50 Rules For Futures Traders

A survey by the John Walsh Agency asked more than a thousand experienced futures brokers what rules they follow for successful futures trading. More than five thousand suggestions were submitted. Here is a list of the futures trading rules they mentioned most often:

Don't be afraid to be a sheep.

1. Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not "one of the crowd." Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not "one of the crowd," to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend. 2. Know why you are trading the commodity markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful futures trading. 3. Use a trading system, any system, and stick to it. 4. Apply money management techniques to your trading. 5. Do not overtrade. 6. Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you. 7. Trade with the trends, rather than trying to pick tops and bottoms. 8. Don't trade many markets with little capital. 9. Don't just trade the volatile contracts. 10. Calculate the risk/reward ratio before putting a trade on, then guard against holding it too long. 11. Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don't change during the session unless you have a very good reason. 12. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes. 13. Use technical signals (charts) to maintain discipline - the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.

Use discipline to eliminate impulse trading.

14. Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, with no changes unless hard data changes. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade. 15. When you have a successful trade, fight the natural tendency to give some of it back. 16. Use a disciplined trade selection system: an organized, systematic process to eliminate impulse or emotional trading. 17. Trade with a plan - not with hope, greed, or fear. Plan where you will get in the market, how much you will risk on the trade, and where you will take your profits.

Cut losses short - let profits run.

18. Most importantly, cut your losses short and let your profits run. It sounds simple, but it isn't. Let's look at some of the reasons many traders have a hard time "cutting losses short." First, it's hard for any of us to admit we've made a mistake. Let's say a position starts going against you, and all your "good" reasons for putting the position on are still there. You say to yourself, "It's only a temporary set-back. After all, you reason, the more the position goes against me, the better the chance it has to come back - the odds will catch up." Also, the reasons for entering the trade are still there. By now you've lost quite a bit; you sell yourself on giving it "one more day." It's easy to convince yourself because, by this time, you probably aren't thinking very clearly about the position. Besides, you've lost so much already, what's a little more? Panic sets in, and then comes the worst, the most devastating, the most fallacious reasoning of all, when you figure, "That contract doesn't expire for a few more months; things are bound to turn around in the meantime." So it goes; so cut those losses short. In fact, many experienced traders say if a position still goes against you the third day in, get out. Cut those losses fast, before the losing position starts to infect you, before you "fall in love" with it. The easiest way is to inscribe across the front of your brain, "Cut my losses fast." Use stop loss orders, aim for a $500 per contract loss limit...or whatever works for you, but do it. Now to the "letting profits run" side of the equation. This is even harder because who knows when those profits will stop running? Well, of course, no one does, but there are some things to consider. First of all, be aware that there is an urge in all of us to want to win...even if it's only by a narrow margin. Most of us were raised that way. Win - even if it's only by one touchdown, one point, or one run. Following that philosophy almost assures you of losing in the futures markets because the nature of trading futures usually means that there are more losers than winners. The winners are often big, big, big winners, not "one run" winners. Here again, you have to fight human nature. Let's say you've had several losses (like most traders), and now one of your

positions is developing into a pretty good winner. The temptation to close it out is universally overwhelming. You're sick about all those losses, and here's a chance to cash in on a pretty good winner. You don't want it to get away. Besides, it gives you a nice warm feeling to close out a winning position and tell yourself (and maybe even your friends) how smart you were (particularly if you're beginning to doubt yourself because of all those past losers). That kind of reasoning and emotionalism have no place in futures trading; therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear...don't; out of greed...don't; out of ego... don't; out of impatience...don't; out of anxiety...don't; out of sound fundamental and/or technical reasoning...do. 19. You can avoid the emotionalism, the second-guessing, the wondering, the agonizing, if you have a sound-trading plan (including price objectives, entry points, exit points, risk-reward ratios, stops, information about historical price levels, seasonal influences, government reports, prices of related markets, chart analysis, etc.) and follow it. Most traders don't want to bother; they like to "wing it." Perhaps they think a plan might take the fun out of it for them. If you're like that and trade futures for the fun of it, fine. If you're trying to make money without a plan - forget it. Trading a sound, smart plan is the answer to cutting your losses short and letting your profits run. 20. Do not overstay a good market. If you do, you are bound to overstay a bad one also. 21. Take your lumps; just be sure they are little lumps. Very successful traders generally have more losing trades than winning trades. They don't have any hang-ups about admitting they're wrong, and have the ability to close out losing positions quickly. 22. Trade all positions in futures on a performance basis. The position must give a profit by the end of the third day after the position is taken, or else get out. 23. Program your mind to accept many small losses. Program your mind to "sit still" for a few large gains.

Learn to trade from the short side.

24. Most people would rather own something (go long) than owe something (go short). Markets can (and should) also be traded from the short side. 25. Watch for divergences in related markets - is one market making a new high and another not following? 26. Recognize that fear, greed, ignorance, generosity, stupidity, impatience, self-delusion, etc. can cost you a lot more money than the markets going against you, and that there is no fundamental method to recognize these factors.

27. Don't blindly follow computer trading. A computer-trading plan is only as good as the program. As the old saying goes, "Garbage in, garbage out." 28. Learn the basics of futures trading. It's amazing how many people simply don't know what they're doing. They're bound to lose, unless they have a strong broker to guide them and keep them out of trouble.

Standing aside is a position. Patience is important.

29. Standing aside is a position. 30. Client and broker must have rapport. Chemistry between account executive and client is very important; the odds of picking the right AE the first time are remote. Pick a broker who will protect you from yourself: greed, ego, fear, or subconscious desire to lose (actually true with some traders). Ask someone who trades if they know a good futures broker. If you find one who has room for you, give him your account. 31. Sometimes, when things aren't going well and you're thinking about changing brokerage firms, think about just changing AEs instead. Phone the manager of the local office, let him describe some of the other AEs in the office, and see if any of them seem right enough to have a first meeting with. Don't worry about getting your account executive in trouble; the office certainly would rather have you switch AEs than to lose your business altogether. 32. Broker/client psychology must be in tune, or else the broker and client should part company early in the program. Client and broker should be in touch repeatedly, so when the time comes, both parties are mentally programmed to take the necessary action without delay. 33. Most people do not have the time or the experience to trade futures profitably, so choosing a broker could be the most important step to successful futures trading. 34. When you go stale, get out of the markets for a while. Trading futures is demanding, and can be draining - especially when you're losing. Step back; get away from it all to recharge your batteries.

Thrill seekers usually lose.

35. If you're in futures simply for the thrill of gambling, you'll probably lose, because chances are the money does not mean as much to you as the excitement. Just knowing this about yourself may cause you to be more prudent, which could improve your trading record. Have a business-like approach to the markets. Anyone who is inclined to speculate in futures should look at speculation as a business, and treat it as such. Do not regard it as a pure gamble, as so many people do. If speculation is a business, anyone in that business should learn and understand it to the best of his/her ability.

Approach the markets with a reasonable time goal.

36. When you open an account with a broker, don't just decide on the amount of money, decide on the length of time you should trade. This approach helps you conserve your equity, and helps avoid the Las Vegas approach of "Well, I'll trade till my stake runs out." Experience shows that many who have been at it over a long period of time end up making money. 37. Don't trade on rumors. If you have, ask yourself this: "Over the long run, have I made money or lost money trading on rumors?" O.K. then, stop it. 38. Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend. 39. Don't trade unless you're well financed, so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you. 40. Be more careful if you're extra smart. Smart people very often put on a position a little too early. They see the potential for a price movement before it becomes actual. They become worn out or "tapped out" and aren't around when a big move finally gets underway. They were too busy trading to make money.

Never add to a losing position.

41. Stay out of trouble, your first loss is your smallest loss. 42. Analyze your losses. Learn from your losses. They're expensive lessons; you paid for them. Most traders don't learn from their mistakes because they don't like to think about them. 43. Survive! In futures trading, the ones who stay around long enough to be there when those "big moves" come along are often successful. 44. If you're just getting into the markets, be a small trader for at least a year, then analyze your good trades and your bad ones. You can really learn more from your bad ones. 45. Carry a notebook with you, and jot down interesting market information. Write down the market openings, price ranges, your fills, stop orders, and your own personal observations. Re-read your notes from time to time; use them to help analyze your performance. 46. "Rome was not built in a day, and no real movement of importance takes place in one day. A speculator should have enough excess margin in his account to provide staying power so he can participate in big moves.

47. Take windfall profits (profits that have no sound reasons for occurring). 48. Periodically redefine the kind of capital you have in the markets. If your personal financial situation changes and the risk capital becomes necessary capital, don't wait for "just one more day" or "one more price tick; get out right away. If you don't, you'll most likely start trading with your heart instead of your head, and then you'll surely lose. 49. Don't use the markets to feed your need for excitement. 50. Always use stop orders, always...always...always.

Option Strategies
Bullish Market Strategies
Option Strategy Description
Strongest bullish option position.

Reason to use
Loss limited to premium.

When to use
Undervalued option with volatility increasing. Large credit bullish market. High or increasing volatility. Small debit, bullish market.

Buy a call

Sell a put

Neutral bullish option Collect premium. position. Loss limited to net debt. Loss limited to price difference minus credit.

Vertical Bull Buy call, sell call of Calls higher strike price. Vertical Bull Buy put, sell put of Puts higher strike price.

Large credit, bullish market.

Bearish Market Strategies

Option Strategy Description Reason to use When to use
Undervalued option with volatility increasing.

Buy a put

Strongest bearish option Loss limited to position. premium.

Sell a call

Neutral bearish option position. Buy at the money put, sell out of the money put. Sell call, buy call of higher strike price.

Collect premium.

Option overvalued, market flat, bearish. Small debit, bearish market.

Vertical Bear Puts

Loss limited to debit.

Vertical Bear Calls

Loss limited to strike price differnce minu credit.

Large credit, bearish market.

Neutral Market Strategies

Option Strategy Description
Sell out fo the money put and call.

Reason to use
Maximum use of time value decay.

When to use
Trading range market w/ volatility peaking.

Strangle

Butterfly

Buy at the money call (put), sell 2 out of the Profit certain if done money calls (puts), and at credit. buy farther out of the money call (put). Sell near month, buy far month, same strike price. Sell calls and puts same strike price. Near month time value decays faster. Profit certain if done at credit.

Any time credit received.

Calender

Small debit, trading range market. Any time credit received. Large credit and difference between strike prices of options bought and sold. Any time credit received.

Box

Ratio

Buy call, sell calls of higher strike price.

Neutral, slightly bullish.

Conversion

Buy futures, buy at the money put and sell out of the money call.

Profit certain if done at credit.

Special Market Situations

Option Strategy

Description

Reason to use

When to use

Straddle Purshase

Buy put and call at or near the money.

Options under-valued and One option will market likely to make a big go in the money. move. Collect premium on calls sold. Collect premium on uts sold. Neutral, slightly bullish.

Covered call

Buy future, sell call.

Covered puts Synthetic futures position.

Sell future, sell put.

Neutral, slightly bearish.

Buy call (put), sell put Neutral, slightly (call). trending market.

When the net positions is better than futures.

Option Selling or "Writing"

Many traders opt to buy options in an effort to maximize gains and limit losses to the purchase price of the option. On the surface this seems ideal, except for one major flaw: time decay. The Chicago Mercantile Exchange estimates that over 80% of all options expire worthless. Those who sell these options to the buyers are known as option writers or sellers. Their objective is to collect the premium paid by the option buyer. Option writing can also be used for hedging purposes and reducing risk. The writer has unlimited risk and a limited profit potential: the premium of the option minus commissions. In appropriate situations you should consider selling out-of-the-money options instead of buying them. Here are some reasons why: top
Benefits of Option Selling
y Time Value: When selling out-of-the-money options, time value works for you instead of against you. The buyer of the option pays you a premium for that option. The longer the buyer holds the option, the more time decay works against him, especially as the option nears expiration. As time passes, the option will lose 100% of its time value. Overvaluation: Besides time decay, another reason we have found option selling so attractive is that small traders most often purchase options. Historically, small traders, as opposed to the large commercial or fund traders, are almost always on the losing side of the trade. Statistics bear out that the small trader tends to buy options, especially call options. Often these options get bid up at exaggerated, overbought prices and when the rally ends the option

buyer is often left holding a deteriorating asset which was gladly sold to him or her by the professional trader. y Three Ways To Win: There are three ways to win as an option writer: The market can move in the opposite direction from the option sold, it can trade sideways, or it can even go against you but not through your strike price. The advantage is time decay. Taking Profits: One of the hardest parts of futures trading is deciding when to take profits. With option selling, if the market behaves favorably towards your position, you won't need to make this decision. As time value decays your option, the market will gradually take profits for you. Upon expiration, if the option still has not reached your strike price, the entire premium for which you sold the option will be in your account. At this time, your position automatically closes out. Less Stressful Trading: Selling out-of -the money options removes much of the stress and emotional decision-making that is common in futures trading. Option selling usually places your position in the market far enough away that short term swings in the market may not dramatically affect your position. You Dont Have To Predict Prices: Instead of trying to predict where prices will go, you are projecting where you think prices won't go. We have found that most of the time prices tend to stay in a trading range. Favorable Statistics: The fair market value of an option is a statistical value based on the volatility of the underlying asset and is calculated to give the seller of the option approximately an 85% chance of making consistent gains. This means that a buyer of an option has an 85% chance of experiencing consistent losses over the life of the option. top

The Option Selling Strategy

As an option seller, you do not have to be concerned so much as to where the price will go, but more importantly where the price will not go. The objective is to select options with the highest probability of expiring worthless. Heritage West uses both fundamental and technical analysis to project the general direction of the underlying futures market on which options will be sold. Then, far out of the money options with 1-1/2 to 4 months time remaining until expiration are selected for consideration. Strike prices are selected that could only be achieved through a dramatic change in the fundamentals of the market. This gives the market plenty of room to make short-term moves against your positions, thus avoiding the "noise" that forces futures traders to be stopped out of the market.

Time Value

An option's value is made up of intrinsic value and extrinsic, or time, value. The intrinsic value is how far the option is in the money. For example, if July silver were at 5.50, the July silver 5.25 call option would have 25 cents of intrinsic value. The balance of the options value would consist of time value - how much time remained until the options expiration. If a trader sold a July silver 6.00 call option, that option would be 50 cents out of the money and therefore have no intrinsic value. The full value of the option would consist of solely time value. July silver would have to move a full 50 cents before the option would be in the money and have any intrinsic value at all. As a seller of options, you are selling time value. As long as July silver stays below 6.00, the option will have no intrinsic value. Its only value is time value; as time passes, the option's time value will erode, slowly at first, then accelerating towards the end. The movement in the futures market can temporarily affect the value of the option as well. A move higher can temporarily propel the value of the option higher, but it will still have no intrinsic value if the futures price is below 6.00. Futures prices moving lower will accelerate the deterioration of the option. In conclusion, if you are bearish silver and you sell a July 6.00 call, the market can move lower as you predicted, stay the same, or even move higher. As long as the price is below 6.00 at expiration, the option will have no intrinsic value and expire worthless, allowing you, the seller, to keep all premium collected as profit. top The graph below illustrates an options eroding time value.

Volatility

Volatility is the most important factor when determining which options to write. Volatility is the measure of the rate and magnitude of change in the price of an option in relation to the change of the underlying futures contract. If volatility is high, the premium on the option will be relatively high, and vice versa. Many option traders fail to understand how volatility affects the price of options and

how to utilize volatility to capture profits.

Sell Overvalued Options; Buy Undervalued Options

The following graph shows the volatility levels of soybeans options over a sixyear period. Notice the consistent pattern. Volatility is lowest in the inactive post-harvest to pre-planting period November to May. As the growing season gets underway volatility increases, usually peaking in July when extreme summer temperatures pose the greatest threat to soybean yields. Taking into account fundamental and technical criteria, you would look to buy options when they are undervalued (cheap), and sell them when overvalued (expensive).

A Word About Risk

Heritage West Financial believes in the prudent writing of options as part of a disciplined overall futures and options trading program. However, we advise against selling options without the advice and expertise of a knowledgeable specialist. Remember, writing options carries the same risks as trading futures, and although the percentages are in your favor, these risks should be treated with the same respect. In addition, if the market moves against your short option position, your margin requirements may increase as well. We also believe in using stops based on the underlying futures price, not on the value of the option. Once a market trades through an area perceived as strong support or resistance we recommend exiting positions. At Heritage West, your broker will work with you in analyzing the risk parameters of each trade and which positions may be suitable for you.
Option Buying & Spreads

Most options expire out of the money and worthless; therefore most traders lose

when buying options. Heritage West still believes there is opportunity in buying options; however, you must be very selective. We dont believe in buying options just because a market is extremely high or low. One must consider the fundamental and technical conditions of the market, along with historic and statistical option volatility and all other significant trading factors. Remember, though, the key factor is still going to be picking the correct market direction. There are usually several different trading scenarios and strategies to take advantage of an emerging profit opportunity. We will help you implement the correct strategies to suit your objectives and risk parameters. There are strategies that combine both futures and options designed to mitigate risk while still providing significant profit potential. top
Here are a few examples often used:
Bull call or bear put spreads involve the writing and buying of options at the

same time. If corn were trading at 240, we could buy one corn 240 call and write one 280 call with the anticipation of corn trending higher. The 280 call sold would subsidize the 240 call, and likely produce a much better risk to reward ratio. The profit is limited to the difference between the 240 and 280 strike prices, less the net premium debit.
Ratio spreads involve buying calls or puts and writing multiple calls or puts that

subsidize or even pay in full for the options purchased. If corn were trading at 240, we could buy one corn 240 call and write two 280 calls with the same expiration date. This would be in anticipation of corn trending higher, but not above 280 before option expiration. We'd be collecting the same amount of premium as the option purchased, so even if corn continued lower we'd lose nothing. Our highest profit would be attained at 280 based on option expiration. We would have 40 cents or $2,000 gross profit on the one 240 corn call we purchased and the two 280 calls sold would expire worthless. Above 240 we would give back our profit penny for penny up to 320, our break-even point based on option expiration. There is risk on the one uncovered 280 call above 320, based on expiration. Above that point we would lose penny for penny.

The Option Greeks

Gamma
Gamma, measures the rate of change of Delta. When call options are deep out of the money, they generally have a small Delta. This is because changes in the underlying bring about only tiny changes in the price of the option. But as the call option gets closer to the money, resulting from a continued rise in the price of the underlying, the Delta gets larger. Gamma is the change in an options delta for unit change in the value of the underlying asset. The gamma of a long option position (both calls and puts) is

always positive. At-the-money options have the largest gamma. The further an option goes "in-the-money" or, "out-of-the-money" the smaller is gamma.
y y y If you are long gamma you expect the underlying to make large moves. Traders with long positions expect positive gamma If you are short gamma you expect the underlying to remain relatively inactive. Traders with short positions expect negative gamma Gamma is a useful indication of the risk associated with a futures position. A large gamma number, whether positive or negative indicates a high degree of risk and a low gamma number indicates a low degree of risk. top

Delta
Delta is the amount by which the option changes compared to the underlying asset. It is a measure of the probability that an option will expire in the money. Call deltas can be interpreted as the probability that the option will finish in the money. Put deltas can be interpreted as -1 times the probability that the option will finish in the money. An at-the-money option, which has a delta of approximately 0.5, has roughly a 50/50 chance of ending up "in-the-money". For example, if an at-the-money wheat call option has a Delta of .5, and if wheat makes a 10-cent move higher, the premium on the option will increase approximately by 5 cents (.5 x 10 = 5), or $250 (each cent in premium is worth $50). The interpretation of Delta values is as under:
y y y y y y y y y Call options: 0 to 1 Put options: -1 to 0 In-the-money options: Delta approaches 1 (call: +1, put: -1) At-the-money options: Delta is about 0.5 (call: +0.5, put: -0.5) Out-of-the-money options: Delta approaches 0 Long Calls have a positive delta -You want the market to go up Short Calls have a negative delta -You want the market to go down Long Puts have a negative delta -You want the market to go down Short Puts have a positive delta -You want the market to go up

Delta is useful as a hedge ratio. A futures option with a delta of 0.5 means that the option price increases 0.5 for every 1 point increase in the futures price. For small changes in the futures price therefore, the option behaves like one-half of a futures contract. Constructing a delta hedge for a long position in 10 calls, each with a delta of 0.5 would require you to sell 5 futures contracts. As time passes, the delta of in-the-money options increases and the delta of out-

of-the-money options decreases.

Theta
Theta is defined as the change in the price of an option for a 1-day decrease in the time left for expiration. At-the-money options have the greatest time value and the greatest rate of time decay (theta). The further an option goes "in-themoney" or "out-of-the-money", the smaller is theta. As volatility falls, the time value declines and hence theta also declines.
y y y y Theta is the rate at which an option loses its value as each day passes. The inherent assumption is that the options are a "wasting asset." Long options have negative theta Short options have positive theta

As time passes, the theta of at-the-money options increases, the theta of deep inthe-money and out-of-the-money options decreases. Theta has the exact opposite characteristics of gamma. Thus the size of a gamma position correlates to the size of the theta position. A large positive gamma position goes in hand with a large negative theta position, while a large negative gamma position goes hand in hand with a large positive theta position. What this means is that every option position is a tradeoff between market movement and time decay. Theta is not used much by traders, but it is an important conceptual dimension. Theta measures the rate of decline of time-premium resulting from the passage of time. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears.

Vega
Vega is the change in the value of an option for a 1-percentage point increase in implied volatility of the underlying asset price. Implied volatility is measured as the annualized standard deviation of an assets daily price changes. The Vega of a long option position (both calls and puts) is always positive. At-the-money options have the greatest Vega. The further an option goes "in-themoney" or "out-of-the-money", the smaller is the Vega. As time passes, Vega decreases. Time amplifies the effect of volatility changes. As a result, Vega is greater for long-dated options than for short dated options.
y y As volatility falls, Vega decreases for in-the-money and out-of-the-money options; Vega is unchanged for at-the-money options. Vega is the options change in theoretical value with a change in volatility.

Most options have a positive Vega because they gain value with rising volatility and lose with falling volatility

Vega of most options decline as time to expiration grows shorter. Vega tells us approximately how much an option price will increase or decrease given an increase or decrease in the level of implied volatility. Option sellers benefit from a fall in implied volatility, and its just the reverse for option buyers. Vega can increase or decrease even without price changes of the underlying because implied volatility is the level of expected volatility If you would like to discuss these methods of option buying and selling, or assembling an option portfolio, please feel free to call us at 800-263-3004.

1. Nifty future trading call Call for 2nd august 2010 buy bank nifty fut at 10255 sl 10221 tgt 10271-10289-10305 sell at 10221 sl 10255 tgt 10204-10187-10153 intraday Call for 2nd august 2010 buy nifty fut at 5420 sl 5394 tgt 5431-5444-5456 sell at 5394 sl 5420 tgt 5382-5370-5358 intraday Call for 3rd august 2010 buy bank nifty fut at 10411 sl 10377 tgt 10428-10462-10496 sell at 10377 sl 10411 tgt 10360-10326-10292 intraday Call for 3rd august 2010 buy nifty fut at 5442 sl 5416 tgt 5454-5466-5478 sell at 5416 sl 5442 tgt 5404-5392-5380 intraday Call for 4th august 2010 buy bank nifty fut at 10451 sl 10417 tgt 10468-10502-10536 sell at 10417 sl 10451 tgt 10400-10366-10332 intraday Call for 4th august 2010 buy nifty fut at 5447 sl 5422 tgt 5460-5472-5484 sell at 5422 sl 5447 tgt 5410-5398-5384 intraday call for 6th august 2010 Buy nifty fut at 5467 sl 5442 tgt 5479-5492-5505 sell at 5442 sl 5467 tgt 5430-5418-5406 intraday call for 6th august 2010 buy bank nifty fut at 10454 sl 10420 tgt 10471-10505-10540 sell at 10420 sl 10454 tgt 10403-10370-10335 intraday call for 10th august 2010 buy nifty fut at 5476 sl 5452 tgt 5488-5502-5513 sell at 5452 sl 5476 tgt 5439-5427-5414 intraday call for 10th august 2010 buy bank nifty fut at 10481 sl 10447 tgt 10498-10532-10566 sell at 10447 sl 10481 tgt 10430-10396-10362 intraday

call for 11th august 2010 buy nifty future at 5472 sl 5447 tgt 5484-5497-5509 sell at 5447 sl 5472 tgt 5435-5423-5410 intraday call for 11th august 2010 buy bank nifty fut at 10498 sl 10464 tgt 10515-10550-10583 sell at 10464 sl 10498 tgt 10447-10413-10395 intraday call for 12th august 2010 buy nifty future at 5386 sl 5362 tgt 5398-5410-5422 sell at 5362 sl 5386 tgt 5349-5337-5325 intraday call for 12th august 2010 buy bank nifty fut at 10367 sl10333 tgt 10383-10417-10451 sell at 10333 sl 10367 tgt 10316-10282-10250 intraday call for 13th august 2010 buy nifty fut at 5443 sl 5418 tgt 5455-5468-5480 sell at 5418 sl 5443 tgt 5406-5394-5382 intraday call for 13th august 2010 buy bank nifty fut at 10723 sl 10689 tgt 10758-10783-10820 sell at 10689 sl 10723 tgt 10656-10610-10583 intraday. 16 th august no call given by us call for 17th august 2010 buy nifty fut at 5432 sl 5419 tgt 5444-5458-5473 sell at 5419 sl 5432 tgt 5404-5390-5366 intraday call for 17th august 2010 buy bank nifty fut at 10760 sl 10726 tgt 10777-10812-10846 sell at 10726 sl 10760 tgt 10708-10674-10640 intraday call for 18th august 2010 BUY NIFTY FUT AT 5440 sl 5414 tgt 5452-5463-5476 sell at 5414 sl 5440 tgt 5402-5378-5353 intraday call for 18th august 2010 buy bank nifty fut at 10829 sl 10795 tgt 10850-10881-10916 sell at 10795 sl 10829 tgt 10777-10743-10708 intraday call for 19th august 2010 buy bank nifty at 10947 sl 10896 tgt 10982-11017-11057 sell at 10896 sl 10930 tgt 10878-10843-10809 intraday call for 19th august 2010 buy nifty fut at 5519 sl 5507 tgt 5532-5557 sell at 5507 sl 5519 tgt 5492-5470-5457-5445 intraday

2. Future and option Strategy reccommendation as per the Volatility analysis call for 26th jul 2010 buy tata steel fut 1 lot at 534 and sell sterlite fut 2 lot at 175 max loss Rs5k profit Rs7k intraday beta hedge call

call for 28th jul 2010 BUY ril 1100 CA aug 11 LOTS AT at 17 , sell 1060 ca aug 4 lots at 35 and buy 1100 pa aug 1 lot at 57 max loss Rs7000 below 1000 profit Rs 20000 above 1115 hold 10 days call for 2nd august 2010 buy hdfc bank future 1 lot at 2128 and sell sbi fut 1 lot at 2519 max loss Rs3000 profit Rs4400 beta hedge call hold for 3 days- hold this strategy and add one more position at 2110 and 2576 level call for 4th august 2010 buy nifty 5400 pe 5 lots at 69 and sell 5500 pe 2 lot at 115 max loss Rs2k profitRs3.7k intraday 5/2 put strategy call for 6th august 2010 buy sbi 2600 pa at 44.80 sl 33.50 at 2666 tgt 50 at 2620, 52 at 2615,60 at 2597 intraday as per binomial price model. level as per future call for 10th august 2010buy icici bank 960 pa at 18.50 sl 12.50 at 985 , targets 22.50 at 959,28 at 948 intraday as per binomial option price model 11th august No option call 12th august call Buy rcom fut 2 lots at 174 and sell bharti fut 1 lot at 316 max loss Rs8k profit Rs19k hold 10 days beta hedge call 13th august 2010 no option call for the day no option call for 16th , 17th ,18th,19th

Black-Scholes Model - Definition A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. Black-Scholes Model - Introduction The Black-Scholes model is a tool for equity options pricing. Prior to the development of the BlackScholes Model, there was no standard options pricing method and nobody can put a fair price to charge for options. The Black-Scholes Model turned that guessing game into a mathematical science which helped develop the options market into the lucrative industry it is today. Options traders compare the prevailing option price in the exchange against the theoretical value derived by the Black-Scholes Model in order to determine if a particular option contract is over or under valued, hence assisting them in their options trading decision. The Black-Scholes Model was originally created for the pricing and hedging of European Call and Put options as the American Options market, the CBOE, started only 1 month before the creation of the Black-Scholes Model. The difference in the pricing of European options and American options is that options pricing of European options do not take into consideration the possibility of early exercising. American options therefore command a higher price than European options due to the flexibility to exercise the option at anytime. The classic Black-Scholes Model does not take this extra value into consideration in its calculations. Black-Scholes Model Assumptions There are several assumptions underlying the Black-Scholes model of calculating options pricing. The most significant is that volatility, a measure of how much a stock can be expected to move in the nearterm, is a constant over time. The Black-Scholes model also assumes stocks move in a manner referred to as a random walk; at any given moment, they are as likely to move up as they are to move down. These assumptions are combined with the principle that options pricing should provide no immediate gain to either seller or buyer. The exact 6 assumptions of the Black-Scholes Model are : 1. Stock pays no dividends 2. Option can only be exercised upon expiration 3. Market direction cannot be predicted, hence "Random Walk" 4. No commissions are charged in the transaction 5. Interest rates remain constant 6. Stock returns are normally distributed, thus volatility is constant over time As you can see, the validity of many of these assumptions used by the Black-Scholes Model is questionable or invalid, resulting in theoretical values which are not always accurate. Hence, theoretical values derived from the Black-Scholes Model are only good as a guide for relative comparison and is not an exact indication to the over or under priced nature of a stock option.

Black-Scholes Model Inputs The Black-Scholes model takes as input current prices, the option's strike price, length of time until the option expires worthless, an estimate of future volatility known as implied volatility, and risk free rate of return, generally defined as the interest rate of short term US treasury notes. The Black-Scholes Model

also works in reverse: instead of calculating a price, an implied volatility for a given price can be calculated. Implied Volatility is commonly calculated using the Black-Scholes Model in order to plot the Volatility Smile or Volatility Skew. The mathematical characteristics of the Black-Scholes model are named after 5 greek letters used to represent them in equations; Delta, Gamma, Vega, Theta and Rho. These are now passionately known to option traders as the "Greeks". Known Problems Of The Black-Scholes Model First, the Black-Scholes Model assumes that the risk-free rate and the stock's volatility are constant. This is obviously wrong as risk free rate and volatility fluctuates according to market conditions. Second, the Black-Scholes Model assumes that stock prices are continuous and that large changes (such as those seen after a merger announcement) don't occur. Third, the Black-Scholes Model assumes a stock pays no dividends until after expiration. Fourth, analysts can only estimate a stock's volatility instead of directly observing it, as they can for the other inputs. Fifth, the Black-Scholes Model tends to overvalue deep out-of-the-money calls and undervalue deep inthe-money calls. Sixth, the Black-Scholes Model tends to misprice options that involve high-dividend stocks. To deal with these limitations, a Black-Scholes Model variant known as ARCH, Autoregressive Conditional Heteroskedasticity, was developed. This variant replaces constant volatility with stochastic (random) volatility. A number of different models was developed afterwhich like the GARCH, E-GARCH, N-GARCH, H-GARCH, etc, all incorporating ever more complex models of volatility. However, despite these known limitations, the classic Black-Scholes model is still the most popular with options traders today due to its simplicity. Alternative to the Black-Scholes Model As the Black-Scholes Model does not take into consideration dividend payments as well as the possibilities of early exercising, it frequently under-values Amercian style options. Let's remember that the Black-Scholes model was initially invented for the purpose of pricing European style options. As such, a new options pricing model called the Cox-Rubinstein binomial model. It is commonly known as the Binomial Option Pricing Model or simply, the Binomial Model was invented in 1979. This options pricing model was more appropriate for American Style options as it allows for the possibility of early exercise.

The Black-Scholes Formula Is: C0 = S0N(d1) - Xe-rTN(d2) Where: d1 = [ln(S0/X) + (r + 2/2)T]/ T And: d2 = d1 - T And where: C0 = current option value S0 = current stock price N(d) = the probability that a random draw from a standard normal distribution will be less than (d). X = exercise price e = 2.71828, the base of the natural log function

r = risk-free interest rate (annualized continuously compounded rate on a safe asset with the same maturity as the expiration of the option; usually the money market rate for a maturity equal to the option's maturity.) T = time to option's maturity, in years ln = natural logarithm function = standard deviation of the annualized continuously compounded rate of return on the stock Even though the original Black-Scholes Model do not take dividends into consideration, an extension of the Black-Scholes Model proposed by Merton in 1973 alters the Black-Scholes model in order to take annual dividend yield into consideration. This model is not as widely used as the original Black-Scholes Model as not every company pays dividends. Here's the Black-Scholes Model for Dividend Stocks formula : C0 = Se-dTN(d1) - Xe-rTN(d2) Where: d1 = [ln(S0/X) + (r - d +

/2)T]/

And: d2 = d1 - T Black-Scholes Model Calculator

History Of The Black-Scholes model The Black-Scholes Model was first discovered in 1973 by Fischer Black and Myron Scholes, and then further developed by Robert Merton. It was for the development of the Black-Scholes Model that Scholes and Merton received the Nobel Prize of Economics in 1997 (Black had passed away two years earlier). The idea of the Black-Scholes Model was first published in "The Pricing of Options and Corporate Liabilities" of the Journal of Political Economy by Fischer Black and Myron Scholes and then elaborated in "Theory of Rational Option Pricing" by Robert Merton in 1973. Black-Scholes Model creators, Myron Scholes was then the professor of finance in Stanford University, Robert Merton was an economist with Harvard University and Fischer Black was a mathematical physicist with a doctorate from Harvard. When Myron Scholes and Fischer Black tried to publish their idea of the Black-Scholes model in 1970, Chicago University's Journal of Political Economy and Harvard's Review of Economics and Statistics both rejected the paper. It was only in 1973, after some influential members of the Chicago faculty put pressure on the journal editors, that the Journal of Political Economy published the Black-Scholes Model paper. Within six months of the publication of the Black-Scholes Model article, Texas Instruments had incorporated the Black-Scholes Model into their calculator, announcing the new feature with a half-page ad in The Wall Street Journal. The three young Black-Scholes Model researchers -- which were still in their twenties -- set about trying to find an answer to derivatives pricing using mathematics, exactly the way a physicist or an engineer approaches a problem. However, few think their approach will work because options trading was very new then and was highly volatile (The CBOE opened in April 1973, just one month prior to the release of the Black-Scholes Model paper!). The skeptics were all wrong. Mathematics could be applied using a little known technique known as stochastic differential equations and that discovery led to the development of the Black-Scholes Model that we know today.

Creators Of The Black-Scholes model Myron Scholes was born in Timmins, Ontario, Canada on July 1, 1941. After attending McMaster University in Hamilton, Ontario (B.A., 1961), Scholes studied under Nobel laureate Merton H. Miller at the University of Chicago (M.B.A., 1964; Ph.D., 1970). Scholes taught at the Massachusetts Institute of Technology (1968 73) and the University of Chicago (1973 83) before joining Stanford University in 1983 as a professor of both law and finance, becoming emeritus in 1996. He also worked with many economic and financial institutions, including the National Bureau of Economic Research, Salomon Brothers, and Long-Term Capital Management (LTCM), which Merton cofounded in 1994.

Robert Merton was born in New York, on July 31, 1944. After studying engineering mathematics at Columbia University (B.S., 1966) and applied mathematics at the California Institute of Technology (M.S., 1967), Merton turned to the study of economics at the Massachusetts Institute of Technology (Ph.D., 1970). He taught at MIT's Sloan School of Management from 1970 until 1988, when he joined the faculty of the Harvard Business School. In addition to his academic duties, he served on the editorial boards of numerous economic journals and as a principal member of Long-Term Capital Management, an investment firm he cofounded and in which Scholes was also a partner. Merton wrote many economic treatises, as well as the book Continuous-Time Finance (1990).

Fischer Black was born on January 11, 1938. He received a Ph.D. in Applied Math from Harvard University in 1964. He was a student of Marvin Minsky and worked on problems in Artificial Intelligence. In 1971 he began to work at the University of Chicago. He later left the University of Chicago to work at the MIT Sloan School of Management. In 1984 he joined Goldman Sachs.

Binomial Option Pricing Model Binomial Option Pricing Model (BOPM) was invented by Cox-Rubinstein in 1979. It was originally invented as a tool to explain the Black-Scholes Model to Cox's students. However, it soon became apparent that the binomial model is a more accurate pricing model for American Style Options. The binomial model is thus named as it returns 2 possibilities at any given time. Therefore, instead of assuming that an option trader will hold an option contract all the way to expiration like in the Black-Scholes Model, it calculates the value of that trader exercising that option contract with every possible future up and down moves on its underlying asset, reflecting its effects on the present value of that option, thus giving a more accurate theoretical price of an American Style option. The binomial model produces a binomial distribution of all the the possible paths that a stock price could take during the life of the option. A binomial distribution, or simply known as a "Binomial Tree", assumes that a stock can only increase or decrease in price all the way until the option expires and then maps it out in a "tree". Here is a simplied version of a binomial distribution just for illustration purpose :

It then fills in the theoretical value of that stock's options at each time step from the very bottom of the binomial tree all the way to the top where the final, present, theoretical value of a stock option is arrived. Any adjustments to stock prices at an ex-dividend date or option prices as a result of early exercise of American options are worked into the calculations at each specific time step . Advantage Of The Binomial Option Pricing Model It can more accurately price American Style Options than the Black-Scholes Model as it takes into consideration the possibilities of early exercise and other factors like dividends. Disadvantage Of The Binomial Option Pricing Model As it is much more complex than the Blac-Scholes Model, it is slow and not useful for calculating thousands of option prices quickly. Binomial Option Pricing Model Calculator An excellent Binomial Model Calculator can be found here.