NIFTY Options Trading by RAJ

[arcus]

Yes you are right from a Retail Trader perspective. (If you have Stocks and you want to protect your stocks you have to Buy Puts and not Sell Puts because there is no Shorts possible in Stocks.) But from a Market Maker perspective, They Can Go Long and/or Sell Short. So they create a Range for the Retailers to play. So let us play within that Range. Sorry If my explanations are confusing. What I wanted to say was Market Makers try to create a Range for the Index or Stock, which is visible using the MAX (OI).

That is silly. Market makers don't always make money. When they realize they are wrong market makers do square off their losses. If they don't, they lose money just like anyone else.

If you don't believe me watch the movie - "Rogue trader". Its a true story about a guy who was a market maker with extremely deep pockets. He did go bust simply because he didn't accept he was wrong.

Hedging a long position never involves selling puts. That's completely ridiculous whether it is from a retail perspective or a market makers perspective.

 

[Niftytradingindia]

In options right way to trade is using spread strategies that involve both buying and selling options.

Nifty futures: good for day trading
Naked options good for weekly or monthly trading but still high risk
Option spreads good for weekly or montly trading with medium risk

What are most suitable spreads
- bull call spreads - trade if trend is bullish
- bear put spreads - trade when trend is bearish
- stradles and strangles - trade when high volatility expected in near term

Here is an example of spread

For august 2013 expiry
Bull call spread:
Buy 6000 call @ 79 & sell 6100 call @43 with net debit of Rs.36/- (as per jul 27 close)
If nifty remains where it is as well as if it rise, you will see this difference of 36 will increase. Say if this difference become Rs50/- you close both positions. Total return is 50-36=Rs.14/- = 39% gain.
For the sale of call there will be margin kept but you will rarely get margin call till nifty go above 6200 and actually if nifty go above 6100 you have to close the position as at this time you will make maximum possible profit (may be 120%).

So
- this spread is safer then futures trading
- has high profit opportunity , negligable chance of margin calls
- this spread will make money even if there is minor uptrend like, nifty go up 60 and come back 60 , still you will see that you will make profits (at same level) as call premiums will rise. In case of futures you would have been terrified by nifty coming back to your buying level and closed your position.

 

[Niftytradingindia]

Also in above spread what happens if nifty go downwards ?
- if you would have bought 6000 naked call at 79, you would have lost all of it on expiry, but in this case your max loss is 36 at expiry (more then 50% loss reduction)

Whats the catch?
- the only catch is that you your max profit is capped to rs.64 (178%) whereas in case of naked call its unlimited. But isn't 178% more then enough. Average profit of highly successful option traders is not even 10% per month.

 

[Happy_Singh]

It just appears, but is it really better than Futures trading?

Selling Options does not, by default, give any advantage over selling futures. Sure, you may have time decay on your side, but you will lose out on Risk Reward ratio.

I mean, if options are sold, then your max return is fixed. But, in futures the max return is unlimited. Therefore, the Risk Reward is bound to be better.

At the end of the day, it is all one and the same. If you have the mental skills, then you will succeed irrespective of the instrument.

I don't understand how it is same . . . can you give an trade example using futures for same/similar trade . . .

I have shorted Bank nifty 13Aug CE 11300 @ Rs. 105, maximum margin would be around 20K . . .

I do not expect BNF to go above 11000, and will think of corrective action only if it does that, meanwhile price of the option will not be considered . . .

Now i fail to understand how can we structure something like above using only futures . . . plz enlighten me.

Thanks

Happy

 

[jamit_05]

For august 2013 expiry
Bull call spread:
Buy 6000 call @ 79 & sell 6100 call @43 with net debit of Rs.36/- (as per jul 27 close)
If nifty remains where it is as well as if it rise, you will see this difference of 36 will increase. Say if this difference become Rs50/- you close both positions. Total return is 50-36=Rs.14/- = 39% gain.
For the sale of call there will be margin kept but you will rarely get margin call till nifty go above 6200 and actually if nifty go above 6100 you have to close the position as at this time you will make maximum possible profit (may be 120%).

So
- this spread is safer then futures trading
- has high profit opportunity , negligable chance of margin calls
- this spread will make money even if there is minor uptrend like, nifty go up 60 and come back 60 , still you will see that you will make profits (at same level) as call premiums will rise. In case of futures you would have been terrified by nifty coming back to your buying level and closed your position.

Lets look at the bigger picture. What will it take to get that 39% gain?

For a Bull Call Spread to succeed at month end, it is required that the buy CE strike ends up being the Low of the month. Now that is pretty hard to achieve.

On the other hand, you may exit at quick gains of 10%. Yet, that won't suffice, because one bad trade (100% loss) will wipe-out all your gains from 10 trades. And this is not just a theory. Ask any seasoned trader and he'd tell you that it is commonplace to see the price reverse as soon as you take entry (u feel as if the market is conspiring against you).

So, to succeed bull call spreads, you will need:

1. Trend Detection System
2. An Exit policy for profit taking, which you consistently follow.
3. An Entry System (plus mental skills to ensure that you take all entries)
4. And, probably, a Stop Loss system too.

In essence, you will require an entire system to achieve any success.

Point being, that whether its futures, options or equities, it is all just trading and hence bound by the rules/tenants of trading.

It may appear so, but there are no short cuts.

 

[jamit_05]

I don't understand how it is same . . . can you give an trade example using futures for same/similar trade . . .

I have shorted Bank nifty 13Aug CE 11300 @ Rs. 105, maximum margin would be around 20K . . .

I do not expect BNF to go above 11000, and will think of corrective action only if it does that, meanwhile price of the option will not be considered . . .

Now i fail to understand how can we structure something like above using only futures . . . plz enlighten me.

Thanks

Happy

I will ignore the sarcasm, if any, when you ask for enlightenment, and proceed.

Let us compare it with futures. I shorted Nifty Futures below LOD 22nd July, which was 10948.40 in BNF. Currently, BNF is 10465.30. So this puts me 483 points in profit and counting. Whereas, if I had shorted a call I would have made 105 points Only!

So, I think Buying Options could make some sense in specific scenarios (like, if one sees momentum or in last week), but shorting options is probably bad deal.

 

[healthraj]

That is silly. Market makers don't always make money. When they realize they are wrong market makers do square off their losses. If they don't, they lose money just like anyone else.

If you don't believe me watch the movie - "Rogue trader". Its a true story about a guy who was a market maker with extremely deep pockets. He did go bust simply because he didn't accept he was wrong.

Hedging a long position never involves selling puts. That's completely ridiculous whether it is from a retail perspective or a market makers perspective.

Arcus, If Market Makers themselves are not able to make money in the market then you can imagine the status of the Retail traders. Thanks for your opinion anyway.

When I read daily how the FIIs and DIIs work in tandem, I don't think they are working like Rogue Traders. Of course there will be always those Rogue Traders but it should be unusual. I am also not able to believe how "When the FII Sell, DII Buy and When the FII Buy - DII Sell". How do the DIIs know that FIIs are selling? If somebody believes that it is all coincidence then that means do not understand the BIG Game behind it. Anyways it is purely my opinion.

 

[healthraj]

That is silly. Market makers don't always make money. When they realize they are wrong market makers do square off their losses. If they don't, they lose money just like anyone else.

If you don't believe me watch the movie - "Rogue trader". Its a true story about a guy who was a market maker with extremely deep pockets. He did go bust simply because he didn't accept he was wrong.

Hedging a long position never involves selling puts. That's completely ridiculous whether it is from a retail perspective or a market makers perspective.

Arcus,

If you don't accept "How selling Puts will put pressure on the Bears?". Then please tell me how else will the Bulls will be able to put pressure on the Bears?

Let us not confuse the people who are beginning to Learn Options by making some obvious statements.

Let us take an example. On Friday Max OI in NIFTY was at 5800PE and 6000CE. On Thursday it was 5900PE-6000CE

So Bulls lost control of 5900 and trying to Protect 5800 by selling 5800 PE.
What Happens when there is a Heavy Selling on an instrument ? Initially the price will go UP but ultimately the Price will go Down when there is a Heavy Volume.

When the MAX OI is at 5800PE-6000CE, my understanding is as follows. We cannot predict the market and I don't want to predict.

Bears are controlling 6000CE and putting pressure on BULLs and so it would not be easy for Bulls to cross 6000.

Bulls lost control of 5900 and now trying to Save 5800 by selling 5800 PE.
So ultimately when the Market moves UP (to say 5900 or 6000), the Bulls will make money by covering the PUTs at the TOP and thus it acts as Hedging. Somebody might say what if the market does not go up? The bulls will loose on the PUTs that they Sold. Yes but the probability is only 20% because the index is trending only 20% of the times. Any market which goes UP has to come DOWN and vice versa. That is what I meant by Hedging Especially when we talk about Index like NIFTY. Only 20% the Index is Trending and 80% of the days the NIFTY Index is Rangebound.

Here Remember that Market makers could play both the Bulls and Bears in Options because their job is to make sure the market is within the Range. If the market goes UP and DOWN like crazy then there will no control and there will be no Market Makers and there will be no Market to Trade. I mean nobody will be willing to play the Role of a Market maker. So the important point is even in a Trending market the Range is fixed by the Market Makers. Instead of 50 points it could be 500 points. So from that point of view whether it is 50 points or 500 points, in a larger sense it is a Range bound market from the Market maker point of view.

As Retail Traders, the only way to find out this Range is using the MAX OI. and since 80% of the time NIFTY Index is trading within the Range, 80% of the time trading that range will also bcome profitable. 20% of the times there would be breakout of the Range.

I used the analogy to only explain people to understand the Options. If you have a better way of making people understand Options, I am willing to learn from you but saying it is silly and ridiculous is does not justify anything.

If somebody wants to make money on NIFTY Index, then if you trade with the assumption that it is Trending 20% and Rangebound 80% then you will make most of the money. Either you might trade for the 20% Trend or 80% Rangebound or BOTH. Whatever technique that I am recommending to Sell the Pairs will be successful only when the market is Rangebound

 

[Happy_Singh]

I will ignore the sarcasm, if any, when you ask for enlightenment, and proceed.

Let us compare it with futures. I shorted Nifty Futures below LOD 22nd July, which was 10948.40 in BNF. Currently, BNF is 10465.30. So this puts me 483 points in profit and counting. Whereas, if I had shorted a call I would have made 105 points Only!

The sarcasm was quite intended . . . :thumb:

In the above reply you have conveniently ignored to show us how the same objectives can be achieved using any futures trade.
The only thing you seem to say is that your this one BNF short trade was ohh so great . . .

further it seems, you are implying that one should only trade using futures as it is far better, compared to any trade that can be structured using options . . .
In other words, your point of view is that it is silly (if not outright stupid) to trade with options . . .

So, I think Buying Options could make some sense in specific scenarios (like, if one sees momentum or in last week), but shorting options is probably bad deal.

Ok, as per you enlightened view all the option sellers are just plain suckers?

anyway . . . don't feel there is anything much we can gain from this discussion . . . we will just muddy this good thread about Options Trading , started by Raj . . .

i know you may have lots to say but i will just opt out of this and let you have the last word . . .

Happy

 

[healthraj]

The sarcasm was quite intended . . . :thumb:

In the above reply you have conveniently ignored to show us how the same objectives can be achieved using any futures trade.
The only thing you seem to say is that your this one BNF short trade was ohh so great . . .

further it seems, you are implying that one should only trade using futures as it is far better, compared to any trade that can be structured using options . . .
In other words, your point of view is that it is silly (if not outright stupid) to trade with options . . .



Ok, as per you enlightened view all the option sellers are just plain suckers?

anyway . . . don't feel there is anything much we can gain from this discussion . . . we will just muddy this good thread about Options Trading , started by Raj . . .

i know you may have lots to say but i will just opt out of this and let you have the last word . . .

Happy

No issues with discussing and debating stuff. Trading is a Zero sum game. In fact I know that even Amit was trading heavily on Options. Amit had a dedicated thread on Options. May be now Amit is at a different higher level. Eveyone is speaking from their own experience. So please discuss freely and I am sure everybody here is to make money and everybody will have something to learn from everybody.

Amit, If I may request, What will be best suggestion for a beginner? To Trade Options or Futures. Please suggest. Ultimately I agree that Futures might have unlimited profit. What about for somebody who is struggling to learn and how will somebody gain that mental confidence. I am sure you might have gone through all these phases. Please suggest.