Buy or Sell Put Options

Script name: Put option buy or sell indicator

put option expiration
buying put option indicator
selling put option indicator

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DISCLAIMER

Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Corporation risk disclosure documented titled Characteristics and Risks of Standardized Options.

 

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Copyright © 2020, by CHOBOTARU BROTHERS

 

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Input parameters explanation
put option indicator input

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1.      Choose Buying a put or Selling a put.

2.      The debit paid for buying the put or credit received for selling the put option (1 unit).

a.       Minimum value: zero; only positive numbers.

b.       If debit for 1 put option is $1 insert 1.

c.       If credit for 1 put option is $0.5 insert 0.5.

d.      1 unit explained – enter the debit/credit of 1 put option only.

3.      The stock price when bought/sold the option.

a.       Minimum value: zero; only positive numbers.

4.      The strike price of the option.

a.       Minimum value: zero; only positive numbers.

5.      Interest rate: annualized continuously compounded risk-free rate of return over the life of the option.

a.       Minimum value: zero; only positive numbers.

b.      U.S. Department of the treasury – find it here

6.      Time to expiration of the option, specify the number of days.

a.       Minimum value: 1; only positive numbers.

b.      Only integer numbers. No half days allowed.

c.       The number of days to expiration has to be matched with the date entered below!  The date and the number of days should not be changed by the user, as time passes.

7.      Annualized asset price volatility, specific as a positive decimal number. IV 10% => input 0.1

a.       Minimum value: zero; only positive numbers.

b.      Find it in the “options chain”, in your brokerage platform.

8.      A calendar day of the month that the option bought/sold.

a.       Input 1 to 31 depending on the calendar date.

9.      Calendar month the option bought/sold.

a.       Input 1 to 12 depending on the calendar date.

10.  Calendar year the option bought/sold.

a.       Minimum value: 1970.

b.      The year format is 4 digits number.

11.  Profit/loss line defined by the user.

a.       Minimum value: -0.95

i.       If an option was bought, -0.95 means, 95% of the option value is lost (unrealized).

ii.      If an option was sold, -0.95 means, 95% of the credit received (unrealized), 95% of the option value is lost.

b.      Maximum value: 10

i.      If an option was bought, 3 means, the risk to reward is 3.

Example: paid $100 for the put option, at this line unrealized profit will be $300.

ii.      If an option was sold, 3 means, the risk to reward is -3

Example: the credit received $100 for the put option, at this line unrealized loss will be $300.

Indicator chart explanation

Put Buying

put buying

Charts by TradingView

  1. 95% loss/profit line – this line means that if the price got there, 95% of the value of the option is lost. In the case of put buy (red line), that means 95% of investment (debit) is lost.

  2. Break-even line – this line means that if the price got there, the unrealized profit is zero.

  3. RR=1 line – this line means that if the price got there, the risk to reward is 1.

  4. RR=2 line – this line means that if the price got there, the risk to reward is 2.

  5. RR=3/CHANGE line – this line means that if the price got there, the risk to reward is 3. This line can be user-defined.

Example:

Option price bought: $5.35 (remember the multiplier for stocks is 100, the debit is $535).

The price of the stock: $76.55

The strike price: $77.5

Risk-free rate: 0%

Days to expire: 28

Implied Volatility: 55.2%

Date: 18/09/2020

If at expiration the price will finish above $77.26 the loss will be more than 95% (red line).

If at expiration the price will finish at exactly $72.16 the position will break even (orange line).

If at expiration the price will finish at exactly $66.79 the position will be profitable with $535 (dark green line).

If at expiration the price will finish at exactly $61.46 the position will be profitable with $1070 (green line).

If at expiration the price will finish at exactly $56.09 the position will be profitable with $1605 (purple line).

Different uses for the indicator

Volatility changes: the indicator can be used to give an estimation about the profit/loss lines as a function of volatility changes.

Volatility increase put option

+20% Volatility increase

Volatility decrease put option

-20% Volatility decrease

Tip: you could add the indicator twice, so you will have a reference point as the charts above.

Lower timeframes: the indicator can be used for intra-day plotting while using a lower timeframe than Daily. This is automatic.

put option lower timeframe

Charts by TradingView

Choosing strikes: (out of the money / at the money / in the money)

out of the money put
in the money put

Charts by TradingView

Changing RR (risk to reward) [purple line]

risk reward put option

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Put Selling

put selling

Charts by TradingView

  1. 95% loss/profit line – this line means that if the price got there, 95% of the value of the option is lost. In the case of put sell (green line), that means 95% of the credit is received.

  2. Break-even line – this line means that if the price got there, the unrealized profit is zero.

  3. RR=1 line – this line means that if the price got there, the risk to reward is -1.

  4. RR=2 line – this line means that if the price got there, the risk to reward is -2.

  5. RR=3/CHANGE line – this line means that if the price got there, the risk to reward is -3. This line can be user-defined.

Example:

Option price sold: $5.35 (remember the multiplier for stocks is 100, the credit is $535).

The price of the stock: $76.55

The strike price: $77.5

Risk-free rate: 0%

Days to expire: 28

Implied Volatility: 55.2%

Date: 18/09/2020

If at expiration the price will finish above $77.26 the profit will be more than 95%, $535*0.95=$508.25 (green line).

If at expiration the price will finish at exactly $72.16 the position will break even (orange line).

If at expiration the price will finish at exactly $66.79 the position will be at a loss of $535 (light red line).

If at expiration the price will finish at exactly $61.46 the position will be at a loss of $1070 (red line).

If at expiration the price will finish at exactly $56.09 the position will be at a loss of $1605 (purple line).

For Futures users

Please note that the futures indicator and the stocks indicator are not the same.

The algorithm is made of different equations for futures. Also using the stock indicator on futures will not work properly.

The stock indicator on Futures will not work.

213.png

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The future indicator on Future will work

put future option

Charts by TradingView

Example on gold futures:

The algorithm is made of different equations for futures.

Even if it looks to be working normally, the result will not be accurate.

In the picture below, the strong lines are the future indicator VS the stock indicator (weak lines).

gold future option put

Charts by TradingView

Notes

TradingView considerations

 

The indicator is subject to the platform constraints, meaning updates in the platform could change the intended results of the indicator. See the following examples:

Holiday Updates: the indicator is updated 2 years ahead, TradingView updates only the current year. Using long term strategies, especially at the end of the calendar year, could result in a discrepancy at the expiration date that is displayed.

Some indicators have a “fill” option available. When using different timeframes, the fill could be out of place.

We recommend the users to save the indicator settings. This is because once in a while there will be updates in the indicators. Once the update is loaded to Tradingview, the settings will convert to the default settings. We will announce updates in advance.

Algorithm considerations

 

IPO stocks – the life of the option needs to be less than the amount of time the stock is in the market. If it is more, only partial calculations will be displayed. For example, the stock is trading 1 month in the market (ever). Calculating for an option with a life of 2 months will not display the entire calculations for the whole life of the option.

“Data Reset” – loading many bars can result in a slower running time of the indicator. To avoid this, zoom in the chart so you will see only a few bars, then change to different stock, and then change again to the original (intended) stock.

Lower timeframes – the indicator is always doing the calculations, even if it is not being displayed. This can be confirmed when the tag “Calculation complete” is seen. If the tag is displayed but the indicator is not, this can be fixed by reloading more historical bars.

Higher timeframes – the highest timeframe that the indicator can be used, is Daily.

Futures/Stocks – the stock indicators cannot be used for futures and vice versa. Using the wrong indicators on the wrong instrument will result in wrong calculations and errors.

Calculation accuracy – the calculation error is less than 0.01%.

Theoretical model accuracy – the indicator is using the Black-Scholes model. Due to price spreads and/or supply and demand real-world market dynamics, there will be a variation from the theoretical model and the real-world market prices. The model is most accurate when the strike price is close to the instrument price (at the money).

Time accuracy – in the futures markets the indicator might show an extra day after expiration due to holidays. The final result doesn’t change between the last day and the extra day.

Commissions – the algorithm does not take into account any commissions you might have.

Dividends and discounts – the user should be aware of upcoming dividends or discounts.

Personal note

 

If this indicator is truly helpful and gives you viable information please give us credit when using it.

If you have any questions or requests please contact us. We will be happy to help.