February 10, 2019

How to trade nifty weekly options?

All options expire last Thursday of every month and now with the introduction of weekly options, we will now have an expiry every week.

It should be noted that premium in options drops faster as one heads towards expiry. So if traded properly, it will mean even more income for an option writer.

Look at this from an option writer's perspective. Assume a trade in NIFTY 11000 CE (at the money) with IV of 15 and expiry of 7 and 30 days.

The options will be priced at Rs.100 and Rs.200 respectively. Note: this is approx and rounded off for convenience. Also, I am using the option calculator at vfmdirect.

Here if I write a monthly option, I will collect Rs.200 as premium income in monthly option. But if I sell a weekly option (current series), I can earn Rs.100/- EVERY week or Rs.400/- in a month. This is fantastic.

For the buyer of the call, it means he will earn a profit only IF the price on expiry is ABOVE 11200 for monthly options and 11100 in case of weekly options.

A simple strategy assuming trend is up would be to:
- buy 10500 CE around 500 and write 11000 CE around 100... SL 100 points in futures

By buying a deep ITM CE, the premium (time decay factor) will be almost nil so the position becomes fully hedged. This trade can be taken every Friday in current series.

One can devise strategies depending on whether one  expects to be bullish, flat / rangebound or bearish. There are hundreds of possibilities. Try the options strategy builder at http://opstra.definedge.com/strategy-builder and experiment with different strategies.

NOTE: as a buyer, your enemy is time decay... you need to be fast with your traders and do the maths accordingly


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