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Welcome to this video on the creation of an options screener. After completing this video,
you will understand the need to screen options, and how to reduce the option chain to a manageable set.
While screening options you will use parameters such as expiry dates, bid and ask prices, open interest, and strike price. John has learned about options and is excited to try his luck with options. On 16th May 2022, the S&P 500 Index is at 4025. John thinks that the fall in S&P 500 is temporary. And he believes that the S&P 500 in the month of June will cross 4500. He buys the SPX Call option for $1.
This call option had a strike price of 4500 and an expiry date of 17 Jun 2022. Lo and behold, after a few days due to fear of recession in the US and high inflation, the S&P 500 fell by 3%.
The option which John had purchased has no bids or buyers. There is no volume either. John is stuck and faces the risk of options expiring worthless and losing out on the premium he paid to purchase the options.
He goes to Sophie. Sophie is a school friend of John and an expert in options trading. John explains to Sophie what happened to him while trading options. That he was stuck in option, there were no buyers and no volume. And asks Sophie for advice.
Sophie tells John that there were multiple mistakes he did, including not selecting the right options. Theoretically, options can make unlimited profits but in reality, it is far from true. So based on your view of the market you should choose the right option strategy.
For example, you could select a bull call spread if you think markets will rise, or butterfly spread if you think the market will stay where it is, and so on. Once you select the strategy,
you need to filter the options set which is available. This will help you when you have to enter and exit a trade.
John admits that is a good idea. Sophie further mentions that there are hundreds of options for a specific asset. And screening options help you to narrow down on a few which are perfect for your strategy.
John asked what should be the first screening criteria?
You can keep the date of expiry as the first criteria. S&P 500 has weekly expiries which expire on each day of the week. That is, they expire on Monday, Tuesday, Wednesday and so on. And there are standard expiry options which expire on the third Friday of the month. On 19th May, we will have the following options which will expire in the month of May. There are two options which are expiring on May 20. One is for standard expiry and the other is for weekly expiry.
Which expiry date to select?
On the 19th of May 2022, the S&P 500 is at 3901. We can take at the money strike price as 3900. For each of the expiry in May, we have to find the open interest for the ATM strike price of 3900. The open interest is highest for the standard expiry of May 20th, 2022. So this expiry date should be selected. John asks Sophie the May 20 expiry is very close.
What other expiry option does he have?
In that case, you can select the next expiry with the highest open interest. You can select the expiry of May 31st, 2022.
John asks why selecting options with high open interest is important?
Open interest is an indication of how many contracts are active. A higher open interest can be inferred as many traders, hedgers and speculators are active on that expiry. This is a good sign as you can easily enter and exit from your options trade. But you know that on
the same expiry date there are still many options with different strike prices.
Which one to select from them?
After you have shortlisted the expiry, you should check for the bid and ask price. You will remove those options which have zero bid or ask price. As there is not much point in selecting options whose value is zero. Also, it will be difficult to enter and exit from such options. In this case, you will not select the option with the strike price of 3955.
Further, if you have two consecutive options with zero bids, then you will not consider any options beyond them. This is more of a subjective criteria but acts as a fail safe method to avoid selecting wrong options. Since the options with the strike price of 3980 and 3985 have zero bid or ask, we will ignore 3990 and all options above 3990 as well.
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