Which variable is important to look at for call/put options?

Discussion in 'Options' started by cashclay, Jul 13, 2021.

  1. :banghead:
     
    #11     Jul 16, 2021
  2. These are so many variables. I know only one or two out of them. I agree with the statement because through IV and volume you can know about the number of traders which can give you the idea about volatility further.
     
    #12     Jul 16, 2021
  3. Don't worry about Rho -that ain't gonna budge for a while yet!
     
    #13     Jul 17, 2021
  4. CannonTrading_Ilan

    CannonTrading_Ilan Sponsor

    underlying
    delta
    Gamma
    what if underlying reaches certain price within certain time
    days to expiration
    cost
    upload_2021-7-20_7-18-12.png
     
    #14     Jul 20, 2021
  5. The bid/ask spread is the most important variable. Wide bid/ask spread equates to less interest in the option. High interest is very important when you are trying to exit a position. Large bid/ask spread equates to bad exit prices.
     
    #15     Jul 29, 2021
  6. cesfx

    cesfx

    If you want to look at the option market just as an indicator for the underlying, I think volume, unusual volume, open interest and iv/hv might help.
     
    #16     Jul 29, 2021
  7. Matt_ORATS

    Matt_ORATS Sponsor

    There are a lot of important variables in trading.
    One approach we take is this:
    1. Find a good options strategy for a particular stock. For example, in AAPL a long call spread with the following parameters tests well.
    2. [​IMG]

    3. Test various indicators to see if they improve the in sample and out of sample returns.
      1. For example when AAPL IV is high relative to its best ETF the XLK is high the call spread does well: ivEtfRatio_ivEtfRatioAvg1m
      2. Also when AAPL IV his high relative to SPY the call spread does well: ivSPYratio explained here in a recent blog and video we put up: https://blog.orats.com/options-indicator-spotlight-implied-volatility-ratio-to-spy
    4. Paper trade this strategy.
    5. Scan using the strategy to identify potential trades looking at the following variables:
      1. Distribution return %. We value the terminal value at each node in the distribution below and compare the expected value to the trade price.
      2. Forecast return %. We make an estimate of the entire vol surface and make theo values based on these forecasts of vol, skew, earnings effects, curvature.
      3. Smooth return %. We smooth the IV surface and compare those theos to the trade price.
      4. Delta cost. We calculate a proprietary parameter that estimates the cost of controlling deltas.
      5. Risk. What is the payoff over a standard deviation range, here 3 stdevs.
    [​IMG]
    For example, we like the first row's vertical more than the last row because of the higher distribution value (D%) and forecast value (F%).
     
    #17     Jul 29, 2021