Option Training

By Ronak Unadkat
Myth and Truth of market

• Myth: To make money in the stock market, you must know what the
market is going to do.

• Truth: You must know what you’re going to do before the market
does what it does.
Trading Capital Management
Trading Capital Management
• If you are trading with more than 10 lacs than try to use collateral
fund.
• Trading income should be used to build a long term wealth not to be
used for speculation.
• For Overnight, it is rule from exchange that we have to keep 50%
capital in cash. So, This is the thing which may need to consider.
• Don’t miss a single chance to generate a return on your capital.
Topic covered
• Basic Option Greek
• India Vix
• How to read option chain
• Define direction based on option chain
• Max Pain & PCR
• Future trading
• Stock options
• When not to trade ( Time to staying away from market )
• Factor needs to be consider for Intraday
• Factor needs to be consider for positional trade
Topic covered
• Strangle Management
• Straddle management
• iron conder
• Credit Spread
• Calendar Spread
• When to buy option and what factor needs to be consider for buying
options
• Event trading ( How to trade on event day like election, Budget, surgical
strike.. Etc… )
• Expiry trading
• how to define stop loss
Basic Option Greek
Basic Option Greeks
• Delta – Measures the rate of change of options premium based on
the directional movement of the underlying
• Gamma – Rate of change of delta itself
• Vega – Rate of change of premium based on change in volatility
• Theta – Measures the impact on premium based on time left for
expiry
Delta Structure

Option Type Approx Delta value (CE) Approx Delta value (PE)
Deep ITM Between + 0.8 to + 1 Between – 0.8 to – 1
Slightly ITM Between + 0.6 to + 1 Between – 0.6 to – 1
ATM Between + 0.45 to + 0.55 Between – 0.45 to – 0.55
Slightly OTM Between + 0.45 to + 0.3 Between – 0.45 to -0.3
Deep OTM Between + 0.3 to + 0 Between – 0.3 to – 0
Basic Option Greeks
Basic Option Greeks
India Vix
India Vix
• NSE calculate India VIX based on the orders of Nifty Options
• India VIX indicates the investor’s perception of the market’s volatility
in the near term (next 30 calendar days)
• Higher the India VIX values, higher the expected volatility and vice-
versa
• When the markets are highly volatile, market tends to move steeply
and during such time the volatility index tends to rise
India Vix
• Volatility index declines when the markets become less volatile.
• Volatility indices such as India VIX are sometimes also referred to as
the ‘Fear Index’, because as the volatility index rises, one should
become careful, as the markets can move steeply into any direction.
• If we want to write the option that it is important to write when
Volatility is high.
• It is dangerous if we write option and volatility starts increasing
because you will not get theta decay. Theta decay will be eaten up by
volatility.
India Vix
• Low IV
• Go for spread.
• Difference between spread is really good.
• don’t do naked selling.
• Don’t do strangle.
• Moderate IV
• Go for strangle
• High IV
• Go directional strangle
• Try to look opportunity for naked selling strictly into intraday
How to read option chain
How to read option chain
• Check OI for both call and put near to current spot price and then
move towards looking OI for both OTM call and put.
• If you want to take position for Intraday that it is equally important to
check change in OI. Even, It is more important than OI also for
intraday.
• Look at highest open interest and changes in Open interest on both
side.
• Look at the building position for future. Sometime call open interest is
high but still market is getting increased the reason behind there are
big hedge funds long on future and writing call so we need to just
write put.
How to read option chain
How to read option chain
Define direction based on option chain
Define direction based on option chain
• When to create bullish position
• When Price increase with heavy call unwinding
• When Price increase with increasing open interest on PUT side
• But, We also need to look that future open interest should be increased with
increasing price.
• There is a trap sometimes for option writer that put open interest is
increasing so we start writing PUT but at the same time price is not increasing
much and future open interest is increasing so big hedge manger is writing a
put and shorting a future so actually, they are on short side so in this case try
to write far out of the money call.
Define direction based on option chain
• When to create bearish position
• When Price decrease with heavy put unwinding
• When Price decrease with increasing open interest on CALL side
• But, We also need to look that future open interest should be increased with
decreasing price.
• There is a trap sometimes for option writer that call open interest is
increasing so we start writing CALL but at the same time price is not
decreasing much and future open interest is increasing so big hedge manger
is writing a call and buying a future so actually, they are on buy side so in this
case try to write far out of the money put.
Define direction based on option chain
• When to create range bound position with moderately bullish or
bearish
• When There is a no signal for call/put unwinding than only start look for
position of non directional
• When open interest is increasing on both side with almost equal ratio( we can
say 1:1.25 )
• Future open interest is not getting increased much.
Define direction based on option chain
• How to predict trend reversal
• When price is increasing and call unwinding is not happening much
and also call writing getting increased on far OTM call than it’s clear
sign of that market may start going down any time.
• When price is decreasing and put unwinding is not happening much
and also PUT writing getting increased on far OTM PUT than it’s clear
sign of that market may start going up any time.
• Don’t start taking huge positon based on prediction of trend reversal.
Always start building position slowly slowly.
Max Pain and PCR
Max Pain and PCR
• Max pain is a point where option buyer lose maximum money
• Max pain is mainly used in expiry
• Max pain is helpful for writing a call or put which has maximum
chance to lose its maximum value on the day of exxpiry
Max Pain and PCR
Max Pain and PCR
• Put Call Ratio helps us identify extreme bullishness or bearishness in
the market
• PCR is normally used to predication reversal.
• if the PCR indicates extreme bearishness, then we expect the market
to reverse so the trader turns bullish.
• if PCR indicates extreme bullishness so traders expect markets to
reverse and decline.
• PCR can be calculated by dividing total open interest of Puts by the
total open interest of the Calls.
Max Pain and PCR
• If the PCR value is above 1.2 then it indicates that there are more Puts
being bought compared to Calls. This suggests that the markets have
turned extremely bearish and therefore sort of oversold. One can
look for reversals and expect the markets to go up.
• Low PCR values such as 0.5 and below indicates that there are more
calls being bought compared to puts. This indicates that the markets
have turned extremely bullish and therefore sort of overbought. Once
can look for reversals and expect the markets to go down.
• All values between 0.5 and 1.2 can be attributed to regular trading
activity and can be ignored.
Max Pain and PCR
Future trading
Future trading
• I am not doing future trading most of the time. Some reason like
stamp duty high, Margin high..
• Option selling has edge on future for Theta decay
• It’s ok sometimes if you are super bearish than you can go shorting
future but don’t go long if you are super bullish.
• If you go long in future than you are paying premium to future seller.
Stock options
Stock options
• I normally trade only in Index because of low risk and high liquidity.
• Stock can go to upper circuit and lower circuit based on some news or
quarterly result, etc..
• You can’t make adjustment if stock comes into F&O ban
• It’s very rare possibility for index to go into upper circuit. Index will
never go into F&O ban so Index is much safer than stock.
When not to trade ( Time to staying away from market )
When not to trade ( Time to staying away from
market )
• When we are sitting with loss of 2% of our trading capital.
• When our stop loss triggered 4 times in a day.
• In a situation that we are defending ourself to recover losses.
• Any sudden event came and our profit start decreasing than book profit and
move out for the day or at least for sometime.
• If at any point if you get 2% profit on your capital than keep SL of 30% below your
current profit and move out if it triggered. For e.g. If you are trading with 10 lacs
and you made profit of 20k that keep SL of 12k and if you reach any point at 12k
that move out from market for a while and came back after taking 15-30 mins
refreshment.
• If you don’t like fire fight than don’t trade on event day like election,budget,
Credit policy etc..
Factor needs to be consider for Intraday
Factor needs to be consider for Intraday
• Always create your first trade with only 40% of your trading capital. If
you take position with less than 40% that it’s ok but never ever create
initial position with more that 40% of your trading capital.
• In most of the time, always keep low risk position in your first trade so
if you are planning to take bullish position than sell PE as well as CE.
PE with delta near (-0.35)-(-0.45) and CE with delta 0.2-0.3. vice versa
for bearish position
• don’t go for naked selling in your first trade.. Rather create spread
depend upon view.
Factor needs to be consider for Intraday
• Never kept ITM call option in your trade always shift your call or PUT
before it becomes ITM. ITM call has high delta so it will be difficult to
handle if market become directional and loss will be huge.
• If market goes in your direction than start increasing position slowly slowly
and take your capital upto 80% never cross 80% limit. Always keep 20%
reserve so it might require you for adjustment if any violent move comes.
• After initially deploy your 40% capital if you feel comfortable and you are
confident that go for naked selling. Always book profit after getting 20%
return on your naked call/put or convert your naked selling into strangle or
spread. If you don’t want to convert into strangle or spread than trail your
SL to 10% of your profit in naked selling.
Factor needs to consider for positional trade
Factor needs to be consider for positional trade
• For positional trade, Monthly expiry is safe.
• Always create positional trade at least 2-3 weeks before monthly expiry.
• Always exit from your trade at least 1 week before expiry.
• Always hedge down side in to your expiry. You can kept naked position into
your upside but for down side try to hedge as early as possible.
• For e.g today 23rd march and we are taking position into April month
expiry. Current spot price of Bank nifty is 27500 and we create a strangle of
26000 PE and 29000 CE after 2-3 day we are in profit of 10-15% of
maximum limit that always go for hedging into down side so you can buy
25500 or 25800 PUT with equal qty or you can buy 1/3 qty of 26200 PUT.
This will help you to minimize your risk.
Strangle Management
Strangle Management
• When to Use: This options trading strategy is taken when the options
trader thinks that the underlying stock will experience little volatility
in the near term.
• We can create a 3 type of strangle.
• Bullish strangle
• Bearish strangle
• Range bound strangle.
Strangle Management - Bullish strangle
• Bullish strangle is created when our view is bullish or moderately bullish.
• If you are full bullish that you need to sell PE with delta (-0.3) - (-0.45) (
near the spot price ) and CE with Delta 0.10-0.25( far away from spot price
)
• For e.g Bank Nifty spot price 27500 and you are expecting that market to
go up than you should initiate trade with selling 27300PE- 27400PE and
28000CE or 28100CE.
• If you are moderately bullish than you need to sell PE with delta
(-0.25) (-0.35)( not too much near spot price ) and CE with Delta 0.2-0.3 (
not too much far than spot price ).
• For e.g Bank Nifty spot price 27500 and you are expecting that market to
go up moderately than you should initiate trade with selling 27200PE and
27800CE or 27900CE.
Strangle Management - Bearish strangle
• Bearish strangle is created when our view is Bearish or moderately bearish.
• If you are full bearish than you need to sell CE with delta 0.3-0.45 ( near the
spot price ) and PE with Delta (-0.15)-(-0.3)( far away from spot price )
• For e.g Bank Nifty spot price 27500 and you are expecting that market to
go down than you should initiate trade with selling 27600CE- 27700CE and
26900PE or 27000PE.
• If you are moderately bearish than you need to sell CE with delta
0.25-0.35( not too much near spot price ) and PE with Delta (-0.2) – (-0.3) (
not too much far than spot price ).
• For e.g Bank Nifty spot price 27500 and you are expecting that market to
go down moderately than you should initiate trade with selling 27800CE
and 27000PE or 27100PE.
Strangle Management – Range bound
strangle
• Range bound strangle is created when our view is side way that
market will trade in range bound
• In this case, you need to sell CE/PE with equal delta on both side. But,
try to keep in mind that delta should be less than 0.35.
• For e.g. Bank Nifty spot price 27500 and you are expecting that
market to remain side way than you should initiate trade with selling
27800CE and 27200PE.
Straddle management
Straddle management
• Straddle is more profitable than strangle but it is also more dangerous
than Strangle because straddle has always chance for delta risk if
market become little directional.
• I prefer more to trade on strangle than straddle because we have
more solution for adjustment into strangle as compare to straddle.
• In straddle, we are selling call and put for same strike price so if
market becomes directional than straddle will have more loss than
strangle.
iron conder
iron conder
• Iron coder is generally a very good strategy when we are playing with
positional strategy.
• It has low return but it has also low risk.
• Generally, iron coder can not be used for intraday. Even, I am also not
using because of low return but for position I always convert my
strangle into iron conder to hedge my position.
• For e.g Bank Nifty spot price 27500 and you initiate trade with selling
27800CE and 27200PE that we should have to buy 28000CE and
27000PE for taking overnight position.
Calendar Spread
Calendar Spread
• Calender spread is really a great strategy but now it is not working as
expected because of increasing of margin requirement from SEBI due
to this theta decay become little slower so it is not fancy now.
• I normally prefer credit spread over calendar spread.
• For e.g Bank Nifty spot price 27500 and you initiate trade with selling
27200PE than you can buy 27200PE or 27100PE for next expiry to
hedge your position.
Credit Spread
Credit Spread
• This is my favorite position. I normally played with strategy every day
for overnight position.
• Option selling has unlimited risk but Credit spread itself is a proper
hedging model so risk will be limited.
• This position can be created on call side or put side.
• we can create a steady everyday income using this strategy.
• This position can be create everyday to take 3-5 point of gain. Later,
we can convert this position into strangle after getting some profit.
Credit Spread
• For e.g.
• if Bank nifty spot price is 27500 and we are bearish or moderately bearish
than we can sell 27700CE and buy 27800CEor27900CE.
• if Bank nifty spot price is 27500 and we are bullish or moderately bullish than
we can sell 27300PE and buy 27200PE.
how to manage everyday spread
• As soon as market open, we have to review our spread after 15-20
mins so there will always be one leg in profit and other leg in loss.
• If you sold 27300PE and buy 27200PE and
• Market open positive than 27300 will be in profit and 27200 will be in loss.
Now, if you think that market will remain positive that than you can exit from
27200 PE and convert 27300PE into strangle with 27800-27900CE.
• Market open negative that 27300 will be in loss and 27200 will be in profit.
Now, If you think market will remain bearish than exit from spread with loss
but, if you think market will bounce back than continue with spread and once
you will be in profit of 27300PE than you can exit from 27200 PE and convert
27300PE into strangle with 27800-27900CE.
When to buy option and what factor needs to
be consider for buying options
When to buy option and what factor needs to
be consider for buying options
• Vix should be low
• Premium should be reasonably low
• If you are expecting strong break out or break down.
• Tight stop loss not based on premium but based on time as well
• Booking profit is more important rather to keep getting increasing of
our greed.
• By taking partial profit , you have to take some profit as well along
with your capital. Don’t just take capital and kept remaining position
into trade. Took some profit as well.
When to buy option and what factor needs to
be consider for buying options
• In option buying, most of the time trade should not be on your side.
• Try to play only in intraday for option buying. If you are very sure than
only took option overnight because time decay is not in our favor.
• For e.g. if you bought 27200 CE at 40 rs around 12 O’clock and you
are expecting big move and kept target of 80 rs around 2 O’clock. If at
2 O’clock if option is traded around 65 than don’t wait for 80 rs. Book
at least 80% profit.
• It’s good decision to buy call/put when major unwinding happen with
strong break out or break down.
Event trading ( How to trade on event day like
election, Budget, surgical strike.. Etc… )
Event trading ( How to trade on event day like
election, Budget, surgical strike.. Etc… )
• I think it is wise decision to staying away if you can’t handle the volatility.
• Premium will always be very attractive during such event so if you are
ready to fire fight than you have to play with strangle during such event.
• For e.g. if Bank nifty spot price is 27500 before election that we should
create our 50% position on selling 29500CE and 25000PE. 30% position on
selling 29000CE and 25500PE and 10% position on 28500CE and 26000PE.
so, as soon as event over market volatility start decreasing and we should
get good return. One more thing if our any position become ITM than we
have to move out without doing any shifting.
Welcome to expiry trading.
Welcome to expiry trading.
• Don’t keep over expectation on a day of expiry.
• Don’t leverage more position on any direction on day of expiry.
• Start selling slowly after 9:45 .
• Used only 20% capital till 12 O’clock
• Don’t create pure strangle on expiry day.
• Always trade directionally on expiry day.
• Keep changing your mind based on option data movement on expiry
day
Welcome to expiry trading.
• If you are bullish that start selling PE. Now, after some time you fell
that open interest is increasing on Call side than don’t be emotional
and change your mind from bullish to bearish. Took 50% profit from
put side and start selling call.
• If bank nifty spot price is 27500 than start selling call from 27800CE-
27900CE and 27100PE-27000PE in morning. After 12, take your view
bullish or bearish based on option data and start selling small qty with
strike price near to spot price.
• Don’t concentrate much on your MTM profit. If you will trade well
than by end of day it should be good.
Welcome to expiry trading.
• Sometime, if you are confident that take some bold decision like if
Bank nifty is trading at spot of 27560 after 1 O’clock and you are
moderately bearish and 27500 call is available at 90 rs than sold with
small qty even if it is ITM. So, when Bank nifty reach 27520 it will
available around 50rs that sold 27500PE which is around 30-40. this
way you can protect your 27500CE.
• At any given point if you are on profit of more that 2% of your capital
than either book profit or trail SL to 30% down of current profit. I
generally book my whole profit after getting 2% and than will taking
break of 15-20 mins before initiating any trade. This will help you to
take fresh view.
How to define stop loss
How to define stop loss
• SL is very important but at the same time it is very complex to define
because we often face problem like after touching our SL. Our target
is frequently achieved.
• Defining SL is very different in option buy and option selling.
• Option buying time should be our SL along with price. Even if, our
target is not achieved but our time frame is over that we have to
move out from our position.
• In option writing, we have to check that how much time left for
expiry, what is current delta, how much volatility and theta decay.
How to define stop loss
• For e.g. Bank nifty spot is 27500.
• 27700CE has second highest open interest and 28000CE highest open
interest Nifty 27900CE is available at 15 rs. If nifty break 27700 than
27900CE should be around 35-40. 27700 has second highest open
interest than it is act resistance but if 27700 break and nifty sustain
for 15-20 mins than you have to wait for retracement so once nifty
will back to 27680 and premium of 27900 will be around 28-30 so one
can buy this option and their target should 70 rs in 1 hours so this will
be you SL based on time because call winding happen on 27700 than
all option will spike but after 1 hours if target is not achieved than
also you have to move our from this CE with whatever profit it is.
How to define stop loss
• For e.g. Bank nifty spot is 27500.
• 27700CE has second highest open interest and 28000CE highest open
interest. Than once can sell 27800 CE which should be around 45.
Delta should be around 0.3 for this price for first resistance is 27700
so if premium move immediate after initiating our position than after
every 100 point premium increased with 30 rs so our stop loss will be
75 rs. We have to revised our stop loss based on price movement and
also depend upon expiry getting nearer.
Questions ?
Thank you