Generally option buying is not encouraged. Can some one who has made money in option buying share their strategies ? Thanks in advance.
SN
1 Like
what does an option buyer do when the india vix is at low levels like 16-18?
does option selling become the only possible thing then?
4 Likes
This is with Rs.640000 capital and the kind of returns we see here is made possible by option buying alone. The greatest benefit of option buying is risk management. Theoretical risk in trading is really high. When one does positional trading, market may have a significant gap open against our position. Even intraday a fat finger error is enough to move the market significantly against our position. By buying options, we have a guaranteed risk per trade limited to premium amount no matter what market does.
In addition there are other benefits like reduced charges, zero leverage (for NRML positions), lower capital requirement etc. Time value degradation gets more or less balanced by downside limitation. If we compare our backtester results in FY 2020-21 with live trading results then the trading slippage + option time value degradation contributes to around 8 points per trade leg. This is not much to loose when one gets superior benefits like the ones pointed above.
2 Likes
1 thing I’ve read, buying would give 9 loss and 1 profit which would cover the losses, while selling would give 9 profits and 1 loss which would eradicate the profits.
Meaning low returns in selling and high returns in buying.
But then buying opportunities are more frequent in high vix, but most times vix is low. What to do then? Capital needed is high
Theories do change with time. That’s what I can tell you.
Markets tend to trend around 33% of the time. So if we have bought options and if it trends we are going to make money.
The total option time value is from contract start to expiry. If one is buying and holding for a short period like 5 days on an average (like I do) not much is lost on that time value. Also ITM options like the ones I trade have lower time value relative to ATM options.
I also don’t look at the option greeks, vix etc. My strategy is just to buy a ITM option when my trading system gives a signal around a certain daily price point in Nifty spot. Exit and buy a new ITM option when there is a reverse signal. So its pretty simple in here the way I look at it.
1 Like
True, ITM and ATM behave differently wrt theta.
And buying as well as selling p&l would change similarly… Isn’t it
Ya that’s right…
At low vix, low premiums and hence sellers also make or lose commensurate to buyers
From vix angle yes.
if you buying which expiry you prefer?
I trade using weekly options…So expiry is on Thursday of every week unless it is a holiday. Weekly options move more when there is a trend and that’s y I prefer it compared to monthly options.
1 Like
Are you buying itm , atm options like straddle or directional ?
If I am long on Nifty I buy ITM call. If I am short on nifty I buy ITM put. That’s it.
1 Like