Saturday, 28 November 2015

How to Play Index Options with minimal risk?

As many of you know buying options is not so profitable unlike writing options

Why buying is not attractive?

Reason 1.Option writers are intelligent most of the times

Reason 2.Your view may be true but it also should become true within your expected time frame else you are loosing the time value to somebody who has written

Every side has its risk whether buying or selling

Risk on Sell Side

Unlimited loss : In buying you pay a fixed amount of premium which is the maximum amount lost but on sell side the option can result unlimited losses too.

Margin Requirements : Option writing requires margins which are high for eg : Nifty Nov 1 lot shorting requires Rs.50000 Approx

VIX very low : When VIX is trading below 17 It is somewhat risky to Write Options because when VIX Increases rapidly option prices will move up rapidly but this is not a worry if Strategy 2 is followed as on Expiry there will be no time value in option prices 

You can resort to shorting if you at least have more than Rs.150000(Strategy 1) Rs.300000 ( Startegy 2)

Why option shorting is better than option buying?

1.You get the time value without the actual change in spots

2.You are protected for the risk (Read Below)

3.Very good when index is not very volatile

So If you have decided to write options then read on.......

I'm going to give you a basic strategy on Nifty for the coming month...

Strategy 1 (More Profitable and Risky than Strategy 2)

Going short CE or PE based on the trend

Nifty closed around 8100 on Oct expiry

Lets assume Nifty continues its downtrend and is expected to close below sychological support 8060 level seeing the day's trend

then it implies nifty is getting ready for a bearish move but it takes little time bcz it is a short term trend reversal level so you have to make use of the time value

You can short 8300 CE or 8400 CE and gain the time value

Normally everyone will buy 8000 Put and hold if the market reverses upside due to some news you lose both time value as well as the intrinsic value

But if you are short you can gain the time value  during the market is range bound

To Put it more simple

For Eg you have sold nifty 8300 CE at say Rs.74

Scenario 1: the market is in range for 2 days in between 8050-8100 then this option loses 4-5 Rs. day and comes to Rs.50 and even if Nifty moves to say 8125+ the option value is still Rs.120 that is you cost..

Scenario 2 : Nifty continues downtrend you will make more profit than Scenario 1

Scenario 3 : Nifty gives a sudden up move say 100+ points the next day you sell the option

What to do ? Jus Hold untill an uptrend is clearly confirmed Say Now if nifty goes above 8220 uptrend will resume again

Untill Nifty is trading below 8220 trade in Nifty Futures in the respective side here it is BUY so buy on support and book on resistance ( Use Open Interest Analysis to decide the trend changes You can get the analysis on Live minute to minute )

Simple rule for OI If calls OI is increasing at a specific strike then that is the resistance and If Puts OI is increasing at a strike that is the support

Strategy 2
(Less Profitable and Riskless ) (Stoploss Strategy)

Going short on multiple strikes and holding till expiry

For Eg you think Nifty will not break 8400 this expiry Short 8400CE and downside you think it will not break 7700 then short 7700PE

What if Nifty is about to cross 8400 levels Buy Nifty futures if 8340 is sustained

What if nifty is about to break 7700 levels Sell Nifty when it is about to break 7700 levels say 7745 levels

Note : The option prices will sky rocket when index is nearing your strike Don't worry you are hedged with futures

To explain it

You have bought nifty futures at 8340 and expiry is above 8400 say 8450 on Expiry day option will be worth Rs.50 Maximum and your futures position is in Rs.110 profit Net profit is Rs.60 per lot

On the other side Nifty expiry is at 7600 your put will be worth Rs.100 maximum and your futures position is in profit of Rs.145 , So Net profit here is Rs.45

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