TAIL RESEARCH 0 Nov 2018

Option Selling Strategies

11th February 20202019

05th November

Nayak Ajit Srinivas

[email protected]
Retail Research | Option selling strategy

Option Writing - Strategies in Nifty / Bank Nifty

Recommendation

Script Expiry Price Range

Sell Bank Nifty PE 30900 13-Feb-20 Rs.33-Rs.36
Sell Nifty CE 12200 13-Feb-20 Rs.33-Rs.36
Buy Nifty CE 12300 13-Feb-20 Rs.8-Rs.10
Nifty and Bank nifty Expected Move for the weekly and monthly expiry.

Why Option Writing?

1. Time Decay favours the Option Seller. The last 1-2 days of expiry witnesses a faster fall in premiums. Most (about 80%) options expire worthless and they
are a depreciating asset due to theta decay. Hence unless you have a fair idea about the direction of the index or stock and its timeline, one should refrain
from buying an option.
2. Option Sellers Do NOT necessarily have to Be Right in Index Direction.
3. Volatility Favors the Option Seller – High current implied volatility ( Nifty 13.35, Bank Nifty17.04) means that it could be headed down to test the lows (low
of Nifty IV over 6 months 9.94 and low of Bank Nifty IV over 6 months 12.01).
4. High liquidity and low impact costs.

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Retail Research | Option selling strategy

5. If done intelligently and with proper risk control measures in place, one can look to earn a good return on the margin amounts invested. The margin
payments can also be deposited in the form of Bank FD or securities/stocks. Traders may have to look for premature exit or shift to higher/lower strike
price/other expiries due to unexpected developments or faster than expected fall in option premiums.
6. The option premium prices are less volatile in the case of indices than in the case of stocks.
Average Weekly Move (derived from 1090 sample data – more than 20 years) Average Daily Move (derived from 1090 sample data – more than 4 years)

Risks Involved:

1. If the option buyer has unlimited profit potential, then the option seller potentially has unlimited loss possibility in case the index moves against his
position directionally in a short period of time.
2. The margins charged to an option seller is similar to the margin requirement for a futures contract. This can be reduced to some extent by doing a strangle
or straddle.
3. In case the IV rises after selling an option premium, the position can go into loss even if the underlying index has not changed much.

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Retail Research | Option selling strategy

Technical Research Analyst: Nayak Ajit Srinivas ([email protected])

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