Straddles, Strangles, Spreads and what not! It would be great to share your strategy and get others opinion
A more detailed answer below –
I have been using (and improvising) this Bank Nifty option selling setup for at least 4 years now (mix of paper trades, excel back testing and real trades)
- SPOT is the only holy grail
- Indicators are just indicators, I don’t use them
- Open Interest shows where the actual money is being deployed/ taken out from the market
- The ‘big guys’ have more information than us, hence we have to follow them
- I don’t check VIX before entering a trade, but I do understand that one needs to sell when VIX is high. How high is high? 15.6 or 20 or 12?
- BankNifty is more volatile than Nifty. And multiples of 20 are far easier than multiples of 75, isn’t it? What is 13 X 20 and 13 X 75. Hence I choose BN
- Most of the option buyers lose money and hence selling options has an edge
If you agree on these points, please read on.
A statisticsal deep-dive:
I tried building this table using previous 20 years BN SPOT data. BN was trading around 10k if I remember it right and today approx 30300 today. I have normalized this data…
… and this is what I got (You can read more here – niftybanknifty.com )
How to study this image – The row labels represent ‘n’ days from a particular day and column labels represent a deviation in points.
Let us take DAY 1 on rows and 0 points on the columns. The value is 24.5%. It means – chances that BankNifty will move from 0 to 100 points from the current spot in 1 day is 24.5%.
If you need a larger range, simply add up the % values.
- Each column will add up to 100%
- It can be observed that the bottom half of the table has more greens than the upper half, indicating that the index moved up and up in the longer run (over the past 20 years)
How is this table useful –
Let us assume we are on Friday closing, and the BankNifty Spot value is 30000.
We have 4 days till expiry (weekly expiry). Considering the range to be (-800,800) from the current spot (highlighted in the red box), the values add up to 96.1%
So we can sell (30000 + 800) CE and (30000 – 800) PE because these options will more likely (96.1%) expire as OTM options
If you are risk-averse option writer, you can choose to write options 1000 or 1200 points away (approx. 99.2%), but your ROI will be lower
On event days, better not to trade. Yes, you are in that 3.9% range and more likely to lose money. Sometimes NO TRADE is A GOOD TRADE. If it is itchy and you badly want to trade, you should hedge your positions
All the Best,
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