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Option chain Premium Decay analysis

Option chain premium decay analysis is a advance and very critical analysis to find the direction of stock market.we cannot ignore the decay of options in option chain analysis. Now the question is why it is important to analyze the premium decay of option during option chain analysis?

Few Standard rules of option trading

  1. Options sellers are more intelligent than the options buyer .
  2. Option sellers take big risk therefor 99 % times they wins.
  3. Most options trade in market are converted to zero after the end of month.
  4. Option seller pay large premium to sell options
  5. Option buyer pay only small amount
  6. Main objective of option seller is to convert the premium to zero

Considering these above impotent points in mind we can conclude that premium decay of option is directly proportional to the strike price to get hit . Therefore the relative decay in the premium is very important parameters to identify the stock market direction .

Basic rules to calculate the premium decay analysis

  1. Consider only out of the money options
  2. Consider top 3 strike price that have highest open interest call side and put side.
  3. Record the movement of index movement daily
  4. Record the premium of highest open interest strike price .

Procedure to calculate the premium decay analysis

  1. Visit Nse option chain page
  2. Note the strike price that have highest open interest both call side and put side.
  3. Record the movement of index movement daily
  4. Record the premium of highest open interest strike price .
  5. After that based upon the recorded data find out the average decay in put side and call side.
  6. If the decay is less on put side than the call side market will move down.
  7. If the decay is less on call side than market will move up.

Conclusion

The reason of less premium decay on either call side or put side indicate option sellers are not taking risk in that direction by selling options.

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Tuesday, 10 December 2019

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