Option Screener – a tool to identify high probability option trades

As option traders its important to know the probabilities of success of an option trade. What if we have a tool which can screen and present us with options trades with high probability of profit (POP). With that in mind, I present Option Screener tool which does exactly that – find and present high POP option trades by screening all NSE Futures and Options (FnO) stocks.

You can find the tool here Option Screener

But before delving further into the tool, let’s look at why the need for such a tool.

Probability of Profit (POP)

Probability of profit or winning probability of an option trade is defined as the chance or likelihood of a trade making at least 5 paisa of profit (or probability of not losing on a trade).

Usually, the POP of an option trade is roughly calculated using option greek Delta. If you buy/sell an at-the-money (ATM) option which has delta of around 50, the probability of the option expiring in-the-money (ITM) or out-of-the-money (OTM) is 50%, that is, the option has a success of 50% of being profitable at expiry.

Similar probability calculations is also done for the out-of-the-money options. For an option buyer, a far OTM call/put option with a delta of 16 has a 16% probability of expiring ITM and profitable or 84% (100-16) chance of expiring OTM and worthless at expiry. To put in other words, if you are an 16 delta option seller, you will win 8 out of 10 times and if you are option buyer you will win 2 out of 10 times.

It’s easy to calculate POP for naked puts or calls but gets little complicated when calculating it for multi-legged strategies like strangle, straddle, ratio spreads, jade lizard etc. And to calculate it for various option strategies of all FnO stocks, it becomes even more complex and certainly cannot be done by human and will need help of heavy computation. For this reason, I’ve made the screener tool to make the life easy.

Finding High POP Trades

In this section, we will explore how the option screener tool works.

Here are the steps followed by the tool to arrive at the high POP trades

  1. Form an Option Chain from the BhavCopy FnO data downloaded from NSE at end-of-the-day
  2. Filter out FnO stock options whose turn-over is less than 150 Crores
  3. Calculate the stock IV from the last settled prices of the various strikes of the options
  4. Calculate the IV Percentile of the stock by looking up the historical IV data of stock over last 6 months and then filter out FnO Stocks with IV percentile less than 50%
  5. Using preset rules, various option strategies such as straddles, strangles etc are run on the filtered FnO stock options and POP values are calculated.
  6. All trades with less than 5000 bucks of maximum profit are filtered out.
  7. And finally, Maximum Return On Capital (MaxROC) is calculated by dividing the maximum profit of the strategy by the total premium or margin required by the strategy for the current expiry series.

Afterwards, all the values are tabulated and presented in a sortable table. By default, the table is pre-sorted by POP values with high POP trades at the top of the table & low POP trades at bottom.

In addition, you will also find a link to the pay-off graph of the option trade where one can see the trade in a visual form. The pay-off  for the trade is calculated 20% on either side of the spot price of the stock. And therefore, in the graphs and the table you will not see the max profit or loss as unlimited or undefined.

A snap shot of the option screener

Option Screener Tool

Option Screener Tool

Usage of Option Screener

Usage of the Option Screener is quite straight forward. Go through the list of high POP trades and select the trade that suits your trading style most.

High POP should not be confused with high profit potential, they have a inverse relationship most of the time. POP tells you about the likelihood of success of a trade while profit potential tells you about the profitability of a trade. For instance, a short strangle of Bajaj Finance stock options has a low profit potential but a higher POP while a short straddle has high profit potential but lower POP.

Probability of Profit & Profit Potential

Probability of Profit & Profit Potential

 

For this reason, traders with low risk appetite should enter low profit potential & high POP trades which has relatively less risk. On the other hand, adventurous traders with riskier appetite an go for high profit potential but lower POP trades & therefore relatively more risky.

Maximum return on capital (MaxROC) serves as a good proxy for the profit potential of a trade. MaxROC tells you the maximum percentage return possible on the premium or margin invested on an option trade. With this in mind, traders should look for trades with higher POP & higher MaxROC to get best of both the worlds.

Options Premium Selling

If you take a careful look at the table, you will find more Strangles, Ratio spreads and Jade Lizards at the top because by design they are the high POP options strategies as they majorly rely on selling the options. At the same time, long option strategies usually are found at the bottom of the table as the probabilities are stacked against them due to the continuous erosion of theta & implied volatility premium in the absence of a sharp move in the underlying.

If you are looking for a stock of your interest & not finding it, its because either they lack liquidity in options or IV percentile is low and therefore got filtered out. Decent liquidity in options with minimal bid/ask spreads is essential for easily getting in and out of the option trades. High IV percentile is important to get high POP trades as high implied volatility in the options allow us to sell them at higher premium  and hence wider breakevens.

Entering Option Trades

As of now, the screener table will be updated at the EOD. As a result, you may not find the same pay-offs for the option trades on the next trading day. You have to re-check the pay-off of the trade that you chose by clicking the ‘Get Fresh Pay-off’ button at the bottom of the chart or on the Options Builder tool and enter the trade accordingly. If its way-off from the screener pay-off, then trade should not be entered.

Ideally, one should be ready with few selected high POP trades and cross-check immediately with ‘Get Fresh Pay-off’ button or Options Builder tool for the new pay-offs after the FnO market opens.

Future Updates

At present, only following option strategies are used in the screener – Straddles, Strangles, Butterfly, Broken Wing Butterfly, Iron Condor and Ratio Spreads. More strategies are being added to the screener such as Calendar Spreads, Vertical Spreads, Covered Calls etc. I’m open to suggestions if  there is need for more strategies to be added.

I will keep the full screener table accessible to everyone for a month and at a later point, the table will be limited to top 10 trades. Subsequently, a paid option will be introduced to expand the abilities of the screener tool to have more functionality, live updating of the table and more features.

Feedback and suggestions always welcome.

Posted in Options and tagged , , , .

14 Comments

  1. Pingback: Option Screener Tool | TradersLounge

  2. Whether liquid options of the next month series are considered, prior to shortlisting is done by your algorithm, particularly in the last week prior to expiry day. This will be useful, as the gamma risk is high in the last week of current series for sellers, and sellers would prefer to look good strategies with high pop and roc in the next series.
    Shai

  3. sorry for posting on multiple post. actually i was seeing on mobile, and while posting, i got the message ‘conflict’ repeatedly, then i tried on different page. it was not intentioned to put messages on several posts.

    please also indicate whether maxROC % values are for the residual period i current series or per month or something else.

    further i would appreciate to have one more filter for filtering out based on iv rank. you may filter out all those options which have iv rank below 40.
    shai

    • MaxROC or any other value is for current series expiry & changes according to margin/premium required for that trade.

      Stocks are now already filtered out with IV Percentile less than 80.

  4. in addition to IV percentile less than 80%, i would appreciate if one more filter for filtering out based on iv rank. for example you may filter out all those options which have iv rank below 40. thus all options in the zone of consideration will have at least IV percentile 80% and IV rank 40%.

    Shai

  5. Hi RAGHUNATH ,

    Thanks for the explanation on how the POP was calculated.
    I visit your site everyday for the IV Percentiles and option screening tool. Thanks very much for making them available to everybody.

    A small request,
    would it be possible to make a post on , how to arrive at POP for some option strategies, for eg, how to calculate the POP for a strangle, credit spread, or iron condor ?

    Also, Could you make some points on any software (from indian stock brokers) that can give the overall “Beta Weighted Portfolio Risk” on the options portfolio.

    At the end, i couldnt leave the reply with out thanking you for all the efforts you are making to keep this website and the tools up and running.

    Thank you very much.

  6. Raghunath ji, you are really doing excellent & appreciative work on options trading, particularly in indian stocks. Kudos to you.
    You are requested to provide
    1. Strategies for weekly expiring Banknifty options.
    2.Meaning of SCTR ranking and its calculation.
    3. Formula for 1 SD.

  7. Hi,
    I appreciate the excellent work being done by you. A suggestion, naked call & put strategy shall also be included in the screener.

    Thanks

  8. Thanks Raghunath ji, such a great tool for trading…… I have a little suggestion. Some more strategies should be added like Long Strangles/Straddles…etc etc…
    Hope you will add the same…
    Thank You Sir.

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