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Market Sentiment |
vimalmehta
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Joined: 07 Apr 2009
Posts: 20
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Post: #31  Posted: Wed Aug 01, 2012 8:50 am Post subject: |
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Thanks ST
| SwingTrader wrote: | | vimalmehta wrote: | Hello ST...very intrigued by these posts on option sentiment and long/int term sentiment...I read the posts right at the beginning but still curious how these indicators are calculated.
Also wanted more info on the putcall ratio? Is it a ratio of the no of puts traded to the no of calls or is it based on outstanding open interest? Thanks VIMZ |
Put/call ratio is total put volume divided by total call volume for a given day (for EOD put/call ratio). One can also compute it based on open interest, that also is valid. You can get it here for our market : http://www.nseindia.com/products/content/derivatives/equities/homepage_fo.htm
About my indicators. Long term sentiment is based on market breadth (specifically, a combination of cummulative advance/decline, cummulative adv/dec volume and % of stocks above/below certain moving averages). Options sentiment is based on options volume & OI of certain key strike prices. Unfortunately their calculations cannot be given. Sorry. |
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SwingTrader
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Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #32 Posted: Wed Aug 01, 2012 8:03 pm Post subject: |
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Options Sentiment Update - 01.08.2012
Just posting a mid-week update. Nothing much has changed, options sentiment still indicating a clear bearish bias despite the strong rally. If I don't exit my intermediate term bearish options trade (on getting an exit signal in the near future due to change of bias) then this trade could be a big one for me. Please go through the next post I am going to make to clarify an important related query sent to me by one user.
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Srikanth Kurdukar
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SwingTrader
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Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #33 Posted: Thu Aug 02, 2012 8:59 am Post subject: |
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I had received a query from a user about options sentiment, I have replied to him but want to post it here to so things are clear on how I use options sentiment.
Query sent by the user :
| Quote: | i follow your thread where you post charts with options data
for mkt sentiment
your last post says both trends are bearish yet the mkt
is making new highs after tht post
is there a mistake or something else
pls post an update and confirm trend
as per your mkt sentiment analysis thread |
My reply :
About market sentiment / options sentiment - these charts reflect the underlying sentiment trend and not the actual market trend. There are times when these two diverge and one of these trends is not correct. One will have to just wait to find out which is correct.
Market Sentiment is based on market breadth. Currently prices are moving up but sentiment is still down, this indicates the underlying market breadth is not supporting the move currently. Ultimately either the trend will turn down or market sentiment will turn up. No idea what will happen. I monitor market sentiment because most of the times it indicates true underlying sentiment.
More so for options sentiment. The way it is built, it tries to capture the sentiment of options writers by getting the volume/OI stats of key options strike prices. I rely on this too as it indicates true sentiment most of the time. But there will always be exceptions but they are rare.
One extremely important thing to remember is that these sentiment charts are useless for intraday & swing trading. They are useful only for position trading & investing. Market making higher highs after a sentiment bias bearish signal does not mean much in the near term. It doesn't work like that.
We will just have to wait and watch what happens this time....
More on options sentiment to make it clear how I use it:
I do not use naked futures to trade these signals. I buy in-the-money options. The intrinsic value of ITM options provide some buffer in case the trend continues against the options sentiment bias (like it is happening now). These signals do not lend themselves to day/swing trading as the trade takes time to develop.
Trend going against the options sentiment has happened before but has turned the trade more lucrative. Not sure if it will happen this time but that is how I am going to trade based on my experience. I just adjust trades and handle the adverse move. If it eventually does not work it is fine, which is the main reason why I use limited risk for these setups.
Attached chart shows earlier examples of price going against options sentiment (like it is happening now). A & B trades had to be adjusted by rolling out to next month (trade closed for moderate loss and another initiated for next month), the rolled out trades went on to hit big profits. C & D were not a problem at all. C was a big profitable trade (Nov 11th short) but had to exit profitably and then re-enter on continuation signal on 9th Dec which again was profitable. D was just adverse move against the options sentiment bias that did not affect the trade at all. 23rd Feb 2012 was the short signal, adverse move lasted for few days from 8th to 15th March but the trade continued after that and was profitable.
Scenario E is happening now for the current trade, it is just another adverse move in another trade. Nothing special. I will just adjust the trade based on what happens in the near future or leave it alone if the price starts going down.
If all the above is confusing, sorry...please ignore. It is kind of insight into what I do with options sentiment. The point of all this is, options sentiment can't be used as a signal/trigger. It is just a rough setup that can be used to position oneself in the probable direction of upcoming price move and this is best done with ITM options to limit risk. The same can surely be duplicated or done better using usual indicators or even plain gut feel.
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Srikanth Kurdukar
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psalm
Black Belt
Joined: 12 Nov 2011
Posts: 5368
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| Post: #34 Posted: Thu Aug 02, 2012 9:17 am Post subject: |
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| SwingTrader wrote: | I had received a query from a user about options sentiment, I have replied to him but want to post it here to so things are clear on how I use options sentiment.
Query sent by the user :
| Quote: | i follow your thread where you post charts with options data
for mkt sentiment
your last post says both trends are bearish yet the mkt
is making new highs after tht post
is there a mistake or something else
pls post an update and confirm trend
as per your mkt sentiment analysis thread |
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First of all, this question itself is ridiculous.....I dont understand why, you want to reply to such questions, ST.....All here are aware that, there is NOTHING (i really mean it) in this world which can identify the top and bottom of any market.....Not a single technical indicator or a fundamental indicator is capable of that.......If someone banking his or her investment ideas purely on this, then its him to blame, not the tool.....The tools are to make the decisions easier....not to find the exact HIGHs and LOWs.....I feel...
Its fashionable to ask questions, why its not working and all.....but its wise to ignore such questions....cos, it doesn't worth a reply... 
Regards,
SAM |
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SwingTrader
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Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #35 Posted: Thu Aug 02, 2012 10:13 am Post subject: |
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| psalm wrote: | | SwingTrader wrote: | I had received a query from a user about options sentiment, I have replied to him but want to post it here to so things are clear on how I use options sentiment.
Query sent by the user :
| Quote: | i follow your thread where you post charts with options data
for mkt sentiment
your last post says both trends are bearish yet the mkt
is making new highs after tht post
is there a mistake or something else
pls post an update and confirm trend
as per your mkt sentiment analysis thread |
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First of all, this question itself is ridiculous.....I dont understand why, you want to reply to such questions, ST.....All here are aware that, there is NOTHING (i really mean it) in this world which can identify the top and bottom of any market.....Not a single technical indicator or a fundamental indicator is capable of that.......If someone banking his or her investment ideas purely on this, then its him to blame, not the tool.....The tools are to make the decisions easier....not to find the exact HIGHs and LOWs.....I feel...
Its fashionable to ask questions, why its not working and all.....but its wise to ignore such questions....cos, it doesn't worth a reply...
Regards,
SAM |
Sam,
Well...I thought it was a genuine question so I sent him a reply. I posted it here too to make sure the trend bias signals are not interpreted as actual trend change signals. It is possible that many other users could be thinking this way so it was best to post this clarification.
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Srikanth Kurdukar
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SwingTrader
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Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #36 Posted: Sun Aug 05, 2012 8:25 am Post subject: |
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Options Sentiment (Intermediate Term) continues to indicate bearish move even though we have seen a strong short-term rally. Europe & US markets have rallied hard on Friday, so we have to see what kind of reaction our markets will see on Monday. Two more days of strong up move can stop me out of my bearish options spreads. Options sentiment still indicates that the current short-term rally is a just a pullback in intermediate downtrend. Let us see...keeping fingers crossed for now.
Long term Sentiment is neutral reflecting indecision in the longer timeframe. Nothing much to do for now here other than holding on to existing hedged long term positions.
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Srikanth Kurdukar
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Gemini
White Belt
Joined: 28 Apr 2009
Posts: 166
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| Post: #37 Posted: Sun Aug 05, 2012 12:33 pm Post subject: |
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Dear ST,
Great to go through this thread. Will it be possible for you to share the system that you operate ? e.g. you decide to buy ITM option and as I understand hedge the same. Do you use "covered call" type of hedging ? Do you keep SL for the positions taken ?
Can this method provide approximate returns over 24% CAGR on long term ?
I have noticed some large positions in deep in the money ( e.g. 400 call and 6000 put this month). Is this method useful for limited capital traders ( say 3 to 5 lacs)?
Sincere thanks. |
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Gemini
White Belt
Joined: 28 Apr 2009
Posts: 166
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| Post: #38 Posted: Sun Aug 05, 2012 12:35 pm Post subject: |
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| *4000 call and 6000 put |
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SwingTrader
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Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #39 Posted: Sun Aug 05, 2012 10:04 pm Post subject: |
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| Gemini wrote: | Dear ST,
Great to go through this thread. Will it be possible for you to share the system that you operate ? e.g. you decide to buy ITM option and as I understand hedge the same. Do you use "covered call" type of hedging ? Do you keep SL for the positions taken ?
Can this method provide approximate returns over 24% CAGR on long term ?
I have noticed some large positions in deep in the money ( e.g. 400 call and 6000 put this month). Is this method useful for limited capital traders ( say 3 to 5 lacs)?
Sincere thanks. |
Gemini,
Here is what I usually do (the below relates to position trading only, not long term) :
I initiate ITM (in-the-money) call if I get a buy signal (options sentiment bullish bias). The call I usually select is about 1-2 strikes ITM. ITM option helps a bit in case of an adverse move, it loses value slower than OTM option and it gains value faster in case of move in the direction of our trade (due to greater delta than OTM put). Once options sentiment hits bullish extreme and/or I feel that the risk of downside has increased then I buy ITM put to hedge (again 1-2 strikes ITM). Once options sentiment signals a bearish bias I exit the call and continue to hold the put. When options sentiment hits bearish extreme I buy ITM call to hedge. Bullish bias again starts the cycle.
The above, of course, is the ideal cycle. There will be expiries in between when whatever position one is in has to be rolled over which I do without hesitation and continue. Sometimes I rollover few days before expiry based on what is happening currently in the market.
One more key part of the system is position sizing. Number of contracts to trade is decided based on current account size after keeping a decent drawdown buffer equity. This results in good compounding of equity and also reduces/increases position size as account equity decreases/increases.
About the signals itself, I think there is nothing special about options sentiment. One can duplicate these signals with simple indicators and even improve on those. A market breadth/sentiment indicator helps to identify extremes and that can be very helpful to identify hedging points (one can look at our EOD based $NSEADV, $NSEDEC, $NSETRIN with moving averages etc for this purpose). Other than that the real power comes from consistently applying some strategy. I firmly believe this from experience. The key thing in this system is to stay through the sideways moves which can test patience as theta eats away the option time value. Again ITM options help here as time value itself is less for these options. But this can really test the patience so discipline is the key. If one can ride through the sideways moves then the trends will much more than take care of the profits, one just needs to be in the trade to take advantage of the trends.
The CAGR for this type of system is much better than 24% in my opinion.
I am currently doing the above with ITM calls/puts. Before that I have traded similar system (continuous in the market thing) with synthetics (fut + opt hedge), collars (fut + options), reverse diagonals, simple debit/credit spreads too. Currently doing only ITM calls/puts for simplicity and sometimes reverse diagonals for isolated trades.
Let me know if you have questions....
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Srikanth Kurdukar
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Gemini
White Belt
Joined: 28 Apr 2009
Posts: 166
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| Post: #40 Posted: Sun Aug 05, 2012 10:53 pm Post subject: |
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Dear ST,
Thanks for very detailed explanation of your startegy. I need to go through the same for a few times before I have further questions !
I am sure this system will be really useful for positional trading and for people who are not able to keep track of the market on a continuous basis during market hours.
Bye for now. |
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anandrathi12
White Belt
Joined: 01 Dec 2010
Posts: 38
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| Post: #41 Posted: Tue Aug 07, 2012 10:02 pm Post subject: |
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ST Sir,
Post if any updates in Sentiment charts after two days of upmove..?
Thanks
Anand Rathi
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SwingTrader
Site Admin
Joined: 11 Aug 2006
Posts: 2903
Location: Hyderabad, India
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| Post: #42 Posted: Tue Aug 07, 2012 10:28 pm Post subject: |
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| anandrathi12 wrote: | ST Sir,
Post if any updates in Sentiment charts after two days of upmove..?
Thanks
Anand Rathi
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Here it is....market obviously extremely overbought. The market has taken off to the upside after the initial down move after the bearish bias signal. I have been holding ITM puts since the bearish bias signal that I had to hedge after the gap up yesterday. Have not participated in this rally as I don't think it will last long. I have been trading this as a pullback in downtrend. Maybe I am wrong but that is how I am going to play it. If the bias signal changes now in the next 1-2 days (it could happen if we get 1-2 more consecutive up days) then I will exit the position as I have already minimized my loss in the position by delta hedging my puts.
BTW this rally going on since 27th Jul has been on decreasing volume which indicates a pullback only. I will wait it out and continue to adjust/manage the current trade until I am confident of the direction which may not be far away. A breakout above today's high will change the complete picture and a strong reversal from here will start playing out the scenario that is being suggested by options sentiment. Let us see...
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Srikanth Kurdukar
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anandrathi12
White Belt
Joined: 01 Dec 2010
Posts: 38
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| Post: #43 Posted: Tue Aug 07, 2012 10:59 pm Post subject: |
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ST sir
 
Anand Rathi |
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dine
White Belt
Joined: 11 Jul 2009
Posts: 73
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| Post: #44 Posted: Tue Aug 07, 2012 11:15 pm Post subject: |
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Dear ST,
I remember, sometime back You suggested a nice book on Hedging. If you do not mind, Can you please share the name of it once again.
Thanks.
Dinesh S. |
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sanmen
White Belt
Joined: 28 Apr 2008
Posts: 88
Location: Delhi
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| Post: #45 Posted: Wed Aug 08, 2012 9:42 am Post subject: |
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Dear ST
yesterday's high has been taken out. whether this is a breakout or not is not confirmed. Would appreciate if you can post an update during the market hours on today's movement and its implication
thanx!
Sandeep |
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