OPTIONS WRITING AND STRATEGIES

PROBABILITY OF PROFIT FOR OPTIONS BUYERS

Depends on factors like

• In the money/ATM or out of money

• Implied volatility
• Time to expiration
• Premium paid to be reduced from probable target
• Movement in underlying in direction of option buying

PROBABILITY OF PROFIT

• For option buyers, probability of profit is 50% in ITM or ATM options but less than 25% in
OTM options.
• Volatility or uncertainty is friend of option buyers.
• More the time to expiry higher are the chances of success in option buying

PROBABILITY OF PROFIT

• Premium paid to buy options need to be reduced from if your underlying closed in your
favour at expiry.
• And most importantly movement of underlying in your favour….
• Even no movement is also friend of option seller.

VWAP (Volume Weighted Average at Price)

• If the closing is Below VWAP, then we should consider it as Bearish.

• If the closing is Above VWAP, then we should consider it as Bullish.

MAX PAIN THEORY

• The origins of Option Pain dates to 2004. So, in a sense, this is still a very young theory.
• The term max pain stems from the Maximum Pain theory, which states that most traders
who buy and hold options contracts until expiration will lose money.
• According to the theory, this is due to the tendency for the price of an underlying stock to
gravitate towards its "maximum pain strike price" - the price where the greatest number of
options (in rupee value) will expire worthless.
• Max Pain is arrived by considering Open Interest and Value of Options – this means that it is
the Real Tussle Point between Option Buyers & Options Sellers for the Weekly Expiry.
• Closing Below Max Pain is Bearish & also Decreasing Max Pain Level is Bearish
• Closing Above Max Pain is Bullish & also Increasing Max Pain Level is Bullish

PUT – CALL RATIO & IMPLIED VOLATILITY

• Increasing PCR with increased CEs Implied Volatility (IV) is Bullish.

• With increased PEs Implied Volatility (IV) Bearish.
 • Decreased PCR with Increased PE IVs is Bearish.
• With Increased CE IVs is Bullish.
• We should focus on CE IVs minus PE IVs…
• Means increased PCR with Increased CE IVs
And
• Decreased PCR with Increased PE IVs
• In Bullish Markets CE IVs will be Higher than PE IVs
• In Bearish Markets Reverse will be seen
• We see IVs as Reflection of Demand and Supply…
• Implied Volatility (IV) of CEs and PEs suggest Demand and Supply.
• Higher Implied Volatility (IV) of CEs than PEs means Higher Demand for CEs means Bullish.
• If Demand is more, then IVs will be Higher, and if Supply is more, then IVs will be Lower
• If Demand is accompanied by Increased Open Interest, then it will reflect in PCR
• If more People are Buying Calls, then More Demand for Calls… means More Implied Volatility
of Calls, Means Bullish.

OPTIONS WRITING

• Options is a depreciating asset.

• If we can mix option writing with technical system, then it becomes a deadly combo.
 • Three types
o Non-Directional
o Directional
o Intentional

NON-DIRECTIONAL OPTION WRITING

• Short Straddle
• Short Strangle
• Iron Condor
• Iron Butterfly

Let’s understand Iron Butterfly in details

• Bought 26900 put at 132

• Sold 27200 put at 246
• Sold 27200 call at 282
 • Bought 27500 call at 150
• Now total premium received will be (282+246)-(150+132)=246
• Maximum profit will be 246*20=4920 on a single lot.
• Here loss is limited because there is protection on both sides.

Knowledge of DELTA helps in selecting the strike price for SHORT STRANGLE.

Selecting DELTA of LESS than 0.20 advisable when going for SHORT STRANGLE.

DELTA

• It measures Sensitivity of the Option Value to a Given Small Change in Underlying Asset.
• Delta = Change in Option Premium / Unit Change in the Price Of Underlying.
• Most Important Parameter for Risk Management.
• Delta Indirectly Reflects Probability of Closing In The Money (ITM)…
• 0.5 Delta has 50% Probability of Closing ITM…
• 0.2 Delta has 20% Probability of Closing ITM…
(means 0.2 Delta Options Writers have 80% Probability Of Profit)
• Delta 0.2 or Lesser: for Option Writing
• Delta 0.5 or Higher: for Option Buying
• What is Delta neutral?
 • When you Sell Equal Quantity and Equal Distance Strikes CE & PE then its DELTA Neutral.
• Delta Neutral advisable when Bias is Neutral and ADX Falling
• Above 70 RSI Delta Of Calls Changes Fast
• Below 30 RSI Delta Of Puts Changes Fast

Gamma

• It measures the change in delta with respect to change in the price of underlying asset.
• Gamma = Change in Option Delta / Unit Change in Underlying Asset.
• Gamma is Accelerator of Delta.
• It is ENEMY of Option Writers.

Theta

• Theta available is per lot per day on sensibul. If theta 60, Means at the end of day 1 lot of
that strike price loses 60 rs value.
• In reality, the Greeks work dynamically. As Vega and Time have effect on theta, delta and
gamma.
• Remember this simple points
If you are option seller:
• High volatility is friend of selling, when it start decreasing.
• Theta is always your friend
• Delta and gamma are option sellers enemies.
• So focus on enemies, friends will keep doing their work.
• gamma is highest in last week of expiry, so delta change are high.
Means, any sudden big move is not good for you.
• About holiday effect on theta, as i said Greeks are dynamic and are first n second order
derivatives... A lot depends on spot price.
• But if we assume spot price to remain same, during holidays weeks. theta will start showing
it's effect from first day itself. As market already know holiday is coming.
• But the effect is highest on day before holiday.

Let us understand in which direction to start a trade looking at the chart. I always look only at RSI
first to decide the direction… For that I use the word… BIAS…

• RSI Above 55… means Long… Buy Future… Buy Call... We can also Buy Delivery…
 o 55-60 ~ Mild Long (25%),
o 60-65 ~ Moderate Long (50%)
o 65-70 ~ Strong Long (75%)
o 70-100 ~ Very Strong Long (100%)
Above 70 No Calls To Be Sold, Even For Hedging.
• RSI Below 45… means Short… Sell Future… Buy Put...
o 40-45 ~ Mild Short (25%),
o 35-40 ~ Moderate Short (50%)
o 30-35 ~ Strong Short (75%)
o 30-00 ~ Very Strong Short (100%)
• RSI Between 45 & 55 = No Trading Zone…

NOTE: One Needs To Check RSI At Closing Of The Day For Continuation Of Trade And Exposure.

❖ When RSI is in Neutral Range… Short Strangle should be Delta Neutral.

❖ When RSI in is Mild Short or Long… Delta should be Non-Neutral.

Let us understand the use of moving averages in the system I follow....

• Two Long Term Averages = 150 EMA & 200 EMA

o Clear Buy… When Closing is Above 150 EMA & 200 EMA.
150 EMA Is Above 200 EMA.
o Clear Sell… When Closing is Below 150 EMA & 200 EMA.
150 EMA Is Below 200 EMA.
o Not Fulfilling Any One Of Above
• Two Short Term Averages = 13 EMA & 21 EMA
o Clear Buy… Closing Above Both Averages
Smaller Average Should Be Higher Than Larger Average.
o Clear Sell… Closing Below Both Averages
Smaller Average Should Be Below Larger Average.

13 EMA & 21 EMA (Both Are Fibonacci Numbers.)

• 13 Average represent Almost Half Day In 15 Minutes Chart, Half Month In Daily Charts,
Three Months In Weekly Charts & One Year In Monthly Charts.
• 21 Average represent Almost One Day In 15 Minutes Chart, One Month In Daily Chart, Five
Months In Weekly Chart & Two Years In Monthly Charts.

We just take overview from Averages but our Trading is based on RSI only…

• Reliable Buy Signal will have Clear Buy Signal in Short Term Averages and Clear Buy Signal in
Long Term Averages also.
• Reliable Sell Signal will have Clear Sell Signal in Short Term Averages and Clear Sell Signal in
Long Term Averages also.
• Long Term Averages- Clear Buy… Short Term Averages- Neutral…
No Reliable Buy Or Sell Signal

What is the use of reliable buy or sell signal?

• If you are Trading in Futures (Not Options) then you should wait for such setup to develop in
your Stock Or Index in Hourly Or 30 Minutes Charts as per your risk appetite.
• If you are Delivery Based Trader then you should wait for such setup to develop in Daily TF.
BOLLINGER

• Bollinger is not required for trade entry but bollinger gives first indication of trend maturity…
• When there is strong trending movement going on and during such times candles remains
outside bollinger but we get first hint of trend maturing is when candle comes inside
bollinger. Next hint when candle don’t touch the band.

Role of ADX & DMI

• ADX is an Effective Tool To Judge The Underlying Is Trending Or Not

• Whenever ADX is Rising it gives Confirmation of Trend Formation and when ADX Crosses 25,
it suggests Strong Trend Formation, means Momentum Is Building And Good For Options
Buyers Or For Futures Traders
• Decrease in momentum can be judged by various methods… when DMI+ comes below ADX
line… first indication… decrease your positions… when RSI comes below 70… second
confirmation… book more profit… and when price goes below 13 average… decrease
positions further or convert into neutral positions.
• For use of ADX… Don’t Go After The Number… Just develop observation skill to watch ADX…
• For use of RSI… Strictly Go As Per Number…
• Rising ADX is Friend of Directional Option Writers
• Falling ADX is Friend of Non-Directional Option Writers

RULES

• Biggest Mistake you can make is: When a Trend is Strong you will try to Find Reversal Points
Rather than Riding the Trend
• For Weekly Expiry we should use 15 Minutes or 30 Minutes Candles
• For Monthly Expiry and For Stock Futures Hourly
• When ADX Falling and RSI in Neutral Range..... Non-Directional Options Writing....
• Close Option Writing Positions when RSI goes Above 60 or Below 40
• Or Close Only Loosing Positions In Above RSI Conditions
• When RDX gives Trending Movement Then Utilise It By Options Buying Or Futures Trading
(THREE LOTS)
• Exit Positions As Per Our Set Rules.
• Simultaneously we can do Options Writing also with Little Liberal Exit Conditions like RSI
40/45 in Short Bias and RSI 55/60 in Long Bias.
• If Daily Is Bullish and First Candle around 9:20am also Bullish then Start Trading (Selling Puts)
• If Daily Is Bullish and First Candle Bearish then Wait for Candle To Get Over
• 15 minutes and sixty minutes charts are like son and father… When in doubt follow father…
• So when 15 minutes turns neutral after trend and father is still directional then better to
remain directional than non-directional

In Options Selling, Probability of Profit (POP) is Directly Related to the Return on Capital.
Therefore, Reduce your Profit Expectation and you Automatically Increase your POP. The Larger
 the Account Size, the Less Important is the ROC and the More Important is your POP. Trade with
80% POP if your account is Larger & ROC will be 2-4% & Improve Consistency.

Stop-Loss / Trail SL

• No Fixed Stop Loss.

• Our indicators dynamically alter the SL.
• Our System Is Dynamic: i.e. we Adjust Our Positions According To Momentum & Trend…
• So our Positions Change as per the Change Of Segment in RSI…
• For example : If a Long Trade is taken, whenever the RSI moves to different levels of
Bullishness, the position is reduced accordingly.
• Fixed stoploss is like applying breaks on a vehicle which is running above 70-80 speed,
Ideally we should decrease our speed gradually
• Same way.... when trending movement is going on and you are riding that..., decrease your
speed gradually
• Expiry trading should be in parts → Close first part around 1.30 pm
• If want to trade after 1.30 pm → then use five minutes
• Stoploss 50% more than premium received.....(if it is combined positions then 50% of
combined premium received)
• Profit booking once premium comes down by 75%

Comparing RSI of two different time frames for better trading results……

• Now that everyone is understanding use of RSI for bias and momentum… let us move on to
next understanding of RSI… that is how to compare relative strength of two time frames…
• Please note that we use RSI of 14 periods means
• RSI in 15 minutes chart shows strength of last 3.5 hours…
• in hourly chart it shows strength of two days
• In daily chart strength of three weeks
• In weekly chart strength of 3.5 months
And
• In monthly chart it represents the strength of 1.2 years…
• Now for sustainable momentum near term strength should always be higher than the far
strength
• Means 3.5 hours strength should be higher than two days strength
• Two days strength should be higher than three weeks… and so on…
• This is the basic funda of comparing the strength between two near time frames…
• We should keep only two time frames for comparison…
• Suppose if we are using 15/60 minutes for comparison then whenever momentum is strong
in 60 minutes chart always try to see RSI of 15 and 60 minutes because inspite of strong
momentum whenever 15 minutes RSI sustains below 60 minutes RSI… we get warning of
exhaustion at higher levels and we should consider this as profit booking signal…
• If you are trading positionally then when 60 minutes RSI sustains below daily RSI then
consider it as profit booking signal
 • Remember that we have to consider this only when higher time frame has strong or very
strong momentum and we are searching for profit booking signals…
• If you are doing short term technical investment then compare such things between daily
and weekly or weekly and monthly charts…
• Opposite will be true for short positions… if you want to study then study zee or yesbank
charts and try to analyse RSI comparison between hourly and daily… so that you will be able
to understand how momentum on short side decreased…

POSITION SIZING FOR OPTION WRITING

• 5 Lakh Capital
• Maximum 7 Lots
• Delta Always Below 0.2
• RSI 35-40: Two PEs / Four CEs
• RSI 40-45: Two PEs / Three CEs
• RSI 45-55: Two PEs / Two CEs
• RSI 55-60: Three PEs / Two CEs
• RSI 60-65: Four PEs / Two CEs
• RSI 65-70 & ADX Not Rising: Three PEs
• RSI 65-70 & ADX Rissing: Four PEs
• RSI 70+: Five / Six PEs