Sensibull - Feedback, Requests, Questions

Hi @Sensibull,

Many thanks for bringing up the much awaited option chain!

I have got a question. How come the IV of Call and Put is same? I have been using this InvestExcel spreadsheet. The only reason the spreadsheet makes sense is because if we back-solve the option price using the calculated IV, the VBA function throws back the same exact option price. Thus, confirming the validity of IV w.r.t. its option price. Have also translated the VBA to AFL and works fine on live data as well.

I have studied BSM not Blackâ€™76 and would be highly grateful if you could refer a book or an article for my better understanding.

Few requests

1. Please create an I.V. Percentile scanner for the liquid stocks;

2. To gain some statistical edge, please include Probability% of a Strike expiring ITM alongside the Greeks (demo spreadsheet). Also incorporate the same onto a price-chart such that the ITM Probable Price Range (70% or 90% or whatever as per userâ€™s preference) would show a cone-shaped bell curve after the last price bar and help a trader anticipate the probable range of the underlying;

3. Although approximated as twice the ITM Prob% (unaware of the actual math), Probability of Touching (POT) can be used to gauge the probability of price hitting a strike in the near future before expiry instead of piercing or breaching it. At-times price moves very strongly against a option seller and often creates a false panic as price (by its nature) tests critical support/resistance which happens to be the sold strike. POT can easily identify these naughty strikes and allow a trader to stay-in the game;

4. Even if you ignore the above three, please do not ignore this one. Kindly introduce an Option Strategy Chart wherein a trader can visualize the possible Payoff and the theoretical P&L w.r.t. days remaining to expiry after combining several options to form a strategy (for e.g. click here). This will help a trader visualize the possible risks.

Sorry to throw away so many requests, have been seeing too many OptionGururs using Thinkorswim platform and wishing to have something of that sort in India. Not asking for the same exact replica but at-least the good features.

Hope you will prioritize the implementation of these requests, as they will not only boost your popularity as a broker but also convert huge amount of guess-work oriented trading to factual based trading for all.

P.S. Great job! Yours is one of a kind tool available to Indian Retail Market. Hope to see the Beta becoming V1. soon.

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Thanks @Dave for the words of encouragement - Answering inline

We hope so too! Thank you so much for taking the time out to give such a detailed feature request

Thank you very much for explaining in such detail. And am glad that you are already aware of the expectations of an options trader. I think you are on a mission to prove Efficient Market Theory in India.

If I may take this as an opportunity to share my alternative that I use to counter put-call disparity and discern the sentiment of Nifty and Banknifty is to consider VIX. As per the NSEâ€™s white paper (plagiarised from CBOE) VIX is the weighted IV of the underlying and upon study it shows that VIX not only accounts for IV of different Strikes (CE/PE) but also their Bid-Ask.

I generally trade Nifty/Banknifty options but if any stock shows high RR then why not. Ever since I finished reading McMillan on Options and The Bible of Option Strategies I have always wanted to see IV in singularity for that underlying and not polarised as in IV Smile. VIX solves that because it represents the market expectancy as a standalone datapoint derived from the IVs of its traded options and Bid-Ask of those options. VIX is available for Nifty/Banknifty and one could also use it for Stocks on the basis of its Correlation and Beta. As a miniature Indian retailer getting Bid-Ask quote in Amibroker (I just love AFL) is expensive, so to calculate VIX of an individual stock is a far-fetched goal for me. Using correlation/beta and this Volatility file shared by NSE might serve as an approximation but not accurate.

Itâ€™s just that I am not accustomed to see the same IV for both CE-PE of a strike. I painstakingly taught myself to understand Newton-Raphson method or approach for Black-Scholes Model using which my calculated IV matches NSEâ€™s option chain. I agree with you, that considering constant ROI is not justified. For curiosity sake could you please share the method used by @Sensibull to calculate the IV? IV is the cart pulling the horses.

Thank you!

Hey @Dave ,

I will go and fetch my old Option Trading text books to understand half of that

We do not do anything too fancy. Generally sticking to the principle of simpler things are easier to work with, and less code = less trouble.

To calculate IV, we use Black Scholes (Black 76 to be precise) with some approximations, such r=0, d=0 to calculate IV from an OTM option. And then we assign the same to ITM.

While this is not 100% accurate, this is good enough for retail trades. Sure, the price of an option is off by less than 5% max to max in some illiquid stocks, but the simplicity it provides, and the low clutter due to one less number to show is worth it . And most people do not mind it if we say IV = 32.1% instead of 32.2 percent on an illiquid strike. And it has some advantage, in the sense OTM tends to be more reliable than ITM.

Long story short, we chose ease of working with, less buggy code, and less data to look at over decimal precision.

NSE uses the stockâ€™s spot price to calculate IV and discern an optionâ€™s theoretical price. Percentage-wise there is no difference between Spot and Futures as every chance of arbitrage is neutralized by the market participants. By using either BSM (on spot) or Blackâ€™76 (on futures) we get the same theoretical options price provided the arbitrage factor of the forward/futures price is neutralized.

Few questions:

1. What are the advantages of Blackâ€™76 over â€śBSM on Spotâ€ť?
2. Every traded option Strike has different IV. Which IV% is considered for figuring out IVP for that security? If IVs of different Strikes are weighted, then please share the method?

Thank you

Thanks for the questions @Dave you are contributing into our FAQ section which I am working on now
1. What are the advantages of Blackâ€™76 over â€śBSM on Spotâ€ť?
It takes futures price. Way cleaner, factors in the implied r, and accounts for dividends/ expectations of dividend.

2. Every traded option Strike has different IV. Which IV% is considered for figuring out IVP for that security? If IVs of different Strikes are weighted, then please share the method?

We just use the ATM. OTM weighted methodology will work unfavourably because of illiquidity of OTM options especially in single stocks. Generally ATMs are more trustworthy, cleaner, liquid. The OTM weighted would of course be more technically precise, but we chose good-enough and works most of the time over precise but fails more often than not.

Thank you for the clarification!

Request
Are we expected to see an automated Greek neutralizer in the Builder section?

P.S. Would like to mention that recently after my first post a friend of mine recommended a book titled â€śThe Complete Guide to Option Pricing Formulasâ€ť by Espen Gaarder Haug. It helped me differentiate BSMâ€™73 and Blackâ€™76. The book is a gem.

The first request for an auto greek neutralizer happened this morning. The second came from you within 24 hours. What are the odds? So yes, we will do it

Question: Just out of curiosity. Who are you? What do you do for a living? Shoot me a mail of [email protected] please?

Law of attraction at its best, I guess!

Using TradeTigerâ€™s Greek Neutralizer, some basic Probability Calculations, bit of VSA and TA (simple trendlines and MAs) have been living on Option Selling for about 4 years.

A brother-like close friend lives in US who handles his green card holder brother-in-lawâ€™s ideal money using ThinkOrSwim. So whenever we chat, there is only one subject - The Market.

Since you all are working so hard to bring SensiBull up and barring Zerodhaâ€™s sporadic network-glitches, I love everything about Zerodha, so, thought of requesting few features that will immensely help all.

Above-all I thank you very much for answering all my queries with friendly replies. Shall eagerly wait for SensiBull to be unleashed with all guns blazing.

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The pleasure is all ours. Thanks a bunch for the feedback and questions!

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Sorry for being a hard-nut!

Previously I was unable to put my thoughts in mathematical terms, as I coded the equations three years back and was feeling lazy to formulate them once again on-screen. While surfing, today, I found an old post in Stackexchange.

The answer shared by FKaria shows exactly what I meant - theoretically yes IV of Call/Put can be same but practically no.

Thank you!

This is true

Theoretically yes, practically no is the right answer.

And honestly I have been trying to dig this answer in the internet for months, and I failed. So thanks there. I got to learn something.

To TL;DR our discussion

1. IV on call and put is different, but using one number is good enough (as we are all â€śengineersâ€ť here and not mathematicians )
2. Easier to track, benchmark and do mental math with one IV
3. More than the fat-tail leptokurtosis mentioned in Quora, I think what affects the Indian IVs is the STT. As he mentioned, for the same strike, a call can be ITM and put OTM. And as soon as something goes ITM, STT started factoring in close to expiry in India. There is some impact of what risk free rate you use as well.
4. The divergence is call and put IV is more pronounced in deeper ITMs, towards expiry. For normal times, the IVs are close enough. We took a call that there is no point in giving the ITM IVs close to expiry, as at that point, trading is not really a Vega game, and IVs donâ€™t matter.
5. Finally, I am not sure how good an idea it is to give an extra number to a new user. This freaks me out. People might just buy the lower IV option and get into trouble. Plus the clutter and real estate.

Finally, and more importantly, what do you think? Shall we stick to one IV and be good enough for most purposes?

Thank you very much for frankly sharing your thoughts. I am on same page with you.

From the very little that I know, eradicating the skew of CE/PE IV of the same strike is not a good idea, because it directly affect the Greeks. Without the skewed IV, Delta-Vega of different strikes cannot be practically neutralized. So, hedging and ultimately the pay-off is affected. The Skew is a necessity on these grounds.

Now the dilemma is to figure out the expected volatility of an underlying as a single datapoint. We use proxies like ATM IV or weighted OTM IV. The ATM IV used by you without the skew is the best proxy. And it can be used for IVP, etc.

On the contrary Exchanges solve this problem by using VIX for their benchmark index. Letâ€™s say, Mohan asks Rohan, â€śWhat is the volatility of Nifty?â€ť. Rohan will give the VIX data and not the ATM IV of nearest month expiring Nifty options. Then why this discrimination with Stocks? Calculation mechanism remains the same.

With your power to access live Level-1 bid-ask data, I think it wonâ€™t be that tough for you to calculate VIX of individual stocks. Once you have the VIX of a stock, then, you can use that number for Percentile calcs and also factor-in that number for other accurate directional bias. VIX is the most accurate Volatility gauge. The steps are presented in a simplified understandable manner by CBOE in their VIX WhitePaper.

All I am proposing is flexibility. For Greeks or for Strategy building purposes, kindly keep the IV Skew. And for IV percentile or other tracking purposes use ATM unskewed IV (the system that we have now) or VIX (if interested).

Completely agreed.

For strategy building, in the main engine, we have skew. In option chain you can observe the skew. Different strikes have different IVs according to the skew, but put and call have the same iv at a given strike.

We will look at vix, but my hunch is we live in a market where you can trust no one except atm

is generally referred as Volatility Surface. And as we move from deep ITM to deep OTM it creates a â€śUâ€ť shaped graph which is referred as Volatility Smile.

In general essence Skew is the absolute difference between Call IV and Put IV. Theoretically it does not exist and as discussed earlier, in reality it exists. Volatility Surface is Skew but a Skew is never a Surface.

Yes but in terms of Volatility Surface only. It should not be confused with the skew of Call/Put of same strike which I am referring to.

For same Strike Call/Put you are using same IV. So, you are going by theoretical IV which cannot be accurately used to measure Delta/Vega. Proper hedging payoff will be affected.

Fine, no foe with ATM. Try to built VIX for individual stocks personally and see the results yourself!

Please for Greeks or for Strategy building purposes, kindly keep the IV Skew (like NSEâ€™s option chain) between Put and Call of same Strike. And for IV percentile or other tracking purposes use ATM un-skewed IV (the system that you have now). Since you are using the same IV for Call and Put the general notion for Put being costlier than Call is lost. And the user is blindfolded from certain practicalities.

Thank you!

I think you got me completely wrong

1. Skew is the difference between IVs at different strikes. Not the difference between call and put IVs of the same strike. Skew exists in theory and in practice. And we have skew in platform

2. The difference in IV between call and put of the same strike is not skew. Correct me if Iâ€™m wrong here, In fact it doesnâ€™t have a name. Because this doesnâ€™t exist in theory. And this, we donâ€™t have in the platform. Using this difference, imho is not a good idea. You can correct me if Iâ€™m wrong

3. Vol surface is vol skew curve plotted over time. This curve can be a surface only in three dimensions. The third dimension is time to expiry.

4. When they say put is more expensive than call it doesnâ€™t mean for the same strike. What it actually means is, for a given equal distance from the ATM, put is more expensive than call. This is because of IV difference between strikes. That is skew. You can check an ATM call and put when the underlying is at strike and youâ€™ll see the prices are the same. The put wonâ€™t be more expensive. NSE will show this wrongly in IV terms though. That is because of wrong value of r.

I think we are boring everyone on Earth with this thread. Please feel free to mail me on [email protected] if you have any more questions

Thanks again for triggering this thread

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@Sensibull @Dave
I am no expert in options trading ,but seeing your discussion above Iâ€™m curious to know if real professional option traders consider all these calculations while trdaing .should an average retai option trader has to get tight grip on these concepts before thinking of options trading??

In other words on scale of 1-5(lowest to highest) where do these concepts lie in terms of profitability

Honestly, 3.

1. If you can get the direction right, none of this really matters
2. If you are using options to play a non Delta neutral game, again doesnâ€™t matter much. This includes directional and non continuous Delta hedging plays
3. All these tools are only for you to make better decisions. Like if I were to sell an atm put option, Iâ€™ll make much better decisions knowing that the IV percentile is in high 90s, which tells me that the iv is very high in a meeningful way. And that there is money to be made even vol falls. If I know theta is 700, I know every day I make 700, which can offset even a one rupee adverse move on a thousand lot size. But whatâ€™s the point if your underlying cracks 10 percent after that

I could go on, but you get the drift

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I did not get you wrong, I was wrong! You cleared some clouds that were cluttering my head. Many thanks for brushing up the concepts. The explanation was very vivid.

Although I am boring everybody and reading between the lines you have asked me to shut up; but could not stop myself from thanking you.

There are many Neo-Humans, like you, who already know the answer to the question that I am going to ask below but I am a monkey who is still scratching his head. And think there might be others as well. I appreciate your generosity in clarifying these doubts.

Question

1. How are you deriving a single data-point IV for the same Strike of Call and Put options wherein their prices differ?

[Barring ATM strike, its an universal truth that if a Call is ITM at a Strike then its corresponding Put will be OTM and if a Call is OTM at a Strike then its corresponding Put will be ITM and the vice-versa is true as well. Deep ITM/OTM call-put are irrelevant, concerned about near ATM - the morale is - there will be huge difference between Call/Put prices. Now using Bisection or Newton-Raphsonâ€™s Back-Solving method when we reverse the equations of BSM or Blackâ€™76 using the traded option price, we get very different IVs at a same strike. And this IV% is market generated, its no longer based on any assumption or proxy.]

1. I will be extremely grateful if you could kindly explain with equations on how you arrive at a single data-point IV for the same Strike of Call and Put options? Or refer some text to read explaining the same.

[The only method I know is to Back-Solve BSM for IV% and very curious to learn this technique.]

Thank you!

@Dave

Hey no way I was. I am terribly sorry if it felt that way, it was not my intention to be that guy. Never was that guy, and I hate being that guy. The thing is some of these discussions have gotten very random in the past, and beech mein some people with no context jump in and completely start troll threads. I just wanted to stay away from that gang and help you out through direct mails

1. Its rather oversimplified. We take the OTM IV and use that IV only. We do not look at the IV of the ITM. For example, if NIFTY FUT is at 11500 and you want to find out the IV of 11300, we look at the OTM option for that strike, which is a put. And display the IV for the strike. The catch is if you reverse calc IV for the ITM call of 11300 you will get a different value, especially near the expiry. This is a mistake we are happy living with. In fact all of the prop option trading community I have worked with does this mistake. I am sure if this is a mistake, because ITM prices are corrupt thanks to illiquidity and STT, and to attribute the lower price to a lower IV might be misleading.

2. I think 1 explains 2, right?

As I did mention before, we are not 100% accurate, but it words for practical purposes.

We back solve too, so we are as neo human as you are