To be a trader - 20 years'journey from novice to pro novice

[oilman5]

Why do I invest in Options? What do options offer me?
Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one's investment strategy dictates.

Some of the benefits of Options are as under:
High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value.
known maximum risk for an option buyer
Large profit potential and limited risk for option buyer
One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.

How can I use options?
If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity.
The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish).
If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value (premium paid).
Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential.

Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect with limited risk.

Individual investors might wish to capitalize on market opinions (bullish, bearish or neutral) by acting on their views of the broad market or one of its many sectors.

The more sophisticated market professionals might find the variety of index option contracts excellent tools for enhancing market timing decisions and adjusting asset mixes for asset allocation.

Investors of equity stock options will enjoy more leverage than their counterparts who invest in the underlying stock market itself in form of greater exposure by paying a small amount as premium.

Investors can also use options in specific stocks to hedge their holding positions in the underlying (i.e. long in the stock itself), by buying a Protective Put. Thus they will insure their portfolio of equity stocks by paying premium.


What are the risks involved for an options buyer?
The risk/ loss of an option buyer is limited to the premium that he has paid,the buyer of the option will pay premium to the options writer in cash at the time of entering into the contract.

How can an option writer take care of his risk?
Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets

 

[oilman5]

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.

An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity).

Options vs. Stocks :Similarities:
• Listed Options are securities, just like stocks.
• Options trade like stocks, with buyers making bids and sellers making offers.
• Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.
Differences:
• Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security).
• Options have expiration dates, while stocks do not.
• Stock-owners have a share of the company, with voting and dividend rights. Options convey no such rights
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When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price.
Put options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies.
If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases.
If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.

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In the money:
Call option - underlying instrument price is higher than the strike price.

Out of the money:
Call option - underlying instrument price is lower than the strike price.
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Intrinsic value is the extent to which the strike price of an option is in-the-money.

Time value, occasionally known as extrinsic value, is defined as the amount by which an option's price exceeds its intrinsic value; time value declines over time � it is less and less relevant as expiration approaches. In fact, upon expiration, an option can be worth only its intrinsic value.

The deeper an option is in-the-money, the more intrinsic value (and less time value) it has
Put Options
Intrinsic value = Put Strike Price - Underlying Stock's Current Price
Time Value = Put Premium - Intrinsic Value
ALL options eventually lose ALL of their "time value."
ALL "Out-Of-The-Money" options expire worthless.
Markets only "trend" 1/3 of the time; they move sideways the other 2/3.

 

[oilman5]

So to apply option for speculation , we have to understand some key themes on market,-nifty + stock specific up/down move. To understand present state (whether accumulation or distribution?)- what type of momentum is coming?
- yes entire money making on this 2 query solving
1]present state(base study) -whether accumulation or distribution?
2] what type of momentum is coming?-rally or drop
BASE = A ZONE WHERE SOME PRO R BUYING & SOME R SELLING , MAINTAINING A BALANCE
RALLY = UP MOMENTUM , DROP = QUICK FALL OF PRICE (down momentum)
- somebody also believe momentum= strength of trend.

To understand basic ,as well as application, some option traders helped-. Dan,Aw10, Pratap, traderji -kudos to them.
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1] option can be used for leverage
2]option can be used for hedge
3] complicated ( mathematical)option can be used for arbitrage (due to greed value of option reached a unsustainable value- typical optiontrading software r used to find return)
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At resistance holding , for reversal trade ,we can simply underwrite call, also we can buy PUT , if we find high probability of price reversal.
similarly At support breaking , for breakdown trade ,we can simply play with put option.At support holding ,we can simply underwrite put.
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However before doing anything following steps r must , say BUY CALL.
♣ Buy Call -Break Even Analysis
♣ Buy Call - Risk & Return
♣ Buy Call - Entry & Exit
♣ Sell Call - Payoff & Graph
yes without doing this not do even a paper trade.
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Similarly all 4 case , buy put/call or underwrite put/call to be seen at appropriate level , when high probability exists.
Next u add , interpretation of open interest & VIX.

Remember basic:Bullish option strategy-Buy a Call=Strongest bullish option position.
Loss limited to premium paid.

Sell a Put =Neutral bullish option position.
Profit limited to premium received.
Bearish option market trading strategy-Buy a Put =Strongest bearish option position.
Loss limited to premium paid.

Sell a Call =Neutral bearish option position.
Profit limited to premium received.

 

[oilman5]

Remember slowly i am building block as option trader.To make money in any trading stock, options), very first thing to know is the direction of the market.U Can't make money by buying something, when market is falling. So very first thing you need to learn is to identify the current trend of the market (up, down or sideway). Better u are in this, solid is your foundation.Once u know the direction of market or stock that u want to trade, then choose appropriate option strategy for this.
There are 6 basic risk graphs in core option and stock strategy. All other strategy is just combination of these 6 basics. They are – Buy Stock/future, Sell stock/future, Buy Call, Sell Call, Buy Put, Sell Put. Spend as much time as required to understand them on parameters I am going to mention in next point.
For any strategy (including the 6 basic one), know how they are constructed, what is max risk, what is max reward, where is BREAK-EVEN point, How the risk graph looks like at expiry, suitable market condition favourable for these strategies. Once, you should be able to draw risk graph without any option analysis tool, then u pass out from this stage.Understand the concept of option pricing, intrinsic value and time value, the factors that affect option premium. Focus on not the theory, but how change in those factors will affect the premium(incase of ITM/OTM). Watch them in real life, experiment with them using option calculator.
At advance stage, u can look at transition of risk graph from now to final stage at expiry, various option Greeks etc., various strategies that are combination of 6 core strategies. This is the stage, I will advise one to start using a tool/option software and transit to a PRO option trader.
There are different approach to get above (read books, take mentorship, play in market and learn the hard way,If u read wrong book, go to wrong person for training, do wrong course, you will be just wasting your resources (time, money, energy etc.).
some hints r- use youtube, optionalpha,optionseducationdotorg,optionprimer- all of u know -how to search/google.
Remember, this doesn’t make you a trader still. Option Trading involves Money mgmt, psychology, risk mgmt, system testing etc.
There are five option Greeks, the Delta, Gamma, Vega, Theta and Rho.
The five Greeks are δ for Delta,
γ for Gamma,
V= Vega,
θ for Theta and
ρ for Rho.
Delta is a measure of an option's sensitivity to various changes in the underlying asset's price. The Gamma is a measure of the delta's sensitivity to various changes in the underlying asset's price. The Vega is a measure of the option's sensitivity to various changes in the underlying asset's volatility. The Theta measures the option's sensitivity to time decay. Finally, the Rho measures the sensitivity of an option to various changes in the risk-free interest rate.

Delta = Amount of Change in Premium for 1 Rs. change in Nifty. So delta = +0.4 means the option price will change by 40 paise for each 1 point move of nifty.
Calls have +ive delta i.e. call premium increases by increase in nifty. Puts hace -ive delta.. cuase their premium drops as market goes up..
ATM options have delta = 0.5
ITM options have delta > 0.5

OTM option have delta < 0.5. Far OTM options have delta near 0.
Due to +change in underlyings,As option gets more and more ITM, its delta will start increasing.
Gamma = Show the spead of change in delta. To keep it simple. Just forget about it for the time being. Generally its value is like 0.002 i.e. 2/1000 of a Rupee i.e. 2paisa
So delta is key
Theta = Rate of premium decay for each passing day of options life.
So if theta is 3, means, on each passing day, option premium will change by 3 rs.
For long position, theta works -ively. and for short position theta is +ive
As we approach towards expiry, the time premium eventually goes toward 0. Theta shows us at what speed it will go towards 0.Again to keep it simple. Calculate the time premium that u are paying in the option.. and divide that by days left.
Option premium has 2 parts = intrinsic value or real value and time value(percept) or value of air around that option.
example = mkt at 6535, 6500 call option is trading at 64 rs. So the intrinsic value = 6535 - 6500 = 35 rs.
Whatever u pay beyond real value is time value i.e 64- 35 = 29 rs.
So if remaining life is 10 days.. i.e. roughly u will loose 29/10 = 2.9rs everyday
Ideally time decay follows expotential curve. but for above calculation , we follow linear curve.doesn't make much difference..in real trading.
Vega = Reflects the impact on premium due to change in underlying volatilty. so let me try to make it simple.
When expected volatility in remaining life of option is high, then option seller wants more money. so premium goes up. Option premium depends on what is gong to come (i.e. right side of the chart)
not the left side.. hence lets use our judgement to find if mkt is going to go thru big swings in next few days or not. (election result, economic news, company result etc are typical events that result in higher volatility).. In such scenario.. the time value calculated above will go up.. so the 64 rs option might start going for 80 rs.. i.e u are paying 80-35 = 45 rs for remain 10days of time.
that gives us theta of 45/10 = 4.5 rs.
So if you just practice above simple calculations.. without going into the complexity of vega, u can find out if option is fairly price (i.e u are paying decent money for per day of time). or it is
exorbitantly high money that option write is asking from you.
With practice, u can find out the typical time premium / day.
Volatility is important concept in option but it gets reflected in time premium. So to keep it simple, just focus on time premium and understand it as best as possible.
Rho = forget it. Doesn't make much difference,because it has minimum effect on pricing. And Interest rate don't change everyday.Also somebody takes futurevalue to nullify it.

To summarize, just understand Delta and Theta first / their movement with respect to ITM/OTM/ATM..
Then look at Gamma / Vega / Rho (when u have excess time....)

so what underlyings, whatever model u use and get the price, real market price of option can still be different form that. So as a trader, we need to live in reality and use the pricing concept to understand what is going on….. and what shd be our trading decision / which strategy(4-buy call/put or underwrite) should fit well etc.......then u will know that there are time when buying option is wrong (low volatility ahead upto expiry) and there are time when selling option is wrong .
Think the important consideration for options system is the selection of strike and right strategy.Keeping TA to form the view about the market and get trading bias ,then TA's job is over and you have to wear the Hat of option trader now .

 

[oilman5]

so at low volatility times- u plan to join break out side with OPTION. For upside with Call option , preferably at the money - when momentum goes down , sale & book profit.
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Here’s an introduction to the VIX, THE VOLATILITY INDEX. The VIX is a volatility index that determines
what option prices imply that our volatility is. This is an “expectation” of volatility in the market.
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Fischer Black and Myron Scholes created a valuation method for options that is called the BLACK SCHOLES METHOD. There’s yet another called the BINOMIAL MODEL. you can get to the price using these parameters:
1. Stock Price
2. Strike Price + Is it a call or put
3. Time to expiry (days)
4. Implied Volatility
5. Risk Free Rate of return
6. Dividend Yield
The idea is to ascribe a number to the chance that the stock or index will go above the strike price, using the above parameters. It uses some flawed assumptions like a bell curve and a “normal” distribution, which hardly ever is the case in reality,
For example, a Nifty 6100 call option expiring Feb 2014 was trading at Rs. 86 in january28’2014, when the Nifty was at 6040. That means someone was willing to pay Rs. 86 to be able to buy the Nifty at 6100 till Feb 26’2014. So his break-even price is Rs. 6186.
But why 86? Since the Nifty is at 6040 on january28’2014, how does he come about to the figure of 86 rupees? Why does it go up to 140 when the Nifty goes up to 6100?
The TIME TO EXPIRY is the amount of time we have when the stock will be volatile. A Feb 6500 call
bought on the 1st of the month, when there is nearly the whole month left, will be priced higher than the same call bought 1 day before expiry. Because the Nifty can go up 0.4% a day (on average), and
within 20 days it will move from 6100 to more than 6500, taking the call in the money. But if the call expires tomorrow, a move from 6100 to 6500 is far less likely.

.... the RISK FREE RATE, used to calculation the cost of the opportunity, which you can assume around 10% nowadays, per year.The DIVIDEND YIELD has a small impact on the cash flow, and is not very relevant when at the tiny 1% or 2% levels Indian stocks seem to see. But you can plug it into the formula to see how it impacts option prices.

IMPLIED VOLATILITY”- Essentially, it is how volatile you believe the underlying stock will
be. The more volatile the expectation, the higher the price of the option.
The IMPLIED VOLATILITY figure will reveal how volatile the stock is expected to be in the days left to expiry. To keep it less complex, implied volatility is quoted as an annual percentage. So if I say an “IV” of 40%, that means the stock might be expected to move with a volatility of 40% a year.
This doesn’t mean the stock will move up 40% or down 40%, but that 40% is the mathematical estimate of the variance of prices expected in a year.
Should you expect a 10% or a 40% move?
The answer you are most likely to hear is: Look at the stock’s history and find out how it has moved over the last year/quarter/month. Use that volatility figure to calculate the option price.but I would double any number that it threw because it’s bound to be wrong
-Historical volatility has very little to do with implied volatility, in the real world. Because the past (unlike TA assumption)doesn’t tend to repeat in the immediate future and such assumptions can lead to disastrous results.
For instance, if in April you look at the Feb+March volatility patterns and assume that for April, you’re toast. Why? Because April is usually results season, and if the stock’s announcing results, it’s likely to be more volatile. If insiders know certain results or events they can buy options and raise their prices, and it will increase the option prices, and probably show implied volatility to be higher than historical volatility, rightfully so. (There’s an event!).
HOW DO YOU USE IMPLIED VOLATILITY?
Now the idea isn’t to price options – it’s to look at option prices and figure out what the implied volatility is. And then, not to compare against historical volatility, but to compare the implied volatility against the IVs earlier, or against the IV of other options, or perhaps other stocks. A comparative implied volatility figure gives us a better picture than historical moves.

Certain stocks are more volatile than others, and indexes, being a collection of stocks, tend to be less volatile than the stocks themselves.U have to another term-
“VOLATILITY SMILE”.
VIX- It’s simply a MARKET-SOURCED WEIGHTED AVERAGE OF THE IMPLIED VOLATILITY ON NIFTY OPTIONS.they take about seven strike prices around the current Nifty prices (Calls above, and puts below, so only OTM options) and weight them according to price and strike. Then they calculate (mathematical term follows) the square root of the variance and normalize it for 30 days.The VIX isn’t useful in isolation. A VIX of 22 doesn’t mean that there will be 22% volatility in the index (less than 2% a month). We know that indices move more than 2% in a week! Volatility assumptions are dangerous
VIX can of course be compared to the past VIX data; and in general, we know that markets price
volatility higher on the way down than on the way up (i.e. people tend to pay more for Out-Of-TheMoney options when the market’s falling than when it’s rising).
You’ll notice that the VIX was going down as the market was rising in 2012. At times when the market fell, the VIX rose.
This translates to: Options get relatively more expensive when markets dip and relatively less when markets rise.. I believe our regulators have wanted to see “stability” in
prices, but markets are not built for stability - they are built for extremes of fear and greed interspersed with times of low volatility. We don’t know how long those low-vol times will stay but the volatility will come back and come back fast.

 

[oilman5]

If you have access to the historical range of IV values for the security in question you can determine if the current level of extrinsic value is presently on the high end (good for writing options) or low end (good for buying options).
Call options are more expensive the lower the strike price. With calls, the lower strike prices have the highest option prices, with option prices declining at each higher strike level. This is because each successive upper strike price is less in-the-money .
......with puts the option prices are greater as the strike prices rise. For call options, the delta values are positive and are higher at lower strike price. For put options, the delta values are negative and are higher at higher strike price. The negative values for put options derive from the fact that they represent a stock equivalent position. Buying a put option is similar to entering a short position in a stock, hence the negative delta value.
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SOME TERMS TO CLARIFY STRATEGY
1]Bull Spread (Call) Strategy on Nifty
In this strategy, one expects markets to go up.

A bull call spread is constructed by buying a call option with a low exercise price (K), and selling another call option with a higher exercise price.
Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money.
Both calls must have the same underlying security and expiration month.

Example:
Date: July 5th 2011.-Nifty Current Value: 5630
Sell (write) one lot of 5800 Call (28 JUL 2011 expiry) at a premium of 35.
Buy one lot of 5600 Call (28 JUL 2011 expiry) at a premium of 120.

95 Rs (35 - 120) per lot is debited from your account entering the above position. You will make profits if Nifty ends expiry above 5695 (5600 + 95)

Below are the various profit/loss scenarios at expiry
Nifty ends above 5800 - You will make profits of 4000 Rs
Nifty ends between (5695 - 5800) - You will make profits ranging from (0 Rs - 4000 Rs)
Nifty ends below 5695 - You will make losses ranging between 0 Rs to 4750 Rs.
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Note : normally due to nifty price volatility,you will get opportunities before expiry to exit the bull spread strategy with decent profits even if Nifty does not rise above 5695.the gap between write and buy contracts is 200 Points in Nifty.

 

[oilman5]

2,Options Strategies - Bear Put Spread

Bear Put Spread is employed when the Option Trader thinks that the price of the underlying security will go down in Near Term.
In this Strategy:
Buy 1 ITM (In the Money) Put
Sell 1 OTM (Out of the Money) Put
Buying a higher striking in-the-money put option and selling a lower striking out-of-the-money put option of the same underlying security with the same expiration date.
3.Bear Spread - Call Strategy (definition)- one expects markets to go down. The strategy balances profit and risk.A bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month.

Exampleate: 28th July 2011,Nifty Value: 5485
Sell (write) one lot of 5500 Call (25 AUG 2011 expiry) at a premium of 103
Buy one lot of 5700 Call (25 AUG 2011 expiry) at a premium of 32.
71 Rs (103 - 32) per lot (3550 Rs) is credited to your account entering the above position. You will make profits if Nifty ends below 5571 (5500 + 71) at expiry (25 AUG 2011).
Below are the various profit/loss scenarios at expiry
Nifty ends below 5500 - Fixed profits of Rs 3550
Nifty ends between (5500 - 5571) - You will make profits ranging from (Rs 3550 - Rs 0)
Nifty ends between (5571 - 5700) - You will make losses ranging from (Rs 0 - Rs 6450)
Nifty ends above 5700 - You will make fixed losses of Rs 6450.
As a smart trader, you will get opportunities before expiry to exit the bear spread strategy with decent profits even if Nifty does not stay below 5571,the gap between write and buy contracts is 200 Points in Nifty.

 

[oilman5]

4. Options Strategies - Long Straddle
Long Straddle is employed when the Option Trader is Neutral on the price of the underlying security but very bullish on the volatility.
In this Strategy:
Buy 1 ATM (At the Money) Call
Buy 1 ATM (At the Money) Put
profit starts in this strategy……..after crossing break even.
Normally for event based , where high price movement is assured , this technique can be applied. alternately for same scenario u may apply
4(a) LONG STRANGLE-Here strikes r selected out of money, so option buy price(both put+call)comes down.But nifty must move substantially to make strangle profitable.

Further improvement by choosing -4(b)Short Put Butterfly
Short Put Butterfly is employed when the Option Trader is Neutral on the price of the underlying security but very bullish on the volatility.
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5.SHORT STRADDLE- NEUTRAL MARKET ,SHALL BE REMAIN RANGEBOUND.we underwrite both call+put at the money premium. Since its highly risky , we modify to SHORT STRANGLE- to earn premium with lowering risk, we underwrite OTM call+put ,at suitable out range ,where i expect reaching Nifty is rare event.
This also can be improved with LONG BUTTERFLY.here we underwrite at the money Call+put, but buy OTM call ,& put at 400 value, so we are considering nifty will be 800 range ,and we get some money. (both ATM underwrite, and buy OTM call+put )
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Whatever strategy u choose , pay-off dia, various scenario, chance of its happening must be checked- also u must be comfortable with it

 

[oilman5]

As mentioned in 4 /4(a)-above,Special Market Strategies work best in those times when you are expecting a BIG move but are uncertain as to the direction of the move. This is specially true during times of the Union Budget, company results, etc.


What are Spreads ?
Spreads are Limited Risk / Limited Reward strategies. They can be constructed using either PUT or CALL options.
They are directional strategy - Bullish or Bearish
It involves 2 options trades - Buying Option at 1 strike and at the same time selling another option at different strike price.

Spreads are classified using
1) Bullish Spread - (eg - buy lower strike option, Sell higher strike option)
2) Bearish Spread - (eg - buy higher strike option, Sell lower strike option)

Cost of the trade = Difference of premium that u pay for buying first leg minus the premium u collect for selling other leg.
Maximum Risk = LIMITED. Cost of trade that is calculated above.
Maximum Reward = LIMITED. Difference of the two strike prices minus the money that u have paid to open this trade i.e. cost of trade. (Naked option buying, theoretically, has Unlimited reward..but in reality there is nothing called Unlimited. There is a limit to which stock can rise during the lifetime of the option.

btw- forget itm/otm/atm stuff.. just keep the lower/higher based relationship in mind and you will not get confused. When u buy stock, you are bullish….. so u buy at low and sell at high.
Nature of initial cash flow
1) Debit - where your acct is debited while opening the position (eg - for bullish spread, Buy lower Strike CALL and Sell higher strike CALL, or for bearish spread, Buy higher strike PUT and sell Lower strike PUT )-initially debit concept is helpful, because of limited risk.
2) Credit - where your acct is credited while opening the position (eg - for bullish spread, Buy lower Strike PUT and Sell higher strike PUT, or for bearish spread, Buy higher strike CALL and sell Lower strike CALL)

EXITs is something that depends from trader to trader hence there is no single correct solution for it. But prepare in advance for any eventuality(scenario preparation). Once we are in trade, emotions start impacting our decision making capability hence it is better to think about them right now when there is nothing is at stake.
Otherwise standard way of interpreting OI is

- If price increases and Open Interest increases, then their is strength behind the price move higher.
- If price decreases and Open Interest increases, then their is strength behind the price move lower.

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Bearish strategy
Bearish Market Strategies work best only in strongly trending bearish markets.
1.Buy a Put
Strongest bearish option position.
Loss limited to premium paid.
2.Sell a Call
Neutral bearish option position.
Profit limited to premium received.
Option overvalued, market flat to bearish.
3.Buy Vertical Bear Put Spread
Buy at the money Put & sell out of the money Put.
consider limited fall in the market ,before expiry
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Bullish Market Strategies work best only in strongly trending bullish markets.
1]Buy a Call
Strongest bullish option position.
Loss limited to premium paid.
2]Sell a Put
Neutral bullish option position.
Profit limited to premium received.
3]Buy Vertical Bull Call Spread
Buy Call at the money & sell Call of higher strike price.
Maximum loss limited to difference between buying a Call and selling a Call of higher strike price.
Small debit, bullish market. infact starting pt of earning through option in bullish market.
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Since the market moves sideways 2/3 of the time, we have option trading strategies for flat or trendless markets:
Strangle
Sell out of the money Put & Call.
Maximum use of time value decay.
works in Trading range market with volatility .

 

[oilman5]

DAN has rightly said- before u become an option pro- pl answer this question

What kind of option trader do I want to be?
- Direction of the market.
- Volatility in the market.
- Time frame of our option trade.
- Choosing the strategy.
- Margins for the strategy.
- Choosing the strike level/s.
- How to implement a strategy.
- Entering the market.
- Adjustment of our option trade.
- Stop loss of our option trade.
- Exit strategies for our option trade.
- Money management and risk reward ratio of our trade.


All of you who happens to be in option trading know that problem: What kind of option strategy should I use and On what kind of parameters / criteria should I build up my decisions which r practically implementable for me? Do present market context support me to implement ?

the objectives should be
Regular Income
Minimum Risk to the Capital
Regular Opportunity for trading

u must have a simple trading plan with payoff & various strike, prepared before you enter an option trade.Also be ready to change , as new condition of market evolves.we should have knowledge about what kind of order possibilities we have to enter or exit a trade in the market. As we now have an idea about the different ways we can implement a whole option strategy in the market.
Basic of structurally choosing strategy, as well as directional hints r given above, only i can add some hints.
1] ADX shows strength - use it in directional trade.
2] bollinger band gives 2sigma holding support pt,with 95% probability - may use it for underwrite.As BB visualise present volatility - can be used for judgmental bias for volatility, as well as when low volatility ends ,-whether expiration can be build up within present expiry.
3] use break even pt extensively in option plan & very clear about ODD in your favour or not. Software helps not only time but for visualisation(u have to fight best here)