understanding of the math behind Options trading. He said he has been successful with options trading without knowing any math behind it. Halfway through our conversation.. he shared the way he operates. He basically operates on indices, keeps an eye on the option chain to understand possible support and resistance for the month. All the buying he does is limited to the first week of expiry. He buys few lots of both put and call (both preferably 1% away from spot price) with 50 % of the corpus he wishes to invest. Based on the movement of the underlying in the next few days.., he decides what is to be done with the other 50% of his corpus. Say, If the index moves 1% upside, he then buys PE 1% away from the new spot. ( He is still holding the contracts he bought in the beginning, where in CE contracts would have become ITM, PE contracts bought at beginning would become OTM, New PE contracts bought would be slightly OTM. The moment index starts moving downwards, he will realize profits on CE, Starts buying PE conracts more aggressively. He was saying, he also keeps an eye on NIFTY VIX to be clear about Voltality. He doesn’t monitor charts, doesn’t follow any technical analysis behind his strategy. He cliams to close the month on a positive note every single time, 20K of the money gained using this strategy goes into his various SIPs, rest for his monthly expenses. He claims to have hardly touched his salary for his expenses over the past 6 months. I wanted to know if this a strategy or if he is purely being lucky. After going through all the technical analysis, if some guy randomly appears and claims that he is making money consistently with no application of TA, I couldn’t believe it. I wanted an expert’s view on this, and so I’m writing. Hope my explanation was clear about the strategy.
Thanks in advance.
Kiran, if your friend is saying the truth, then he maybe lucky and continue to be lucky for few more months. None of us can take a punt on that 🙂
But generally speaking, people in markets tend to exaggerate their profits and underplay their losses. No one wants to appear stupid.
From what I can see, the only smart thing he seems to be doing is that he is avoiding buying options closer to expiry, so with or without his knowledge, theta is favoring him.
Thank you. I was convinced that he was just getting lucky, I wanted your confirmation too. He is very content with the way he operates, is reluctant to learn options theory. His take is, ” when something is working for me consistently, why do I even bother changing it? ” I believe, the biggest threat behind a not so strong strategy is, when it starts working in our favor ( may be by luck ), we start believing in it way too much, get complacent and end up taking bigger risk, which may eventually backfire. Luckily , I’m a Varsity reader. Thanks to Karthik and team 😉
Good luck, Kiran. Hope you find all the success. Stay profitable!
Hi Karthik,
Before asking my query I would like to thank you for writing such a wonderful and easy to understand content. I have a doubt around the derivatives, Someone told me that index futures can drive and lead the price movement of the underlying stock indices. Given my limited experience with futures, I am puzzled. My textbook knowledge tells me that index futures are derivatives of stock indices. Therefore, futures prices are derived from stock indices. It should be indices that drive and lead futures. Logically, there should not be price feedback from futures back to stocks. How does it really work, if there is no feedback from derivatives to stock / indices then how max pain works…?
Yes, Kiran…the stocks influence the derivatives. However, there could be brief periods where the other way round could happen, but this does not sustain through for long (not more than an hour or so).
Hello sir,
Really useful chapters on options trading. Thanks for taking efforts for beginners like me.
I trade in banknifty regularly. I need ur guidance in following.
I sold itm call of 26000 & put of 27000 when the spot was 26500. After two days market moved 200 points on one side and my put sold is showing profit. ( Off course call sold is showing loss) I want to book profit of 200 points so i squared off the put side. Now i have loss making side of call sold is in hand. What position should i take to get insulation in both directions for call side making loss. I don’t want more profit. Happy with booked profit. Just want to retain it by taking new position. May b hedging i guess. Pls suggest preferably options as i don’t want to trade in futures.
Your guidance will really help me.
Thanks once again.
Prasanna, I’d suggest you close the position and book profits. Usually, things get messy when you try to hedge and make other positional adjustments. However, if you really want to hedge the open call short, then you will probably have to buy futures to offset the position.
Dear Sir,
Thanks for the reply. If I close the position then I will not get any profit as I am short on both call & put.. Hence I was thinking for booking profit from one leg & reduce loss from other leg. so overall P&L will be on plus side.
Yes, but do remember, when you close one of the positions, you will have a naked exposure to one of the legs. The risk element drastically increases here.
Hi Karthik, I have created a webpage in my personal blog to calculate Nifty and BankNifty max pain in realtime. Please have a look at it and let me know whether the calculations are working fine. https://www.someshr.com/p/optionsmaxpainchartniftyandbanknifty.html
Somesh, looks like you have taken the content from Varsity, can you please give the necessary credits and a link back to the original source?
Hi Karthik,
I have a small doubt. Kindly clarify. I was closely watching Nifty 50 chart today as I was holding 16 lots of Nifty 11300 Aug CE purchased at 88 (cover order). Close to the end of the day .. around 1445 the index went haywire.. I believed it was possible manipulation by option writers as this was the expiry day for July series. It started dropping for no reason… there was no news.. no recognisable bearish pattern on charts.. option premium even dropped to 80 at a particular point of time. Since I strongly believed that it was manipulation, I kept putting a steep SL. I have modified it to 75 at a point of time. (I know this is against what I have learnt from varsity, but I believed it was just a matter of time before index breaks off the shackles). It eventually did.. in the last 45 min, index started gaining momentum .. option premium surged back to 96. I have closed the trade at 95. I wanted to know if my interpretation was right about the whole scenario.. or if I was just lucky to get out without loss. I have breached the stop loss rule.. but I have learnt one great lesson.. I’m never trading MIS on Options on expiry day. If I see clear opportunity, I will look for CNC but not MIS On expiry day.
PS: Thanks to these few lines below
” Now if this statement is true, then we can make a bunch of logical deductions –
At any point only one party can make money i.e either the option buyers or option sellers, but not both. From the above statement, it is clear that the sellers are the ones making money.
If option sellers tend to make maximum money, then it also means that the price of the option on expiry day should be driven to a point where it would cause least amount of loss to option writers.
If point 2 is true, then it further implies that option prices can be manipulated, at least on the day of expiry.
If point 3 is true, then it further implies that there exists a group of traders who can manipulate the option prices, at least on the day of expiry. ”
These were the lines that helped in clinging on the trade and not lose confidence.
Well, I’d say you were both lucky and smart to have managed to get out of this position. Lucky, because there is no way to figure out what which direction the index would move 🙂
Hi Karhtik,
Thank you 🙂 .. I was lucky, I admit. I also wanted to know if my interpretation about the scenario was correct.. Was that a possible manipulation by writers which attributed to the index falling sharply in the last hour of 26/07/2018 ( July expiry) ? Or was it something else, (Have I wrongly interpreted it) ?
Thank You 🙂
Kiran, I think you were indeed thinking in the right direction 🙂
Good luck and hope you continue to remain profitable!
Hi,
It is always said that it is better to sell options with high IV . But what if IV is high and PCR is above 1 . Doesnt PCR above 1 indicate bullishness?
I’d suggest you pay more attention to the implied volatility, Shyam 🙂
Dear Sir,
Today’s max pain was 28000 and bank nifty is at 28350 at 3.15
I was under the assumption that BN will expire approx 28100 level. I wrote 28300 calls .Then I realized there was huge put writing at 28200 and 28300 and banknifty surged to 28387 level. Luckily i I closed my position little earleir.
I am confused here. Just unable to understand where did I go wrong
Well, theories like Max Pain is just empirical, Shyam. There are no guarantees in the market. I have explained how I personally use Max Pain.
will you please explain steps invoved in calculating options max pain in excel .
I have done that in the chapter, request you to kindly go through the same. Thanks.
I want to ask wheather increase in open interest in some strike impliy more option writing or option buying because in some analysis increase in open interest is termed as option writing and in some it is termed as option buying for example if we term increase in call option open interest of some out of money strike it could be termed as more option writing which is ought to result in price stabilisation or bearishness but if we would term this increase as more option buying this would impliy bullish view. So how would we interpret this contradictory view. I hope you got my point.
On a standalone basis, increase in OI means nothing, because there are both buyers and sellers for the same contract. Hence traders associate price movement along with OI to make interpretations, this is similar to volume analysis.
Sir,
How can I download PDF format of Module 10, All other Modules have PDF format. Could you help me out?
Module 10 is not really complete, Prem. PDF will be available once the module complete.
Sir,
where from we can get daily historical data for max pain and PCR
Adhik, maybe you should check with https://sensibull.com/
Dear Karthik,
Greetings for the day. Thanks for such a nice and simple explanation. I have below doubts.
e.g. Stock xyz current price is say 150, maxPainPrice is 185 and PCR is 0.27, in this case PCR says that there would be further downside and Max Pain say that the price may rise to 185, what should we do in this case ? How do we interpret this ?
Generic question is like if Max Pain suggest rise in price and PCR suggest fall in price, than what should be the action ? Which is more powerful signal Max Pain or PCR ?
Thanks in Advance.
Muffadal Katheria
This is a matter of personal preference, I’d pay more attention to the Max Pain 🙂
Hi Karthik , Not sure if this is the right platform with regard to a query on covered call on Nifty Futures.
I was just curious to know if it is worthwhile to write covered call on Nifty futures by selling deep in the money call say by 800 points below the spot price and just focus on time value in the call which will although be low but going to be a sure shot profit as Nifty does not move that much in a month.
Please let me know if my understanding is correct.
Sudeep, how will this be a covered call? Also, selling deep ITM option can be scary.
Thanks for replying.
The covered call by buying a Nifty future and selling a deep in the money call so that the downside is protected by getting a huge premium and on the upside there will be a limited profit…essentially the time value in the call.
Please also let me know as to why it is scary ? Does it have any risk attached to it even if we are long on future at the same time ?
Ah, I think I didn’t notice the buy Nifty future in your previous comment, thought it was a naked short. If you are long futures and short Deep ITM, it should be alright in terms of containing risk. However, there is liquidity risk here in terms of exiting long ITM, you may not have buyers at the time of square off.
Thanks Karthik,
So what I understand is, there is a liquidity issue if I want to exit before expiry, however if I keep it till expiry I don’t need to find a buyer as exchange will itself square it off. Is that correct ?
Yes, that’s right.
Good Morning Karthik Sir.
You may know me from twitter, the guy who sent you excel screenshot.
Today i got my first profit(obviously after many manageable losses).
I want to my one and only teacher whom i consider my GURU.
So i bought BN 25800CE 17 oct at 60R.coz of two reasons (Correct me if I am wrong)
1) Fundamentally WPI rate increases and that translates to rise in Bank Nifty (I may be wrong)
2) Technically due to formation of Bullish hammer that day.
Next day as my trade proved right I squared off the deal at 90R. of 2lot =80.
Booking 2400 by 10:00 AM next day.
I want to thank you sir coz as a medical student itbwas difficult for me to learn a different but Varsity is really good for a beginner noob like me.
Can you correct me if i was wrong somewhere in my trade.
I will accept if you tell me if i am wrong in my reasons behind these trades.
Thank you.
Here’s the hammer that formed that day.
https://twitter.com/edward_thought/status/1052253676385927168?s=09
Hey Edward, thanks for the very kind words and congrats on a profitable trade 🙂
The take on WPI and Hammer was right. I always think the best trades are the ones in which there are both technical and fundamental factors at play. Good luck and hope you have many more profitable trades 🙂
Hi Karthik,
Just came across all this good work created and published by you. I cannot think of appropriate words to express my appreciation for the quality of content!!! Just tooo… good.
I am naturally trying to download the material so that I could go through the same peacefully at my pace. However while I have been able to download a couple of modules, but trying to download Modules 2, 3, 4, 6, and 10 just throws up an error message. Could you please look into it.
Regards and thanks again!
Alok
Thanks for the kind words, Alok. Glad you liked the content. I’ll check on this and get back.
Guess few of the users were facing this issue due to download limitations from Dropbox.
We’ve moved all the PDFs to our own storage and the links have been updated.
PDF for Module 10 will only be available after all the chapters have been published.
Dear karthik
Commendable job by you sir …. I have gone through all of your modules.. and my journey from a newbie to a trader is started with varsity ..thanks A ton…
One module is really missing in varsity so I request you to add future oi analysis , option chain ,
So please look into it. Will be helpful
Glad to know that, Gokul. Wishing you all the very best!
Will try and add these lessons as and when possible.
Hi Karthik,
Thanks for wonderful lesson on option strategies.
I was going through the MAX. PAIN strategy.
I tried to calculate the strike price at which the option writers would lose the least amount of money using excel sheet as provided by you with different set of strike prices for the Nifty Option Chain of 01-Nov-2018 using data from NSE website.
I found that the strike prices, at which option writer would lose least amount of money, are different for different set of strike prices as follows:
Strike prices set: 8800 to 10400 ………….and I get strike price with least amount as –10200
Strike prices set: 9100 to 10700 ………….and I get strike price with least amount as –10300
Strike prices set: 9600 to 11200 ………….and I get strike price with least amount as –10400
Strike prices set: 10100 to 11700 ………….and I get strike price with least amount as –10400
I used strike prices as multiplier of 100 only, sequentially, 17 readings each time ( Avoided strike prices like 9850, 10250, 11050 etc that are not multiplier of 100).
I think results for the option chain of same day should not vary with different sets of strike prices.
Can you please help me to find where did I go wrong? Is formula foolproof?
The formula used in the chapter is right. Remember, the formula is just about using the intrinsic value of the option upon expiry..the rest is simple arithmetic. Can you double check the intrinsic value formula for both call and put?
Dear sir,
I appreciate your prompt response. Thank you very much.
Today, I did the same exercise again for the Nifty Option Chain data of today, i.e. 02-11-2018.
End of the day data used after the normal market was closed.
Again observed the similar discrepancy tabulated as follows:
Strike prices set: 9000 to 10600 ………….and I get strike price with least amount as –10300
Strike prices set: 9600 to 11200 ………….and I get strike price with least amount as –10500
Strike prices set: 10100 to 11700 ………….and I get strike price with least amount as –10500
Strike prices set: 10400 to 12000 ………….and I get strike price with least amount as –10600
Sir, the same nifty option chain table will remain available up to Monday morning due to weekend.
Please cross examine and enlighten.
Why are you splitting the strikes? You need to consider all the strikes at once.
Thank you sir.
I split the strike prices because in the excel sheet provided by you there is provision for only 17 entries/data points at a time. Hence I can select only 17 entries at a time.
From 9000 to 12000 there will be 31 entries/data points. Since I myself do not know how to put formulas in excel, hence could not increase entries more than 17.
Pls suggest.
That will take some time, Ghanendra. Instead, I’d suggest you take a look at the way I have explained the process. I have given step by step guidelines on it, follow the same. The number of entries does not really matter.
OK.
Thank you sir.
Welcome!
Hi Kathik,
I have an account with Zerodha and i am starting to trade in options. I did paper trading for a while based on the virsity strategies and seems to work fine. 🙂
I have a question.
In banknifty, when does next week’s option trading open? Friday after previous expiry and not before that?
Also as soon as on friday when market opens, who decides the initial price of options? Option writers?
Are number of writers and buyers same? As during expiry everything gets squared off.
For eg. If a writer writes 2 lots at 100 Rs. 2 buyers buy 1 each. But overall floating options yet to be squared off = number of options written. Am i correct?
When a new month contract releases its weekly options are also made available. The initial price is set by the traders 🙂
No, the number of traders and buyers need not be the same.
Does Max pain strategy work for both Nifty & Stock options ? Under what circumstances one can apply put writing exercise(s) in max pain considerations ?? Since you emphasized mainly on call writing phenomenon.
Yes, you can apply Max Pain to all assets – Nifty, Bank Nifty, stocks etc. Put writing is a little scary because the markets can fall much faster than it can raise. So you dont want to be stuck in a position where its hard to get out of.
Thank a lot , Sir !!
Good luck, Himanshu!
Dear Team , I have a confusion over the calculation of max pain. you are considering the difference point as amount but if the point difference is 100 or 200 then why not loss is being calculated as per premium amount for that difference of point? how can point is being multiplying with open interest?
Rupa, remember the whole calculation is upon expiry. When you get upon expiry is the intrinsic value of the option.
Dear Karthik thank for your quick reply.
I got your point.Thank you dor the clarification.
Good luck, Rupa. Happy learning 🙂
Dear Karthik,
Thank you for providing varsity. There were many useful insights.
Request to provide typical day to day activities of an options trader. This will help us organize our day and arrive at a game plan for trading.
This is an interesting topic, Kiran. Will probably do this as a separate post 🙂
Karthik,
How significant is NSE Currency Options Chain data ( OI, Strike with max Puts, Strike with max Calls, PCR, Max Pain etc.) to drive inferences about movement of a currency pair?
I have found NIFTY Options data useful to some extent but not sure about currency options.
Thanks,
Akshay
And, are Currency Options really liquid?
USD INR options are quite liquid.
Akshay, I’m guessing its effective enough to help you develop a view with quantifiable data. But yeah, I’ve not used currency options data much myself.
Where and how do I get the data for ticker symbol SPX (index for S&P 500) into the Excel spreadsheet, please?
Robert, you will have to download the historical data in either text or csv and open the same (import) into excel.
I always find study material by zerodha quite useful as it explains various concepts in simple language .
Great work for trying to enable others understand although just like everyone else i would appreciate more if you can share a profit making strategy .
Thanks .
Thanks, Akshat. We have shared everything that we can, one has to calibrate these to convert them into a strategy.
Karthik – I wonder, Nifty has lot of open interest at all levels starting from strike price 3600 levels to 14100 levels. So my question is do we need to consider all these prices while calculating max pain or do we go with a band say 1000 points. e.g if today Nifty is trading at 10750, so do I look at from 10000 to 11000, or is there any standard inclusion criteria for this.
You can consider a 10-15% range either sides of ATM. This should take care of most of the possibilities.
Sir, where can we get option chain historical data for 1 or 2 years to back test PCR.
I’m not sure if this data is available in the format that you’d need, but I’d suggest you check this – https://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm
Hi Karthik,
Just want to understand why do many experts say that 90% options expire worthless, when they also say the most of the options are squared off and very few exercised. Aren’t these two statements contradictory??
When the seller knows that he is making money and the market will not reach his strike price, he will not square off his position (since he is not affected by the STT trap too) to pocket the entire premium. i.e If i had sold a 10500 CE in the beginning of the month and on the day of expiry the market is at 9900..i know the nifty cannot move 600 pts in a day(normally)..and even if it reaches 10490…my profit is still the entire premium. That means there has to be a buyer on the other side for such sellers..and if 90% sellers make money..that means that many buyers must also be there right??
Thanks,
Alok.
Just want to understand why do many experts say that 90% options expire worthless, when they also say the most of the options are squared off and very few exercised. Aren’t these two statements contradictory?? ——->
Better way to put this is that only options which are above ITM have intrinsic value, rest all (including ATM) expire worthlessly. Yes, most of the time, traders prefer to square off the position rather than letting it expire.
Ok..thanks…but where is that 90% coming from..or its just a ballpark figure??
What about those who make money and get out of the market..i mean a buyer could have made money n exited…likewise a seller may have entered on the day of expiry and made a loss…
Its a ballpark and applicable to the market participants in general. No study as such to prove this. It is like out of every 10 option traders, 9 lose and 1 makes the money sorts.
Thanks a lot! I guess i won’t be digging too much into option pain 🙂
Nothing really wrong with it )
Hi Kartik sir, Can you please translate all modules in Hindi language..How much time it will take to translate in Hindi?
Patel, the problem with translation is that it won’t be accurate. We tried this in the past, but we weren’t happy with the final output.
Sir, I am using SD to write options for quite sometime, want to explore other writing strategies but don’t know where to look.
How is the SD approach working out, Mani? The other classic technique is the technical analysis way. You may want to go through the TA module for that.
I am using SD and IV to write sir, made some money consistently, roughly 13% in last 5 months sir. More than the strategy I believe managing the trade is the key sir, also wrote only call options sir.
I did use TA sir, didn’t work out for me. I believe more in probability that SD offers sir. Is there any book or can you point me in right direction sir? I believe I am more of math person sir.
How big Fund houses and institutions write options sir?
Mani, thats nice to hear. Use SD+IV, this, in fact, is one of the best approaches to writing call options. Apart from this there are few techniques such as dynamic delta hedging, slightly complicated but will try and write about this.
sir, any books on dynamic delta hedging?
There was one by Taleb, but that was quite complex to understand, Mani. Have not really found anything interesting on that subject since then.
I am trying a dynamic hedging strategy using long Futures and short call options sir, in that I neutralised gamma then delta sir, but I am unable to eliminate the risk of gap down or gap up opening. Another issue is selection of strikes, there are so many combinations available donno which one to select.
Mani, the gap part is the volatility bit which needs to be hedged Mani. This can be a little tricky.
so I have to set Vega to some value like -500, so that when Vega decreases I will make money and also make sure that delta, gamma is zero and theta is positive, so that time is also in my favour. correct sir?
Yup, good luck, Mani.
I will work on it sir, meanwhile I am eagerly awaiting your take on dynamic hedging sir.
Sure, Mani. Thanks.
also I am aspiring to become professional options writer sir
Good luck, Mani!
When we are looking at OI data we judge from a seller’s perspective. Suppose spot is at 10900, then the increase in put OI at 10800 means that longs are being created at 10800 by “selling” puts. But when it comes to PCR we consider it from the buyer’s perspective (i.e. number of “puts” being bought). Why is that?
Also, I do realise that looking at PCR from the seller’s perspective produces the same outcome.
Actually, OI should not be looked at from either the seller’s or buyer’s perspective, Sandeepan. If a strike has OI, then it means there are both buyers and sellers there in equal measure.
Okay. I want to present two scenarios to you.
1. The spot is trading at 150. All things remaining the same, there is a 25% increase in call OI at strike 160. What do you infer from this? A bullish signal or bearish?
2. Same as 1. but result day is tomorrow.
1) I look at this as increased activity in 160 CE. To figure bullish/bearish I’d see how the overall trend of the stock has been over the last few trading session. Increase in OI with an increase in price indicates bullishness. Likewise for bearishness.
2) Same as above, in the absence of insider information
Alright. Thanks a ton! I really appreciate everything you and your team are doing for the community free of cost 😀
Happy reading, Sandeepan! Good luck.
Calculation mistake in Case 3: market expires at 7900…1823400*200 = 364680000. Extra ‘0’ added i guess
Thanks for pointing, let me check that 🙂
Dear Mr Karthik,
Is India vix is historical volatility of nifty or IV of nifty? Pl clarify me.
Technically, both India ViX and Nifty volatility are different but can be used as a close approximation for one another.
Hello. Wonderfully written. One quick question. As an option seller, I would ideally want to sell at a time when the volatility is highest so that I can collect maximum premium. What is the rationale behind waiting for 15 days? The rationale behind a buffer of 5%? The pain point will vary everyday.
Is there any forecasting technique to identify which day’s option pain point will be truly (as true as possible) representative of the actual expiry level?
Thanks!
I would ideally want to sell at a time when the volatility is highest so that I can collect maximum premium –> agreed. So your call should be on volatility here and not really on time. The explanations put up talks about time assuming all else equal.
I’m not sure if such a predictive tool exists, the closest I can think of is the max pain theory – https://zerodha.com/varsity/chapter/max-pain-pcr-ratio/
Dear Karthikji
I sell options(mostly call) considering some rational perspective u’d taught like high volatility, close to expiry, buffer using std deviation after getting max pain & of course market direction. My following questions are these…
1) when to sell call options using pcr ratio. For example if I want to sell call options of Nifty OTM then what should be ideal pcr ? (Here I’m very much confused with pcr)
2)The std deviation of 1 or 2 isn’t working even with most liquid stocks like RIL, TCS or infy (but yes in index it’s working). All in zerodha kite showing illiquid & can’t trade using market order & one can try LIMIT order. So is it OK to sell LIMIT order of OTM options of high quality liquid company stocks. Can I be guaranteed of retaining premium in LIMIT order if all goes well ??
1) PCR according to me is a ‘good to know’ information, I don’t depend on it for trading cues
2) I mean if the order gets executed, then that implies that you will own the contract and therefore the premium
Thank u 🙂
Also wishing you, ur beloved ones & all our zerodha family a Belated Happy Holi 🙂
Same to you, Harsh!
Hi Karthik,
A quick query please, Let’s assume I BUY Call PE Deep OTM and by the time of expiry it becomes further DEEP (ha ha ha) and their are no Buyers for that Option Anymore. Then what will happen after the Expiry Day or How do I SELL that position?
Just little curious. 🙂
Thanks,
Suvajit
It will just expire worthless and you’ll lose the premium paid 🙂
Hi Karthik R,
First of all, I would like to salute you for training via such a amazing module. After going through both the option modules, I realized how much planning one needs to do, in order to place successful trade.
Please keep it up.
Kind regards,
Jayant
Jayant, thank you! Yes, options need a lot of thinking through. Good luck and happy trading 🙂
Hi Karthik,
Awesome for explaining it so clearly.
This article reading has struck me at PCR vaue . As it says PCR is greater than 1 you said puts have brought more than calls and it is kind of bearish but i have been known this in opposite way.
If PCR is greater than 1 than it is something puts have writen more and it is kind of bullish.
Please help me understand here.
Thank you for taking time to read this .
Thanks
It is basically treating PCR as a contrarian indicator. If more puts are being bought, then there could an expansion and vice versa. That’s the basic logic.
Hi Karthik,
Thanks for the information.
I understand it’s basically the contrarian the way each individual think. For every sell there is a buy and some people think it was write and some other think it was brought. The big one is how we think.
I was trying to see max pain and now it is at 10700 and maybe after few days it may move to 10800 or 10600 depending upon the bullish and bearish nature. Where can i get the max pain chart moved last month and may be last 6 months of max pain movement .
Thank Karthik for helping retail investors for understanding the basics. Kudos to you
Thanks,
Yugandar
Yugandar, I think Sensibull may provide this chart. Maybe you should check with their team – [email protected]. Good luck and happy trading 🙂
Thank you Karthik 🙂
Hi Karthik,
I was going through the sensibull tool. It is really awesome to get the basics right.
I have a question
When we calculate PCR for nifty is it something we take all the open interest of puts divide by all the open interest of calls . If that is right than the PCR value will come at 1.16 but in the tool it is showing as 1.09 under screener.
I was supprised this PCR value is showing under Nifty futures . Do we really have PCR for Nifty futures . i was thinking it will be there only for Nifty.
Or we consider only ATM stike price OI for the puts and calls to get PCR .
How exactly we calcualte it .
Thanks for taking time
Thats right, Jagan. PCR is calculated by taking all the OI of CE an PEs. I have shared the step by step procedure to calculate the PCR.I’d suggest you go through it. Btw, PCR is available only for derivatives contracts, not for the spot.
Hi sir, I’ve a doubt, for monthly expiry we’ll calculate max pain after 15 days.. But in case of nifty and BN weekly expiry which day is sufficient to make a decision on max pain strike?
Bala, for weekly expiry, I’d probably run this around Tuesday evening.
“If the PCR value is above 1, say 1.3 – then it suggests that there are more Puts being bought compared to Calls. This suggests that the markets have turned extremely bearish, and therefore sort of oversold. One can look for reversals and expect the markets to go up.”
Greetings Sir, While analysing Max pain, we look from a sellers perspective. But why PCR alone we are looking from buyers perspective ?. If we look from a sellers perspective, PCR 1.3- suggests more puts being written by sellers, hence It’s bullish sign only … Please let me know in which way we should analyse PCR and why?
For this reason, it is always a good idea to check the directional move along with PCR.
Hi, can you pls clarify on tax applicable if one is trading in options.
As option trading is considered as speculative income,one need to file itr3 return even though one is a salaried person.
Also I have read that if the annual turnover is more than 3crore rupees which includes profit+losses+ traded value. one need to get his account audited.
So can pls clarify the facts
Thanks in advance
Venkat
Venkat, I’s suggest you read this chapter on taxation for traders – https://zerodha.com/varsity/chapter/taxation-for-traders/
hello,in the above calculation of max pain how do we select the range of the strikes(like you selected from 7000-8600),please clarify my doubts.
thank you
Suraj, I’d suggest you select at least 5 strikes above and below the ATM strike.
Hi,
Please can you tell where we can get historical values of Max Pain for Nifty? For example: Max Pain at close of each day in 2019
Hmm, maybe you should check – https://sensibull.com/
In real scenarios how to calculate helper column data? Should we need to take actual LTP as mentioned below, or ranges mentioned in excel i.e 100 to 1600
e.g
a) 10700 CE, LTP is 152 * 10700 PE, LTP is 5.55 = 157.55
b) 10700 CE, LTP is 152 * 11100PE, LTP is 254.55 = 406.55
Kindly help.
Yes, you need to take the actual LTP, Samier.
Hi Karthik,
I really loved and enjoyed the way you have explained the chapters. Like we have calculated max pain for index, can we calculate the same for stocks. As you mentioned max pain is the point where buyers lose money.
Can we buy the strike where sellers lose max money as per max pain theory.
Please guide and suggest.
Yes, you certainly can apply Max pain for individual stocks as well.
Hi,
How would you read this situation : OI PCR has gone down and Volume PCR has gone up?
Thanks in Advance.
Rgs
Anupam
The unwinding of a position?
Hi Karthik,
Thanks for the knowledge sharing.
For weekly expiry of bank nifty & nifty options, what is the right time/day to calculate max pain.
Thanks in advance,
Deviprasad
As a thumb rule, I’d suggest you calculate the max pain halfway through the expiry.
Dear Karthik,
i wud like to put up my query in form of example. Say i write option SBI at LTP of 5.00 and next day spot shoots up & LTP rises to 10. That means i m in loss. But at expiry spot goes down and LTP comes to 1.00. I immediately sells it to earn a diff of Rs. 4 profit.
Am i thinking right or once spot moves up my options gets squared off and I book a loss?
Yup, thats right, Arun.
Hi Karthik,
I have calculated BN range for one week from 17.10.19 to 24.10.19 and first sigma range is 28000(28029.98) to 30000(29984.26) and max pain as mid of the period (weekly) obtained 29300. Which one need to be considered to write options.
Thanks,
Deviprasad
I’d consider the upper range i.e. 30000.
Hi karthik, Thanks for this quick and crisp sessions. You are our tom sossnoff.
I want to ask you that I have taken index data for last 5 years. Then I calculated SD and AVG over 5 years.
1. Should I use all 5 years data to forecast weekly or monthly. I have been trading using 5 years and 2SD range. The range of outcome is big and I found the option prices were very cheap at 2 SD but very attractive at 1SD. But I consider only year data, then the range of 2SD may be equivalent to 1SD of 5 year. I mean less broader than 5 year data. Means the 2SD range may be very close to ATM. It also means that my stop loss or drawdown could be very heavy as range is narrow and I am totally dependent on market mercy to ensure profit. I am unsure becoz I feel I may be considering only bear or bull phase and my outcome would be seriously wrong as the feed is. Should I consider only one year? What say you?
2. If I am option buyer, should I use 1SD or 2 SD.
3. If I am option seller, should I use 1SD or 2 SD?
Regards,
Narendra Bande
You are our tom sossnoff—-> this is too much, and I don’t think I’m worthy of that mention 🙂
1) In my opinion, 5 yrs of data can be a bit too much. Maybe you should stick to 1 years data and monitor the price moves closely
2) & 3) 2SD
Sir,
When I tried to calculate the max pain using all strikes available for Bank nifty, the resulting strike is not correct as it shows far ITM strike as Max pain. So how do I calculate it?
Hmm, the technique is explained in the chapter itself, Subhash. Can you please take a look again?
Hey Karthik, I’d executed an Iron Condor yesterday (expiry day). Sold 12000 PE & 12200 CE, and bought 11950 PE & 12250 CE. There wasn’t much movement so I was able to make a small profit.
What I wanted to know was what I could have done in case the market moves too much in one direction. Say, the Nifty moves above 12200. Should I have let the CE side remain as it is (loss) and made PE side a bit nearer to the Nifty or try to adjust the CE side instead?
Would appreciate your two cents. Thanks!
Sachin, this depends on your original thesis for the trades. If you continue to expect the market to be rangebound and not move much, then perhaps you should stick/adjust the iron condor. However, if you develop a directional view, then you can get rid of all the legs that are against the directional move and ride on only the one which benefits from the directional move.
Bad Ass Material Rangappa
Just Amazing………!!
Hehe, thanks! Your comment made my day 🙂
hii sir pls cover some material on weekly options as well
Will do, Sahil.
sir, when does the theta decay, starts to play out in monthly options contract what would be the right date of someone wants to play on theta decay by shorting straddle with protection is after the 15th day when decay really starts to speed up?
The theta decay is on a continuous basis. It accentuates towards the 2nd half of the series and peaks towards the end of the series.
hii sir my name is Sahil Swaroop and big fan of your material just wanted to ask whether if u are interested in collaborating as I majorly do options backtesting at algo trading firm in Mumbai in python.i have created one successful trading wich is running live in automation that I coded and is doing good till now I was wondering wherein if we can collaborate I backtest trading strategies that u think are good and I will share the thorough backtest results with u if u want I like to find new trading strategies and both of us can benefit from that it might sound weird to u. I am your student I have reading varsity for quite some time and when I think of collaborating with someone u were the first who came to my mind and i also have minute by minute options chain data u dont worry about the data. sir i hope i am not going out of the line i read lot your content just felt collaborating . but its totally ok if that if u cannot do that thier must be sveral valid reasons for that .but still if u are interested pls let me know my email will be thier.
Sahil, thanks for thinking about me for the collaboration work. However, I’ve stopped trading as it occupies too much time, so not sure if I’ll be able to devote the time this work demands.
sir, u share an idea and after 2 to 3 days I mail u results u can improvise and give a review on those results if needed tell me what to improvise on the mail we might get some good strategies sir I think there is a lot to be found in the Indian market in options segment.u will have analyse the backtest results and interpret them. but I totally understand u would be having time constraints to be able to do this if u cannot its fine sir I totally understand. but if u can let me know sir.
Thanks, Sahil. Unfortunately, I won’t be able to help you/participate in this 🙂
Max pain theory, Applicable on BankNifty as well?
It is applicable on all option contracts.
Max pain theory, Applicable on BankNifty weekly expiry as well?
i can understand sir its ok
Thanks!
In my experience I came to conclusion max pain theory applies just to high volume and OI stock options. Do you agree ? If so, how much would be the minimum volume to be intrested in applying maxpain theory ?
Thanks
I agree, in fact, most of such theories (including TA), works on the underlying assumption that there is enough liquidity. Unfortunately, I cannot put a number to this.
Thank you so much for sharing such intrinsic knowledge over the platform.
I am not able to find the max pain excel, can you please help with link or attachment where I can find the same.
Thanks
Sanjay, do Ctrl+F and search for download, you’ll get it.
MAXPAIN automatic calculation:
http://maximum-pain.com/options/max-pain
Reagards
Fede
Hi Karthik,
Do Nifty and BankNifty really expire at max pain point? what does your experience say about it?
Thanks,
Raj
No, it does not, at best it is a rough approximation. It is best if you can build a range around the max pain level and expect the expiry to occur anywere within that range, rather than looking at 1 particular price point.
Ok. Thanks : )
http://niftyinvest.com/max-pain
here you to can find max pain for any stocks
Does it simply means that the strike with highest oi by adding both call oi and put oi. Please correct if my understanding is wrong.
Yup, highest OI and value. Check the excel calculation.
Hands up…. The best explanations about the concepts and theories of the stock market I’ve ever seen. It’s like feeding a baby. Kudos to you sir : ) ..
Thanks for the kind words, Tamil Selvan 🙂
Hi Karthik,
Thank you so much for writing these articles. Each module is top class, lucid and yet so insightful.
I have a question regarding max pain. While calculating losses for option writers, we have not considered the premiums they have received while selling the options. I realize that this data is not readily available, but aren’t we subjecting ourselves to availability bias by eliminating this key component? The losses could be much lower when we consider the premium received.
Hmm, Anish I agree to some extent. Some because on expiry what matters is the intrinsic value of the option. Anyway, these things is what constitutes a ‘model error’, hence its always better to take a range as a possible final solution, which is what I’ve mentioned in this chapter as well.
Hi Karthik,
Thanks for awesome I formation.
I have question,
As we all know option chain data keep changing for every min. So how do we calculate correct strike for Max. Pain?
Let’s say Experiy on Thursday. Today is Monday. How can I write calls based on option chain data of Today? It is gona change tomorrow and even on day of Experiy, right?
Please correct me if I am wrong..thanks in advance.
Regards
One thing you can do is…You can look at the Max pain value, estimate a range around the max pain value and then write options outside this range.
Sir in sensibull they are referring pcr above 1.3 as over bought and 0.5 as over sold which one is correct.
I’d say mine, but do hear their perspective once 🙂
1.They say in their webinar,pcr above 1.3 means more puts big(sellers) have sold puts and the market is bullish and over bought and we can expect reversal and vice versa for calls.
2.After adding the 5% buffer should we go with naked selling or with hedging.
These are tools developed based on emperical science. There is no defenite answers, I’d suggest you use this, observe and then make adjustments to match your risk and reward temperments.
The knowledge you possess in trading is enormous.
It might sounds crazy, why don’t you give us your own trading strategies?
There will be many out here who ready to pay for this:)
Everything I know is put up here for free, so no need to pay 🙂
Happy reading!
What you are doing is really appreciable..
Is there an strategies out there on expiry day? Many are marketing about hero or zero calls which I feel like a lottery.
Also do you think retail traders can make out of living with this? As I am seeing around, there are very few who are successful and taking it as profession..
Ram, don’t trust stuff like zero to hero or whatever, it is most likely a scam 🙂
It is hard to make a living, not that people have not done that. They have. To give you a perspective, 1 in maybe 25,000 can do this successfully. What is a more likely possibility is that you can make trading as a supplementary income, to complement your main source of income.
Hi Karthik,
Thank you for your valuable information.
I think you are seeing PCR from byers perspective. I have observed that whenever the pcr is rising bullishness turns in the market. and whenever its decreasing bearishness.
Yup. Thats true, Aasim.
Hi Karthik,
Really liked the way you explained the stuff. I coded the excel calculations using R and wanted to share it here for benefit of everyone.
Method of use:
1. Install R software.
2. Set up your working directory.
3. Make a CSV file called “Options.csv” which contains the following columns: “Strike”, “Call OI” and “Put OI”. The names of the columns should be exactly the same as written here (else the code will throw an error). The data of the strike price, and OIs needs to be pasted into this CSV file and saved in your working directory. The numbers need to be in normal format (without commas).
4. The code needs “ggplot2” package for producing the bar diagram. This can be done by typing the following into R console:
install.packages(“ggplot2”)
5. Now the following code can be run on the R console:
###########################
library(ggplot2)
D<-read.csv("Option.csv",header=TRUE)
D[D=="-"]<-NA
D<-data.frame(apply(D,2,as.numeric))
Call_val<-NULL
Put_val<-NULL
Helper<-D$Strike-D$Strike[1]
RevHelper<-D$Strike[nrow(D)]-D$Strike
for(i in 1:nrow(D)){
Put_val[i]<-sum(D$Put.OI[nrow(D):i]*RevHelper[nrow(D):i],na.rm=TRUE)
Call_val[i]<-sum(D$Call.OI[1:i]*Helper[1:i],na.rm=TRUE)}
Total<-Put_val+Call_val
PCR<-round(sum(D$Put.OI,na.rm=TRUE)/sum(D$Call.OI,na.rm=TRUE),3)
G<-ggplot(data=D,aes(x=factor(Strike),y=Total))+geom_bar(stat="identity")+labs(x="Strike Price",y="Total Pain",title="Max Pain")
print(G)
cat("Max Pain Level= ",D$Strike[Total==min(Total)],"\n","PCR OI = ",PCR,"\n")
View(data.frame(D,Call_val,Put_val,Total))
###########################
Thanks again,
Dhritiman
Wow! Thanks for sharing the code 🙂
Cheers bro!
Cheers!
@Karthik Rangappa
I have read both the modules with regard to options, they are simply superb. 🙂
Using python i have calculated option pain for each day w.r.t monthly expiry options for all the months in 2017, 2018, 2019.
I have downloaded contracts data form NSE Website.
The results were written to an excel file.
Please share your email id so that i will share the python code, input files used and the results.
I am sharing these because you could use them for to improve the option pain chapter.
Thanks, 🙂
Hey thanks so much for the offer. Maybe you can share the link here to download, will help many others too.
Yes, that’s a great idea and its my pleasure to share…! @Karthik Rangappa
Simply put the results of back testing :– The maximum deviation that i have seen from option pain on any given day of expiry month to underlying expiry on the day of expiry is between 7.13% for 2019, 8.78% for 2018 and 7% for 2017.
Therefore, we can confidently add 9% or like 10% to least option pain expiry on any given day in expiry month so that the expiry would not be beyond the strike.
However the Python code along with results of the code and input files can be downloaded form google drive link below:
https://drive.google.com/open?id=1zuEqxhzbjcjD7iXfH79fZIx9DmRJefld
Hi Karthik,
I read somewhere that PCR is to be viewed from the angle of option writers, not the option buyers.
For example, if PCR is 1.3, this means there are more put writers than call writers. This means more writers believe markets will not go down further and hence bullish.
Is this view correct? Thanks.
Hard to say that, simply because the OI is reflective of both buyers and seller right? Cant really distinguish one from another.
sir I can clearly see all the options strategy excel sheets except Max Pain & PCR ?
Plz share.
The calculation excel is available I guess. Search for the term ‘Download’.
Sir
I have following queries:
1. PCR (put-call ratio) when viewed from seller’s perspective would give better understanding. Correct me if I am wrong.
2. We have a fixed number of outstanding shares of a company that can be traded on exchanges. Is there any relationship between the no. of outstanding shares and the no. of options contracts (i.e. OI) that can exist at a time?
Thanks
1) Not really, its not biased towards buyer or seller
2) Nope, no direct relationship as such.
Hi Karthik,
Thanks a lot, u have explained the option trading very nicely. I would like to suggest one thing why don’t you start your YouTube channel and make videos on these modules.I watched a lot of videos to understand the option trading but none was good enough.
Thanks for the suggestion, Arvind. It is just that videos will take away a lot of bandwidth, so we are kind of hesitant to do that at this point.
Sir
As per recent SEBI Circular, there is proposal for reduced margin requirement for hedged positions in FNO w.e.f. 01 June 2020. But at the same time, it is stated that brokers may remain conservative if they wish. Will we as Zerodha’s client be able to have this benefit or Zerodha will opt out to remain conservative with no change in margin requirements for clients?
Thanks
We are yet to spec the details, but we are likely to take a conservative approach.
Hi Sir
Thanks for such clear and precise explanation for Max Pain and PCR. All your chapters are amazing. I just have 1 small query. In your improvised implementation of Max Pain, you are taking positive 5% buffer. Any specific reason why you considered only positive buffer and not a negative?
Thanks
The buffer is just to accommodate the errors if any. Think of it as a safety net.
hi Sir
Sir , why my postings are deleted is it not relevant or idiotic or offensive.
Hello sir,
How option circuits are calculated.
What is max risk, if CE 9500 is bought in current week and sold in next week at same time.
Please do check this – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/what-does-circuit-limits-i-e-price-bands-mean
Hi Karthik,
Many thanks for making option trading learning easy and interesting. I have liked contents and the way of explaining things.
Interesting read about max pain.
After reading modules related to options, got so much interested into options trading, now i wanted to become quants!
Thanks!
Happy to note that Nilesh, good luck for your journey 🙂
Simple and Well explained best part is Excel template
Happy learning!
Dear Karthick,
Thanks for the wonderful module on option, i enjoyed reading them, my thanks for keeping them as simple as possible and also have gone through your twitter thread about option buying couple of days back, it was crisp and clear
Just help me out in clarifying few things
1. Do net credit strategies yield more profits compared to net debit, I am just looking for probabilities. Please indicate the same out of your experience
2. I have come across IVP and IV ranks, have also read we need to use either one of them, which will be better to use IVP (Percentile) Or IVR Rank
Glad you liked the tweet thread 🙂
1) No, they both have similar probabilities. Net credit gives more conform to the trader though
2) I’d prefer the IV rank
hi karthik .
i want to know that market is a place of uncertainity (trading).suppose if i trade a plan well there is no certainity that it will be profitable it can go to loss also.
i want to know when is the right time to trade a big trade like paul tudor jones or george soros .
thought process before getting a trade ,trading physocology etc
how will i get the conviction to take that big trade .
With more trading experience, the higher is your conviction on trades. This will take few years of market exposure.
Hello Karthik,
Just a personal thought. I feel a bit doubtful about max pain theory. There are very few articles on it. Wikipedia doesn’t say anything. Even the website mentioned on this page (optionspain.com) is dead. I also feel doubtful that bunch of options trader can really manipulate stock prices of large-cap stocks. aBut I guess there need more research as well as backtesting on this.
One question. I believe the market will be sideways so I want to sell options. But I also want to limit my loss in case I am wrong. Are their popular strategies for my situation that I can read about on the internet?
I think a short straddle with OTM long Call and OTM long Put would do the job. Wondering are there any other popular strategies?
Varun, most of these concepts are like that. Obscure and not backed by scientific theory, just like TA. The problem is that you can’t disregard it as well 🙂 It is up to you to figure the best way to use in the markets, maybe reconfigure and reuse to match your trading requirement 🙂
I think you have made mistake in writing in the para after 7th point in section 13.4. You should write “1.5 to 2 times” Std.Div away from mean instead of “1.5 to 2%” Std.Div.
Let me review this again, Savan.
Sir,Can you provide the excel sheet for calculating max pain theory?
It is uploaded in the chapter itself, please feel free to download the same.
Hey man, I got some doubts related to the margin required for option writing.
1) Let’s take an example where I sell a put option
Instrument: niftybank
Spot – 19000
Strike – 17500
Margin – 47k ( span – 30k + exp – 17k)
Premium – 4.2k
Now let’s say the trade goes against my view and niftybank spot becomes 18000.
When I executed the trade, I had 12 trading secessions before expiry and the move to 18000 happened in 2 trading secessions.
How will you this affect my margin? Will I have to pay more? In futures margin M2M makes prefect sense to me but I couldn’t understand how margin works in options.
2) Here am implementing call ration back spread –
Selling 1 ITM CE
Buying 2 OTM CE
my margin requirement is 70k(span – 40k and exp – 30k) according to zerodha margin calculate.
From my calculations the max loss I can experience is 30k.
Got more than 30 days for expiry.
In this case will there be any increase or decrease in margin depending upon the underlying assets?( Because I have sold a call option)
Let me know if my questions are not clear… I’ll put it in a different way but please help me out.
Unlike futures, there is no M2M in options.
1) When you write options, the premium will be credited to your trading account on T+1 basis
2) The margins blocked will suffice in normal cases (like this one) for you to continue holding the position.
3) However, if the volatility shoots up drastically or the underlying moves heavily against your position, then you’d be required to bring additional to suffice for increased margin
4) The blocked margins will be released once you square off the position
5) Your profit is to the extent of the premium received
6) You make a loss if you square off the trade at a premium lesser than what you’ve received. The difference will be debited at the time you will square off the trade.
7) Btw, going forward the margin for multileg positions will reduce, check this – https://tradingqna.com/t/new-margin-framework-sample-calculations/78211
Hey,
“3) However, if the volatility shoots up drastically or the underlying moves heavily against your position, then you’d be required to bring additional to suffice for increased margin.”
Will the margin reduces with a decrease in volatility or/and the underlying moving in favour of my viewpoint or will it stay the same till I square off my position?
Other points are clear Karthik, Thanks.
With a decrease in volatility, margins may drop.
I”M IN CONFUSED SIR WE CAN FIND PCR FOR EVERY STRIKE PRICE SO BEFORE ENTRY WHICH PCR WE HAVE TO CONSIDER THE TOTAL OI PCR OR FOR EVERY STRIKE PRICE PCR PLIZ CLARIFY ME.
Look at the ATM strike.
Your PCR interpretation is just opposite. Today on 1st June 20, the PCR is 1.6 and market is heading to 10k and it is bullish and overbought. It may reverse in few days.
Hmm, yeah, that’s why PCR is a contrarian indicator.
Dear Karthik,
The maxpain theory seems quite impressive, but why come there is no research papers around this, can you share link of any such research paper if you have come across?
I’m not sure if this research worthy 🙂
Dear Sir
cordially THANK YOU soo much sir for All modules.
Sir please help me out to calculate Cumulative Values in Excel Sheet
Please Sir!
Where are you stuck in the calculation? I’ve tried to explain it stepwise in the chapter.
Hi Karthik,
Can we use the Max Pain excel shared by you in this chapter for nifty weekly expiry. I know you suggested to avoid weekly expiry. But i want to trade on nifty weekly expiry , please suggest the approach using this Max Pain excel shared.
Thanks,
Natwar Mandal
You can, but just be aware that the theta decay in weekly options is quite high, which is good for the sellers.
Thanks Karthik !!!!
Hi Karthik,
So I assume there is no change in any formula on Max Pain excel shared in this tutorial ( for weekly expiry trades ).
One more thing regarding column R (Helper Column). does this need any modification for trading on stock specific ? or values in this column will always be multiples of 100.
Regards,
Natwar Mandal
+91 6204194107
Yes, no change in formula or logic. No, helper remains the same. Use this according to the situation.
Considering Nifty 25 June 2020 Strike. If i take ATM PCR, it is ~1.2. If i take the total PCR of all strikes it is 1.53. Which one should be taken into account for setting up a trade ?
YOu will have to consider the overall market, not just the ATM strike.
Thanks !!!
For calculating Max Pain should I take all Call & Put OI values or those which are “In the Money” only. Pl clarify
No, you need to consider every strike and not just ITM.
Is there weekly expiry for Nifty options. I thought it there only for Bank Nifty options
Yes, but they are not too liquid.
The formula in Excel sheet for Max Pain calculations can be simplified by using $ sign against column B (like B$4) copying down. Then only one more row & column combination (R..$B…) combination has to be added
Ah ok. I’m not the best in Excel, so you’ll have to excuse me here 🙂
Will Zerodha accept shares in my demat account as collateral for options selling. If yes where can I see the procedure. I have a Zerodha account
Yes, check this – https://support.zerodha.com/category/console/portfolio/articles/how-do-i-pledge-my-shares-to-get-collateral-margin
Yesterday I made a template for calculating Max Pain for Nifty & Bank Nifty. Now all I have to do is to copy the strike & OI data from NSE site. 5% addition seems very high for Bank Nifty. Don’t you think so?
Yup, if you have a template then its fairly easy.
For working out Max Pain I took no of trading days for June series ( 20 days starting from 29th May & ending on 25th Jun ) & will work out the Max Pain for Nifty on 12th Jun i.e the 11th day ( not 13th😁). Is that ok
Yes, thats ok.
It is really nice explanation Karthik. Thank you very much for sharing. I need small clarification on your improvements.
“ The OI values change every day. This means the option pain could suggest 7800 as the expiry level on 10th of May and may very well suggest 8000 on 20th of May. I froze on a particular day of the month to run this computation. I preferred doing this when there were 15 days to expiry.”
Can you please explain the below point with example.
What I meant here Sekhar is that the OI fluctuates daily, so the value you get today may be different from the value you get t’row. So the question is which value will you take? Y’day or today? Given this, one of the better approaches would be to calculate this on a fixed day of the month and stick with the values for the rest of the month. I prefer the midway to expiry i.e. around the 15th of every month.
Hi Karthik,
shared max pain excel template have 8 ITM , 1 ATM, and 8 otp strikes right ?
it has to be 17 strikes only ? or we can add/ reduce ?
please suggest.
Regards,
natwar
No, you can reduce and consider only the liquid strikes.
got it… Thanks 🙂
Happy reading 🙂
hi karthik,can u plz guide how to make template on excel to calculate max pain of nifty.can u share from where on nse site OI data with strike rates is available?
The template is the same, you can replace it with any underlying.
hi karthik,from where to obtain data on nse website regarding open interest and strike rate.
Look for the option chain, Manish.
Thank you very much for the reply!
I have another doubt on calculating the Maxpain.
1. If I want to take the position for expiry 30-07-2020 on 15-07-2020 (15 days before expiry), which date Maxpain we should calculate( 30th or 15th)?
2. 15 days before means, 15 calender days or market business days?
Thanks in advance!
1) Max pain is based on current OI, hence you cant take for 30th, but will have to take for 15th only
2) 15 calender days.
Karthik sir,
I have a small question in mind, how can someone lose money if he does call writting . suppose I write a call at 20 rs and if the premium surge up we would lose money. but the question is why to book the loss when I know at the end of the month premium becomes 0 and I can collect all the premium on expiry. can you clear this simple doubt sir. I will be grateful to you.
regards
Abhishek sharma
There is no guarantee that the underlying will come down right, Abhishek? Hence there is no guarantee that the option will hit 0.
Dear Karthik,
Small confusion. I have sold a Call of Tata motors @ 20.45. For one of my strategies
though tata motors have gone up 6% I was expecting a loss and premium to go up.
as the stock price increases, there will be an increase in premium.
Is it only because of the fall in Volatility the premium has come down as I am closure to expiry?
Its a function of both drop-in volatility plus drop-in time to expiry.
Dear Karthik,
Any reliable source where I can learn the co-relation between PCR and IV.
have done little research your inputs will add value.
And should we use PCR to find support and resistance of stocks/index?
Not sure about that Anil.
Why it is called Maximum pain rather it should be called minimum pain considering it would cause minimum pain to writers if it happens to expire where it hurts less 😀
Max pain looks at that price point, at which if market expires, maximum pain is caused to option buyers. Hence max pain 🙂
Sir,I am fascinated with kite app and application and also i am college student.I just wanted to know how did you code zerodha like did you do it yourself or got it done by some third part because i was planning to make a very small project with moving average for stocks.
I’m glad you liked Kite, Abhay. We have a very hard working in house tech team driving all the innovation, led by a fascinating guy. Do check out the blog – https://zerodha.tech/
Sir,what if i used the oi of weekly options and calculate the max pain of the week? And write an option on monday with 5% sd waiting till the weekly thursday expiration
Perfectly valid, no harm trying that out. Paper trade this for a bit, observe and then take a call 🙂
@ Karthik, @ Ravindra Thakur
Just thought of sharing this info to make max pain calculations easier.
We can leverage SUMPRODUCT (which is already used in Cumulative put) to make it lot more shorter formula.
I could not find a reverse range formula in excel, so I got one from Google.
Here is the code:
Public Function reverse(rng As Range)
Dim ary(), N As Long, i As Long
N = rng.Count
ReDim ary(1 To N)
i = N
For Each r In rng
ary(i) = r.Value
i = i – 1
Next r
With Application.WorksheetFunction
reverse = .Transpose(ary)
End With
End Function
————————————–
Just enter this in user defined function code editor (Alt+F11) and then cumulative call can be calculated as :
SUMPRODUCT(reverse(R3:R9),B2:B8)
SUMPRODUCT(reverse(R3:R10),B2:B9)
where C column has call open interest and R column has helper values (Refer to original excel).
Reference link for more details in excel:
https://stackoverflow.com/questions/48751620/reversing-a-list-in-excel-within-a-formula
Sir,
Would it be right to say that Max Pain Strike calculation done 10 days prior to Expiry Date is likely to be more accurate/has higher probability to occur, when compared to Max Pain Calculation done 20 days prior to expiry?
Tough conclusion, you need some sort to backtesting to validate this. Having said that, I’d take the values roughly 10 days prior and work with it.
Sir,
Consider Reliance Jul 2140 CE. Current Spot Price of Reliance is 2146.
The PCR ratio calculated by Sensibull is based on the entire Option Chain OIs and the value comes to be 1.08 . Hence we expect the market to go up.
However, if we calculate PCR ratio based on just 17 Strike Prices, as given in the PCR Excel file (8 OTMs + 8 ITMs + 1 ATM), the value turns out to be 0.48. Based on this value we expect the Market to go down.
Now which value to use for forming an opinion about the market?
Regards.
In my opinion, the decision to include strikes should really be based on the liquidity of strikes. If all strikes are liquid, take them all. If the liquidity is spread across just 8-10 strikes, then consider just that.
Hi Karthik,
Scenario – I have been observing Lupin’s charts and have subsequently sold 1050 CE, and unfortunately it shot up yesterday by ~10% and is currently at ~1020(with 13 calendar days till expiry).
I checked out the max pain which is at 960. The ATM IV is at 56 which is considerably higher than the average of around last 2-3 months.The stock has already broken its resistance 1, heading towards resistance 2.
My point is the max pain seems way too far than the CMP right now. I was playing safe and hence sold it at a much higher strike price.
With your experience, and with only 9 trading sessions left till expiry, what else do you see as the driving force or what other metrics should I give weightage to, on the same level that I’m giving to PCR, IV and Max Pain?
Thanks
PCR is secondary, what really matters is the IV. So please develop your thoughts on IV and set up your trades based on that.
Respected Sir, How to interpret the change in Max pain? It keeps on increasing or decreasing till expiry. Can we say that when the Max pain is increasing, the spot is bullish and vice versa or otherwise. For eg. Today Bank Nifty jumped up by 500+ points and Max pain reduced from 22600 to 22400. Getting bit confused. I could not find any resourse where movement of max pain is discussed. Kindly throw some light on this please sir.
Warm regards.
You need to calculate the max pain on a particular day and take a stance with that. The reason we add a % band around this is because it keeps varying.
Hello,
I didn’t understood the meaning of helper column!
Its just an excel column where you do rough work.
Dear Sir,
As usual your explanations are crystal clear. We as a community owe a lot to you.
My query here is… in your example you have mentioned buffer as 7800 + 5% of 7800. This addition is only on one side. what about the other side ? like 7800 – (minus) 5% of 7800. Hope you have ignored the same as you are looking more from the call option perspective. Otherwise it should be both sides..right ? Kindly clarify.
That’s right, the idea is to write only CE options. Hence the upper range.
Din’t actually get why the PCR is a contrarian indicator… can you please explain a bit more…. does hedging also comes into picture which makes PCR a contrarian indicator.
Also instead of calculating the rupee value for option pain, Can we take only the cumulative OI of both puts and call side… I think that will also work or is there any catch in it..
Thanks in advance
Gaurav, I think another person had the exact same query, and we have discussed this in the comments. Can you please check? Thanks.
sir , how do you analyze when oi on option chain are nearly equal on both the sides (call and put ) ?
thank you.
OI does not really matter, what matters is the price action.
Dear sir, I am learning how read option chain but I am always confuse with Deep ITM writings. For example right now market has come already above 11400 but still we can see some open interest on 11000 to 10800 on calls side for current week(8th oct). May be those are hedged positions but why somebody will want to write below 11000 strikes as they are still very far for hedging purpose. same things I have noticed sometime on put side as well. please tell what does this means.
Markets are made of different opinions, at every strike there is an opinion which translates to buy or sell. Hence you see OIs at these strikes.
oh ok. Thank you for reply.
Good luck!
Hi, Its very pleasant to read concepts in this simplified way. I can see the efforts of your Team in the content.
It would be more beneficial if you guys can create Youtube Videos in a Channel.
Glad you liked the content and the feedback. We are working on these lines 🙂
First time I read Full article . Thanks sir god bless u.
Happy reading 🙂
Enlightening facts about max pain theory and PCR . Kudos .
Glad you liked it, Nagarjuna.
You are doing something very rare with varsity. Thank you for keeping it free for everyone. I am really learning a lot.
I had a thought so wanted to ask your view regarding it?
Considering trade for weekly expiry, example:
Suppose bank nifty has maxpain around 26000 level Tuesday mid, days left to expiry is 3 so we calculate Standard deviation of 3 days around maxpain level keeping bank nifty Price action in mind and create short strangle or inverted strangle around it with 1SD till expiry day and exit by Thursday mid. What do you think about this strategy?
Thanks for the kind words, Shubham!
That sounds alright, but do bear in mind that 1SD can be taken off easily on expiry days as the volatility tends to shoot up.
Request you to provide analytical details like PCR ratio, Max Pain details for nifty weekly expiry. Currently data analysis available for monthly expiry only in nifty.
Analytical details like? Maybe you should check this with Sensibull.
In PCR it’s mentioned that if PCR is more than 1 that means more puts are being bought, but it also signifies that the same amount of puts are being sold.
Put OI means put open contracts if its 1 lac than that means 1 lac puts being sold and at the same time 1 lac puts being bought so that why PCR Formula should be puts bought/call bought or put sold/call sold.
Please tell me where I am wrong.
Regards
True, the fact that there is so much interest in PUTs is the whole point. Also, keep in mind the price itself when you look at any OI derived parameter.