There is no best nifty option trading strategy; however you need to keep certain points in mind before putting a trade to make it work. Please understand any strategy is the best if it is profitable. Unfortunately you will know if that trade was profitable only when you close it.
Important: Whatever you trade you should strictly limit your losses. While trading limiting your losses should be given more importance than taking the profits. One big loss can take away years of profits. To limit your losses you should do any one of the following:
1. Keep Stop Loss in your system: I said stop loss in your system not in your mind. You know if you put a frog in a tub of hot water, it will immediately jump out to save its life. But if you put it in a tub of cold water, and boil it slowly the frog will not jump out, and hurt himself. This only means that if you don’t put a stop loss in the system, you will never take the stop loss and you may lose too much money before you even realize.
I do not know which broker you trade with, but I am sure every broker offers a stop loss in their system. If you call and trade, you can ask the operator to keep a stop loss in the system as soon as you place the order to trade and it is complete. This way you will make sure your losses are limited. Of course when time comes to take the profits you can cancel the stop loss order and book your profits. In some systems it is done automatically.
2. Or you can hedge your position: I always prefer hedging over the stop loss. Why? Because hedging will keep the trade alive while limiting the losses. In case the markets turn in your favor, you can still book profits. But if the stop loss is hit, you cannot do anything about it. Yes, hedging involves extra transaction, but over a long period of time its more profitable than stop loss.
Did you get what I am trying to say here? All I am saying is that limiting your losses is MORE important than taking the profits. If you can limit your losses I assure you will become a better trader.
NOTE: If you are willing to learn how to trade options profitably I offer a course to help you learn the best option strategies that are almost always profitable in any situation. You will learn five great conservative strategies to trade options profitably month after month while limiting your losses. Contact me for more info.
Depending on the condition of Nifty and of course your view, sometimes it is better to buy options, sometimes it is better to sell options. But how do you decide what exactly to do – Buy or Sell? Here are some of the best option strategies to help you succeed:
1) When the volatility is low, you should buy options. Remember anything less than 15 is considered as less, and anything above 20 is considered high volatility. When the volatility is low, the options are priced low. You can buy and sell them when the volatility increases thus increasing the prices of the options. To know volatility you can visit: http://www.moneycontrol.com/indian-indices/india-vix-36.html.
Note: Since the last 1 year or so (May 2013), volatility is on the higher side. It went up to 39.30 on 12-May-2014 when election results were to be declared in a few days. Buying options and selling them at a higher price is now getting very difficult.
2) Exactly the opposite – when the volatility is high, you should sell options and buy them back when the volatility drops thus reducing the price of the options. Selling naked options by the way is a simple way to suicide in your trading career. In other words please do not sell naked options. It is a very dangerous strategy.
Note: The problem with the two above written strategies is that it is very difficult to time volatility. Today it might be 16 – and you may want to wait for sometime more so that it falls, but the next day it might be 20 and you may miss the bus. Some experienced traders however trade only volatility and win too. Recently Volatility trading was also introduced by Nifty in the Futures segment. But for average retail traders like you and me, it is very difficult to time the volatility. So what do you do? Ok, let’s look at some more good strategies.
Also note that no volatility can supersede Delta and Gamma if you view was right. A 50-60 point swift upwards move in Nifty will increase the price of calls and decrease the price of puts even if volatility decreases or increases up to a certain level and enough time is left for expiry but again you should get your timing right.
3) Buy call options – When you think markets will go up for some time. Let’s assume a stock is at 5600 and is on a breakout on the upside. You can buy ITM calls. Why ITM calls? Because ITM calls move fast with the underlying. If you buy out of the money calls, the underlying has to move significantly for you to gain some points. Remember it’s all about points and nothing else. For the same 100 points move in a stock, the In The Money (ITM) calls will go up more than the Out of The Money (OTM) calls. So your profits will be more. Yes the losses can be more too. But with OTM options you are more likely to lose even if your prediction of the movement was right.
Here is an important point to limit your losses. If your view is that a stock will go up 200 points only then why you should play a move that you think may never happen? In that case you should sell the 5800 calls (you have bought the 5600 calls). If Nifty expires below 5800, than you keep the premium paid to you as well as the profits you made on the 5600 calls.
Great. Hmm!! So what is the problem with this strategy? The problem is that if your view was right and you do not want to wait till expiry, the profit you make will be less than what you could have made had you bought a naked I(not-hedged) 5600 call. Selling 5800 call will limit your profits beyond 5800. However if your view was wrong you will make a limited income on the calls you sold, and make losses in the calls you bought. Therefore your losses will also be limited. It depends on the loss you are willing to take. You should do this if you feel markets will move in a certain direction for sure. Even if you are right 50% of your time, with this strategy you should make money, because the sold calls will limit your losses.
If you did not understand, selling the 5800 call is NOT unlimited loss as you have bought another call of 5600. This is a limited profit strategy as any profits above 5800 will be a loss for the 5800 call that you sold. So your max profit will be capped till the stock reaches 5800. After that there is no point in staying in the market. You should close your position and take your profits even if the expiry is far away. Why? Because you cannot predict what will happen during the expiry. The profitable trade today may be a loss making one when expiry arrives. So do not wait till expiry. If you are thinking how will you make profit because one call will be in profit and another in a loss? The 5800 call will make less loss since it was OTM and the 5600 call will be more profitable since it was ITM/ATM. In the money options move faster than out of the money options. The difference is your profit. And if the market starts to go down, the 5800 call sold will start to generate profits; however your losses will be more in the 5600 call bought. The difference is your loss. Someone who bought a naked (not-hedged) 5600 call would in this case lose more money than you. However his profits also will be more.
4) Similarly if you think the markets will tank, you should buy ITM puts and sell OTM puts. BTW in any strategy you should clearly know your stop-losses and profits that you want to take. If you don’t know in advance it may be that you will lose more than you want, but it’s strange that you will take much less profits than your losses since you will be hurry to take the profits, but wait for very long when your trade is making a loss. Therefore your strategy should be clear on when to take a profit and when to book a loss even before you put the trade.
5) Selling Iron Condors: One of the most popular strategies worldwide – this is a market neutral strategy where you just need to have an idea of where the markets may be trading near expiry or in the near future. If you feel markets are not going to move much in either direction for the next few days – Iron condors are the best strategy during these times. If the markets actually do not go anywhere and stays at around the same level you will make money. Iron condors are nothing but a combination of credit spreads of calls and puts. The call credit spread acts as a hedge for the put credit spreads.
For example if you think the current series of Nifty will not go beyond 5900 and will not end below 5600, you can sell 5600 put and 5900 call. However since this is a very risky strategy as you can suffer unlimited losses on either the call or the put if Nifty starts moving beyond those levels you will have to hedge your position.
You can buy 6000 call and buy 5500 puts. This way you are insured even if Nifty goes anywhere above 5900 and below 5600. As you can see now you have done a call and a put credit spread. But this strategy will limit your income and the risk-reward ratio is also not good. If you win 3 times and lose 1 time you will barely break even. If you continue doing this for a life time you achieve nothing. Strangely this is the most popular way of trading by most traders all over the world. However this strategy can be very profitable over a long period of time. In short I can only say that you need to adjust if one of your positions gets threatened and have a strict stop loss. The success rate of this strategy is 80%.
Condors works best when nifty is stable. If you think for the next few days nifty will be range bound, you can sell a condor. Some people just sell condor and do nothing. These people are looking for less income but more chances of winning. For example if Nifty is at 5800, what about selling 6200 calls and 5400 puts. What are the chances that Nifty will cross 6200 or go below 5400 at the end of the series? So you can see the wider the condor, the greater the chances of winning. But the wider you go the lesser you make. 🙂 Everything has a trade-off ;).
Some people sell condors without hedging it (means without buying the calls and puts as protection or insurance. For some strange reason its mostly called insurance in the western countries like the US. In India traders call it protection. I do not know why. It does not matter what people call it – you should buy them – Period.
Technically they are insurance as they cannot protect the losses – they can only limit it. 🙂 Unfortunately this is greed and nothing else. Greedy traders rarely make money. They will make very good money for 3-4 months and one bad month will wipe away all their profits. And technically it’s not even a condor. They are actually trading short strangle or short straddle. Both are dangerous strategies.
6) I do trade Futures (Nifty or Stock) but only when I have a strong view. Mostly after a major news is out. As a risk management strategy I consider Futures a very risky derivative. So even if I trade in Futures, I combine them with options.
If you trade Futures too here is a piece of advice: If you buy a Future do buy an ATM put and if you short Future do buy ATM call. Yes this will limit your profits, but a sudden whipsaw (when a stock’s price takes a sudden turn in the opposite direction of the trade sometimes as soon as a trader puts a trade), this will severely limit your losses. If an ATM (At The Money) Option is priced at 100 – your maximum loss is 100 points.
Note: If you like to trade Nifty Futures, my course also has 2 very conservative directional trades – a beautiful combination of Futures and Options. In that you make money if you are right, but you lose less if you are wrong. If you are badly wrong – a gap opening against your Future – you still make money.
Note: Option is a game of math and Option Greeks. It’s the points you make or lose. Whatever strategy you are following you should have a strict target and stop loss. You should do virtual trading for a while before putting your hard earned money on the line. If you have a target in mind, keep it to the number of points and not money. For example if you want to make Rs. 5000.00 and you have bought 10 lots of Nifty. You need only 10 points to meet your target (500*10 = 5000). Exit your position if your target is met. Do not be greedy. Greed, fear and hope are the three emotions that are your worst enemies while trading. If you can get rid of them and get some knowledge you will be a winning trader.
Whenever I write an option strategy I update this page with a link to it: http://www.theoptioncourse.com/free-nifty-option-trading-strategies/. If you think you gain anything by reading the strategies here please do bookmark that page or at least subscribe to my newsletter. Whenever I write a new post you will get an email with link to that article. You can subscribe your email at the bottom of this page.
I will be happy to answer any questions that you may have on options trading. Please ask in the comments section below or contact me.
Thanks & Happy Trading 🙂
You Can Read More On My Site
WhatsApp or Call me: 9051143004
If you have any question you can contact me.
You can read about me here and my trading mistakes here.
Dilip Shaw, Founder
Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. In other words I am a sub-broker. I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other forms of social media. I strictly adhere to laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles in this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given in this website. I am not responsible for any investment decision you take after reading any article in this website. Click here to read the disclaimer in full.