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Option Writing
Option Writing
By Ronak Unadkat
Myth and Truth of market
• Myth: To make money in the stock market, you must know what the
market is going to do.
• Truth: You must know what you’re going to do before the market
does what it does.
Trading Capital Management
Trading Capital Management
• If you are trading with more than 10 lacs than try to use collateral
fund.
• Trading income should be used to build a long term wealth not to be
used for speculation.
• For Overnight, it is rule from exchange that we have to keep 50%
capital in cash. So, This is the thing which may need to consider.
• Don’t miss a single chance to generate a return on your capital.
Topic covered
• Basic Option Greek
• India Vix
• ADX and DMI to predict trend
• How to read option chain
• Define direction based on option chain
• Max Pain & PCR
• Future trading
• Stock options
• When not to trade ( Time to staying away from market )
• Factor needs to be consider for Intraday
• Factor needs to be consider for positional trade
Topic covered
• Strangle Management
• Straddle management
• iron conder
• Credit Spread
• Calendar Spread
• When to buy option and what factor needs to be consider for buying options
• Event trading ( How to trade on event day like election, Budget, surgical strike..
Etc… )
• Expiry trading
• how to define stop loss
Basic Option Greek
Basic Option Greeks
• Delta – Measures the rate of change of options premium based on
the directional movement of the underlying
• Gamma – Rate of change of delta itself
• Vega – Rate of change of premium based on change in volatility
• Theta – Measures the impact on premium based on time left for
expiry
Delta Structure
Option Type Approx Delta value (CE) Approx Delta value (PE)
Deep ITM Between + 0.8 to + 1 Between – 0.8 to – 1
Slightly ITM Between + 0.6 to + 1 Between – 0.6 to – 1
ATM Between + 0.45 to + 0.55 Between – 0.45 to – 0.55
Slightly OTM Between + 0.45 to + 0.3 Between – 0.45 to -0.3
Deep OTM Between + 0.3 to + 0 Between – 0.3 to – 0
Basic Option Greeks
Basic Option Greeks
India Vix
India Vix
• Downward Trend.
ADX and DMI Indicator
Upward Trend.
ADX and DMI Indicator
• Reversal trend
ADX and DMI Indicator
• Check OI for both call and put near to current spot price and then move
towards looking OI for both OTM call and put.
• If you want to take position for Intraday that it is equally important to
check change in OI. Even, It is more important than OI also for intraday.
• Look at highest open interest and changes in Open interest on both
side.
• Look at the building position for future. Sometime call open interest is
high but still market is getting increased the reason behind there are
big hedge funds long on future and writing call so we need to just write
put.
How to read option chain
How to read option chain
Define direction based on option chain
Define direction based on option chain
• When to create bullish position
• When Price increase with heavy call unwinding
• When Price increase with increasing open interest on PUT side
• But, We also need to look that future open interest should be increased with
increasing price.
• There is a trap sometimes for option writer that put open interest is
increasing so we start writing PUT but at the same time price is not increasing
much and future open interest is increasing so big hedge manger is writing a
put and shorting a future so actually, they are on short side so in this case try
to write far out of the money call.
Define direction based on option chain
• When to create bearish position
• When Price decrease with heavy put unwinding
• When Price decrease with increasing open interest on CALL side
• But, We also need to look that future open interest should be increased with
decreasing price.
• There is a trap sometimes for option writer that call open interest is
increasing so we start writing CALL but at the same time price is not
decreasing much and future open interest is increasing so big hedge manger
is writing a call and buying a future so actually, they are on buy side so in this
case try to write far out of the money put.
Define direction based on option chain
• When to create range bound position with moderately bullish or
bearish
• When There is a no signal for call/put unwinding than only start look for
position of non directional
• When open interest is increasing on both side with almost equal ratio( we can
say 1:1.25 )
• Future open interest is not getting increased much.
Define direction based on option chain
• How to predict trend reversal
• When price is increasing and call unwinding is not happening much
and also call writing getting increased on far OTM call than it’s clear
sign of that market may start going down any time.
• When price is decreasing and put unwinding is not happening much
and also PUT writing getting increased on far OTM PUT than it’s clear
sign of that market may start going up any time.
• Don’t start taking huge positon based on prediction of trend reversal.
Always start building position slowly slowly.
Max Pain and PCR
Max Pain and PCR
• Max pain is a point where option buyer lose maximum money
• Max pain is mainly used in expiry
• Max pain is helpful for writing a call or put which has maximum
chance to lose its maximum value on the day of exxpiry
Max Pain and PCR
Max Pain and PCR
• Put Call Ratio helps us identify extreme bullishness or bearishness in
the market
• PCR is normally used to predication reversal.
• if the PCR indicates extreme bearishness, then we expect the market
to reverse so the trader turns bullish.
• if PCR indicates extreme bullishness so traders expect markets to
reverse and decline.
• PCR can be calculated by dividing total open interest of Puts by the
total open interest of the Calls.
Max Pain and PCR
• If the PCR value is above 1 then it indicates that there are more Puts
being bought compared to Calls. This suggests that the markets have
turned extremely bearish and therefore sort of oversold. One can look
for reversals and expect the markets to go up.
• Low PCR values such as 0.5 and below indicates that there are more
calls being bought compared to puts. This indicates that the markets
have turned extremely bullish and therefore sort of overbought. Once
can look for reversals and expect the markets to go down.
• All values between 0.5 and 1 can be attributed to regular trading
activity and can be ignored.
Max Pain and PCR
Future trading
Future trading
• I am not doing future trading most of the time. Some reason like
stamp duty high, Margin high..
• Option selling has edge on future for Theta decay
• It’s ok sometimes if you are super bearish than you can go shorting
future but don’t go long if you are super bullish.
• If you go long in future than you are paying premium to future seller.
Stock options
Stock options
• I normally trade only in Index because of low risk and high liquidity.
• Stock can go to upper circuit and lower circuit based on some news or
quarterly result, etc..
• You can’t make adjustment if stock comes into F&O ban
• It’s very rare possibility for index to go into upper circuit. Index will
never go into F&O ban so Index is much safer than stock.
When not to trade ( Time to staying away from market )
When not to trade ( Time to staying away from market )