Momentum – buy options
Swing – sell options
Selecting strike price
a. Buyer – select the strike price at ATM or closest ITM or next best OTM. It normally
gives highest ROI
b. Seller – select OTM
The above table is applicable to all 3 - future, calls and puts
OI GOES UP WHEN FRESH POSITIONS ARE CREATED. IT IS CALLED AS ‘BUILD UP’
OI GOES DOWN WHEN EXISTING POSITIONS ARE CLOSED/COVERED/SQUARED OFF. IT IS
CALLED AS ‘COVERING’
Long build up – Fresh ‘Long’ positions are being created by buyers.
Short covering – Existing ‘Short’ positions are being covered / closed / squared off.
Short build up – New ‘Short’ positions are being created by sellers.
Long covering – Existing ‘Long’ positions are being covered / closed / squared off by buyers.
Short covering - TMG – Tambu Me Ghabrahat
Short build up – TMJ - Tambu Me Jamavat – YNJ
FUTURES
OPTIONs
Always look from ‘seller’s’ perspective in case of options (both CALL and PUT). These are
big guys and therefore dominant forces.
Buyer of options are usually retail traders since it requires very less capital (no margin).
Tambu me Jamawat (TMJ) i.e. price going down and OI going up (short buildup). It indicates
that the price will not cross the given strike price (Yaha Nahi Jayega)
Sell options at OTM where there is maximum TMJ.
YNJ = Yaha Nahi Jayega
Historical volatility – affects the option premium (high volatility = high premium and vice
versa)
It is a TA indicator which should be looked at on a ‘daily’ chart.
HV increases due to major events such as elections, budget, interest rate decision etc.
(DON’T “BUY” OPTIONS on EVENT DAYS. It is better to SELL options on such occasions)
If HV is low, buy the options.
If HV is high, sell the options.
Covered options + Collars
Vertical spread
Should be done on Daily wave (positional tradin). Avoid on intra-day / hourly wave.
Suggested vertical spread strategies in different scenarios:
Bullish Momentum – Bull Call spread (Debit strategy)
Bullish swing – Bull Put spread (Credit strategy)
Bearish momentum – Bear Put spread (Debit strategy)
Bearish swing – Bear Call spread (Credit strategy)
Bull call spread
Applicable for momentum trades (e.g breakouts)
Buy ATM call
Sell next OTM call
Bull put spread
Applicable for swing trades (e.g. double bottom)
Sell ATM put
Buy next OTM put
Bull put spread will provide better ROI if the trade are executed at the beginning of the
contract period i.e. say 28 / 29 of the month. (reason: premiums are more expensive)
Call put spread will provide better ROI if executed towards expiry (because premiums are
cheaper)
Bear call spread
Applicable for momentum trades (e.g breakouts)
Buy ATM put
Sell next OTM put
Bear put spread
Applicable for swing trades (e.g. double top)
Sell ATM call
Buy next OTM call
ROI is poor in this case because the premiums are cheaper (due to closer to expiry). Also, this
is a bearish trade in overall strong bullish market. Therefore, not recommended.
Max gain = difference between premiums of the spread
Max loss = strike price difference – max gain
Ratio spreads (for super bullish / bearish market)
Must be done in Debit strategy i.e. for buying (i.e. bull call and bear put). This will provide
opportunity of unlimited profit with limited (but higher loss than normal spread)
Not to be done for selling (since there is unlimited risk will get multiplied against limited
cover).
Converting Ratio spread into regular spread (in case market is no longer super bullish /
bearish)
Start with ratio spread. E.g buy 5 and sell only 3. By end of the day, sell another 2 (assuming
the rates have moved favourably, you would get better rates). This way, at end of the day,
Ratio spread gets converted into a normal spread.
Straddle / strangle (for sideways market)
Straddle: When buy and sell options at same strike price at ATM. Expiry at ATM gives
maximum profit
Strangle: Buy and sell OTM options
Since this is a sale strategy, it should be done when the premiums are high i.e.
1) At the beginning of contract period
2) When HV is high
Risk: If the price closes outside the range, then there will be unlimited loss. Therefore, these
are naked strategies.
Covering the risk for straddle / strangle
Use Iron butterfly / iron candor
Short straddle and Short iron butterfly example
Short strangle
Strangle has maximum profit at a range of prices; whereas straddle has maximum profit at a
ATM.
Long straddle / strangle
- To be done when market is in confusion
- When you are expecting a big move – but direction is not known i.e. big event
- Your view is that the price will either move above or below a range
- Not recommended since does not often succeed
Put call ratio (PCR)
0.9 to 1.1 is neutral
Should be checked for broader market i.e. Nifty and not for individual stocks
Important summary
Option buying conditions
- Momentum
- HV low
- End of expiry
Option selling conditions
- Swing
- HV high
- Beginning of expiry
Naked option sell – jamawat ke peeche
Covered option sell – ATM
Sudama set up (zero to hero setup: high risk high return)
- Its about option buying (not selling)
- Important to build a “view” (bullish or bearish)
- On the date of index expiry
- Bullish – buy calls; bearish – buy puts
- Warning – to be done out of your profits (say 2% of monthly profits or 5% of weekly
profits) – the amount you are willing to completely lose
- Most probable candidates: FinNifty (Tuesday expiry), Bank Nifty (Wednesday), Nifty
(Thursday)
- Select an option which made a low during the day and is at 2X price at 1 pm
- TMG is a mandatory condition (price up; OI down) – else it is not Sudama
- View building process
o Start watching charts after 1230 pm on 5 mins wave
o Direction of tide (i.e 15 mins and 1 hour MACD) decides whether Sudama will be
on put or call
o Breakdown / breakout on 5 mins wave
Main session revision
TLBO = Trendline breakup
TLBD = Trendline breakdown
MCBO = Mother candle breakup
MCBD = Mother candle breakdown
BuCA = Bullish counterattack
BeCA = Bearish counterattack
Example of double bottom