Trading Nifty Options?
- Thread starter rahulsarna
- Start date
- Tags f&o intraday options trading
Dear AW / Dan,
Theoritically writing an Option is called naked as the risk is "unlimited", but practcially I would like to call it otherwise, i.e. buying an Option is naked, also explain that writing options is not dangerous, as what is coventionally thought.
For example I will use only directional position below:
So say if you have 30,000 in your account and you are bullish about the Nifty, you have to trades you can take, one is Buy CE or other is Sell PE. (For simplicity assuming other factors being constant, Vega, Gamma - Dan, I am mentioning this for you), and if the CE is priced at 100 and PE also is priced at 100, both are ATM strike prices with Delta 0.5 then as a normal beginner trader or even an average trader, with the funds in your account you can do the following:
Buy CE @ 100 : QUANTITY : 300
Or
Sell PE @ 100 : QUANTITY : 50
(because the Margin required to write One Lot of Nifty (50) is Rs. 30,000
Now coming to Dan's point of selling Options being dangerous i.e. dangerous means the Nifty spot falls (instead of rising as you were bullish).
So if Nifty falls by 30 points with Delta as 0.5 for both CE and PE, the below will be the outcome of the above two trades:
Type...Trade...Price...Qty...CurrentPrice...Loss...Net Loss
CE.......Buy......100....300.....85................15.....4500
PE.......Sell......100......50....115...............15 .....750
So you see, how can selling an Option become dangerous, on the contrary you lose less by selling an Option because your quantity is less due to Margin requirement.
Now, some may argue that the loss in selling Options is unlimited, it is not so, it is less, since if be Nifty keeps on dropping further and you are unable to make decision to exit (a typical traders dilema) than your broker will ask for additional margin and since you do not have it your account he will square it off for you (a good decision he has taken what a trader is not able to take due to loss).
On the contrary if you stuck in the same situation with Long Options, you will gradually leave the Option to expire worthless (a classic example of one trader here - Stock72, who is long on deep OTM CE Nifty and due to huge losses he has decided to hold deep OTM CE in his account - most likely will expire worth less as per him at the end of this month)
So by buying an Option you can lose 100% of your trading capital but by selling an Option you will not lose 100% of your trading capital.
Also to add, Theta favours selling Options, and is against buying Options, so you have atleast one of the greeks with you as you take the position an short Option position.
Note :
The above has been calculated with an assumption that the entire trading capital is used, either as margin or to buy options, which mormally is the case with most novice/average, directional options traders.
Also have rounded all the figures above for simplicity.
Regards,
Theoritically writing an Option is called naked as the risk is "unlimited", but practcially I would like to call it otherwise, i.e. buying an Option is naked, also explain that writing options is not dangerous, as what is coventionally thought.
For example I will use only directional position below:
So say if you have 30,000 in your account and you are bullish about the Nifty, you have to trades you can take, one is Buy CE or other is Sell PE. (For simplicity assuming other factors being constant, Vega, Gamma - Dan, I am mentioning this for you), and if the CE is priced at 100 and PE also is priced at 100, both are ATM strike prices with Delta 0.5 then as a normal beginner trader or even an average trader, with the funds in your account you can do the following:
Buy CE @ 100 : QUANTITY : 300
Or
Sell PE @ 100 : QUANTITY : 50
(because the Margin required to write One Lot of Nifty (50) is Rs. 30,000
Now coming to Dan's point of selling Options being dangerous i.e. dangerous means the Nifty spot falls (instead of rising as you were bullish).
So if Nifty falls by 30 points with Delta as 0.5 for both CE and PE, the below will be the outcome of the above two trades:
Type...Trade...Price...Qty...CurrentPrice...Loss...Net Loss
CE.......Buy......100....300.....85................15.....4500
PE.......Sell......100......50....115...............15 .....750
So you see, how can selling an Option become dangerous, on the contrary you lose less by selling an Option because your quantity is less due to Margin requirement.
Now, some may argue that the loss in selling Options is unlimited, it is not so, it is less, since if be Nifty keeps on dropping further and you are unable to make decision to exit (a typical traders dilema) than your broker will ask for additional margin and since you do not have it your account he will square it off for you (a good decision he has taken what a trader is not able to take due to loss).
On the contrary if you stuck in the same situation with Long Options, you will gradually leave the Option to expire worthless (a classic example of one trader here - Stock72, who is long on deep OTM CE Nifty and due to huge losses he has decided to hold deep OTM CE in his account - most likely will expire worth less as per him at the end of this month)
So by buying an Option you can lose 100% of your trading capital but by selling an Option you will not lose 100% of your trading capital.
Also to add, Theta favours selling Options, and is against buying Options, so you have atleast one of the greeks with you as you take the position an short Option position.
Note :
The above has been calculated with an assumption that the entire trading capital is used, either as margin or to buy options, which mormally is the case with most novice/average, directional options traders.
Also have rounded all the figures above for simplicity.
Regards,
Last edited:
Hi tnsn2345
Rely nice post! Some thing to talk about it :thumb:
First : You did not show my whole comment and it was like this :
""I agree about not selling naked options, as this is quit dangerous. At least nothing for beginners.""
Why ? Your calculations are nicely made. Nice theory and some times happens in reality. It even can happen on a regular basis.
Even then. The risk you take by selling naked is incredible. You may explain or give an example, how you would trade a naked option under the actual market situation in Nifty on Monday. You would have the choice to buy a put naked or you would have the choice to sell a call naked.
What strike would you choose, how many positions would you take, life time of the option, what money management would you use and what stop loss levels would be appropriate in a market like now. What kind of orders would you place by your broker before Monday morning.
DanPickUp
Rely nice post! Some thing to talk about it :thumb:
First : You did not show my whole comment and it was like this :
""I agree about not selling naked options, as this is quit dangerous. At least nothing for beginners.""
Why ? Your calculations are nicely made. Nice theory and some times happens in reality. It even can happen on a regular basis.
Even then. The risk you take by selling naked is incredible. You may explain or give an example, how you would trade a naked option under the actual market situation in Nifty on Monday. You would have the choice to buy a put naked or you would have the choice to sell a call naked.
What strike would you choose, how many positions would you take, life time of the option, what money management would you use and what stop loss levels would be appropriate in a market like now. What kind of orders would you place by your broker before Monday morning.
DanPickUp
Dear Murtaza,
You may address me by whatever pleases and is convenient it you
....
Most of the Options strategy are mentioned in books, no need to get into complex set ups, but what is not mentioned in details in the books even with simple strategies, is the Greeks, which are very important for Options strategies.
In Options, you should always have simple setups which are easier to understand and unwind. So practice with simple ones which are given in the books. But a few words if you still want me to tell you what I do when I set up an Options trade...
1) Get the direction right (obviously)
2) Get the speed right (important if the set up has adverse time decay impact)
3) Get the distance right (preferably)
4) Get the strike prices right (very very important to get this thing right, for this you will need to take greeks into account)
5) Get the equation of the set up right (so at all times you know your net greeks of the set up)
6) Have a plan to manage your set up (in favourable and unfavourable circumstances)
For all of the above, you will basically need to have a good Options analysis software, which can give you all the information of the set up at one glance.
Secondly a good charting software which would give you graphic representation of your set up, this would help you in the same was as what a chart of a stock or index does in basic trading.
Thirdly and preferably you should have independent accounts for Options trading and your other trading portfolios, the reason being, a) Options prices (in absolute terms) are very volatile hence if you cannot resist watching your set up now and then, you will be tempted to make changes (adds, reductions, going unhedged, over hedging etc) if you keep on looking at Option prices frequently b) this also affects your performance with other trading portfolios. Hence keep multiple accounts and with different brokers.
Before setting up the strategy, also plan for course correction (very important) and also how and what will you unwind if the direction is happening in your favour. This is essentially nothing but managing your set up, this would call for adding, reducing, going unhedged, over hedging, changing strike prices etc as the time passes and under different circumstances.
Options strategies are very rarely used for intraday kind of setups (unless it is the last week or so to expiry, where intraday setups can also be planned). Option strategies should be for periods of atleast 3 / 4 days, to a week or even larger periods. Hence a proper knowledge of margin requirements is a must (a good Options software should help to track this). Once you are successful with simpler set ups, you can the get into more complex setups involving different months Options.
Overall, it may look complex to trade Options strategies over conventional directional stock / futures trading (long / short) where you just need to get the direction right, but if you sincerely create a system to help you track all of the above mentioned points and if you have patience to allow your set up unfold, you can very easily make living out of Options trading alone. If you have been exposed to Structured Products offered by leading private wealth / financial institutions in India and abroad, they are all primarily built on Options
To conclude,
1) Trade a simple Options strategy, which you can understand. You do not want to prove anything to the world, prove it to yourself. All basic bookish strategies are good enough for all of us in our entire life time, let us not reinvent the wheel (unless you are a hedge fund manager or want to impress a girl, which you still can more easily do by buying her what she loves from the profits generated by trading simple strategies)
2) There is always a Options strategy for any kind of market, only payoffs differ.
3) The Options strategies setups are not static, they have to be managed, until they are unwound.
4) Trading Options strategies does not mean that you have only Options positions, many set up use Futures positions too. So a combination of both Futures and Options positions still constitute trading in Options setups.
5) Without Options software you should not trade Options set ups.
6) For trading Options strategies, you need patience.
Regards,
You may address me by whatever pleases and is convenient it you
....Most of the Options strategy are mentioned in books, no need to get into complex set ups, but what is not mentioned in details in the books even with simple strategies, is the Greeks, which are very important for Options strategies.
In Options, you should always have simple setups which are easier to understand and unwind. So practice with simple ones which are given in the books. But a few words if you still want me to tell you what I do when I set up an Options trade...
1) Get the direction right (obviously)
2) Get the speed right (important if the set up has adverse time decay impact)
3) Get the distance right (preferably)
4) Get the strike prices right (very very important to get this thing right, for this you will need to take greeks into account)
5) Get the equation of the set up right (so at all times you know your net greeks of the set up)
6) Have a plan to manage your set up (in favourable and unfavourable circumstances)
For all of the above, you will basically need to have a good Options analysis software, which can give you all the information of the set up at one glance.
Secondly a good charting software which would give you graphic representation of your set up, this would help you in the same was as what a chart of a stock or index does in basic trading.
Thirdly and preferably you should have independent accounts for Options trading and your other trading portfolios, the reason being, a) Options prices (in absolute terms) are very volatile hence if you cannot resist watching your set up now and then, you will be tempted to make changes (adds, reductions, going unhedged, over hedging etc) if you keep on looking at Option prices frequently b) this also affects your performance with other trading portfolios. Hence keep multiple accounts and with different brokers.
Before setting up the strategy, also plan for course correction (very important) and also how and what will you unwind if the direction is happening in your favour. This is essentially nothing but managing your set up, this would call for adding, reducing, going unhedged, over hedging, changing strike prices etc as the time passes and under different circumstances.
Options strategies are very rarely used for intraday kind of setups (unless it is the last week or so to expiry, where intraday setups can also be planned). Option strategies should be for periods of atleast 3 / 4 days, to a week or even larger periods. Hence a proper knowledge of margin requirements is a must (a good Options software should help to track this). Once you are successful with simpler set ups, you can the get into more complex setups involving different months Options.
Overall, it may look complex to trade Options strategies over conventional directional stock / futures trading (long / short) where you just need to get the direction right, but if you sincerely create a system to help you track all of the above mentioned points and if you have patience to allow your set up unfold, you can very easily make living out of Options trading alone. If you have been exposed to Structured Products offered by leading private wealth / financial institutions in India and abroad, they are all primarily built on Options
To conclude,
1) Trade a simple Options strategy, which you can understand. You do not want to prove anything to the world, prove it to yourself. All basic bookish strategies are good enough for all of us in our entire life time, let us not reinvent the wheel (unless you are a hedge fund manager or want to impress a girl
, which you still can more easily do by buying her what she loves from the profits generated by trading simple strategies)2) There is always a Options strategy for any kind of market, only payoffs differ.
3) The Options strategies setups are not static, they have to be managed, until they are unwound.
4) Trading Options strategies does not mean that you have only Options positions, many set up use Futures positions too. So a combination of both Futures and Options positions still constitute trading in Options setups.
5) Without Options software you should not trade Options set ups.
6) For trading Options strategies, you need patience.
Regards,
Dear Dan,
This is no theory, it is practice ! Theory says writing Options is unlimited risk, I have never ever lost 100% with my sell Options positions, while on long, I have. So this is what is practice, rest all is theory.
Also one point I missed mentioning in my earlier post is, by writing options, you automatically adhere to MM, as your quantity is small, by buying Options you may get carried away by emotions etc and may forgot MM by taking large quantities as you see idle money in your account (if any, is left if you haven't taken consumed all the funds for by Options position)
Coming to your point of showing my trades, that is not coming, definitely not.
I know you have made earlier attempts too, but still, this cannot happen. Reasoning some other time....
Regards,
This is no theory, it is practice ! Theory says writing Options is unlimited risk, I have never ever lost 100% with my sell Options positions, while on long, I have. So this is what is practice, rest all is theory.
Also one point I missed mentioning in my earlier post is, by writing options, you automatically adhere to MM, as your quantity is small, by buying Options you may get carried away by emotions etc and may forgot MM by taking large quantities as you see idle money in your account (if any, is left if you haven't taken consumed all the funds for by Options position)
Coming to your point of showing my trades, that is not coming, definitely not.
I know you have made earlier attempts too, but still, this cannot happen. Reasoning some other time....
Regards,
Last edited:
Dear Dan,
This is no theory, it is practice ! Theory says writing Options is unlimited risk, I have never ever lost 100% with my sell Options positions, while on long, I have. So this is what is practice, rest all is theory.
Also one point I missed mentioning in my earlier post is, by writing options, you automatically adhere to MM, as your quantity is small, by buying Options you may get carried away by emotions etc and may forgot MM by taking large quantities as you see idle money in your account (if any, is left if you haven't taken consumed all the funds for by Options position)
Coming to your point of showing my trades, that is not coming, definitely not.
I know you have made earlier attempts too, but still, this cannot happen. Reasoning some other time....
Regards,
This is no theory, it is practice ! Theory says writing Options is unlimited risk, I have never ever lost 100% with my sell Options positions, while on long, I have. So this is what is practice, rest all is theory.
Also one point I missed mentioning in my earlier post is, by writing options, you automatically adhere to MM, as your quantity is small, by buying Options you may get carried away by emotions etc and may forgot MM by taking large quantities as you see idle money in your account (if any, is left if you haven't taken consumed all the funds for by Options position)
Coming to your point of showing my trades, that is not coming, definitely not.
I know you have made earlier attempts too, but still, this cannot happen. Reasoning some other time....
Regards,
No body is more clever as the market and if you are the one, I wish you good success in your limited market.
Take care and all the best
DanPickUp
Last edited:
Selling options is dangerous for following reasons :
1) In a crash situation if the market opens much below the strike price, the put sellers will not be able to get out of their positions quickly...also though rare there could be down circuit filters,market stoppages due to the crash make things still worse. Imagine the plight of put sellers in early 2008 market crash. But market does not do these thins all of a sudden,it tips its hand before the crash.Even in 2008 crash,the market gave enough indication that the trend has changed to downtrend and the put sellers had enough opportunity to get out of their positions.
2) A person new in trading is not likely to be that professional and ruthless with his stops to get out of loosing positions immediately ,no matter what, ( it does not imply that all seasoned traders are very strict with their stops ...but that is another story....) He is likely to wait is hope that market will improve and give him a better price to get out which market most likely will not give adding to his losses.....all traders have these weaknesses though professionals have to a great extent conquered this demon....see what is happening in last one week....still I see many posts in our forum where people are still long in their trading positions....
There is a basic difference one has to understand in buying and selling options....an option seller wants that market should remain sideways and he makes money on time decay whereas option buyer wants market to move immediately once he buys option contracts so that he makes money on price swings though looses a bit on small time decay. Option buying is very profitable if the following are observed :
1) Option buying should not be considered as an investment....it is a trade...dont buy options in anticipation of a price move ( it may never take off) buy when you see the move has started.
2) If the move stalls, get out of your option buy position...you can always enter again once the move resumes after antitrend correction/consolidation/sideways movement.
Options can be even daytraded successfully as per the short term trends that we get during the day......
Options is a great tool in the hands of a skilled trader.....
Smart_trade
1) In a crash situation if the market opens much below the strike price, the put sellers will not be able to get out of their positions quickly...also though rare there could be down circuit filters,market stoppages due to the crash make things still worse. Imagine the plight of put sellers in early 2008 market crash. But market does not do these thins all of a sudden,it tips its hand before the crash.Even in 2008 crash,the market gave enough indication that the trend has changed to downtrend and the put sellers had enough opportunity to get out of their positions.
2) A person new in trading is not likely to be that professional and ruthless with his stops to get out of loosing positions immediately ,no matter what, ( it does not imply that all seasoned traders are very strict with their stops ...but that is another story....
) He is likely to wait is hope that market will improve and give him a better price to get out which market most likely will not give adding to his losses.....all traders have these weaknesses though professionals have to a great extent conquered this demon....see what is happening in last one week....still I see many posts in our forum where people are still long in their trading positions....There is a basic difference one has to understand in buying and selling options....an option seller wants that market should remain sideways and he makes money on time decay whereas option buyer wants market to move immediately once he buys option contracts so that he makes money on price swings though looses a bit on small time decay. Option buying is very profitable if the following are observed :
1) Option buying should not be considered as an investment....it is a trade...dont buy options in anticipation of a price move ( it may never take off) buy when you see the move has started.
2) If the move stalls, get out of your option buy position...you can always enter again once the move resumes after antitrend correction/consolidation/sideways movement.
Options can be even daytraded successfully as per the short term trends that we get during the day......
Options is a great tool in the hands of a skilled trader.....
Smart_trade
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