OPTION SELLING

Price Action Based Option Selling

Just like option buyers, option sellers engage in trading breakouts and
breakdowns. What differs is the approach; instead of buying Call
options upon breakouts, they prefer to sell Put options. While buyers
need higher delta, IV spikes and gamma spikes for high returns,
sellers prioritise Theta decay.
Here, if the underlying asset doesn’t move favourably after the
breakout, sellers can capitalise on the profit due to theta decay. If
the breakout is strong, the price of the Put option will fall due to
lower demand.
 Directional Trading
Directional trading as a writer involves selling options to profit
from a predicted price movement of an asset. If you're bullish,
you sell puts; if bearish, you sell calls. You receive a premium
upfront (credit) but face limited profit and potentially
significant losses if the market moves against your prediction.
Successful execution requires accurate analysis and risk
management.
 Range Trading
When an underlying asset becomes range-bound, an option buyer,
who wants to profit from the higher volatility in the underlying asset,
loses money. An option seller, on the other hand, seizes the opportunity
by deploying a strangle or an iron condor strategy. They patiently wait
for the option premiums to decay. As we have previously understood,
option prices fall as the expiry comes closer. A further decrease takes
place when there is no movement in the underlying asset, which is an
advantage for an option seller.
 Support And Resistance
We have learnt what support and resistances are. Now, let's explore how an
option seller can trade using support and resistance. Say you observe a weekly
resistance in Nifty 50 at 19480 and a support at 19305. With this information,
you can create a strangle by selling 19500 CE and 19300 PE. If Nifty doesn’t
break either of the levels, you stand to make the highest profit.

You can also plan for directional trading, If Nifty approaches the 19480
resistance, you can consider selling a call option and anticipate the market to
fall from the resistance. Conversely, you can sell put options when the market
reaches the support level.
Let's say you're considering a bullish directional trade using option selling on the Nifty 50
index:
Bull Put Spread:
Current Nifty 50 Index Level: 19,000 points
View: You believe the Nifty 50 index will rise or at least stay steady.

Strategy
Sell Put Option: You sell a put option with a strike price of 18,800 points. This is an
"out-of-the-money" put option since the strike price is lower than the current index level.
Buy Protective Put: To limit your potential losses, you simultaneously buy a put option with
a strike price of 18,700 points.

Outcome:
If the Nifty 50 index rises or remains above 18,800 points by expiration, both put options
will expire worthless, and you keep the premium received from selling the put option.
If the Nifty 50 index falls below 18,800 points, the put option you sold might get
exercised, but your potential loss is limited by the put option you bought.
GREEK BASED
TRADING
 Option Selling Based On Implied
Volatility
One of the most commonly traded option selling strategies based on IV is
explained below:
When the market opens, options exhibit higher IV. As we have learned, IV has a
tendency to revert to its mean value. Recognizing this opportunity, traders
execute multi-leg straddles. They accomplish this by selling call and put options
for three consecutive strike prices, thereby forming a multi-leg straddle. As the
IV cools down, the option prices decrease, enabling sellers to realize substantial
profits across all legs. Let's consider an example: Assuming Nifty is trading at
19500 at 9:15 am, the trader will sell 19500 CE & PE, 19450 CE & PE, and
19550 CE & PE. As the IV cools down, option prices will diminish, leading
the trader to earn profits on all six legs. It's important to close this
trade within the first 30 minutes or sooner if the IV approaches the
historical IV.
 Delta Neutral Strategy
A delta-neutral strategy is an options trading strategy that seeks to create a position
with a delta value of zero or as close to zero as possible. The delta of an option is a
measure of its sensitivity to changes in the price of the underlying asset. By
achieving delta neutrality, traders aim to reduce directional risk and profit from other
factors such as volatility or time decay.

Understanding Delta:
Delta is a value between 1 and 0 for call options and between -1 and 0 for put
options.
Positive delta indicates that the option price will increase with an increase in the
underlying asset's price.
Negative delta indicates that the option price will decrease with an increase
in the underlying asset's price.
These strategies focus on profiting from other factors like changes in
volatility (vega) or the passage of time (theta).

Examples of Delta-Neutral Strategies:

Short Straddle: Involves selling a call and a put option at the same strike
price and expiration. This creates a delta-neutral position that profits when
the underlying asset doesn’t move in either direction. To put it in simple
words, it will profit from a sideways market.

Iron Condor: Combines a bear call spread and a bull put spread. This
strategy aims to profit from low volatility and minimal price
movement.
 Vega Positive Trades
A vega positive trade is an options trading strategy that aims to profit from an increase in
implied volatility. Implied volatility reflects the market's expectation of how much an
underlying asset's price will fluctuate in the future. When you have a vega positive trade, it
means that the value of your position increases when implied volatility goes up and decreases
when implied volatility goes down.

Calendar Spread:
A calendar spread, also known as a time spread or horizontal spread, is an options trading
strategy that involves buying and selling two options with the same strike price but different
expiration dates. The primary goal of a calendar spread is to profit from the differing rates of
time decay (theta) between the two options.
In a calendar spread:
● You simultaneously buy an option with a longer expiration date (typically
referred to as the "long" leg).
● You sell an option with a shorter expiration date (referred to as the "short"
leg).
 Option Selling Using Open Interest
Option selling using open interest involves analyzing the open interest data of
options contracts to make informed decisions about selling options. Open interest is
the total number of outstanding options contracts for a specific strike price and
expiration date.

Here's how option selling using open interest works:

Identifying Strong Levels: Traders look at open interest to identify strike prices
where a significant number of options contracts have been traded and are still
open. This indicates strong market interest at those levels.

Support and Resistance: High open interest at certain strike prices can act
as support (for calls) or resistance (for puts) levels. Traders might sell
options at these levels, anticipating the price to stay within that
range.
Once you have identified the levels of high interest, you can construct a
strategy aligned with your risk appetite. Now, let's consider a scenario:
If you are an aggressive trader, you would await the market's
approach to one of these levels before commencing the sale of options.
In this case, rather than adopting a hedged approach, you might opt
to sell naked options. Conversely, if you are a risk-averse trader, you
would simply sell the option with the highest Open Interest (by creating
a strangle or an iron condor).
 Psychology Of Option Sellers
● Risk Tolerance: Option sellers need a higher risk tolerance because their
potential losses can exceed their initial premiums. They must be
comfortable with the possibility of significant market moves against their
positions.

● Conservative Outlook: Option sellers often have a more conservative

market outlook. They might be more focused on capital preservation and
steady income rather than aggressive capital growth.

● Control and Patience: Option sellers value control over their trades
and patience in waiting for options to expire. They aim to let time
decay work in their favor to maximize profitability.
● Comfort with Limited Gain: Sellers are content with limited profit
potential (premium received) compared to buyers who seek potentially
unlimited gains. They prioritize consistent returns over hitting big wins.

● Emotion Management: Option selling requires emotional resilience. Sellers

must remain calm during market fluctuations and not let fear or greed drive
their decisions.

● Trade Discipline: Following a well-defined strategy and sticking to the plan is

crucial. This includes entry and exit criteria, position sizing, and risk
management rules.