Please guide me on which option strike I should select. Assume my strategy is similar to the 15-minute ORB. My long entry today is at 26000, and the stop loss is 25900 on the Nifty spot chart. If I am going long using short options, should I short the 26000 PE or the 25900 PE?
You can short the 25900 PE
Here’s a breakdown of why and how this aligns with your strategy:
Strategy Alignment: Shorting the 25900 PE
- Mimicking the Stop Loss: The primary goal of using a short put in place of a physical spot position with an SL is to manage the risk at a specific price point. Your spot SL is 25,900. By shorting the 25900 PE, this option becomes In-The-Money (ITM) only when the Nifty spot falls below 25,900.
- Risk Profile: When you short the 25900 PE, your maximum potential loss begins to accrue significantly if the Nifty falls below 25,900, which aligns with your predefined risk tolerance level (your stop loss). If the Nifty stays above 25,900, the put option is likely to expire worthless (or lose most of its value), allowing you to capture the entire premium as profit.
- 15-Minute ORB Context: The Opening Range Breakout (ORB) strategy involves setting an entry and a stop loss based on the first 15 minutes of trading. The principles of risk management apply equally when using options. The stop loss level (25,900) determines the appropriate strike for managing risk.
Why Not the 26000 PE?
Shorting the 26000 PE (At-The-Money or slightly In-The-Money initially, since your entry is 26000) would expose you to a higher risk profile from the moment you enter the trade. The premium would be higher, but you would start incurring significant notional losses much sooner as the market moves only slightly against you, before your intended 25,900 stop loss level is reached in the spot market. This does not match your specified stop loss of 25,900
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This. Since you SL is this value. Once your strike gets ITM, delta is higher.
Also it give you some time for decay in case you get the direction wrong.
Also, I would suggest your entry exit and SL, should be on the basis of future contracts and not spot. But over a numerous trades this will nullify and shouldn’t make much difference.
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thanks @Abhijit and @Jason_Castelino … 1 more question pls.
Again considering the same situation where I’m trading an ORB intraday system, using analysis on spot chart, but execution using short options. What are some intricacies I should be aware of?
One that I know is that on expiry day I should avoid shorting options because of high gamma risk.
I’m confused about IV. People say that when IV percentile is low, I shouldn’t short options. In that case, should I switch to buying options instead?
Are there any other important intricacies that you’d like to make me aware about? Thanks,
I am more of a contra player taking Random guesses without using TA. I rely on probability and law of averages. Not sure if i am the right person to guide you.
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Do you trade in stocks options or index ?
index, nifty
So if you used stops, you would put the stop based on future price and not option ?
Then you cannot send to exchange. Or do you estimate what the option value should be at your future stop and send that to exchange ?
Just curious. I have some future systems running on 1 lot for tp, options will cost less but i havent looked at it so far due to complexity and since its not scaled and not yet in priority.
I have no stops too. I will keep fighting my positions until i feel it’s going beyond my control. I have a fixed loss in mind, where i close all positions. Happens very rarely.
Last happened on 7th April.
Also, if you wanna trigger options using future price, there is ATO.
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This will still have delay as order will be with Zerodha rather than NSE.
But likely better than keeping it on your own machine.
Will test and see in future. This or some sort of calculated value or just % of option price that many seem to use.
Less than sec.
And over a reasonable number of trades, it will get nullified since Market won’t always go against you in this 1sec.
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I have experience with similar thing via Interactive brokers looong ago - on Index futures with stop logic held by broker.
Exit order Slippages were pretty high (6x vs my current test run where orders go to exchange), it did not even out. Entry orders slippage are more comparable as they were executed in similar way without broker.
And IB is pretty good. Did not see delay, much less than a second. They dont have many clients, and infra should be very good.
With directional systems, maybe it wont get evened out. Sample size is still smallish but difference seems large enough to be reasonably clear.
Anyway, will see. Was also curious whether you used stop at all since you trade very differently.
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99% of the time I don’t.
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