What is the Premium Matching functionality?
This functionality allows the entries to be executed only when the specified entry conditions provided under this functionality, match for configured legs.
So, in an algo if a Straddle (sell ATM CE & sell ATM PE) is configured to be Sold, and one or more of Premium Matching conditions is applied, then the algo will enter only when those Premium Matching entry conditions are met for the ATM CE and ATM PE only, and no other strikes other that the above 2 configured strikes.
To enter with with specific premiums that scan the entire option chain, refer to the functionality Entry by Premium
II. How to enable the Premium Matching functionality:
The Premium Matching option can be found on the algo under the MTM Target and MTM Stoploss section on the algo configuration page.
1. Select the desired premium matching setting and insert the desired value.
2. Mark minimum 2 legs (or any 2 legs in the case where there are more than 2 legs configured in a the same algo) whose premiums need to be matched.
2 legs in a single algo: In the above example, the ATM CE and ATM PE legs are marked. The premium matching conditions will be run on the premiums of these 2 marked legs. Once fulfilled, the algo will take entries in these 2 legs.
4 legs in a single algo: In the above example, the ATM CE and ATM PE legs are marked. Hence, the matching conditions will be run on the premiums of these 2 legs only. Once the conditions are fulfilled, only then will the algo take entries in all the 4 legs III. Types of Premium Matching conditions:
There are 3 types of Premium Matching conditions:
1. No Matching of Premiums: (default setting)
This is the default option that doesn't apply any matching condition between the configured legs. If this option is selected, the configured legs will immediately enter at the start time.
2. Match premiums with maximum difference:
If this option is selected, the positions will be taken in the configured legs when the difference between the premiums of the strikes are equal to or less than the percentage value specified by the user.
Example:
If the specified maximum matching difference (%) value is set to 5%,
- And if the current CE and PE premiums are 200 and 210 respectively, the current difference between the two premiums is 10 points which is less than 5%. Hence, the positions will be taken immediately.
- If the current CE and PE premiums were 200 and 250 respectively, the difference between the two premiums is 50 points, which is more than 5%. Hence, the positions will not be taken till the difference between the two premiums is less than 5%. In this case, the algo will keep waiting for the premium difference to be equal to or less than 5% till the End Time.
3. Premium close to:
If premiums of the legs configured in the algo have premiums close to the specified value for all legs at the same time, then the algo will enter the positions in those legs.
If the premiums are close to the specified value of any other strikes levels above or below the configured legs/strikes, then the position will not be taken.
Both the legs that are marked for matching should have premium close to the specified value for the positions to be taken. If only 1 leg's premium is close to the premium specified and the other leg's premium is not close to the specified value, then the entry will not be taken in both the legs.
Example:
ATM CE and ATM PE are marked for premium matching with a condition premium close to with a value 200, which means that the positions in ATM CE and ATM PE will be opened only when the premiums of both these legs are close to 200.
ATM CE has a premium of 220 and ATM PE has a premium of 180, in this case the premium close to 200 condition is fulfilled and entries will be taken in both these legs.
If, for example, the premium of ATM CE is 260 and the premium of OTM1 CE (ie. ATM+100 CE) is 160, then the matching condition for ATM CE is not fufilled, as 160 is closer to 200, than 260. At the same time, on the PE side, the premium for ATM PE may be closer to 200, than ITM1 PE or OTM1 PE, but since ATM CE and ATM PE both do no have the premiums close to 200 at the same time, the positions will not be taken, till the time the condition is fulfilled for both legs.
4. Premium range:
An upper and lower limit values are specified when using this premium matching option. At any given time after the start time, when the premiums of all the marked legs fall within the specified premium range, the algo takes the positions.
Example:
Settings:
Premium range setting: 100 to 150
Legs marked for matching: ATM CE & ATM PE
Start time: 9:30 AM
Scenarios:
At 9:30 AM, ATM CE premium is 120 and ATM PE premium is 160. Since one of the legs premium's falls outside the specified range, the entries will not be taken by the algo.
At 9:45 AM, ATM CE premium is 118 and ATM PE premium is 149. Since both legs have premiums that fall within the specified range, the entries will be taken in all configured legs by the algo.