NK SIR CLASS 7

(24-08-2021)

TOPICS

• OPTION BEHAVIOUR
• HOW TO TRADE OPTION WITH HEDGE
• CALCULATION OF OPTIONS
• ZERODHA INDICATOR
• EXPIRY DAY TRADE
• RESULT DAY TRADE

Options work in correlation to the price of future. Only on expiry day after 12 pm Options starts adjusting according to spot. Even in Index
Weekly expiry Options starts corelating with Spot after 12 pm on expiry day.

Future Price is derived from Spot and that is why future is a derivative of Spot. Option is a Premium of the derivative and thus there is no price
in Option – Option Only has premium which composes of Hawa (Extrinsic Value) and Chips (Intrinsic Value)

BHAW BHAGWAN CHE…. we know that … But Today we learnt that there is no BHAW in OPTIONS

Option only has a premium. Option can have any of the three combinations in its premium:

• Only Hawa : All OTM OPTIONS

• Only Chips : Deep ITM OPTIONS
• Both Chips and Hawa : ITM OPTIONS

ROLE OF VIX: Option is mostly affected by the VIX, even more than the price of future. We have to kill the volatility of option – price will give
us the profit automatically.

Vineet Jain
TYPES OF OPTIONS
ITM | ATM | OTM

ITM:
In Call All Option Strikes Below Future price are ITM CALL OPTION and in Put All Option Strikes Above the Future Price is ITM PUT OPTION It
can have chips and hawa both Or It can have only Chips.
Jaise Jaise ITM Options price strike se far hote jata hai usme hawa kam hoti jati hai and chips badti jati hai and ek aysa time ata hai jab usme
sirf chips hote hai and that is the time such ITM strike Option becomes equal to Future. Such Options become sub-ordinate of futures. This is
the time when buying such Options is 100% better that future due to 3 benefits:

• Margin Benefit: For Buying Nifty Future, Margin required is 1 lac and gives M-to-M risk but to buy a Deep ITM Option Cost will be
Premium* 50 which will be very less and the risk is only confined to the premium paid.
• GAP up/down Risk Control: GAP up/down movement will give big loss in future but option will give much less loss as it’s Delta is less
than 1.
• Better Risk control in case of extreme movement: Suppose there is a big one-sided movement then future will give absolute M to M
loss but Options will still hold some value as expiry is far or will only loose its entire premium. Suppose Deep ITM of 700 Points far ITM
Call of Banknifty is bought at 700 rupees and Banknifty falls by 1000 points after that the in future the loss will be 1000 rupees but in
options one can lose maximum 700 rupees. So, such options give us the option to earn unlimited profits with limited risk

ATM:
It has Maximum Hawa

OTM:
It has only Hawa. Further you go the amount of hawa goes down, thus the risk goes down in far OTM Calls and risk is more in near OTM Calls.
When someone sells the OTM Call then your actual loss will happen only when price of future crosses the strike price plus the premium at
which it is sold. It may show loss even before the future price crosses this level but it is only notional loss.

Vineet Jain
When to Sell Which Option:

One should sell Current Week Options only on Friday, Wednesday and Thursday. On Monday and Tuesday, you should sell next week’s
Options. Reason behind it is that on these days you will get maximum hawa in these Options.

Which Option to Buy:

Always remember that ITM Options will give maximum return price wise but OTM options will always give maximum return percentage wise.
So, if on technical indicator you can see trend very clearly then always BUY OTM CALL and not ITM CALL as it will give better return.
E.g., In ITM you may buy at Rs 500 and if the future goes up by 100 points you may get 100 rupees as profit but if you buy OTM of the same
instrument at Rs 10 and it goes to 30 then you make more money in OTM Option.

• Clear trend on Technicals Like: BBTRAP, Killer Wave, Bollinger Band Blast etc.
• Kitna OTM ko Buy karna hai: Banknifty me 200 to 300 points even 400 points – it depends how far is expiry.
• Big and Small Spread: Bigger the Gap between buying strike and selling strike - bigger will be the risk and bigger will be the profit and
similarly buying a strike and selling just one strike above option will limit our losses to minimum but will also give us a very small profit.
(Refer Max profit and max loss calculation to determine your trading strikes) – So, if you have clear trend then make a big spread and if
you have a unclear trend or you r feeling risk is too high then make a small spread.

Very Near to expiry : Buy ITM Options only

Few days from Expiry : Buy OTM Options if clear trend is shown on technical

Always use hedge like simple spread in both the cases

Vineet Jain
HEDGING
Nature of Options is very Dynamic as it changes itself very fast.
Option Buying means Limited Risk Un-limited reward.
Options Selling means Limited reward and unlimited risk.

Hedging gives us the power to reduce the risk even further make it static to any changes in the price of future.

SIMPLE HEDGE:

Spread: When we buy an option and sell another option then we change the Dynamic Nature of Option for your loss. Our Risk becomes Static
as we cannot get more than a stipulated loss which is calculated as follows:

HOW TO CALCULATE

For Call Spread:

Maximum Loss: Premium paid to Buy a Call – Premium Received from selling A Call
Maximum Profit: This also limits our profit from Options: (Strike at which Option is sold + Its premium) – (Strike at which Option is bought + its
premium)

For Put Spread:

Maximum Loss: Premium paid to Buy a Put – Premium Received from selling a Put
Maximum Profit: This also limits our profit from Options: (Strike at which Option is bought - Its premium) – (Strike at which Option is sold - its
premium)

One must always be happy and book their profits when we receive 50% to 60% of the maximum profit from a spread trade.

Vineet Jain
How to create a spread

• For Long Trade: Buy a Call option and sell a further away call option.
• For Short Trade: Buy a Put option and sell a further away Put option.
• Bigger the Gap between buying strike and selling strike - bigger will be the risk and bigger will be the profit and similarly buying a strike
and selling just one strike above option will limit our losses to minimum but will also give us a very small profit. (Refer Max profit and
max loss calculation to determine your trading strikes)
• Selection of strike depends upon the number of days until expiry and your conviction on the technical pattern
• Entry and Exit must be done together
• Always use Basket order for Indexes and never use basket for stock options.
• Do not try to create a spread by selling first and buying otm option.
• Trade may not show profit instantly but during the day the trade must start to show profit otherwise we will use counter strategy
discussed below.

What Happens when market does not go in our direction after creating a spread

In this case sell an additional lot of Option sold earlier. This will require additional margin (so keep that margin always in account when you
make a spread) and this will almost give you 70% to 80% safety and sometimes even 100% safety from loss. E.g. If a call option of Rs 200 is
bought and a OTM call of Rs 90 is sold and now if the market starts going down or falls below 5 sma or VWAP then sell additional lot of the
OTM Call which may now be at 60 or 70. So when we created the spread the risk was Rs 110 but now the risk would be 200-90+60= Rs 50 only.

• But if the market again turns and starts going up that is if price closes above VWAP or 5 SMA then wait for the entire position to
breakeven or even exit with a minor loss.
• If the market goes further down only, then you may gradually book your position from the OTM Option sold and sell a nearer OTM
option to gain from this spread strategy. The entire energy will be spent in how to safeguard our premium paid for buying the option.
• Again, there may be a situation when after falling price seems to turn back, in this case we can square off the Short position and stay in
the long position.

Star Mark: If there is a one-sided movement from Friday to Tuesday then there is a sharp movement in opposite direction either on
Wednesday or Thursday, So you can use this movement to gain from the long position(as per the above example)

Vineet Jain
ZERODHA INDICATOR
On EXPIRY DAY WE USE IT
• Look for a band blast on 5 min chart in Nifty and Banknifty
• Look for an option which was trading at very low price and has suddenly started moving and Zerodha will lock that option and now let
you buy it at any cost, even market orders will be blocked on these strikes.
• In such a scenario Buy the same strike for next week.
• Whenever such options run after going up substantially, they come back to their VWAP very quickly and again go up. This is the golden
time to buy these options as now when they go up, they will break the previous high also. Potential of this trade is to give 100 % or
more return on a single day.

The Zerodha indicator gives us a clear picture of the TREND

Use the new margin rule for your advantage on expiry day

There will be a strike price – OTM Strike in the direction of the market which will be trading at 1 rupee for at least 2 hours in expiry day. You
can buy that option as its premium will not go down as now people buy these options to lower their margin on short trades. During the day
you will see you will get a chance to sell it at 2 to 4 rupees which will give you 200 to 400% return easily.

Use the Result announcement of companies

If the company will come out with its result tomorrow and today it is up 5% or more then you can be rest assured that tomorrow after the
result the price will come down even if the result is good and similarly if today the price is down 5% or more and tomorrow the company is
coming up with results then you will see a sudden jump in prices after the result even if the result is poor.

So how to trade this:

Buy far OTM Option in your desired direction - why? Because if the mkt goes in our favor then we will get percentage wise return but if it fails
then we will suffer only price wise loss.

BAKI TO SAB MOH MAYA HI HAIN…….!!

Vineet Jain