How to identify the best time to

sell options using India VIX:

Shubham Agarwal
Whenever we have India VIX trading above 20-day
moving average, we will not initiate or hold a sell option
trading position.

Option selling has always been a lucrative trade. They say, more
than six out of 10 options ever created have expired worthless (“0”).
This creates a very strong case in favour of Sell Option trades.
However, if Option selling is done without any filters, it can do a lot
more harm than good.

As all of us remember that Selling Options come with a

characteristic of unlimited or undefined loss. So, to be extra careful
let us today see one such filter that can at least safeguard us from
expected losses. There are always surprise moves that the market
makes for which we must keep stop losses.

Here we will discuss how to identify the best time to sell Nifty
options. To identify if it is the best time to sell or not we shall
observe India VIX. Let us understand what India VIX is and why
and how we use it as a filter.

What is India VIX?

India VIX, also referred to as risk index, is an index of Implied
Volatility or Volatility Inputs used in pricing all Nifty options expiring
in the near term.

These Volatility Inputs (also known as Implied Volatilities) are

basically an indication of expected future volatility.

Why use India VIX as a filter?

India VIX gives us an indication of what kind of volatility the market
is expecting in the coming days. As we all know, more volatility is
bad for Option Sellers and less volatility is good. So, to judge if the
expected volatility in the coming days is low or high, India VIX can
be used as a filter.

How to use India VIX as a filter?

We want India VIX to be downward trending or stable for us to
avoid any expected risk of loss due to high volatility in our Sell
Option trade. With India having one of the highest numbers of
Technical Trend Analysts in the world, I don’t think I need to explain
much on how to identify the trend.

However, for those who may not have the expertise a simple
indicator may just do the job. Getting a chart of India VIX is not that
difficult. Just add a 20-day moving average on top of it. If India VIX
 is trading above the 20-day moving average, the index is trending
up meaning the expected volatility could be more and more.
So, a simple rule is whenever we have India VIX trading above the
20-day moving average, we will not initiate or hold a sell option
trading position.

The impact of this will be:

1. 1. We will have fewer opportunities to trade, as we will not initiate
the trade in times when there is high expectation of volatility.
2. 2. We may have to exit a trade early (with lower profits) if India VIX
starts trading above the 20-day moving average.
Both these cases will minimise our returns but at the same time it
will reduce a sizeable amount of risk.
Now, the same technique can be used for individual stocks also.
There are various platforms that provide charts of Implied Volatility
of individual stocks. Those charts can be used with moving average
to create filter for individual stocks as well.
Finally, this does not mean that we should not keep a stop loss.
Stop Loss in Sell Option trade is a must because let us not forget
that the market can behave in a completely opposite direction to our
expectation.
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