How to use 1SD level to form option strategy?
To make use of the 1SD trend levels one need strong fundamental in Fibonacci principle. Many trader conclude that the Fibonacci ratios are just numbers. However these numbers has greater meaning, for me each Fibonacci ratio is a sentimental indicator.
|Trend expectation as per Fibonacci|
From past 2 months every week I am posting the nifty future levels as per the Fibonacci and 1SD formula. Form the report you would have understood few things about the Fibonacci psychological indicators. If you will closely observe these levels you will find few key factors which I am going to list below. Using the above 1SD levels for the nifty future for 2015 November 3rd week I am going to guide you how you can form option strategy for meeting the short term trade objective.
A.) If price action fail to cross 0.382 retracement we experience the trend change is happening in the opposite direction.
For example as per the above data if the nifty uptrend price is 7803 and downtrend is 7738 this is the 0.236 retracement levels followed with these levels uptrend and downtrend 0.382 levels are 7823 and 7717 . On closing basis if the uptrend breakout 7803 given and fail to cross and close above 7823 then we expect this uptrend is not sustainable and trend change will happen in down side direction.
B.) If the 0.382 retracement crossed and maintained on closing basis then in maximum cases we have successfully achieved the 0.618 and 0.786 retracement level.
C.) If 0.786 retracement achieved and price hold it on closing basis then 0.888, 1.236 and 1.618 targets become a bright possibility.
These observations on the Fibonacci levels are key to many beautiful option trade idea few I am listing below:-
1.) If uptrend break out happen and 0.382 retracement fail to hold on closing basis then following option trades have greater probability of success.
1.a) Net debit bear spread at the 0.236 downtrend starting point and 0.618 retracement levels of downtrend price point. For example as per the above nifty data if you observe nifty cross 7802 and fail to close above 7823. Then buy 7750 pe 1lot and sell 7650 pe 1lot both strikes are close to the .236 and .618 price point of the down trend.
1.b) Net credit bull spread at .618 retracement and 1.236 retracement price levels of the uptrend. For example as per the above data selling 7850ce and buying 7950 ce each one lot both the strikes are close to the 0.618 and 1.236 retracement levels.
2.) If the 0.382 retracement crossed and maintained on closing basis then in maximum cases we have successfully achieved the 0.618 and 0.786 retracement level.
2.a) In this scenario net delta positive above +1 or net delta negative below -1 is recommended.
2.a.1) As per the above nifty data if price close above 7823 and below 7839 then sell future and buy multiple 7900 ce in such a way that the net delta must be above +1. Book profit if nifty manage to move above 7879 level exit if nifty fall back to 7738 level.
2.b) Ratio call spread in .618 and 1.618 level also useful in medium to low volatility scenario. Example buy 7850 ce 1 lot and sell 8000 ce 2lot both the strikes are close near to the 0.618 and 1.618 retracement price levels of the above nifty data. Similar way you can form option strategy in puts if price shows down trend actions.
3.) If 0.786 retracement achieved and price hold it on closing basis then 0.888, 1.236 and 1.618 targets become a bright possibility.
3.a) In this scenario net delta positive above +1 or net delta negative below -1 is recommended.
3.a.1) As per the above nifty data if price close above 7879 then sell future and buy multiple 8000 ce in such a way that the net delta must be above +1. Book profit if nifty manage to move above 8000 level exit if nifty fall back to 7738 level. In this case little be careful and must inspect that 8000ce must not have highest open interest among all the call options.
3.a.2) If 8000 ce has highest open interest then ratio call spread, cross calendar bull spread, net debit calendar spread at 8000 strike is recommended. Similar way you can form option strategy in puts if price shows down trend actions.