Short put is a strategy which can be played when you are bullish about nifty or any stock. If you think that Nifty will be go up you can either buy calls (long call) or short puts (sell puts). Most retailers almost always buy option and never sell. Its quite strange as option buyers mostly lose money. Your strategy should depend on market conditions and not just one single strategy.

Anyways coming back to the topic. If you think Nifty will move up you can short puts. If your view was right, your put will expire worthless and you can keep the premium. Of course if your view was wrong – you are at unknown risk till expiry or till the stock or index reaches zero. 🙂 Put cannot lose any further.

Have a look at the graph:

Its clear from the graph above that a put loss can be max when the stock reaches 0. A short put cannot lose more than that. However a short call can lose unlimited amount of money because the stock can rise to any level on the upside. In my course I teach how you can use this feature to your advantage.

Don’t be afraid of shorting puts, but have a plan like buying another put for protection. Yes you can buy calls as well if your view is bullish and it does have a limited risk. But the problem is buying options also comes at a risk. We will first discuss the short put and the difference between buying calls and shorting puts later.

Let suppose Nifty is at 5300 and you think that it may go up in the near future (you are bullish), you can short OTM puts. For example if you think Nifty may not go below 5200 this series as it has already come down a lot recently, then you can sell 5200 put. The lower you go, the safer you are, but the lesser premium you get. Low risk low returns, high risk high returns.

If Nifty does not go below 5200 as you had expected, you keep the premium. However if it keeps going down, your risk starts from 5200 minus the premium you got. For example if you got 100 as premium then your risk will start from 5200-100 = 5100.

Therefore it is always recommended that you should do a credit spread. Short 5200 put and buy 5100 or 5000 put. That way you will be not be on unlimited risk and you can breath easy even if Nifty is going against your view. Selling naked options is very risky. With credit spreads you know your max risk, and the best part is you are not on max risk from day one. If indeed nifty moves against your spread you can buy it back and sell another spread much lower – say for example 5000/4800. Chances are this time you will be successful. After all what are the chances that Nifty will close below 5000 within a month? You will get back your loss plus you may make some profit as well.

Of course you must make sure you are not taking a big loss, so before Nifty reaches an uncomfortable level you should buy back to close the spread. And if you think nifty will go even further down, you can wait for a couple of days to sell another spread. This will give you double benefits of going much lower and getting good premium. And don’t forget the losses you restricted because you acted sooner. If you keep waiting for things to reverse, that’s the worst decision you can ever take. Because in trading, hope never works. Period.

Yes nifty may revert back, but most of the times waiting for too long will make your losses bigger and impact your over all return in a year.

And one more thing – you should not wait till expiry. If you got 70-80% of return of a sold put or call you should close it as eventually you will find that a profitable position going back to a losing one. You do not want that. Don’t be cheap. Just close your profitable position, and be happy. Look for other opportunities.

Now coming to the difference between buying calls and selling puts. Both do the same job – giving you profits if Nifty goes up. On paper though buying calls is limited risk and unlimited profits, and shorting puts is limited profit and unlimited risk. However in reality both of them have some risk and some profit.

Example time. Lets suppose Nifty is at 5500 and you decided to short put and you got 100 as premium. Your friend decides to buy calls. Lets suppose 5500 call is also at 100. As a buyer probably he is looking for 10 points or 20 points profit. That is what most option buyers look for isn’t it? However you have decided that you will close your short put if Nifty reaches 5400 – that is your stop loss. Your friend will make his 20 point profit and exit. If nifty does not come back to 5500 in that series – your put will expire worthless and you keep all 100 points. Who made more?

Yes, if your view was wrong you are at unlimited risk so you can’t wait beyond 5400 and close your trade at a loss, however an option buyer may wait till the end of series to try his luck as he is at limited risk. If nifty turns and starts moving up, he can close at a profit. As you can see there is a trade off in both.

Some people like me, like to sell, but some like to buy. That is not important. What is important is what nifty does after you put on the trade.

Married or Protective puts are helpful when you want to protect the profits made from a stock, but do not want to sell it as of now to lock in the profits.

Married or Protective puts are also helpful when you bought shares and fear that the stock value may fall – but for some reason you do not want to sell the stock. Married puts will help in case the stock actually falls.

Here is a graph of married puts. If stock falls below “A” the protective puts will save the investor from losses in the stock.

Let me now explain in details.

You hold quite a lot of shares of a company and some bad news comes in about the company or about equities in general and you fear that your shares’ value may now tank. What do you do? You have two options:

1. Sell the shares at a loss, or
2. Buy ATM/OTM put of the same company.

Option 1 is pretty easy, but mostly you will lose money. Remember markets get the news before retail investors like us get. So even before you can trade, the markets will price the shares of the company you own at appropriate levels which almost always means you will be at a loss or may be breaking even (if you bought the shares at a great price.)

Even if you are not in a loss, one thing is pretty sure you lost a great amount of profits that you could have made had you sold the shares when they were at a higher level. Unfortunately greed came in and you kept it on hold. 🙂 Well don’t worry, it happens with everyone. Nothing to feel guilty about it. If you are still in profit, my advice is that you should get out, and re-enter at a lower levels. The problem is how on earth you know if it will ever go more down and where to re-enter?

Timing the market is extremely difficult if not impossible. (Actually impossible, but they say nothing is impossible so 🙂

You can however protect further downside of the stock by a simple strategy called married puts. Which takes us to the second option. Buy ATM/OTM put of the same company.

Note: Married puts are useful if you have a lot at stake in that particular stock, at least 2-3 lakhs or equivalent to its leverage in futures and options. For example right at the time of writing this article HDFC Bank is trading at Rs. 588.00 and let us suppose you bought 500 shares of HDFC Bank at 590.00. So your total investment is 500*590 = Rs. 295,000.00. The markets are falling – especially the banking sector. You fear that HDFC Bank may also fall and so you may suffer a loss, but you want to hold the stock and don’t want to sell right now and not lose money too.

You can then buy a put option of HDFC Bank to protect your losses from the downfall. Now if HDFC Bank falls, you need not worry as the put you bought will also increase in value and you can sell it at an appropriate level to realize a profit. Now your buying cost of HDFC Bank will come down due to this profit.

Three things can happen when in a married put strategy:

1. Prices moves down: You profit from the put bought. Your cost of buying the stock comes down.
2. Prices remain at the same level: Put expires worthless. You lose the premium paid to buy it. (Worst situation.)
3. Prices move up: You profit on the stocks bought. However you lose money on the puts bought. If prices move beyond the breakeven point you will make money. The premium paid to buy the puts should be added to the cost of buying stock. This is your breakeven point. Anything beyond that is your profit.

Great. But what is the risk?

The risk is if HDFC Bank shares stays at the same level or move up. The worst situation is when they stay at the same level. Your puts will expire worthless and you will lose whatever you paid as premium to buy them. If the shares move up, you will gain some from the up move but your puts will get lower in value as the stock price moves upwards. But after your breakeven points you should be in profits.

When is a married put helpful?

You should go for married put when you are certain that the stock price of the company you hold shares in will fall in value. And you should also know the maximum risk you are wiling to take. To make married puts work its best, it is best to buy ATM or just OTM puts. If you buy too far OTM puts they may be cheap but will not increase in value fast and may actually expire worthless even if the share price drops. This will be a double whammy. You lose money in shares and you will also lose money you invested in puts as well. As in joke they will become divorced puts. 🙂 Rather your expression will be 🙁

Yes taking a married put decision can bring rewards, but the risk is definitely there. You may ask why not sell futures of the same company when the stock price is going down.

Yes you may be right. Yes there are no premiums to pay and the cash also comes from the collateral from the same shares. You can use your collateral to buy options as well but at least you know your max loss when buying options. In futures you have no idea as it can be unlimited loss, so using collateral money in not a good idea.

Selling future is a better option if the stock price stays there or goes down. However what happens if there is some good news and the stock opens gap up the next day morning? You will make money in stocks you hold, but lose the same amount of money in the future. Your buying cost of the stock will go up. Unfortunately you will have to pay this as MTM (mark to margin) and if you don’t have cash your broker may sell some of your shares to pay for the losses you incurred in the future. Not a good situation to be in.

With married puts you know exactly how much you are going to lose. And if your view was wrong you may actually sell the put and restrict your losses.

It is your call, but experts always say married puts not married futures. So there is something to it.

Important Note: If you are not sure of the movement or if you think there will not be a significant drop in the share value do not attempt a married put. You may lose the premium you paid.

If you have a bullish or a bearish view in Nifty, here are some tips to help you make most money in a Nifty trend. Before reading please understand that this article is written for people with some knowledge about futures and options. As Nifty does not have any stock, it is only apparent that we use futures and options to give some tips on making the most money. If you have no knowledge of futures and options – please get some knowledge before reading this article.

Here we go.

1. You can buy Nifty futures if you are bullish or sell futures if bearish. A future will go up or down 1:1 in the same ratio as Nifty. Yes it does have a premium. But in any case it increases 1 point with every 1 point raise in Nifty and decreases 1 point in every 1 point decrease in Nifty. So even if it has a premium, you need not worry. You should realize a profit of almost 100 points if nifty actually raises or falls 100 points from the point you bought/sold the future. If your view was wrong, your losses will also be the same.

Well whenever you are trading you must keep in mind that you will not be right 100% of the time. In fact it is nearly impossible to be right more than 60% of the time. Here is where it is important that you hedge your position even if you are absolutely sure of the move. Since the derivatives gives you a huge leverage, doesn’t it make sense to use some of it to protect your losses to some extend?

These financial instruments are dangerous if not used wisely. You should be willing to sacrifice a percentage of your profits for the sake of protection. If you are wrong, which you will be many times during the course of your trades in one year, your protections will keep you in the game. Moreover with futures your timing has to be excellent. If your view was right but you timed it wrong, you will still end up putting a stop loss to your contract. For example if you were looking at 20 points profit or 20 points loss. You could hit a stop-loss only to see that Nifty actually moved in the direction you predicted. There will be heart burn, but then you have already lost it and there is nothing you can do to reverse it.So how to take on the ride?

There are two ways to do it.

ONE – If you have bought futures, simultaneously buy a slightly OTM (out of the money) put, and if you have sold a future, buy a slightly OTM call. Now you are protected at least to some extend. Remember this – this strategy WONT work if you wait till expiry. In fact in real world of trading you should not wait till expiry at all. If you have made a profit, move on to next trade. Why wait till expiry?

A wining trade may become a losing one in few hours of trading, let alone days. Today you are winner, tomorrow the same trade may be losing – so why keep yourself on the tenterhooks till the expiry day? You also save time and unlock trading cash once you book a small profit. Waiting till expiry is a foolish move. You will rarely win in the stock market if you trade derivatives and take it to expiry. Expiry day is also too volatile, and you wont have anytime left to do anything. You will be left praying if a wining trade suddenly goes against you. And praying to win in the stock market is another topic.

When you achieve your target, just close the trade. Agreed you will have to take a loss in your protection. But it will give you enough strength to stay in the trade if its going against you. Depending on how far OTM you have bought, at least you will keep getting back some of you losses from these options. Yes you will lose money if you were right in these options – but this is a limited loss and your profits from the futures will surpass this loss.

Buy the same number of lots as that of the futures. Yes if you are too far OTM or you are getting options at a very low cost (low volatility), you can buy a few extra. You wont believe if you were absolutely wrong (a strong move against your trade) – the extra options will actually bring in more profits than your losses in futures. But you got to do some math before buying protection. 20% of your profit target should be good enough. Do not spend too much on buying protection. Remember if you are right you should be rewarded for it. The protections will eat away your profits. So use your brain, do some math before buying protection.

TWO – This one is more popular. If you have bought a future, you can sell at OTM call. Now if your view was right, you will make money in your future buy, but you will lose some in your sold call option. But if you were wrong, you will recover some from the profits you will make in selling your call option. However if you are right, your profits are limited. Why? Because the losses in sold call, will offset the profits you make in the future. Lets take an example.

Suppose Nifty is at 5700 and the trend is bullish. So you buy a future and sell a 5800 Call. Lets suppose 5800 call is at 50. Now if Nifty expires at 5800, you will make 100 points from future and since 5800 call will also expire worthless, you will make 100+50 = 150 points. Now lets suppose Nifty expires at 5900. You make 200 points from future, but you make a 50 point loss in the short call. Your total profit stands at 200-50 = 150 points. That’s your max profit. However since you have bought futures, you losses are unlimited. If nifty keeps going down, your max profit from sold calls is 50 only, but you will keep losing money in futures. Your breakeven is at 5650 – after that losses are unlimited. (Nifty expiry just used as explanation. You shouldn’t bother going till expiry.)

Here is a tip: What about combining ONE and TWO? If you are bullish, buy a future, sell a call and buy a OTM put from the money you got from selling the call. You must be thinking wow what a great idea. Well everything comes at a cost. Here your max profit will be even less than the option TWO as if you are right, you will make money from the future, but lose on the short call and the bought put. Since you cannot buy deep OTM puts as they wont make sense, you may have to put money from your pocket to buy that put. What will be your payoff? Exact calculation is not possible but lets suppose you got 50 from selling call and you had to pay 50 to buy puts. If Nifty expires at 5800, you make 100 points from future, 50 from sold calls but you lost 50 form buying puts. Your total profit is 100 points. However if put was costlier than call, you need to subtract the difference from the profits. And that is you max profit. However in this strategy your losses are not unlimited.

If your view was wrong and Nifty closed at 5600, and supposing you had bought 5600 puts for 70. You will lose 100 points in the future, your put will also expire worthless but you make 50 points from the short call. Your loss -100-70+50 = -120. This is also your maximum loss. Your max loss is greater that your max profits. 🙂 Well as you can see everything in trading comes at a cost.

Similarly the above strategy can be inverted if the trend is bearish. You will then sell a future and buy a call or sell a put or both. The rest is self explanatory.

Important Note: If you have not hedged your position in futures than it is important you play with a strict stop loss. Buying or selling future is a unlimited profit and unlimited loss strategy. Also you should make sure you take maximum profit. So do not put a target. If your target is reached go for a trailing stop-loss as much as possible. This way if market goes up even after hitting your target you will not miss out on future profits. However if there is a gap down opening you may rue your decision of not exiting and booking profits. It depends on the market conditions. If you think market may go even further you may go with a trailing stop-loss. There can be a gap up opening as well. But if you are in doubt, its better to take the profit and exit.

2. You can buy calls if the trend is bullish or buy puts if its bearish. This one the is most sought after trade done by retail traders in India. Why? Because its easy to do and its cheap. But is it really cheap? We will discuss. But of course it is simple. If the trend is bullish you buy nifty calls and buy puts if the trend is bearish. You buy low sell high. Isn’t it the simplest way of making money from stocks? This is one single reason that attracts traders. Everybody wants to buy low and sell high. Therefore this trading strategy is very popular. Search for nifty trading tips in Google and you will see ads full of nifty option tips. They will be much more than ads of futures. Why? Because someone with even Rs. 5,000 in their trading account can buy options. And they know they can get money from you. However for futures trading you need more money in your account – at least Rs. 20,000.00.

Buying options is also a limited risk, unlimited profit strategy. This again appeal to traders. It can actually be sold by tips providers. Cheap, limited risk, unlimited profits – wow sounds so good. But is it really? No its not. The problem with this strategy is the theta time decay. When you buy options you are running against time and volatility. Your view has to be correct from the time you bought the options. Even if nifty stays in the same place, you will lose money. Even if your view was right but the pace is slow and volatility drops, the value of your options will drop. So in reality the limited risk and unlimited profits is only on paper. As soon as you buy options your premium is at risk of melting down to zero (0.05 actually :))

How to hedge this? If you have bought calls then you should sell calls. So even if your bought options melts away, you will realize some profit from sold options. Unfortunately not many traders do this. If you make money from the bought options, the sold OTM options will not lose much. But if your bought options expire worthless, your sold options will expire worthless too and you will recover some money from them. However your profits will be limited, as the sold options will start losing money, if your bought options are making money and vice versa. Your losses are also capped at the money used to buy options. You cannot lose more than money used to buy options minus money got from sold options.

3. You can sell puts if the trend is bullish and sell calls if the trend is bearish. This strategy is mostly done by institutional investors and hedge fund managers. As you all know selling options is a limited profit and unlimited risk strategy. Therefore most retail investors stay away from it. However it is not as bad as it looks on the paper. You can always buy back your options if you get into losses. Where is the unlimited loss? In that sense even futures buying or selling is unlimited loss on paper. But retailers do trade in futures. However just like futures, selling naked options is very risky.

How to hedge it? Best way to hedge is to sell a credit spread. You sell a OTM option and buy the same number of even further OTM options. If you do so, there will be credit in your account. This is a limited profit and limited loss strategy. Credit spreads and iron condors are very popular in the west as they are easy to mange. Most of the times a credit spread will expire worthless and you make money by doing nothing for a whole month. Great? Read this – trouble starts if the trend goes against you. Moreover the risk-reward ratio is very bad in credit spreads. Two bad spreads can eat away many months of profits. Therefore here too you should put a stop loss if the spread reaches a level you are not comfortable with. As you can see every strategy comes with their own pros and cons.

However when nifty is in a clear trend you should go with the trend. Do not go against it, or else you will lose money. And if you have good strategy in place with hedging making money in nifty in a trend is not that difficult.

Hedging any trade is very important. If you love to take Nifty Future trade in a trend I highly recommend my course where in the directional strategy you will learn how you can hedge Futures with options. If you are right you will make money – but you make money taking a Future trade anyway if you are right. So whats so great about the strategy in my course? It is that you can make money even if you were WRONG in your Nifty Future trade. Yes if you were wrong the options’ delta increases more than the Future delta and you can make money. For that to happen Nifty or the stock has to move fast against your trade. For more information please read about the course.

If you do some research online or even ask an expert, you will find that a lot of people and experts advise against buying out-of-money (OTM) options. The reason is plain and simple. They say it has more chances of expiring worthless so you may also lose your money. They should be sold not bought. Well they are right. More often than not out of the money options expire worthless. Is that the only reason you should not buy them?

I do not agree – to some extend. If you have a well thought out strategy you can make a good profit out of them. Also out of money options have other importance too – else why are they traded? Let me put some points outright to explain:

1) OTM options are great for protection: If you have read about credit spreads, you will understand the value of buying OTM options for protection. If a spread is going against you, it is the OTM option that will bring profits and minimize your unlimited losses. In fact it is due to out of the money options that you may sleep well in the night knowing very well your max loss. Buying OTM options will limit your losses. OTM options have the same job on the iron condors as well. Buying out of the money options can be a lifesaver if you have sold in the money options.

2) OTMs double money very fast: Agreed, its easier said than done. But in my three years of experience in trading, I have seen hundreds of out of the money options doubling in value in days. (You feel bad thinking why you did not invest, isn’t it? But that’s a different topic.) I am sure you must have experienced too.

I have seen an option going from 1.00 to 3.75 in one day. Yes an increase of 375% in one day. No in-the-money option can ever match that even if there is a huge move in the underlying. But please never buy so deep out-of-money option. This is just an example that happens very rarely.

You see percentage wise, it is the out-of-money options that increase in value fast – by the way, they don’t decrease that fast. Why? Because the max they can decrease is to 0.05. If 30 days are left for expiry, an OTM with the value 2 – how fast do you think its going to decrease? Because they have nothing but time value left, the deep out-of-money options cannot decrease very fast if enough time is left. Yes enough time should be left – and that is a very important factor. I will explain later why.

3) Who is waiting till expiry anyway? Did you make any meaning out of that? If you didn’t I will explain.

Read this is important. When experts say you shouldn’t buy out-of-money options they are referring to the expiry. Yes its true that OTM options mostly expire worthless, so if you plan to wait till expiry then you are doing a huge mistake. Do not buy out-of-money options to hold till expiry. You will lose all your premium paid. Experts are right – out-of-money options expire worthless 80% of the time. But my point is who is waiting till expiry?

Let me give you a live example. Today 26-July-2013, I bought NIFTY AUG13 6400 CE (call option) for 3.5. My max loss capacity I have determined is Rs. 3500. (Note that I am not putting a lot of money at risk as this option will 90% expire worthless, I cannot be greedy.) I have bought 20 lots. Here is the math: 3.5*20*50 = Rs. 3500.00.

Nifty today closed at around 5886. There is a lot of time for the August 2013 series to expire. I need not worry. And moreover I have made up my mind not to lose more than 2500 in this trade. If this option reaches 1.00, I will close this trade. However what are the chances that this option will only decrease in value for the next few trading sessions? For that 1) Nifty has to keep going down and 2) volatility has to also keep going down. Even if Nifty goes slightly down, but volatility rises – I can make a profit.

My target is 5.5. if Nifty goes up by even 50-60 points or volatility rises I can achieve that. The profit I make is Rs. 2000.00. I am risking Rs. 2500.00 to make 2000. Isn’t that fair?

I will not update with what happened to this particular trade as it is not important. But what is important is that when you buy out of money options you should keep the following strategy in mind:

1. Never buy very deep out-of-money option. As explained earlier please do not be greedy and buy too deep out-of-money options. Yes they may also increase in value but for that the underlying has to move very fast.

2. Give your option enough time and room to increase in value. Do not buy a out of the money option in its last week of expiry. You will rarely make a profit. If you keep your stop-loss very small you are most likely to lose money every time.

3. Sometimes be prepared to lose 100% of your option premium – as you may not get time to close the trade (a huge jump against your trade) and you may not get back a comfortable amount. In that case leave the option till expiry, who knows the trend will change and you may get your money back, or you may even be in profit. Remember the first point, you should have enough time for it.

4. Do not buy options too often. Usually option buyers lose money. Yes if 80% of options expire worthless, it means option sellers are making money. Do proper research before even thinking of buying an option. Lots of people have lost lot of money buying options. This point goes for at the money (ATM), in the money (ITM) or out of the money (OTM) options. If you want to buy anyway – you should have a clear stop loss or profit booking price in your mind. You should place it in your system if you think the option price may reach there on that day.

Now you must be thinking why I bought this option? Because right now Nifty is in a bull run and it fell 200 points in three days. I am sure it will try to climb some points up in the next few days and I should get my target. No technical analysis here – just pure speculation – with risking only Rs. 2500.00. Hope you get the idea.

4. Do not spend a lot of money on buying out of the money options. As you can see I put in less that half percentage of my trading capital into buying these OTM options. Even if they expire worthless – I will not lose much. My next trade can make me money.

Remember these points and just don’t ignore out of the money options – sometimes they carry gold with them. Spot them. 🙂

A lot of Indian retail option traders buy options in the hope of making money, sorry I was wrong actually they buy options in the hope of making a lot of money (unlimited profits).

Here is one real example of how a trader lost more than 40 lakhs buying options looking for that home-run which never happened. Actually home-run never happens because people book profits much earlier and let the losses run.

Unlimited profits is actually a trap. How many of you have actually made even one trade of unlimited profits? I mean what is unlimited profits? Buying an option for 10 and selling it for 100? Has anyone done that? Or you book your profits much before that? Maybe when its up 20% or 30%. So where are unlimited profits? Please do not fall for such a trap.

Unlimited profits is nothing but another name of GREED. And greedy option traders never make money. Ask me, I was one of those greedy traders. But the stock markets took a lot of money from me to make me realize greed is bad in stock markets.

Similarly unlimited loss is also a trap. Do you think an option seller will leave his sold option open if its losing money? No. But lets leave that topic for another article.

However option buyers have an excuse and that is they think option buying is “limited loss unlimited income strategy”. Yes it is. But the problem is they book profits at 10 points and leave the losses open in the hope the trade will reverse. Unfortunately the option expire worthless. All money gone. Where is the profit?

Option buyers have to get 3 things right:

1. Their timing and direction of the stock price,
2. Their view of the movement and how far the stock travels,
3. Time and volatility.

I should have written 6 actually, but that would have scared option buyers. 🙂

Lets discuss them one by one.

1. Their timing and direction of the stock price:

Option buyer timing has to be perfect when they buy options. As soon as they buy a call option, the stock has to go up. If they buy a put option, the stock has to go down for them to make money.

Let me take an example. At the time of writing this article Nifty is at 6050 (a 1.25% up-move from yesterdays close). Now a call buyers view might be that Nifty might move further 20-50 odd points up. He buys a Nifty JUL13 call option strike price 6000 currently at 78. Now what I mean by the timing has to be right is that Nifty has to go up from here from the time he bought the call option. It’s already 3.20 pm – we are ten minutes away from close.

The buyer may have a target of 10 or 20 points and since ATM options generally have a delta of .50, it is assumed that Nifty has to go up 20 points from here for him to make 10 points profit or has to go up 40 points for him to make 20 points. Note that .50 delta means every 1 point move in Nifty will add .50 points in the ATM call. Similarly .50 we be deducted from the ATM call if Nifty moves down.

What do you think are his chances of success. Forget about what the technical analysis says. Just think about a figure of the success rate. 50%? Yes it is and in that case his probability of winning has already reduced by 50%.

So when you are buying options – your timing has to be right – absolutely right. The stock or the index has to move in the direction of your option from the moment you buy until you book profit.

2. Their view of the movement and how far the stock travels:

If a stock is moving up, or going down – chances are it will continue to do so for sometime and then the trend will change. The problem is we don’t know when. Today Nifty went only up, and closed almost at its peak at 6040 (the 6000 call we bought is already at a loss). The point is the option buyer’s view should be correct and it should hold for quite some time for him to book profits. Remember that time is also eating away the premiums of the options bought. His race is against time too. The stock has to move pretty quickly in the direction the buyer predicted, so that he hits the profit.

Unfortunately most of the times their view is right but timing is wrong. They still lose money. For example, you are thinking that Nifty will move up from here and you bought at call. If your target is 10 points your stop-loss should be also 10 points. What if Nifty hits your stop loss and then starts its upwards journey again? Your view of the movement was right, but in the long term not in the short term but you lost anyway because you cannot keep waiting to see your options expire worthless. If they do you will lose all the money you paid as premium. You have to take a stop loss at some point even if your view was right.

Seeing this many option buyers increase their stop loss points to 20 or 30 points. And increase their target to 20 points too. Can you get the idea? The more money they are losing the more money they are putting at risk. Do you think this is a good idea? Well it may work if you buy more time. Explanation is below. However there are no guarantees.

Another example. What if Nifty stays in a tight range for quite a few days? Only 7 calendar days are left for expiry. Time is eating away your premiums almost 10% a day on an average. Even if your view was right, you will have to take a stop loss just because your premiums were melting away.

So your view of how far the stock will travel, and timing both have to be correct to make a profit when buying options. Chances of success? 50%.

Combining 1 and 2. The chances of success of an option buyer is 25%.

3. Time and Volatility:

If the above 2 were not enough, the option buyers have one more major issue – their prediction of the movement has to come within a specified time else the option premium will melt away. Of course especially for call buyers, when the stock moves up, volatility goes down. For call buyers this can be killing.

They will be frustrated to see that their prediction was right, timing was also right, speed was also right but somehow the options worth is not increasing because the volatility is decreasing.

Lets discuss in details. Just like stocks, no one can predict volatility. Jumps in volatility in the range of 3%-10% are quite common. A 5% jump in volatility can bring in significant changes in the price of an option. Volatility is a friend of an option buyer if it increases, but enemy if it decreases. Usually when the market is trending up the volatility decreases. It also decreases if markets remain calm and stagnant. But they can also increase if it goes up especially when predicting gets difficult. However one thing is for sure, when market falls fast, volatility increases, because there is fear in the markets.

The point here is and I think everyone knows it, if volatility decreases the option values also decreases. So your timing may be right, your view may also be right, but if volatility crunches after you have bought an option – chances are you will still be making a loss. How bad is that?

I have myself witnessed many times call option getting reduced in value even after an increase in the stock price. It will be really frustrating to see your option going down in value even after your view was right and the timing excellent.

Now the big question. How many times can you get all of the 3 points correct? Don’t be disappointed. You can, it is not that every time you will fail. But the failures will be more than the winners and therefore you will not be able to make money buying options.

One thing more. Most retail traders buy ATM (at the money) options. In technical sense, ATM options are the costliest. Why? Because they have the most time value. They have zero intrinsic value and therefore all they are buying is time. If the stock does not move – the option will become worthless. If they buy OTM (out of the money) options, the stock has to travel very far and with high speed for OTM buyers to be successful. How many times will they be successful?

Combining 1, 2 and 3 we can see that the chances of option buyer being successful is only 12.5%. Which means they lose money 8 or more times out of 10 times they trade on an average.

So what you should do when you want to buy options?

1. Buy time too: You should give your options enough time to succeed. For example if you give yourself 60 days of time instead of 30 days – you have a lot of time to make a profit. Agreed 60 days options are costlier, but they give you a chance to succeed. However since you have given yourself time you should also now give the options more room to perform. For example a 20-25 point stop loss and a 40-50 point profit booking whichever comes first. Note that the profit points are double than the losses.

2. Buy when volatility is low: Agreed you cannot time volatility, but if you someday see the volatility has droped considerably, you may go ahead and buy options. When volatility will increase you can realize a profit.

3. Don’t be greedy: Keep booking profits at regular intervals or just keep a trailing stop-loss of profits. Don’t get greedy thinking to book profits when the option price will double. They do happen but sadly you don’t know if your option will double or not. You should look at points and book your profit when it arrives.

Final word: You got to take a call. Sometimes buying options is good. For example when you are sure a stock price will move in any direction sharply, in that case selling options is suicidal. In such a situation you should buy call and put options and wait for the price move and book your profits – still if volatility drop you will lose money.

However under normal market conditions – buying options will not make you money in the long run!

Note: If you are tired of buying options and losing money, I advise you to take my course. I do not promise that you will make 100% returns every month or even a year. But I can promise you that 3-5% a month is possible. I will explain to you very conservative strategies. You will know exactly when to enter and when to exit and book profit. For more information read this or contact me.

Iron condors is my favorite strategy to trade nifty options month after month. Well if you want to know the winning percentage – its close to 70%. But what’s more important is how to handle the 30% losses. If you are willing to take less profits you can also trade iron condors with 90% winning probability – and that’s the best strategy for beginners.

First thing first – What is an Iron Condor?

An iron condor is a trade of two credit spreads – one on a call option and one on the put option – sold on any underlying for the same month. Since I always trade on nifty, henceforth all my examples will be restricted to nifty only.

If you don’t know what credit spreads are, this article will help you to know about credit spreads. Read that first and then come back here.

In short in credit spreads, one near option is sold and the further OTM option is bought for insurance. Since the sold option has more points, a credit is done to your account. You actually buy the OTM option from the money you get by selling the near option. That is why the number of sold options should be equal to the bought options.

Now what if you think in this month nifty will not close beyond 6000 and not fall below 5500? you can sell an iron condor for that month. You can sell a credit spread on 6000 call by selling 6000 call and buying either 6100 call or 6200 call according to your risk capacity. Similarly you can sell a 5500 put and buy 5400 or 5300 put as per your risk. Remember the more gap you give between the sold and the bought options – the more money you make but more risky your iron condor becomes. Justified, isn’t it?

How to do it? Ok let me take a live example from one of my trades:

This trade was done in the month of May 2013. My view was that nifty will not go beyond 6000 and not go below 5700 in the May 2013 series. So I sold an iron condor for lets suppose four lots (I trade more lots but this is to simplify). Here are the details:

1. Buy 6100 Call Option: 31.70 * 100 (2 lots) = -3170 (debit)
2. Sell 6000 Call Option: 65.90 * 100 (2 lots) = 6590 (credit)
3. Buy 5600 Put Option: 12.75 * 100 (2 lots) = -1275 (debit)
4. Sell 5700 Put Option: 23.45 * 100 (2 lots) = 2345 (credit)

Here the profit and loss graph of an Iron Condor:

You can see in the graph that profit and loss is limited in Iron Condor. But the risk in the Iron condor is more than the reward you get. However Iron Condors are profitable most of the times. The rest of the times the risk needs to be managed aggressively. If you take my course I will tell you exactly how I manage the risk much better than how most traders manage it. I actually take a trade that is successful 95% of the times after my Iron condor hits a stop loss. This ensures I get back losses made in the Iron Condor trade plus I end up making a small profit because I double the lot in the second strategy.

Ok, lets get back to the strategy I was discussing in this article.

Net Credit in my account: 6590+2345-3170-1275 = Rs. 4490.00

Now lets calculate the ROI if I win.

For 6000 call and 5700 put option sold investment required: 15000*4 (lots) = 60000.00

For options bought= 3170+1275 = 4445.00

So 60000.00 + 4445.00 = 64,445.00 – this is approx cash locked in my account for this trade for margin money.

If all of the options expire worthless I keep 4490.

ROI: (4490/64450) * 100 = 6.96% in 30 days – not bad!

Now lets calculate the losses:

If Nifty expires at 6100: -3170-3410-1275+2345 = -5510

If Nifty expires at 6200: 6830-13410-1275+2345 = -5510

If Nifty expired at 6300: 16830-23410-1275+2345= -5510

If Nifty expires at 5600: -3170+6590-1275-7655 = -5510

If Nifty expires at 5500: -3170+6590+8725-17655 = -5510

Loss ROI = (5510/64450) * 100 = 8.54%

It means my maximum loss in this trade is 5510 wherever nifty closes and maximum profit is 4490 if it closes between 6000 and 5700. Does that makes sense? Yes it does if I risk 8.54% of my capital to make 6.96% in 30 days.

Now this discussion will get even interesting. What happens if my view goes for a toss and nifty starts to move in one direction and my real fears come true? Well it did and that is the reason I took this month’s example. A loosing one and not an easy win. 🙂

As soon as put the trade on 26-Apr-2013 – nifty started to rise – a worst case scenario. Nifty was already in a bull run since 9-Apr-2013 from touching of a low of 5487. It had reached almost 5900 when I put on the trade. I thought it wont raise any further or start to fall soon. As you can see I got more premiums from my calls than my puts. When nifty or any stock is rising the system makes the calls costlier and vice verse. This I done to make an even field for buyers and sellers. If the sellers are not getting a good premium for selling options why would they sell in the first place?

Long story short – my short call was in trouble and I had to adjust or get out or hedge my position to make sure I at least do not lose a lot on my trade.

How to adjust an iron condor?

We will come later to what I did, but lets first discuss what you can do when your iron condor is in danger:

1. The most common option done by traders – rollover the condor one step up if the underlying is going up – or roll down if its going down. In my case I should close the 6000/6100 leg and sell/buy the 6100/6200 calls. Depending on profits I should also close my puts and bring them up one position to make more money. However please note that this should be done early as otherwise it will get costly to close the condor. Idea is to lose less and make more.

2. Close the losing leg in small loss (in my case the sold call) and let the other leg expire worthless. Note that the bought calls will bring in some money and offset the losses. So I don’t lose 5510 – my max loss. I lose much less. In reality if your losses are less than you can make from the leg that expires worthless you make money and not lose it. Though your ROI will be less. However the problem with this strategy is that what if nifty nose dives back in the opposite direction after you close the losing leg?

3. Take a small loss before it escalates. Close the condor before you smell trouble. You can put on the condor again and get your money back.

4. Buy more OTM calls or puts depending on which leg is in trouble. However the same problem exists here – what if nifty starts heading south?

As you can see all the above three adjustments to iron condors come with their own risk. However one thing is clear – you should take action before you start losing a lot of money. Even though you know your maximum risk but why wait if you can recover the same money in that month and lose nothing?

If you actually lose nothing in that 30% of the times when an iron condor is in trouble – you will see that in a year your investments have bought in around 30-50%. And that is very good.

Now you would like to know what I did? I closed my call leg for a small loss of around 1000 and sold 6300/6400 JUNE call option. Technically this is not a iron condor as I shifted to next month, but its all fair in the game as I have to do what will make me money. The put ones expired worthless in may and I waited for nifty to go down. It did and I closed the June credit spread at a good profit. Nifty started to go down after reaching 6146. My profits actually exceeded my max profit but it took a little more time and patience. Yes patience is important in any trade. Nothing happens in a day or even two. You have to have patience while trading. Eventually the win will come.

As you can see iron condors can be profitable even if your view is wrong. And since one leg is guaranteed to make money, will expire worthless – you can use some strategy to make sure you come out winner of the other leg. However its easier said than done. What if nifty would have kept creeping up? My losses would have been much more than my max loss.

Another thing you should keep in mind when trading iron condors is that you should go as far deep OTM as possible if that makes sense. The further you go, the probability of wining be more. It depends on how experienced you are. A 700 points wide iron condor will have a 80-90% probability.

One more point: Sometime volatility will drop after you have traded an iron condor – and you will be in good profit in few days. In that case don’t wait till expiry – just book your profits. Whats wrong in making 2% in 10 days? You can make the rest in the remaining days. These small profits will add up to big profits in a year.

Happy Trading.

I had done a nifty credit spread a few days back so I will be discussing a live example with you. BTW credit spreads is my favorite strategy. I mostly do them every month and occasionally naked selling only if the markets gives me a great opportunity. If you do not know what a credit spread is here is an explanation.

An option credit spared is a position when the nearer strike option is sold and the further out of the money (OTM) option is bought for protection. Ideally they both should be of the same stock or index and of the same lot size and of the same months (some people create credit spreads with different months but that is entirely different subject. This article deals with same month credit spreads). Since the nearer option is sold – the difference of the amount between the sold and the bought option is “credited” to your account. Therefore the name – Credit Spreads.

Confusing? Ok let me give an example to help you understand.

Lets suppose nifty is at 5800. It has already fallen 200 points recently and you think a re-bounce may happen anytime soon. Even if it falls a bit further you do not think that it will go below 5600 this month. What do you do? You sell (short) one lot (or more) of the PUT at 5600. Now as you know shorting options can be very risky, to protect yourself from a great downfall you buy the same number of lots you sold at the strike price of 5500 or 5400 as per your risk. Now if nifty goes for a free fall you will realize some profit from the options you bought limiting your losses to a certain extend in the short options.

But then, how do you profit?

If both the options expire worthless you keep the premium. That is your maximum profit. Do not worry about losing the premium you paid for buying the options – you will profit anyway because the sold options will also expire worthless. Remember they were costlier than the ones you bought so the premium you received should be more than what you paid to buy the options.

Lets take a real example – a trade I did. As on June 12, 2013 Nifty closed at 5760. In the last 30 days Nifty made a high of almost 6200 and since May 30, 2013 Nifty is continuously falling from a high of 6133.75. This is a fall of almost 6% in 12 days. Yes Nifty can fall a bit further – but certainly from some point it will rebound. I don’t know from where, but eventually it should. (Even if it doesn’t I don’t have much to lose – I will explain why).

The VIX (volatility index) was also on the higher end. Note that option prices are directly proportional to volatility. If VIX is high option prices will also be priced higher. Tomorrow if volatility drops the same options will lose their value. (In that case I can actually profit tomorrow itself and close my positions. However I am not in a hurry.) For those who want some more info on volatility here is a para taken from http://www.moneycontrol.com/indian-indices/india-vix-36.html:

Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Since the volatility was high I was getting a good price on July 5500 PE (put option). I got it at 45. Now you tell me what are the chances that after falling 6% in 12 days Nifty will fall another 5% and more? Slim. But one can’t predict markets, so protection is important – very very important. Here is what I did:

1. Short (sold) to open Nifty July 5500 PE at 45*400 (8 lots) = Rs. 18000.00 (credit in my account)
2. Long (bought) to open Nifty July 5300 PE at 20*400 (8 lots) = Rs. 8000.00 (debit from my account)

Total credit = 18000 – 8000 = Rs. 10,000.00.

ROI: 45 days are left for expiry. Total money invested is 1,30,000.00. Absolute return is 7.69%. it comes to almost 5% return in a month. Of course, I need to get out in a profit.

Here is the profit and loss graph of Credit Spreads:

By seeing the image I hope you can understand that profit and loss in a credit spread is always limited.

Now coming to my trade. As you can see I got a credit, the trade is called “Credit Spread”. This can be done either in calls or in puts. You just have to sell the option with the higher value and buy the option with the lower value to get a credit in your account.

Credit spread usually have a success rate of 80%. But here is a cliche – one losing trade can eat profits of many months. Therefore its important to adjust your credit spreads if your short leg is in trouble – and it does happens believe me – more often than you can think of.

Why I did a trade in July month and not June month. Only 15 days are left for expiry of this month so I would have not got a good credit at 5500 puts. (June 5500 PE is at 13.05) plus if Nifty starts moving down fast I will have no time to adjust my credit spread. It made sense to play the next month options.

Profits are limited, what about the losses?

Good question. You see losses are limited too since I have bought 5300 puts for protection. The difference between the prices of the options will be my maximum loss. Lets take an example. What happens if Nifty closed at 5200 in July expiry:

1. 5500 PE = 300 (5500-5200 = 300) I had received 45 so ((45-300)*400) = -102000.00

2. 5300 PE = 100 (5300-5200 = 100) I had paid 20 so ((100-20)*400) = 32000

32,000 -1,02,000.00 = -70,000.00 this is my maximum loss. However my profits are only 10,000.00. As you can see even if I make profit for 7 months – just one month loss will offset my profits. Therefore I should adjust my spread if Nifty gets closer to my shorted puts i.e… 5500. and I have to do it much before I enter a huge loss.

Lets see how we adjust our credit spread if it really comes to that. Luckily I did not have to adjust my spreads as Nifty never came close to my short puts. 🙂 (BTW if I had to, I would have taken a small loss in my credit spread and rolled it down 200 points if Nifty had fallen sharply near 5500 very fast as soon as I opened my spreads. If nifty closed above my new position I will have no profit or no loss or some profit / loss depending on the trade. But I would have certainly avoided a huge loss as explained earlier. And further I keep a record of my trades so if anytime I adjust my spreads I will update this post with a real adjustment of credit spreads.)

Here is a update: On July 04, 2013 I closed my credit spread.

I bought July 5500 PE (remember I had sold it earlier) at 16.00, and
I sold July 5500 PE (remember I had bought it earlier for protection) at 4.50.

Lets calculate my profit or loss:

Sold July 5500 PE (8 lots): (45 -16) * 400 = 11,600.00 (profit)
Bought July 5300 PE (8 lots): (4.50 – 20) * 400 = -6200.00 (loss)
Total Profit: 11,600.00 – 6200.00 = 5,400.00

Some people might be thinking why I bought the protection. My profit would have been great. Yes you are right, but falls are steeper, even before you know you can incur huge losses. With this small price for insurance at least I can sleep better in night. You don’t want to make money without sleeping, do you?

Lets calculate return on investment.

Total cost of opening the spread: 1,30,000.00

Absolute returns: (5400/130000.00) * 100 = 4.15% in 20 days.

Note that I could have close my spread a few days back when Nifty went near 5900 and got even better profits in less days – but these things keep happening in trading. You never get the best price. Ultimately its the profits that matters. 🙂

Also I did not wait for the expiry. Why? Because I am already getting a good profit and a full month is left for expiry. A winning trade can become a losing trade some day, who knows. So its better to close the spread when you have realised a good profit from it and release your locked for margin cash for opening another spread or doing any other trade.

Hope this article has helped you to understand credit spreads. If you want to know anything please ask in the comments section below.

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 🙂

Long call is a bullish strategy. This is a very simple and straight forward strategy. This strategy is followed by most option traders all over the world even in India.

In fact this is the first strategy option traders start with. As soon as a trader learns options the first thing they do is buy an option in lure of making unlimited profits.

This sentence – Option Buy Is Limited Loss & Unlimited Profit – is the biggest reason for financial losses caused to option traders ALL OVER THE WORLD

How many option traders will read that and NOT become greedy? Almost all will and try their hands in option buying.

Long call (or long put) are both highly favored by traders because it can produce jackpot profits. Limited loss is involved – that is limited to money paid to buy the option, but the trader if right can make unlimited profits. Here is the graph of the long call:

Note: This does not mean a trader always make unlimited profits buying options. In fact most option buyers lose money. The reason is the lure of hitting the jackpot one day. Unfortunately that unlimited profits never comes and in the dream of getting those profits traders keep losing money for years but they still believe that one day one option will recover all their losses. This NEVER happens. Here is an example of a trader losing 40 lakhs buying options.

Ok, coming back to the topic. Let me discuss in a simple way. Suppose you feel a stock ABC Ltd will go up in next 2-3 months, what do you do? You simply advice your broker to buy that stock. If it goes up as you guessed, you sell it and make money. However if the stock doesn’t go up, you wait until it goes up to sell.

If your view in Nifty is the same – that it will go up, what can you do? There are no shares of Nifty floating in the stock markets. So you have two options. Either buy futures of Nifty or buy calls. Well both have their pros and cons.

If you buy futures you are taking unlimited risk. For example if you buy a stock futures when the stock is at 100 and if your view goes wrong and the stock starts going down, you will panic and sell the future at a loss only to see that your view was right and the stock started climbing up again. This happens to most future traders. After taking a stop loss they see the stock moving in their favor. What is the solution? Solution is hedging futures with options which is well explained in my course.

What I want to say is this, buying/selling futures will not give you the confidence to stay in the game for long. With futures you need extra-ordinary timing. The stock should go up from the point you bought the future else you may panic. How many times can you time the markets? You will lose 8 times out of 10 for sure.

However what if you buy a call option instead of a future? Lets suppose a current month ATM call is at 100 and its lot size is 50, which means you only pay 100*50 = Rs.5000/- to buy a call. So your maximum risk is Rs.5000. Does that give you some confidence? Of course it does. Now even if the stock is going down, you can wait as you know the maximum you will lose is Rs.5000/- only. In fact if you have decided that you will take a max loss of 2000 in this strategy – this will give you even more confidence. For you to lose Rs.2000/-, the call should reach 60 – a 40% decline. For that the stock lets assume has to go down 80 points for you to take a stop loss. If your view was right, it actually may not go down till there, from some point it will start the upwards journey.

In the above example had you taken a future you would have taken a loss of Rs.4000/- (80*50) – double compared to call option. But still many traders prefer futures. You must be thinking why? Its just because if the risk is less in options, even the rewards are less.

Lets take the above example. Lets suppose you bought one lot of futures and one lot of call option at Rs.100 when the stock was at 5500. Lets also suppose you were right and within 2-3 trading sessions stock went up 100 points. In futures you profit stands at: 5600-5500 = 100*50 = Rs.5000/-. And your profit in the Call Option? The call would have grown by only 50 points or slightly more/less. Why? This is due to Delta. Delta is value that decides how much an option will gain in value if the stock gains 1 point. Delta works differently with different strike prices. Lets not get into further details of delta except that it effects the way option prices increases or decreases with the underlying.

So your gain would have been 50*50 = 2500.00. Not fair? No it is, if your risk is less, why should you gain more than your risk?

I would advise, buy options if you feel markets will go up. Be ready to take a stop loss at a point where you are comfortable. Most traders keep a 20-10 strict rule of profit vs stop loss. That is a 20% profit and 10% stop loss. However you can have your own rules. With this rule if you are right even 50% of the times, you will be in profit.

Another important thing that I want to mention is that do not take your options to the expiry. Its very risky. If your are taking a profit, just sell the option and be happy. You will not go broke booking profits. You can take the option to expiry only if you have already lost most of your premium and you are certain that markets will eventually take a turn that too before expiry. But you should never let yourself be in that situation in any case, you should take a stop loss. Markets behaves in their own ways, we need to respect that behavior and take our loss or profits whenever we are comfortable.

Now the next question is which option to buy. As I have mentioned before there is something called Delta that effects the option prices. ITM (In The Money) options have higher delta, which means they move smartly with the markets. Deep in the money options will almost move 1-1 with every increase in nifty prices. But the only problem is that they are very costly.

In that above example when the stock is at 5500, a 5400 near month call will be priced at approx 140-160 depending on the time to expiry. To buy this call you may need anywhere from 7000-8000 rupees. But the benefit is that if nifty moves even 20-25 points you can realize a good profit.

However deep OTM (Out Of The Money) calls will be cheaper. For example when the stock is at 5500, a near month 5700 call will be around 35-42 approx. You can buy more lots with the same amount of money, but a small move in the stock will have no effect on a OTM call, and if the stock does not move beyond 5700 until expiry, you may lose your entire investment.

Therefore if there is no apparent reason and you want to buy not-hedged calls, just buy at least at the money calls, but never out of the money calls. You should always look for percentage when trading, buying more options with less money will not be of any help. Buy ATM calls and work on percentage. ITM calls will be very costly so its better to avoid them.

If you have less cash, then buy less lots of ATM calls or puts. At least if the markets moves in the direction you predicted you will make some profit and get out. As far as OTM calls are concerned, sometimes even if your view was correct you may start to see your options lose value with time and you may sell at a loss – this even if your view was right. Therefore I highly recommend buy ATM or ITM calls only.

Learn Option Trading with perfect hedging to make a monthly income without stress, which will be kind of side business. Once your account grows big enough you can do it full time. See testimonials here. You can enroll for the course here.