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By Jegathesan,
Consistent 60 day Challenge Winner
(10 times) in Zerodha
Training
 Why Option Selling and myths?
 Market Analysis (Technical & FNO)
 How to identify/Capture Trending Signals?
 Option Strategies (Positional and Intraday)
 Special Strategies for Expiry Day
 Market View Vs Strategies with position size
 Various Delta Neutral Hedging Methods
 Handling Gamma/Expiry day Risk
 Risk and Margin Management and position size
 Trading Psychology
Why is the Edge in Option Selling?
 Option sellers have a default edge (Time Decay).
 Statistics say that more than 80% options will
expire worth less.
 Most institutional traders do option selling
Myths About Option Selling
 Unlimited Risk – It is only for naked option selling.
With proper hedging model, one can define the risk
 Return is too less – Make use of collateral, margin
and exposure benefits and return would be decent
 Limited profit – You can always roll up or down your
options. Can make better return
 Need special software for option Greek and other
stuffs – No need to have paid software. Free
software are available if needed.
 Only for big boys – People with 5L capital can do
Various Returns from money
 There are 3 types of return you can get
 Yield from your asset (Collateral) – 12%
 Return from your option selling – 12%
 Return from using extra exposure given by broker – 12-24 %
 We can achieve 36-48 per anum collectively
 If you need more return, you can need to concentrate
more on intraday as you will get higher exposure.
Recommendation to Naked Seller
 Most retail option sellers are naked sellers.
 Should have the ability to bring more capital if capital is
wiped out
 Play only with limited capital (Not more than 25L)
 Target 5-6% per month
 Never accumulate your profit into your capital
 Shift to Risk Defined Strategies if you cannot afford the
loose the entire capital in black swan event
 Avoid Stocks
Market Analysis

 Technical Analysis
 FNO Data Analysis
ADX Signal for intraday & expiry
 Use 13 and 8 Settings in ADX for higher sensitivity with
time frame 3-5 mins
 If ADX should be in uptrend below 25 with good
volume in force index
 ADX is directionless, but DMI cross-over will signal the
direction. Positive crossover indicates uptrend &
negative crossover indicates downtrend
 DMI+/DMI- would have crossed 25 and its current
value should be higher than previous pivot point to
avoid false signal
 FI volume should be more than 60K for Banknifty
 Price should be above 100 WMA for long and below 100
WMA for short.
ADX Signal for intraday & expiry
 Book or Exit if force index comes to zero.
 Use short time frame below 5 minutes. Don’t use longer
time frame.
 No need to use VWAP if you use 100 WMA
 Do not book profit when ADX comes down
 It is Gamma Finder. It helps to find the violent
movement in expiry.
 It is life jacket if you are doing expiry trading.
 It is more affective post lunch.
 You will get more benefits if you try to capture through
option selling.
 Generally one trade will take 1-2 hours
Example for ADX signal
Position size calculation for intraday
 Capital is 10L
 Risk 0.50%. Risk amount: 10L*0.50%=5000
 Generally SL is 25 points in Banknifty
 Hence volume = Risk (Amount)/Stop Loss (Points)
 Ex: 5000/25 = 200
 Personally I take only 0.25% risk.
 Never have position size that can hurt more than 0.50%
of your capital
 For other scripts, you can do position size using the
same formula.
How to sell options for ADX signal
 Sell only weekly Banknifty options
 Sell naked PE for long and Naked CE for short. Premium
should be close to 100 from Friday to Tuesday.
 Sell 80 on Wednesday and 50-60 in expiry day.
 Make sure that you do not sell ITM options.
 The maximum loss shall be premium 25 in total (but do
not place SL at 125)
 If signal fails, sell options in opposite side before it hits
your SL 25 and try to come out without loss.
 Manage your positions as we manage strangle and
straddle in intraday
 Keep 25 SL for the entire trade system, not for positions
How to manage naked options
 Assume that you sold naked 27000 CE at 100 for ADX
signal for short
 Since we have 25 points as SL, we do not need to keep
SL for 27000 CE at 125
 Instead we can sell in opposite side (Sell 27000 or some
strike price PE close to the premium for 27000 CE)
before it 27000 CE goes to 125
 Now your total positions could be either short strangle
or short straddle (SS)
 Manage your positions as we manage SS in intraday
(will be explained in intraday section later)
 If you had sold CE and Banknifty came down 400
points, you can carry forward your positions
Option Selling using ADX signal
 It works for all high beta stocks.
 Never use this signal when there is a mega event
 Do this trade only from 9:30 am to 3.00 pm.
 Enable this chart in expiry day.
 Exit all sold CEs if you get long signal.
 Exit all sold PEs if you get short signal.
 Used this ADX indicator to exit my positions in expiry.
FNO Data Analysis
 Future Position – Current speculation of Nifty and
Banknifty stocks.
 Highest IO – Acts as support and resistance.
 Recent Winding and Unwinding of OI – Recent
pulse of option writers.
 Put Call Ratio (PCR) – Indicates the mood of option
market for the market direction.
 MAX Pain – The point where most options will
become worthless.
 Track all these data in our website
https://www.capitalzone.in/fo-data/
Note on PCR
 Absolute Value in PCR doesn’t have weightage in
market view
 Relative difference in PCR will reflect the option
seller view
 Increase in PCR value (compared to yesterday)
indicates that it is bullish
 Decrease in PCR value (compared to yesterday)
indicates that it is bearish
Note on MaxPain
 Pain is calculated based on OI, not based on
premium
 It shifts usually 4-5 times in a monthly expiry
 In weekly expiry, it can move violently.
 Based on your positions (weekly or monthly), watch
weekly or monthly max pain
 All trend-follower can use this for confirmation
 Do not reply on max pain if big gap happens
because most option sellers would be in profit with
future which will not be discounted in max pain
FNO Data Analysis Key Points
 Consider stock weightage while analysing stock future.
 Recent Winding and Unwinding of OI can be ignored if
it is far OTM near expiry.
 Consider OI changes near OTMs.
 More weightage should be given to Future, Max Pain and
then OI
 Strong trend will move along with MAX Pain, PCR and
high OI
Analyzing the Implied volatility
 Generally you can look for IV Rank and IV
percentile to know whether it is high IV or low IV.
 In short, you can consider VIX below 15 is low IV.
VIX above 15 is high IV for the current scenarios.
 Premium difference between current month and
next month in Nifty ATM shall be below 60 in low
IV
 Do horizontal spreads in Low IV
 Do vertical spreads in high IV
Diversification & Positional size (Positional)

 Big Boy Covered Call – Equal to Underlying


 Butterfly/Twisted Sister/Iron Condor – 50%
 Calendar spread – 30%
 Call ratio – 25 %
 Credit Spreads – 25%
 Short Straddles/Strangles – 10%
 Free cash – 10%

All numbers represent margin for option selling


Diversification & Positional size (Intraday)

 Strangles/Straddles – 50%
 Iron fly – 50%
 Call Ratio – 25 %
 Trend-following – 25%

All numbers represent margin for option selling


My Premium in Nifty
 25 – First Week
 20 – Second Week
 15 – Third Week
 10 – Last Week
 5 – 2 days before expiry
 2 – On Expiry

It is a net premium if it is spread


My Premium in Banknifty
 50 – First Week
 40 – Second Week
 30 – Third Week
 20 – Last Week
 10 – 2 days before expiry
 5 – On Expiry

It is a net premium if it is spread


My Premium in Weekly Banknifty (Intraday)

 25 – Monday
 20 – Tuesday
 15 – Wednesday
 5 – On Expiry

It is a net premium if it is spread. Never do intraday in


Friday
Positional Option Strategies
 Big Boy Covered CE(Only Ultra HNI > 50L)
 Short Strangle
 Short Straddle
 Call Ratios
 Twister Sister
 Big Boy Iron Condor and Twisted sister
 Put Calendar
 Call calendar
Big Boy Covered CE
Definition: Long in cash market and sell CE in non
trending stocks (ADX should be less than 25)
When: Buy quality large cap stocks equal to FNO
volume size. Buy at least 8-10 stocks
Strike Price: Sell CE equal to cash market value at 10%
above spot price
Exit: Leave to expiry. If it goes down, roll down your
CE
Example: You bought Reliance shares at 1100. Sell CE
at 1200
Advantage of Big Boy covered CE
 Since you are long in cash market, selling CE is
totally risk free.
 Phycological advantage of holding sold CE if spot
comes to strike price.
 Selling CEs in many stocks will diversify your risk,
only few stocks will hit your strike price
 Total immunity from black swan event at any cost
 High probability of getting profit in cash market and
option selling
 Easily one can target 24% per Anum for the margin
used
 Tax and roll over charges will be very minimal
Managing Big Boy Covered CE
 Roll down or sell additional CE if underlying stock
comes down
 Only few stocks will hit your strike price, if it expires
1-2% above your strike price, just book minor loss.
 If underlying hits in middle of the expiry, do either
of the followings to manage it based on your view
and comfort
 Add Put credit spread to compensate the loss of CE
 Add COLLAR strategy in long side
Ex: Managing Big Boy Covered CE
 You bought Reliance share at 1100 and sold 1200 CE
at 10
 RIL hits 1200 15 days before expiry
 Never even naked PE to defend your CE
 Do either one of these strategies
 Put credit spread sell 1160PE and buy 1140 PE
 Create COLLAR (Long at 1200 , buy 1160 PE and sell 1240
CE) – Preferred
 Keep creating collar if underlying goes up
Short Strangle
Definition: Selling CE /PE in OTM strike price
When: IV is high, market is range bound
Target/SL: Leave to expiry
Volume: 10-20%
Exit: Roll up/Down CE and PE to match the premium
till it becomes straddle
Duration: 10 days or more away to expiration
Premium: As per the table given
Example: Sell 10000 PE & 11000CE when Nifty is at
10500
Managing strangles
 Roll up your PE if market goes up
 Roll up your CE if market does down
 All rolls should be done if max pain moves
 Make sure that the premium in CE and PE should
be equal after shifting
 Once it becomes short straddle as manage it as we
manage short straddle
Short Straddle
Definition: Selling CE /PE in same strike price - Short
straddle
When: IV is high, market is range bound
Target/SL: Leave to expiry. Exit if max pain moves
Volume: 10%
Exit: Create more SS if market comes down, add more
call ratio. If market goes, book profit in SS
Duration: 45 days or more away to expiration
Premium: above 350 (nifty) and 900 (Banknifty)
Example: Sell 10000 CE and PE when Nifty is at 10000
Managing short straddle
Create first SS for 10 % of your total portfolio
Do average in 200 points difference if Nifty moves
with max pain
Total volume would be 20 % after averaging
Create put credit spread or put calendars (diagonal or
ITM) if market goes up
Sell additional CE if market comes down and it can
be done in current month or next month
Go long in future if market touches upside break-
even, buy PE and exit all put strategies
Go short in future if market touches downside break-
even
Ex: Managing SS in upside
Created SS at 11000 (400 premium)
Created one more SS at 11200 (market went up)
Average SS is at 11100 (premium 400)
Break-even is from 10700-11500
Created put strategies (if market goes up again)
put strategies include all PCS, put credit spread
Go future long in upside breakeven
Ex: Long at 11500
Buy PE to protect future long at lower strike price
Ex: Buy PE at 11000
Do all these adjustments if market goes up with
maxpain
Ex: Managing SS in downside
Created SS at 11000 (400 premium)
Created one more SS at 10800 (market came down)
Average SS is at 10900 (premium 400)
Break-even is from 10500-11300
Created call strategies (if market goes down again)
Call strategies include all Call ratio & Naked CE
Sell CE for the premium equal to the loss in SS
Go future short in downside breakeven
Ex: Short Future at 10500
Do all these adjustments if market goes up with
maxpain
Disclaimer about Straddle/Strangle
 Strangles/Straddles come under risk undefined strategies
 The loss is unlimited and vulnerable for downside risk in
black swan event.
 Never ever do more than 20 % total volume in
straddle/strangle totally put together
 If your capital is huge & you are very conservation person, I
would advise not to implement this strategies for positional
trading
 Better to replace with Iron Condor/Twister Sister
 Double Calendar is not advisable as both sides will be in loss
if there is a violent movement in one side
Twisted Sister
Definition: It is same as Short Strangle, but there is a
protection only in PE (200 points away from short strike)
When: IV is high, market is range bound
Target/SL: Leave to expiry
Volume: 50 %
Time : Minimum 45 DTE
Adjustment: Roll down sold CE or Roll up put credit spread
Premium: As per the table given
Example: Sell 10000 PE, Buy 9800 PE & sell 11000CE when
Nifty is at 10500
Big Boy Iron Condor
Definition: It is same as Short Strangle, but there is a
protection for CE and PE in longer distance.
Volume: 50 %
Time : Minimum 3 DTE.
Adjustment: Roll up or Down credit spread
Premium: As per the table given
Example: Sell 27000 PE, Buy 26500 PE & sell 28000 CE and
buy 28500 CE when Banknifty is at 27500
Dynamic Big Boy Iron Condor
 It is same as Big Boy Iron Condor, but Buying CE and PE for
protection should be done only after 3:15 pm
 In the morning, you need to exit your bought options as it
should not suffer time decay if there is no big gaps.
 In intraday, you need to manage as you manage short
strangles
 In short, day time it should be short strangle and during the
overnight it would be big boy Iron Condor
 Job goers can do Big Boy Iron Condor and full time trader
can do dynamic one.
 This Big Boy iron condors can be easily replaced with Big
Boy twister sister as well.
Rules for Big Boy IC/TS
 Only for weekly options
 More effective from Monday post lunch to till Wednesday
 Never do this strategy on Friday as time decay will not help
 No need to hedge your positions in expiry day as it will come
under expiry day.
 Make your position size in such a way that you do not loose
more than 3 months profit if there is a big gap.
 CE can be unhedged if your strike price higher than 500
points in Banknifty and 200 points in Nifty
PUT Calendar Spread
Definition: Selling PE option in current month and
buying the in same strike price in next month.
Strike Price: One strike price below market.
When: When marker is slightly bullish.
Target: When market view changes to bearish.
Volume: 10%
Adjustment: Keep rolling short PE if market goes up.
Add call ratio spread if market comes down.
Duration: below 20 days to expiration
Example: market is at 10000. Sell 10000 PE in current
month and buy 10000 PE in next month
Managing Put Calendar Spread
 If market moves up violently
 Roll up short PE up to 2 times
 If market moves down
 Sell and additional CE. You can also roll down sold CE.
 You can start creating more PCS if market goes up
 Make it diagonal if you are bullish so that you can
avoid one role up.
Managing PCS (Example)
 Ex: Sell 10500 in current month & Buy in next
month.
 If market moves up
a. Book profit 10500 PE in current month & sell 10600 PE
 If market moves down
 Sell CEs to match with excess premium of 10500 PE.
Assume that you sold 10500 for 50, right now it is 80. Sell
CE which has 30 premium in current month.
 Manage the positions till your SL hits
PUT Calendar (One Day before Expiry)
Definition: Selling PE option in current week and buying the
in below strike price in next week on Wednesday
Strike Price: One strike price below market.
When: When marker is slightly bullish and OI is high in PE
side
Target: When market view changes to bullish.
Volume: 20%
Adjustment: sell additional PE if market goes up. Sell CE if
market comes down.
Duration: 1 DTE
Example: market is at 26000. Sell 25900PE in current week and
buy 25700 PE in next week
Call Ratio Spread
Definition: Buy OTM call and sell more far OTM calls
to receive more credits
Strike Price: One strike price above market.
When: When marker is bearish.
Target: Credits received
Volume: 10%
Adjustment: Book profit if market comes down. Add
put calendar or long PE butterfly if market goes up.
Duration: below 10 days to expiration
Example: Market is at 10000. buy 10000 CE and sell
Intraday strategies
1. Earning Trade – Earning Month
2. Expiry Trade – Every Thursday
3. Strangle
4. Straddle
5. Straddle (Expiry)
6. Iron-fly
7. Call Ratio or Put Ratio
Expiry Trading
 Check how quantities (10K to me) can be sold in intraday.
 Divide it by 20. Approximately it is 2400 to me.
 Sell options slowly in both side one by one (I do 2400
quantities) and follow delta neutral hedging rule.
 Exploit weighted average price kicked in after 3.00 pm
 Sell options premium with the following values with time.
 Rs 5 at 9:15 am
 Rs 4 at 11 am
 Rs 3 at 12:30 pm
 Rs 2 at 2 pm
 Rs 1 at 3 pm
 Rs 0.50 at 3:12 pm.
Cardinal Rules for Expiry Trading
 Do not sell further CE if market goes up
 Do not sell further PE if market goes down.
 Never sell more than 4 times option than Opp0site.
 After 3 pm, have SL for all your positions.
 Avoid future.
 Better not to initiate trading after 3 pm initially.
 Always choose OTM options.
 Don’t play with ITM option. It will become illiquid near
expiry.
 Get more exposure and go far OTM to reduce the risk.
Exit rules for expiry trading
 Gamma period is a time where cheaper option can go ITM
and it can hurt you.
 There are two ways to find Gamma or trending signals
 ADX signals (80% of Gamma move will be captured)
 Price breaking day low/high
 Be alert once price crosses 100 WMA. Then the chance of
reversal/trending is very high. By this time you would have
sold options for cheaper price.
 Once you get trending signal, exit your positions slowly (25%
time at a time) in instalments.
 Exit all of your positions if you see 2% MTM loss.
 There is no point in trading more than 2% loss. Though you
get more profit after 2% MTM loss, it is highly dangerous
4 Exits for Expiry Trading
1. Premium higher than 20 should be exited and go to next
strike price
2. On ADX signal, respective CE or PE should be exited slowly
3. As soon as price breaks day high or low, respective CE or PE
should be exited.
4. Exit all of the positional if portfolio SL (2%) is hit
Time Decay Vs Gamma
 Generally it is advised not to enter in Gamma Period
 But time decay is faster in Gamma periods and the chance of
making money is higher. Risk can be easily managed.
 Though Gamma is risky one, it is very rare. Only 10% of the
time it will hurt you.
 Ways to handle Gamma
 Reduce the volume by half after 2:30 pm
 Exit if you are in super profit and premium comes down to 1
near ATM. This will reduce more volume.
 Respect trending signals and exit your positions
 Respect portfolio SL (2%)
 Use NEST software to exit your positions quickly irrespective of
how much quantities you have
 If you have more exposure, you can use it in opposite side to
some extend
Short Strangle (Intraday – Banknifty)
Definition: Selling CE /PE in OTM strike price
Target: Till we get trending signal from ADX
SL: Rs 25
Volume: 25%
Adjustment: DNH
Premium: As per the table given
When: ADX is coming down
Carry Forward: Make it Iron condor or twisted sister
Example: Sell 26000 PE & 27000 CE when Banknifty is at
26500
Short Straddle (Intraday – Banknifty)
Definition: Selling CE /PE in same ATM Strike Price
Target: Till we get next ADX trending signal
SL: 25 points
Volume: 25%
Adjustment: DNH, Convert in to strangles if needed.
When: ADX is coming down
Premium: ATM premiums
Carry Forward: You can convert into Iron-Fly
Example: Sell 26500 PE & CE when Banknifty is at 26500
Adjustment in straddles in intraday
 Book profit if market stays in range-bound
 Make it Iron-fly if you are in profit in expiry day
 Sell it in opposite side if market moves in a direction
 If it comes back to straddles
 Book profit in straddles
 Make it strangles by selling in opposite side

 Make condor if you want to carry forward your


positions
 If it does not come back, keep selling in opposite till SL
hits
Ratio Spread(Intraday – Banknifty -
Expiry)
Definition: Buy ATM or near OTM option and sell multiple far
OTM options
When: OTM option (Rs 6-10) has more than 30L OI. Near
OTM option may have premium 20-30.
Time: After 1:30 pm
Target: Leave to expiry
SL: Have SL 30 for OTM options
Volume: 25%
Adjustment: DNH, Convert into double ratio and sell in
opposite side
Example: Market is at 28100. Buy 28200 CE at 25 and sell 28300
CE at 8 with ratio 1:8 at 2:30 pm
Trading Goal

 Overall Goal – 3% per Month


 Positional – 1 per Month
 Intraday – 2% per Month
 Intraday (0.50 % per Week)
Notional Value
 The total contract value of naked sold option without leverage.
 Example:
 You have 10L capital
 You sold 10 PE Banknifty options
 1 Banknifty option notional value is around 10L
 Hence notional value of your positions 1 crore
 It is 10X notional value
 If there is a 10% gap down, your capital may be wiped out.
 Never ever allow your notional value more than 2.5 times
 Know your notional value before creating any positions
Cardinal Rules for strategies
 Always be protected in downside (PUT side).
 Make sure that you have 1 long PE for each short PE.
 Exception would be a short straddle because we collect high
premium.
 Be ready to accept 10% lower freeze.
 Create more broken wing butterfly.
 Deploy not more than 25% of folio in any strategy.
 Do call ratio spreads, but not put ratio spread. Instead make it put
credit spread or PUT calendar spread.
 Don’t use more 10% volume in strange/straddle for positional.
Instead make it, Iron condor or twister sister
 Never do lizards as downside is not protected
Risk Management
 Have Portfolio SL (2%)
 Diversify positions
 Generally don’t have much position during
weekend
 Don’t trade when there is a mega event
 Respect possible black swan event
 Concentrate on less premium
Trading Psychology
 Arrogance once profit is made
 Scan and Repair
 Reset your brain and do unlearn
 Draw Blueprint and Flow chart for your positions
 Draw Candle stick pattern for your brain
 Program your brain to get more of Dogis ☺
 Understand your divergence periods
 Be warrior to fight with market till your SL hits.
 Understand your Volume and Money Power
 Self Reflection