NSE Nifty Option Review

I just found out in a seminar that NSE Nifty Option has the highest volume in the world.  I was so excited as that is the last exchange in Asia Pacific available for trading Options in Interactive Broker (IB).

The Option Spec in NSE wasn't structure in the same 'standard' way as other Option Spec. (http://www.nseindia.com/products/content/derivatives/equities/contract_specifitns.htmhttp://www.nseindia.com/products/content/derivatives/equities/contract_specifitns.htm)

I decided to come back to review Option Spec later and just try to setup some charts, Option Chain to see the bid/ask spead and to test some execution.  I immediately get the pop screen:

Chat up with IB customer support, I was told that:

 "Currently as per Indian regulations only India residents, Non Resident Indians (NRIs) and Companies registered in India are allowed to trade on India markets"

That ended the review on the last exchange in Asia Pacific for trading Options via IB.

Last trade on Nikkei 225 (N225) Index Options

On April 30, I closed my last contracts of Nikkei 225 (N225) Index Options.  With that, I will stop trading N225 Index Options.

The main reason to stop trading N225 Index Option is : Tick Size!

Source : Option Spec (http://www.jpx.co.jp/english/derivatives/products/domestic/225options/01.html)

What this means is :

• If the Option price is 50 points or less, the Option change price in 1 point up or down.  
• Once the Option price goes over 50 points, the Option price change in 5 points up or down.  
• And if the Option price goes over 1000 points (ie 1000 * JPY 1,000 = JPY 1,000,000), the Option price change in 10 points up or down.  I have yet to encounter any Option price above 1000 points.

As an Options Seller, you want your Options to expire worthless.  That is to say, you want your option price to go down.  You do not want your option price to go up.  You make money when option price goes down; you loss money when option price goes up.

Here is the problem of the Tick Size.  When the option price goes down, below 50 points, it goes down 1 point at a time, slowly.  When the option price goes up, over 50 points, it jump 5 points at time!

A typical premium collected from N225 Credit Spread is about 20 points.  To reach the targeted profit of 80% (4 points), it goes down 1 point slowly from 20 to 4 points.  However, when your option position goes against you, it will jump 5 points at a time.  And 5 points is 25% of your collected premium!

At the point (Delta 25-30) that you need to make adjustment (or cut loss), your option price is definitely over 50 points.  Your option price is definitely going to jump 5 points at a time.  And because of the Difficulty In Trading Combo Order for K200 and N225 and the Problem In Combo Order Execution for K200 and N225, you will not just loss 5 points.  You will loss 10 points due to the Bid/Ask Spread. That is 50% of your collected premium!

As you can see from the above screenshot, at Delta 14-23, the option prices are already above 50.  With a tight Bid/Ask spread, you will see 5 point Bid/Ask spread at single option contract.  With spread (due to two option contracts), the tight Bid/Ask spread is 10 points.  The above screenshot didn't have the fortune of tight Bid/Ask spread, you ended up with 15 points Bid/Ask spread.

My analysis of my trade results show that I always end up losing more than 3X of the collected premium when I adjust (or cut loss) at Delta 25-30.

Even though Option Selling has higher probability (about 80%) of wining, you will still be hit with losing (even if it is 20% probability).  Losing trade is certain.  You will have to accept that you will have losing trade, about 1 out of 5. Hopefully 1 out of 10.

If you make 64 points in 4 wining trade (4 * 16 points = 64 points) but you loss 65-70 points (3 * 20 points + 5-10 points spread), you will end up losing even though you have higher probability of wining.  This does not work.

The total wining must be more than the total losing.  The lost trade has to be limit to about 2X, ie 40 points.  With that, at least, you will end up wining 24 points (64 points - 40 points) for 1 losing trade out of 5 trades.

Therefore, here ends my option trading with N225.  I will only trade K200 from May.  I will start to explore commodity future option to diversify.  I think trading with just one Index Option is a bit risky even though I know there are people simply trade S&P500 Index Option or Russel 2000 Index Option solely.

Well, let's continue to explore in this journey of Option Trading.

ASX Index Option Review

I want to trade another market/product, in the same timezone, in addition to K200 Index Option to diversify.  With that, I start to explore Australian Stock Exchange (ASX) Index Option.

Basic Option Spec: (http://www.asx.com.au/products/equity-options/options-contract-specifications.htm#XJO-Index)

• Exercise Style : European
• ASX Index Option is AUD 10 per index point
• Minimum Spread : 25 points, ie AUD 250 (~USD  189.82 or ~SGD 258.62)
• Trading Hours is 9:50am - 5:00pm & 5:30pm - 7:00pm Sydney Time (6:50am - 2:00pm & 2:30-pm - 4:00pm Singapore Time)

Cost of Trading
1. Market Data AUD 25.00 (~USD 18.98 or ~SGD 25.87)
- Korean Stk Exch Deriv Free

IB market data is generally cheap.  While USD 18.98 market data per month is not expensive, it is relative more expensive than other exchanges.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- AUD 2.00 (~USD1.52 or ~SGD2.07) per contract
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

Assuming 10% premium (ie AUD 25) collected from Credit Spread,
- ASX commission will take 16% away from the 10% premium received, ie for every AUD 25 premium received, AUD 4 (1 spread = 2 contracts = 2 x AUD 2.00) will be deducted for commission.
- For round-turn spread trades AUD 8 will be incurred in commission.
- With target profit of 80%, ie AUD 20, the commission takes away AUD 8, 40% of the profit.  The net profit is only AUD 16.
- Even if held to expiration with full AUD 25 profit, the commission still takes away AUD 8, 16% of the profit.  The net profit is only AUD 21.
- The worst thing is: the typical premium is only about AUD 10 - 20.

- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.


3. Margin
- for a ASX Option 25pt Spread (min spread), the Initial & Maintenance margin is about USD 104.17  & USD 83.63 (SGD 142 & SGD 114) respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For ASX Option, selling a 25pt Spread to receive say 2.5 pt (10% min premium) is about AUD 25 (~USD 18.98 or ~SGD 25.87), I will need to tied up USD 104.17  & USD 83.63 (SGD 142 & SGD 114)  initial/maintenance margin.  Return On Margin (ROM) is 18.21%/22.69%.

For K200 Option, selling a 2.5pt Spread to receive say 0.25 pit (10% min premium) is about KRW 125,000 (~USD 115.75), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 18.17%/22.69%.


4. Option price spread and volume
K200 Option spread is generally about 2 ticks wide.  Selling at midpoint has been generally successful.  The Bid and Ask volume is also good.

ASX Option spread is about 2-3 ticks wide.  Selling at midpoint has been not successful.  Not only the Bid and Ask volume is comparatively lower, there is even no transaction for most of the delta 10-12 options.

Conclusion
The trading cost (in particular Commission) of ASX Option is simply too high to trade.  The commission can easily eat away 16-40% of the profit, assuming 10% premium.  However, as can see from the Bid/Ask spread, the premium is typically AUD 10-20 (i.e. 4-8% premium).  The return is simply quite bad.
The worst thing is there is no transaction for options with delta 10-12!  This simply make ASX Index Option not suitable for my trading strategy.

Weekly Market Reivew HSI

I have decided to stop exploring HSI Option trading for the following reasons:

1. Low volume for next month contract (covered in this post)
- I normally enter a trade 6-8 weeks before expiration.  That means, I don't really trade current month contract.  I trade the next month or next next month contract.
- the low Open Interest in next month (worst in next next month) contract is the main reason I don't want to force myself into trading HSI Option.

2. All the reasons cover in previous review here.

Therefore, I will stop cover HSI with immediate effect and focus back on N225 and K200.

Weekly Market Reivew HSI

I started to look at HSI this month to diversify, especially when N225 is having such a low volatility.  While I have written in this post that HSI is not as attractive as K200 (and N225), it nevertheless is another popular Asia index that I can trade in Asia hours.

HSI closed at 23,233.45 on Friday, 11-Jul-2014, lost 312.91 (1.33%) over the last 5 trading days.

HSI seems to be also in a period of low volatility, unfortunately.  The daily and weekly movement this month to date is rather small.

HSI Options Open Interest (OI) is very small as compare to N225 or K200 for future months, even for current+1 month (August).  You only see OI >1K contracts in July.

For K200, you can easily get >1K contracts in OI even for further month like September.

This might be a challenge for me as I don't usually trade the current month.  Will assess for 1 month.

N225 Index Option Review

After decided not to trade HSI Index Option, I continue to explore another market/product for Option trading, the Nikkei 225.

Option Spec: (http://www.ose.or.jp/e/derivative/225options)

• Exercise Style : European
• Contract unit : JPY 1,000 per index point
• Minimum Spread : 125 point, ie JPY 125,000 (~USD 1221.42)
• Trading Hours : 9:00-15:15, 16:30-3:00 (Japan Hours)

Cost of Trading
1. Market Data JPY 200.00 (~USD 1.95)
- Osaka Sec Exch JPY 200.00

N225 Market Data cost is ok.  Not too high.  About on par with US Options.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- N225 commission is also not bad.
- 0.18% of option value, min JPY 100 (~USD 0.98) per order
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

For a 10% premium collected from Credit Spread,
- N225 commission will take 1% away from the 10% premium received, ie for every $100 premium received, $1 will be deducted for commission.
- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.

3. Margin
- N225 margin is good
- for a N225 Option 125pt Spread (min spread), the Initial & Maintenance margin is about USD 463 & USD 370 respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For N225 Option, selling a 125pt Spread to receive say 15 pt (cannot do 12.5 pt. so, 12% premium) is about JPY 15,000 (~USD 146.57), I will need to tied up USD 463/370 initial/maintenance margin.  Return On Margin (ROM) is 31.65%/39.61%.

For K200 Option, selling a 2.5pt Spread to receive say 0.3 pt (adjust to 12% premium as N225) is about KRW 150,000 (~USD 139.90), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 21.96%/27.43%.

4. Option price spread and volume
As with K200, the bid/ask spead is very close, mostly 1-2 ticks wide.  Bid and Ask volume is also good.

Risk/Reward
1. Spread Risk
- min spread is 125 points, which equate to JPY JPY 125,000 (~USD 1221.42) 
- K200 min spead is 2.5 points, which equate to KRW 1,250,000 (~USD 1,165.39)
- this is about the same

2.  Support & Resistance
- as my selection of Strike is primary base on Support & Resistance (that may change), the validity of Support & Resistance is important
- N225 is in general similar to K200, with enough up & down (volatility) but at the same with good support & resistance.

3. Number of Strikes
One problem I have with K200 is the number of Strikes.  It is quite limited.  It is about 26 strike prices(current month) and 18 strike prices (next month).  This make adjustment kind of challenging at times.
N225 does not has this problem.  It has abundant of Strikes to trade.

4. Trading Hours
N225 Trading hours coincide with K200 for T-session (regular trading hours), where the Index is moving.  However, N225 has a T+1 session (non-regular trading hours) that you can continue to trade, even though spread and volume is not as good as T-session. 


Conclusion
N225 Option in many ways are comparable as K200, and better in some areas.  As such, I will be trading N225 in addition to K200.

HSI Index Option Review

I want to trade another market/product in addition to K200 Index Option to diversify.  With that, I start to explore Hong Kong Hang Seng Index Option.

Basic Option Spec: (http://www.hkex.com.hk/eng/prod/drprod/hkifo/options.htm)

• Exercise Style : European
• HSI Option is HKD 50 per index point
• Minimum Spread : 200 point, ie HKD 10,000 (~USD  1,288.94)
• Trading Hours is 9:15m - 12:00noon & 1:00pm - 4.15pm

Cost of Trading
1. Market Data HKD 40.00 HKD (~USD 5.16)
- Hang Seng Indices HKD 15.00
- HKFE Deriv HKD 25.00
- Korean Stk Exch Deriv Free

IB market data is generally cheap.  While USD 5.16 market data per month is not expensive, it is relative more expensive than other exchanges.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- HKD 30.00 (~USD3.86) per contract
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

For a 10% premium collected from Credit Spread,
- HSI commission will take 6% away from the 10% premium received, ie for every $100 premium received, $6 will be deducted for commission.
- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.

3. Margin
- for a HSI Option 200pt Spread (min spread), the Initial & Maintenance margin is about USD 1,201 & USD 961 respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For HSI Option, selling a 200pt Spread to receive say 20 pt (10% min premium) is about HKD 1,000 (~USD 128.81), I will need to tied up USD 1,201/961 initial/maintenance margin.  Return On Margin (ROM) is 10.72%/13.40%.

For K200 Option, selling a 2.5pt Spread to receive say 0.25 pit (10% min premium) is about KRW 125,000 (~USD 115.75), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 18.17%/22.69%.

4. Option price spread and volume
K200 Option spread is generally about 2 ticks wide.  Selling at midpoint has been generally successful.  The Bid and Ask volume is also good.

However, HSI Option spread is about 4 ticks wide.  Selling at midpoint has been not successful.  The Bid and Ask volume is also comparatively lower.

Risk/Reward
1. Spread Risk
- min spread is 200 points, which equate to HKD 10,000.00 (~USD 1,288.94)
- K200 min spead is 2.5 points, which equate to KRW 1,250,000 (~USD 1,165.39)
- this is about the same

2.  Support & Resistance
- as my selection of Strike is primary base on Support & Resistance, the validity of Support & Resistance is important
- HSI gaps up & down very often.  This make the Support & Resistance not so reliable.  Very unpredictable.  This inherently results in higher risk.
- In addition, the up & down swing could be 300-500, even 700 points in one day!

Conclusion
HSI Option is not easy to trade as there are too many gaps up & down.  And the up & down swing is huge.  This make selection of Strike extremely difficult.  It is thus more risky.  The short strike could be hit easily.  In addition, for the same USD 100 premium received, I will need almost twice the margin as compared to K200.  Not to mentioned, the commission and market data fee is higher.
Therefore, HSI Option is not a suitable market/product for me to trade (at least for now).  I will need to expore some more market/product, such as Japan or Europe Options.