It is no secret option sellers has a edge. But of course, for every option sold, there is a buyer. Now, I just want to know, who are these option buyers and why are they buying?
I can guess, some category of option buyers are:
1.) People who sell option, also buy to hedge position.
2.) Small new Retail traders with very less knowledge looking to get rich quick.
3.) Conservative Institutions that are looking to hedge their portfolio. (How often they do it?)
Who else?
Too many reasons. Some of them :
They are a necessary part of many strategies.
They are used to leg trades later to respond to change in greeks.
To defend strategies when the market moves against you.
To lower margin requirements on your next position(s)
To take a small hopium bet that market will overreact to certain upcoming news, if it happens… Stonks. If it doesn’t Meh.
To Square off previous positions.
I buy naked Nifty ITM weekly options as part of my trend following strategy. The advantages are
Limited risk - I won’t loose more than what I have paid no matter what happens in the market.
Unlimited profit - If market moves in my direction I need to be able to ride the trend as long as it stays and closer to 1:1 i.e spot move 1 point my position should also move close to 1 point.
Lower transaction cost - Much lower than futures (another instrument for riding trends in 1:1)
No leverage - Trade only with the money I have. No pledging or margin reliance. This means there is no margin shortfall penalties as well which option sellers need to be constantly aware of.
Low capital - Since the option premium in buying is much less compared to the margins required for selling the per trade exposure moneywise is much lower compared to selling and even hedged selling positions.
Simplicity - Its so easy to buy naked options in the direction of trend rather than devoting one self to all those complicated option selling strategies (which also involves buys still). When something is super simple it also becomes super easy to follow, which is a critical aspect of profitable trading.
how much capital you have for option buying i believe you are profitable? and tell how much % return you have made so far ?
For my current nifty naked option buying strategy I started with 1.9 Lakhs in 2017. Reinvested the profits back and moved to 17.1 Lakhs capital till Nov, 2021. Now added some extra capital and moved to 28.5 lakhs capital. Am in the 30% tax bracket and 30% of my trading profits go as taxes. So extra capital is added to boost my trading income. From 1 lot in 2017 to 15 lots now the journey has been nothing but a persistant discplined execution of my trading system.
My PNL from Zerodha for this strategy from 2017 - till date is given below.
It is a myth of sorts. Option buying is immensely profitable if done with purpose and with a plan. You will lose more often than you win; but you can still be hugely profitable.
Yeah, option buyers make money too. Thats why people buy options. I just want to understand, persona of those people. So just posted here.
Most people would say not to buy a naked option because of the time value decay. But they miss a point which is evident from my p&l shown above. I trade with a 47% accurate trend following system. When I win I do give away points due to time value decay. But when I loose I also gain points due to time value effect. Add to that the fact that market can gap up or down against my position. But whatever market does I am not going to loose more than the premium. As I loose more than I win and as am insured against gaps, the balance tilts in my favour.
I agree
I don’t agree with this statement fully. Option sellers have an edge (if they are following a well researched trading system, otherwise god help them), so do option buyers (same conditions apply).
There are experienced, profitable option buyers also in retail traders.
Option sellers have an edge because more often than not most options expire at 0. So the strike ratio will be higher but it is very difficult to get high risk reward ratios (RRR). They are trading off good RRR for good strike rate.
Option buyers don’t get awesome strike ratio (Mine is around 43%, I’m a full time intraday trader. I buy Nifty options only) but they get rewarded by good RRR (My average gain to average loss is around 2.1, the best RRR I have got is 11.55 on 31 Aug 20, 11700PE. It came after a drawdown of almost 20.8% (the biggest DD I have experienced till date)
This is a great discussion, my 2 cents:
I would say it depends on your trading style.
It’s about 2 things
sellers have an advantage in 1, buyers have an advantage in 2.
Sellers should be able to cut the losses as much as possible, and buyers have to run with the trend as much as possible
I am doing good with my intraday stocks trading thinking of moving to option but i am not jumping in to options because of lack of knowledge and experience. I know trend trading but is it enough to trade options?
There are several instruments. tools and strategies out there. Its up to us to use these according to our needs. For the trend following strategy am using naked option buying is absolutely fine. But whether option buying or selling will be useful for you would depend on your strategy metrics.
Most people wouldn’t advice naked option buying. But that is like saying
as per your experience which expiry one should choose when he is trading a trend following strategy in options ,Not on intraday but on positional trading perspective
I trade with nearest expiry ITM weekly option close to the spot price.
my only problem with Option buying the the time decay. not only mine, most of the people who lost their money in taing. because of my experience I WILL NEVER BUY a NAKED OPTION. it is more important to make profit (even if it is less, less ? yes, accept it. because greedy ruins everything. longer we stay here we have high prob of ending up profit, so slow and steady profit is what me should aim for)
lets discuss your points.
i care about people who are struggling to make little money becuase people who lost money might have have the experienced the taste of Option buying.
whoever is reading the comment kindly help me with spelling mistakes and grammer.
-- ExperienceKindly read these blogs or watever if you think u can make more money from market and become very rich. i had to understand few things very hard way ( market taught me very nicely 
)
im just sharing what i think might be usefull to know.
Reiterating what was posted earlier - With naked option buying we loose money due to time value when market moves in our direction. But we also loose less when market moves against our direction. Option Delta comes in to play. Also we are insured against gaps against our position. So time value effect gets evened out over a period of time.
Risk amount is subjective. Am willing to take the risk on the entire option premium with a naked option buy which is actually around 7K-15K per lot only. But this allows me to ride the trend as long as it trends with out any capping of profits. This is what am looking for as a trend following trader. Market globally trends around 30-35% of the time only. We need to make merry when it is trending. Its the big trends that offset for the lower accuracy in trend following systems.
Yes turnover is more. But you see when you sell an option you are capping your profit tremendously. An option buyer has no cap on profit. Also unless you have fairly sized trading account, option selling won’t yield much. Also option selling needs margin amount much higher than option buying premium and we also have the risk of margin shortfalls. Futures is another instrument that has unlimited profit potential of course with way more risk. That is why the transaction cost of futures were mentioned. We need to compare apples with apples.
The point here is to trade with money we have. Debt funding of trading account is putting more pressure on oneself to make profit from trading. Not an ideal mindset for sound trading.
Probability of profit is an overrated metric of a system. Accuracy has to be seen hand in hand with Profit factor. Not to mention the importance of money management.
I buy a call when Nifty is likely to trend up and I buy a put when Nifty is likely to trend down. Super simple from an “execution” point of view. The elaborate multi legged option strategies make it difficult to understand and execute consistently. Consistency with a well tested profitable plan is key to trading success.
People have also lost money buying equities, selling options etc. We have several instruments, strategies and tools out there. We need to pick and use these according to our needs.
kindly help me understand this. ( thank you )
regarding this its not about accuracy bro. its not about how much nifty/BN should move in our expected direction. its about how much nifty/BN can move AGAINST our direction and we still end up not making loss.
Option LTP doesn’t move 1:1 with spot. For the weekly ITM options, I trade close to spot, the delta is around 0.5-0.6 on a thursday (one week prior to expiry). It gradually approaches 1 as we move towards the expiry thursday. So if I had a spot movement against my position by X points I don’t loose 1:1 (unless expiry day). I loose only in proportion to delta. If I have a spot movement in my direction I won’t make 1:1 profit (unless expiry day). But my profit is in proportion to delta. I trade with 47% accurate system. Now its just simple math to understand that time value degradation evens out over a period of time.
Also if there is a big trend running for a few weeks I consistently keep loosing some part of the immensely profitable trend. But the capped risk of my naked option position limits and counter balance the above when there are gaps against my overnight positions. Market does have its black swan days !!!