Ask me anything about options

#1

Hello,

My name is Abid, and I was an Options Trader practically all my working life. I have traded options equity, FX and Interest Rate options with ICICI Bank, IIFL etc. I studied Computer Science from NIT, Calicut, and PGDM from IIMA.

Currently I am building Sensibull (sensibull.com), which aims to take options trading to everyone. I strongly believe that with proper risk management and discipline, anyone can trade options!

I largely (rightly or wrongly) believe I know a thing or two about option math and practice. Feel free to ask me anything :slight_smile:

Note: The thread will remain open until Thursday.

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Continuing the discussion from [Ask me anything about options](https://tradingqna.com/t/ask-me-anything-about-options/26712):
pinned globally #2
#3

Nice to have an Options expert in this forum. Let me then take this opportunity to ask a few questions that I always wanted to ask an experienced Options trader of the Indian markets.

Here is my question: In this current environment of persistent low VIX, option premiums in the Nifty Option segment has remained low for many months now and though VIX does have mean reverting nature, it is still languishing below 13 for quite some time now (majority of time) and it’s very difficult to say when VIX will rise again given this persistent bull market. In such a scenario, purely hedged Theta dependent strategies have somewhat become less profitable and more vulnerable to Delta. Given your experience, I am sure you have seen many such bull markets and similar environments, therefore, what strategies do you think will work well if one wishes to play Delta neutral strategies(in Nifty) to avoid Delta risk?

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#4

Hi Abid,

Thanks for the AMA. I watched your webinar on Options 101, and it was very detailed and informative, I really liked the second part of the series and I’m looking forward to more from the series in future.

Here are my questions
I have traded in Index options before and made decent profits before losing it all due to not being able to make decisions on time and not being disciplined. All my decisions were based on the futures movement with some technical analysis, I am a full time working professional and I now understand how much attention is required while trading in intraday or derivatives market, my question to you is,

  1. Do you recommend options trading for someone like me ? If yes, what should be my strategy?

  2. If I were to start over again, what do you suggest is the best way to learn about options and how to I pick my first few trades?

  3. What is one time I should know about Options trading that I should avoid and one thing which I should absolutely know?

  4. How much of options movement is driven by Institutional Investors(Domestic and Foreign) ? And what part of their portfolio is in derivatives market?

  5. And lastly, you being a successful options trader for so many years, what is your go to strategy when it comes to options considering all external factors are equal?

Also, would you be interested in having live trading session any time in future?

Thanks

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#5

Hi @Abid_Hassan thank you for the AMA. I’ve never traded in my life let alone options. But i have seen enough newbies and beginners who have lost their savings lured into the markets by the promise of quick bucks. Given the fact that 80%+ volumes on the Indian exchanges are derivatives.

  1. What would be your advice to beginners?
  2. Since there is no way beginners will be discouraged, what would be the checks and balances you would like to see put in place that would to some extent reduce the risk for beginners?
  3. Would you be kind enough shares some experiences tat you have learnt through your career? Do’s and don’ts basically.
#7

what is OTM LEAPS Call?

#8

LEAPS are options having far away expiry dates. For example, if you go to the Nifty option chain page at NSE website, and click on the drop-down for the Expiry Date, you will see expiry dates that are far away in time. These are LEAPS (in the Indian context though). So OTM LEAPS Call is nothing but an Out-of-the-Money Call that has a far away expiry date.

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#9

Hi Abid,

Glad to have you as an expert.Your credentials are as good as it gets.

Can you please explain how does market making actually work for NSE ?

As a market maker of options, you need to provide liquidity? Say you are quoting a bid/ask on a strike and one of your quotes are taken by someone. What do you do next ? How do you ensure that once you have sold an option, you make money on that trade ? Please be very gentle with your exaplnation and be as detailed as your time allows. Would be immensely grateful.

Hopefull you will respond soon !

#10

Hi Abid,

Have few quries ,

  1. Whether you guys were able to take advantage of time decay in weekly options on intraday basis ? ( here Bank Nifty )
  2. time decay on weekly options on intraday basis is still not quite clear ( sometimes it deacys in the last 45mins and sometime not … sometimes it decays imediately within the first 10mins )
  3. How to manage the large size orders in options ( ex:- like if we want to initiate 50 lots in bank nifty strangle )
#11

hello sir, is hedging the only purpose of options ?? if so, then why dont retail investors get fair chance to hedge their small quantities. lot sizes are too much.

#12

Hello @Abid_Hassan Sir,
Watched your webinars.
They are excellent. Thanks a lot.
Please solve my few basic questions.

  1. Are there any powerful yet completely free FnO strategy calculators available? Zerodha has none. Upstox has very basic one. We need a strategy builder that use a live or EOD data like option chain, Greeks, volatility, etc.
  2. I have read about constant profit strategy.
    I don’t know exactly . Calendar spread or something. It’s like I buy near month future / call option and sell next month future or Call option . Can you explain?
#13

Hey @vicky_kothari,

Hedging is not the only purpose of options. In fact the largest amount of market volumes in most markets usually comes from speculators and not hedgers. And yes, as you pointed out, the high lot sizes do not help in hedging small quantities of stocks.

If you ask me, if you do it in a disciplined, risk managed approach, options are a great way to speculate and create profits.

1 Like
#14

Thanks @maddy_Des,

Will make more of those Webinars.

  1. Yes! We are building one! And that will be soon available on sensibull.com and you can access it through Kite. GIve us a couple of months? :slight_smile:

If you have feature requests for that, now is the time! I’ll put you on the early bird list

  1. Not sure what the question is
#15

Edited the question sir. Plz see again

#16

Hello @shivamulky
Thanks for the feedback on the Webinar

Here are my 2 cents on your questions
Do you recommend options trading for someone like me ? If yes, what should be my strategy?
1) Do Trading which wont take your time
You are a working professional. You dont have the time to monitor the market. It will affect your work performance, mental bandwidth, and peace of mind. Trust me, I hate looking at markets all the time. I hate it even now. But when you are trading, it comes as something we cannot control.

2) Do Trading Peace of mind
As the legendary @nithin says, “If you cannot sleep peacefully with a position open in the mind, then you are trading wrong. Scale down!” :slight_smile: And keep your losses limited

So let us combine 1&2. Example
You have a view NIFTY is not going to be above 10500 on Expiry
You sell a 10500 Call (27 Rs). To limit risk and gain peace of mind you need to buy a protection, say 10600 Call (11 Rs). This is a 10500-10600 Call Spread
You will need a margin of around 50 k for this.

Your max profit is 16*75 = 1200
Your max loss is (100-16)*75 = 6300
You will lose money only if NIFTY is above 10516 on expiry, a good 200 points away

On this trade, all you need to think is this:
In a week, you will gain 1200 max, and lose 6300 max.
After fitting this strategy in you can go to sleep till expiry. The 10600 call you bought acts like a stop loss :slight_smile:
If you make 1200, it is 24% return on 50k in 1 week, which I think is good.
You can make this more lucrative by doing 10400-10500, or a condor where you sell both 10200 Put (sell)-10100 Put (buy) spread and 10400 Call(Sell) 10500 Call (Buy)

If I were to start over again, what do you suggest is the best way to learn about options and how to I pick my first few trades?
0. Spend some time studying the market. Do your homework. Write somewhere down that “Tomorrow this is my trade, this is the entry, this is the exit, I will do no other trade”. And stick to it.

  1. Trade Small, and have a limit in your mind, something like you will not trade more than x lots at a time, on buy or sell side. Do this till you get some confidence back
  2. Always have stop losses. If you think you do not have the discipline to do that, buy OTM options which will cover your losses. This protection will cost you, but trust me, it is better than a blow up :slight_smile:
  3. Trade less. Lesser that even what you thought right now - You just need 2-3 great trades a month. No point having a trade all the time. Its is just like poker. Play very few hands, and play them well.
  4. Reset your mind. Take breaks, say a week every month should do
  5. Live life! Spend time with family. Travel. There are much better things to do in life than trade

What is one time I should know about Options trading that I should avoid and one thing which I should absolutely know?
Buying OTM options is always a bad idea in the long run. It is the way most people blow up their accounts :slight_smile:

On a serious note, passage of time is an inevitability. If you try to sell options more than buy options, in the long run, you stand to make money from Theta. The catch here is black swan movements, against which you need to get protection by buying OTM options which hedge your sell options

How much of options movement is driven by Institutional Investors(Domestic and Foreign) ? And what part of their portfolio is in derivatives market?
Very Large part is FII + DII.
What part of their portfolio is derivs is tricky. I would not know that. You can learn more bt Googling FII buy sell data. Sorry I am not being of help here

And lastly, you being a successful options trader for so many years, what is your go to strategy when it comes to options considering all external factors are equal?
Not sure about “successful option trader” :slight_smile:
That is more a function of so many things you cannot control. But yeah, I think I understand a little bit of technicality.

I do not really have a go to strategy. But this is what I think is the essence of what successful option trading is, in the long run

1. Change the fast gambling mentality to let’s get there steadily.
You are not in it for a 2-3 months. Trading is for the long run. The more you last, the more you will get better, and stand a chance to win. To give a ballpark number, if you gain 30% every year with minimal time and effort, that’s phenomenal

2. Trade less, and with better payoffs
You have to be very choosy about the trades you enter. There have to be many reasons why you will enter a trade. Never play a 50-50 trade. Trade 70-30 odds trades

3. Bet Size correctly
Enough said on this. Peace of mind matters

4. Trade with limited losses
Same as 3

5. Know the payoffs and take decisions with better expected payoffs
When you have options bought or sold it is important to know what will be the option value if underlying moves 5% in 4 days? Or what if the underlying is still tomorrow morning. How much will the option value decrease over the weekend, etc. Else you are doing it wrong

6. Bet against unlikely events more often, (Sell OTM) because in the long run that makes money

Be net option sellers than buyers more often, because in the long run that makes money

Also, would you be interested in having live trading session any time in future?

Well. I am working on a platform which hopefully is made for you. Let us make the platform trade live, yes :slight_smile:

4 Likes
#17

Hello @iSTFF

I love your handle :slight_smile:

Honestly, I have never seen a 13% NIFTY vol in my life! When I started, NIFTY vol was 16-21%. We used to sell 21 and buy 16. Life was easy! This is phenomenally low vol environment these days.

Systematic options trading involve selling more than buying. All my HFT/ Medium Term Trading friends vouch for this. And they are equally frustrated by low vols. Most of these folks are no longer selling options. They are sitting on the sidelines and watching. And IMHO, not having a position is a position. I would stay away too from selling options unless I have COMPELLING reasons to do so.

So may be, we should look at other delta neutral strategies such as relative value in F&O. Or look at other assets classes such as currencies.

3 Likes
#18

Hello @Sanket

What would be your advice to beginners?
Since there is no way beginners will be discouraged, what would be the checks and balances you would like to see put in place that would to some extent reduce the risk for beginners?
Would you be kind enough shares some experiences tat you have learnt through your career? Do’s and don’ts basically.

0. The only difference between good traders and bad traders is discipline and a plan. Have a plan. There is nothing more important.

  1. Trade your plan, plan your trade. Write down somewhere -" This is what I will do tomorrow. Buy at, Sell at, stoploss at." And do that ONLY. Do not have a single trade in your account which you did not think through the previous day
  2. You are trading for the long run. Say years. Do not attempt doubling up in 2 months. That will make you take reckless risks. Think more like 30% a year
  3. Trade very very less. 2-3 good trades a month is all you need. Be superchoosy and enter great trades at bargain prices.
  4. Trade with small bet sizes. Nothing is worth your peace of mind. And nothing is worse than looking at markets all the time. Do those trades which dont need monitoring
  5. Always have stop losses built in. If you don’t think you will hit stops because psychology, make sure you buy protection with options which act like stop losses. Say you shorted a 10400 Call, make sure you buy a 10500 Call
  6. Avoid buying OTM options with a lot of money. Most OTM options expire worthless. OTM options are unlikely to make you money. You should be betting against them than bet for them.
  7. In the long run, selling is a better idea than buying. And since it requires margin, it limits your trading. What I mean is, you can buy a lot of OTM options with 1 L capital and blow it all up. But you can only sell 2 options with that money, which helps as a protection

Will keep adding more :slight_smile:

6 Likes
#19

Hey @abbanerjee

I will try to be as detailed as I can. Please allow me till tomorrow :slight_smile:

#20

Thanks for replying Abid! Now I feel so much assured that I am not the only one who has been sulking because of this low Volatility level in Nifty :smile:

I am not familiar with “relative value in F&O” strategy that you have advised. Were you alluding to Dispersion trading strategy with the index and index components?

#21

Hi Abid,

I have been trying Options and i focus on banknifty weekly options. I keep looking at the prices of those 12 banks and try to see if i can make a pattern.

I have a few confusions -

a) I read everywhere that the value of an option is premium + the intrinsic value. Am i correct in guessing that the value of an option is always a computer generated value and the people quoting higher value to buy it does not affect the price (like how stocks work)? I mean, the value is 100% decided by the algorithm and the number of people tryng to buy it has no impact on it?

The reason i ask this is- i want to know if the volume for a particular strike price can have some effect in its price too.

b) How can i track the movement of institutional buyers to guess the trend? I mean, i read everywhere that big institutions short options and people like me who buy call/put should try to go in the opposite direction. So is it a good appraoch to see the OI and try to guess where the big investors have put their bet?

c) I keep looking at the prices and actions of top 3 banks (HDFC, ICICI and KOtak( as they constitute 75% of Bank Nifty, and formulate 10 minute a plan on the basis of this. I go in and come out in 10 mins. Is this a viable strategy? Although people talk about watching real time news and all- it does not help me to find the sudden peaks and drops on a normal day unless some big news are out like the quarterly results.

Thank you for your time.

Regards
Nirmal