Adjustments in Option Strategies

Lots of option strategies are available with each option strategy having its own pros and cons. What kind of strategy is useful for something like Banknifty , which is an active index, which is a sectoral index and is a volatile index.

Any strategy which we want to apply, must ensure that we can travel with the market and it can take care of both the possibilities i.e. huge movements or no movements. In an unstable scenario when with a small news, markets / index start making wild moves, it is very important that we know advance skills of adjustments in our option strategies. All non-directional option strategies (where we are not predicting the direction of market ) require us to be very clear in our adjustment plans. When should the adjustment be made , at what point of Banknifty , what should be the action – all these points should be hundred percent clear, objectively, before entering the trade using non-directional strategy.

Since there are relatively huge premiums available in Banknifty options , if we are clear about our adjustment process in overall scheme of things, the daily decay in Banknifty options will surly result in very good results. Yes, this will happen even with volatile movements in the Banknifty index because higher implied volatility in option contracts of Banknifty, ensure very good theta i.e. time decay.

So most important part of Banknifty trading is the adjustment part. Once a good adjustment plan is in place, there is no looking back. And returns are fairly consistent also.

One day workshops in option strategies and adjustments by www.theoptionschool.in

Understanding Implied Volatility

When we are trading in options, specially with option strategies , correct understanding of implied volatility is must. A non-directional option trader is trying to earn profits through decay in option premiums and it is extremely important that trade is initiated when premiums are high.

When will the option premiums be high ? Option premiums of all the options will increase whenever there is more uncertainty in the scrip or in the market as a whole. Due to this uncertainty (which may be because of various reasons) , there will be a good increase in the premiums  for both the options across different strikes. This is very clearly reflected by increase in Implied Volatility values as these values are directly proportional to the value of premium in the option. And hence provide a great opportunity for option writers to write options.

Once the event because of which there was increase in Implied Volatility is over, there will be a sharp decrease in values of implied volatility and in the premiums of options. This is what option writer wants. He would write options at a much higher value and square off his trades at a much lower value, thereby booking profits in his trade.

So golden rule is sell high implied volatilities and buy low implied volatilities.

Now a good option trader must develop capabilities to identify what value of Implied Volatility is high and what value is low. This requires experience and a plan to trade for events so that right kind of trade is executed.

 

Author is conducting workshops in options trading across India. For details visits :-

www.theoptionschool.in

Understanding Implied Volatility

When we are trading in options, specially with option strategies , correct understanding of implied volatility is must. A non-directional option trader is trying to earn profits through decay in option premiums and it is extremely important that trade is initiated when premiums are high.

When will the option premiums be high ? Option premiums of all the options will increase whenever there is more uncertainty in the scrip or in the market as a whole. Due to this uncertainty (which may be because of various reasons) , there will be a good increase in the premiums  for both the options across different strikes. This is very clearly reflected by increase in Implied Volatility values as these values are directly proportional to the value of premium in the option. And hence provide a great opportunity for option writers to write options.

Once the event because of which there was increase in Implied Volatility is over, there will be a sharp decrease in values of implied volatility and in the premiums of options. This is what option writer wants. He would write options at a much higher value and square off his trades at a much lower value, thereby booking profits in his trade.

So golden rule is sell high implied volatilities and buy low implied volatilities.

Now a good option trader must develop capabilities to identify what value of Implied Volatility is high and what value is low. This requires experience and a plan to trade for events so that right kind of trade is executed.

 

Author is conducting workshops in options trading across India. For details visits :-

www.theoptionschool.in

Trading in Banknifty

How different is trading in Banknifty options ? Can we apply same principles of Nifty trading in Banknifty also ?

To answer these questions , we must first understand the difference between Nifty and Banknifty. Nifty is a broad index representing different sectors like banking, IT , capital goods, pharma , metal, auto etc whereas Banknifty is a sectoral index of 12 large capital banks only. Having a broad base should give Nifty a much more stability because different sectors can behave differently. If one sector is rising, another can be falling and hence balancing each others movement to some extent. But in Banknifty , only differentiation can be private banks or public sector banks. Differentiation is too thin and hence movement can be unidirectional and much more sharp.

So fundamentally, Nifty is broad based but Banknifty is sectoral although it is very stronlgy represented in Nifty Index also. If stability is what we are looking for in our trading strategy, Nifty should be obvious choice. But this is not the case in recent past. It has been observed that percentage movement in Nifty has been equally (if not more) volatile as that of Banknifty.

Another important observation is that Implied volatility in Banknifty options is at least 10 points higher than Nifty options.This means higher premiums and which means higher decay in premiums is possible with similar movements. If we calculate and compare the amount of money invested for Nifty and Banknifty options, we will find percentage returns are rather slightly better in case of Banknifty. Although this should not have been the case , but becuase of extremely low implied volatility but still high movements, Nifty has become a second choice for option writers. Its a matter of time when volumes will also catch up. Till otherers catch up , let us take the benefit of trading in Banknifty options.

Start with paper trading

If you are just starting your journey in options trading, it is always prudent to start it with paper trading only. Although option trading through option strategies can be a really rewarding business, but if you do not understand it well, it can be really dangerous on your capital.

So, best way to start is trade options on paper only. Make some theoretical purchases and sales , observe how it works with the actual market movements , make the adjustments as per the required system, again follow the real markets and see the results.Once you are fully confident and comfortable with the strategy, only then go for actual trades.

This becomes all the more important because when we are trading with actual money, Greed and Fear will come into picture which will force us to take wrong decisions. But as long as we are trading on paper, our decisions will be much more rational and hence execution will be much better. Once you understand the strategy with experience in paper trade , you are ready to trade with real money in few days.

Also , its important to get your learnings in paper trade on track. You must be able to clarify your doubts, so that the actual benefit of paper trading is extracted. Lastly, do not go very long for paper trading only. Start real trading in a step by step manner. Ultimately, in any case, the real learning will take place through actual trades only !!