Getting Started

OptionAction is an Option Analysis tool which lets you to build and analyze option strategies for Indian Stock Markets. It provides most of the analytic required for an option trader to practice and implement their option strategies. Though it is a simple tool with cool UI interface you can build any complex option strategies with the available pre built option templates.

It comes with features like Option Chain, Option Greeks, Option Strategy Builder, Option Greeks Calculator, Option Pain, Put-Call Ratio (OI & Volume), Open Interest look up, Volatility Smile, Volatility Cone and much more.

Registration

1) Download OptionAction Setup and Install it.

2) Open OptionAction. It opens the registration page.



3) Give your registration details and register. You will receive an activation link in your registered email id.

NOTE: If you do not receive the Registration activation message within a few minutes of Registration, please check your Spam/Junk/Bulk folder just in case the activation email got delivered there instead of your inbox. If so, select the Registration activation message and click Not Spam/Junk, which will allow future messages to get through.

Activation

4) Click the activation link received in your registered email to activate your OA.

Login

5) After successful activation, Click OA shortcut available in your Desktop. It will launch OA Login form. Enter the login credentials which you have entered during registration process and press Login button.



6) Enabling "Remember Me" setting will let OA to remember your password so that you do not have to re-type when returning to the Application.

Forgot Password

7) Forgot Password allows users to reset the password if in case they don't remember their password.



8) You are required to enter the registered mobile number then choose your New Password and re-type to confirm your password. Once done, you need to click on "Change Password" button to reset the password.

Option Chain

An option chain is simply a listing of all the put and call option strike prices along with their premiums for a given maturity period. The majority of online brokers and stock trading platforms display option quotes in the form of an option chain.

OA displays Option Chain with Option Greeks, Implied Volatility, PCR Ratio (OI & Volume), Type and Symbols. It also computes total PCR ratio for the entire option expiry contracts or individual expiry contracts. By default it computes Total Put-Call Ratio for the entire expiry contracts.



Enter the Symbol in the Symbol text box.

Symbol Auto complete feature provides Symbol suggestions while you type into the Symbol text box.

Press "Enter" key or "Update" button to fetch the latest Option Chain Data pertaining to the entered Symbol.

Once the Option Chain data fetched, all the relevant filters will be enabled.

By default GREEK filter check-box will be un-checked. To fetch information on Delta, Gamma, Vega, Theta and Strike SD values you need to check the GRK option.

Option Greeks

Options traders often refer to the delta, gamma, vega and theta of their option positions. Collectively, these terms are known as the "Greeks" and they provide a way to measure the sensitivity of an option's price to quantifiable factors.

Option Greeks are nothing but the statistical references that are calculated by the option pricing model (Black & Scholes). Greeks basically helps calculate the option price. It really measures the individual option sensitivity to the changes in the component variable that affects the option pricing.

Delta - Measures the rate of change of options premium based on the directional movement of the underlying.

Gamma – Rate of change of delta itself.

Vega - Rate of change of premium based on change in volatility.

Theta - Measures the impact on premium based on time left for expiry.

Option Pricing

Option Price is composed of 2 components

1)Intrinsic Value
2)Extrinsic Value

Let’s take an example to understand the Intrinsic and Extrinsic value. On Oct 30th, 2016 ICICI Bank spot price is closed at 276.85 and ICICIBANK November contract 270CE premium is trading around 16.50. And the call option is currently trading as in the money and has 22 trading sessions remaining to expire.

Hence,

Intrinsic Value = Underlying stock price – Strike Price = 276.85-270 = Rs6.85
Extrinsic Value = Call Option Premium – Intrinsic Value = 16.50 – 6.85 = Rs9.65

Extrinsic Value depends on multiple components

1)Time Decay
2)Volatility
3)Interest Rates

Let say the underlying stock price stays at 276.85 till the expiry date. In that case extrinsic value goes to zero and what is left in the 270CE call option premium is only intrinsic value.
The Extrinsic value of Rs9.65 premium is subject to Option Greeks and play a crucial role in selecting an option strike price and effectively implement/design an option strategy.

Delta

Delta measures the rate of change of an option premium value relative to a change in the underlying. It defines the size of the option price move per 1 rupee move in the underlying stock/index price.

Lets assume that ICICI underlying spot price moved 1 rupee higher in your favor I.e from 276 to 277. In that case Call value would have moved from 16.50 to 16.50 + Current Delta Value = 17.10



Calls have positive delta, between 0 and 1. That means if the stock price goes up and no other pricing variables change, the price for the call will go up and and delta increases. If the stock price goes down and no other pricing value change, the price for the call will go down and delta decreases.



Lets assume that ICICI underlying spot price moved 1 rupee lower against your favor I.e from 276 to 275. In that case Call value would have moved from 16.50 to 16.50 - Current Delta Value = 15.90 and delta decreases.

Puts have a negative delta, between 0 and -1. That means if the stock goes up and no other pricing variables change, the price of the option will go down. For example, if a put has a delta of -.50 and the stock goes up 1 rupee, in theory, the price of the put will go down 50 paise. If the stock goes down 1 rupee, in theory, the price of the put will go up 50 paise.

Delta value is not constant and changes dynamically based upon the dynamic inputs of the pricing model - underlying stock/index price, time to expiry, volatility. Every professional option trader uses delta as a common parameter in their trading strategies.

Delta also measures the likelihood of the option expiring ITM. Generally ITM options have higher delta and OTM has lower delta and ATM options have medium delta.

As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. Delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock.

As a general rule, the absolute value of the call delta and absolute value of the put delta of the same strike add up close to 1.00

Effect of Time on Delta

The more time left until an option expires the less certain it is whether the option will be in the money or out of the money. Therefore the Delta’s of both ITM or OTM options reflect that uncertainty. ITM option Delta’s increases as expiration approaches. OTM option Delta’s decreases as expiration approaches.

Effect of Volatility on Delta

As Volatility increases OTM Delta’s increases and ITM Delta’s decreases. As volatility decreases OTM Delta’s decreases and ITM Delta’s Increases.

Gamma

Gamma measures the rate of change of an option’s delta given a change in the price of the underlying security. Gamma is expressed in terms of delta per one rupee move.

Gamma is the second derivative of the graph of the option price relative to the stock price. Gamma (like Delta) is not constant. ITM & OTM options have lower gamma. ATM options have higher gamma.

When you buy(Long) option you acquire positive gamma. Positive gamma helps a long trader – causes option to gain value at faster rate and lose value at a slower rate.

When you short sell option you acquire negative gamma. Negative gamma works against a short seller – it will accelerate your losses. this means when the position moves against trader (as market moves up while he is short) the deltas add up (thanks to gamma) and therefore at every stage of market increase, the delta and gamma gang up against the short option trader, making his position riskier.

Let’s consider the ATM options in ICICI Bank. ICICI Bank is currently trading at 276. And the ATM options are 275CE trading with premium of 13.30 and 275PE with premium of 11. We know from the earlier chapter that calls will have a positive delta and puts will have negative delta. And for the ATM options delta will be approximately around 0.5. Now let’s try to understand how the long stock option price changes when the delta changes.

In 275CE you could notice from the below example that for every 1 point up move in the underlying security price the delta increases because of the positive gamma. And positive gamma accelerates the option price when the price moves upwards.



In 275CE you could notice from the below example that for every 1 point down move in the underlying security price the delta decreases because of the positive gamma. And positive gamma decelerates the option price when the price moves downwards.



Now let’s look into 275PE you could notice from the below example that for every 1 point up move in the underlying security price the delta decreases because of the positive gamma. And positive gamma decelerates the option price when the price moves against your position.



In 275PE you could notice from the below example that for every 1 point down-move in the underlying security price the delta increases because of the positive gamma. And positive gamma accelerates the option price when the price moves downwards.



It is strongly recommended not to short options with larger gamma as the losses will exponentially add up faster.

Vega

Vega measure the rate of change of an option’s theoretical value relative to change in implied volatility (IV). This is the value that when entered into a option pricing model returns the option’s theoretical value. When IV rises or fall , option prices rise or fall in line with it (Vega is the rate of change).

A Call/Put with the same expiration month & same strike on the same underlying will have the same vega value as it corresponding Put/Call. Long Options have positive vega and Short options have negative vega.

The higher the time premium higher the vega. ATM options have the highest vega since vega affects only the extrinsic value.

Let's consider MARUTI stock price is currently trading around 5805 and OTM put options 5500PE with premium of Rs 27 , Implied Volatility is at 25 and vega is at 3.2. Lets consider implied volatility increases from 25 to 30 then option value increases by Rs16 (3.2x5) to 43 (59% increase in option premium).

Let's consider another example VEDANTA (VEDL) stock price is currently trading around 218.6 and OTM Put option 200PE with premium of Rs 2.70 , Implied Volatility is at 47 and Vega = 0.14. Lets consider implied volatility decreases from 47 to 42 then option value decreases by 0.7 (5*0.14) to Rs 2.00 (15% decrease in option premium).

Erosion of Time and its effect on Vega



The more time remaining to option expiration, the higher the vega. This makes sense as time value makes up a larger proportion of the premium for longer term options and it is the time value that is sensitive to changes in volatility.

Option traders should strive to gain an accurate understanding of volatility — and its many uses — because volatility affects option prices, trading decisions and risk analysis.

Theta

Generally Option Prices are broken into 2 components Intrinsic Value and Extrinsic Value. Intrinsic value is measurable [the ITM part of the premium] whereas extrinsic value is considered as the time value [premium paid over the parity for the option]

The decay in option value because of time passage is called time decay or Theta in the Greeks. Long Options will have negative Theta and short options will have positive Theta.

If the interest rates are above zero then call Theta is higher than put Theta. At the money option strikes will have higher theta compared to ITM or OTM options as ATM options have highest Time Value compared to any other strike price. Higher the extrinsic value or time value higher the theta.

If you are a credit spread trader you need to understand where you place your strikes to determine how much premium decay you want to get.

Higher volatility also increases an option premiums thus increasing theta decay. Theta is not a constant number it varies non linearly. The “Velocity” of theta decay grows geometrically as we get closer to expiration. By the time you reach 10-15 days to expiration the theta decay will start accelerating faster. The 30-50 day time frame lets us to capture significant theta with reasonable risk profile. And on the expiry day theta becomes zero and hence the time value also becomes zero.



Overall theta is a tool for short sellers as most of the the short sellers profit from selling options closer to the expiry – traders will get at lower premium but the drop in premium is high, which is advantageous to the options seller.

Options Greek Calculator

Option price value is determined by various factors i.e., underlying spot price, strike price, volatility, time to maturity, interest rate etc., and option trader needs to know how the changes in these parameters affect the option price or option premium.

Option Greeks Calculator constitute an essential toolkit for an option trader as the greeks help option traders to understand and estimate the extent of risk while trading options.

Steps to Use Options Greeks Calculator

Once the Option Chain data fetched, go to the Menu Charts->Greek Calc.

Greek Calculator will open as a Pop-up window and it computes the Option Greeks like Delta, Gamma, Theta, Vega and Rho. Now you can change the variables like Time to Expiry, Expiry Date, Strike price, Stock Price, Option price, Volatility, Interest Rate, Dividend Rate and one compute the Option Greeks based on user input. There is also option provided to switch between Black-Scholes option pricing model and Binomial Option pricing model.