Best Trading Strategies

2 Comments so far ↓

• zman492 // Jul 6, 2010 at 12:03 am

  1.OPTION VOLUME:

  – As a Indicator,wHAT DOES Option Volume says about future price Movements?

  In my opinion, nothing.

  – What does High/Low Option volume says?

  Higher volume, more liquidity.
  Lower volume, less liquidity.

  – When usually High/Low option volume occurs?

  High volume – shortly before or after a scheduled event
  High volume – shortly after an unscheduled event
  Low volume – any other time

  Can u give some circumsatances at which High/Low Option volume occurs?

  High volume – before/after an earnings announcement, before/after and FDA decision about a new product, after an earnings warning

  2.Volatility:

  a. IMPLIED VOLATILITY (IV):

  —What does High/Low Implied Volatility (IV) reading says? Does it gives any signals?

  High IV – high risk, high potential reward, fear, expectation that the underlying will be volatile prior to expiration.
  Low IV – expectation that the underlying will be less volatile prior to expiration

  —If "Yes" to the above question,Does that IV reading has any correlation with price of stock inorder to Ensure that the
  provided signals ( By IV) are not fake.

  In my opinion, no.

  —At what circumstances Implied Volatility become unusual High/Low?Can you Give some circumstances?

  -Unusually high, before a scheduled event such as an earnings announcement, press conference, FDA ruling, court ruling, etc or after an unscheduled event such as the CEO/CFO quitting unexpectedly, an earnings warning, losing a major customer, an announcement that the product is killing people, etc.

  Unusually low, after accepting a cash buyout offer.

  —Does IV provides Buy and sell signal for option trading?Please explain in simple and clearly.

  Not in a vacuum. IV should always be part of a buy or sell decision, but only as it compares to what you expect acutally volatility will be prior to expiration.

  –Does IV provides the direction>?Like is it going to bullish or bearish or sideways?

  Generally no, but it would be fair to say low IV indicates more options traders expect a sideways market.

  b. HISTORICAL VOLATILITY (HV) AND IMPLIED VOLATILITY (IV) RELATIONS:

  —Is there any rules like HV should be above or below IV ? or any RULES LIKE IV located above HV?

  There are no rules but there are considerations. An option trade should be based, at least in part, on your expectation that actual volatility of the price of the underlying will be above or below the IV of the option. Some people base an expectation that actual volatility of the price of the underlying, at least partially, on HV.

  —If "YES" to the above question, what is the signal it provides when HV is located above IV (or)IV located above HV.

  If you base your expectation that actual volatility of the price of the underlying entirely on the HV, you would want a positive vega if IV < HV and a negative vega if IV > HV.

  –dOES cRossovers of HV and IV provide any signals?

  If you based your expectation that actual volatility of the price of the underlying by comparing IV to HV it might indicate that you should adjust or close your position.

  3.LIQUIDITY:

  —cAN YOU TELL ME ANY SIMPLE STRATEGY (Other than Volume) to measure the Liquidity of Stock option?

  Bid size, ask size, bid-ask spread and open interest would all correlate with liquidity.

  —I hear one friend saying:measuring liquidity from Bid/ask spread…..But his explanation is not making me
  understanding….If you really know answer, Please explain to me in simple and clearly….

  Market makers make more profit if there is a bigger bid/ask spread so they would prefer a bigger spread but, if there are a lot of other people trading the options they will put in limit orders between the bid and the ask. When that happens it not only decreases the bid/ask spread directly, it also reduces it indirectly by forcing market makers to reduce their bid/ask spread. Remember market makes have to make trades to make profits;

  —does Liquity provides Buy and sell signals? Please explain in simple and clear way.

  In my opinion liquidity does not provide buy or sell signals, but low liquidity would be an indication that you would prefer to find a different option to trade.

  4.Suggestions:

  If you have your own experience of the following for the option trading,please explain to me in simple way.

  —Forecasting the direction?Like Bullish or bearish or sideaways?

  I do not believe that it is wise to forecast a bullish or bearish direction from option trading. Others disagree.

  —Entry and exit signals of option trading

  Any news item that you believe will cause the market to react irrationally, or any reaction you consider irrational.

• half2005 // Jul 6, 2010 at 12:03 am

  Go to the bookstore and find a book to read.

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