I had a query from Viren last week about predicting a range or a price target for expiry.
Whilst we do not really have good reliable software like max pain to get the correct expiry figure, I have found that some good old-fashioned Option arithmetic can help predict the closing price of the Nifty fairly accurately.
I had posted this information on a public forum earlier, so those who know it already, please excuse us, but for those who do not- have a pencil, paper and calculator ready.
I intended to do this post in the morning and even communicated to Viren a closing price of 5272 ( +/ - 10 points), but got stuck in my daily routine and when I saw the close, I had to leave everything aside and do this post.
Hopefully it should help you sort out the next one...
Here are the calculations. If you are good in options, you will have this figured out...Old schoolers like us used these maths to figure out if options were cheap or expensive.
We begin by looking at the VIX and the spot closing from the day before.
Step 1 : Look at the spot price from the day before ( 5225 )
Step 2 : Look at the Vix from the day before ( 18.13 )
Step 3 : Look at the days to expiry ( 1).You can do this any number of days before expiry.
Step 4 : Divide this figure from step 3 by the nos of days of the year ( 365/1 )
You get 365.
Step 5 : Take the square root of the figure in step 4 ( 19.10)
Step 6 : Divide Vix by 100 ( 0.1813)
Step 7 : Now divide step 6 by step 5.You get 0.0094.
Step 8 : Multiply step 7 by the spot price of step 1 ( 0.0094 x 5225 = 49.6 )
Since Nifty has closed at 5225, we will look at the open interest at 5200 and that at 5300.
5200 PE has OI of 6 million and the OI at 5300 CE is of 5.6 million. In view of this, we can forecast an expiry between 5200 and 5300.This also discounts the possibility of a move to 5175.
Aligning this view with our range from step 9, we can see Nifty at the upper end of the range.The high of the day was 5268 and the Nifty closed at 5260.
That's it. 10 easy steps to take expiry blues away.
Whilst we do not really have good reliable software like max pain to get the correct expiry figure, I have found that some good old-fashioned Option arithmetic can help predict the closing price of the Nifty fairly accurately.
I had posted this information on a public forum earlier, so those who know it already, please excuse us, but for those who do not- have a pencil, paper and calculator ready.
I intended to do this post in the morning and even communicated to Viren a closing price of 5272 ( +/ - 10 points), but got stuck in my daily routine and when I saw the close, I had to leave everything aside and do this post.
Hopefully it should help you sort out the next one...
Here are the calculations. If you are good in options, you will have this figured out...Old schoolers like us used these maths to figure out if options were cheap or expensive.
We begin by looking at the VIX and the spot closing from the day before.
Step 1 : Look at the spot price from the day before ( 5225 )
Step 2 : Look at the Vix from the day before ( 18.13 )
Step 3 : Look at the days to expiry ( 1).You can do this any number of days before expiry.
Step 4 : Divide this figure from step 3 by the nos of days of the year ( 365/1 )
You get 365.
Step 5 : Take the square root of the figure in step 4 ( 19.10)
Step 6 : Divide Vix by 100 ( 0.1813)
Step 7 : Now divide step 6 by step 5.You get 0.0094.
Step 8 : Multiply step 7 by the spot price of step 1 ( 0.0094 x 5225 = 49.6 )
Step 9 : Add and subtract step 8 from step 1 ( 5175-5275)
Step 10 :Now let’s monitor the Open interest.
5200 PE has OI of 6 million and the OI at 5300 CE is of 5.6 million. In view of this, we can forecast an expiry between 5200 and 5300.This also discounts the possibility of a move to 5175.
Aligning this view with our range from step 9, we can see Nifty at the upper end of the range.The high of the day was 5268 and the Nifty closed at 5260.
That's it. 10 easy steps to take expiry blues away.
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