OPTION’S EDGE

“ trading is a game of probability , and it’s always better to

be on the right side of probability “
OPTION’S BUYING / SELLING
 First thing first , where is the edge ?
 Option selling has an edge as the odds are in your favour.

 Remember one thing , option’s buying needs 10X skills ,

so it is important to start small , test the water and then
scale up when it comes to options buying
 There is only thing certain in market , and that is time
decay , and time decay works in favour of option seller ,
and works against option buyers.
UNDERSTANDING THE EDGE
 When does option seller make money ?
1. When the market moves in his favour.
2. When the market remains sideways.
3. When the market moves against your entry price , but
after long sideways move.
 When does option buyer make money ?
1. When the market moves in it’s direction with
momentum ( Sharp move )

 Conclusion – “ Option seller has a inherent chances of

being right close to 70 percent ’’
DID YOU KNOW ?
 Over the years since 2006 , the movement of NIFTY /
BANK NIFTY is as below

movement Range Range Beyonfd

( +/- 8 ) (.8 to 2 range
percent ) ( 2 percent )
Days 2314 1004 365
CONCLUSION
 Market likely to remain range bound 63 percentage of
the times
 Market likely to remain trending 27 percent of the time

 Market to remain highly trending only 10 percent of the

time.
SHORT STRADDLE – INTRA DAY
TRADING
 Short straddle is basically , selling ATM calls and puts
 Short strangle is basically engaging with OTM calls and
puts
 We’re talking about a short straddle / strangle as we
know we have an edge by selling options
 However , we’re going to be focused on short straddles ,
and not strangles so let’s understand why
 By selling options , we are trying to capture the time
decay that happens in options over the entire day.
TWO DAY TRADING SYSTEMS

 Bank nifty morning straddle

 Bank nifty / nifty straddle using CPR ( we have
introduced this as the margins are increasing starting
from september , and the conventional passive income
straddles can’t be hedged for margin benefit due to
slippaages )
BANK NIFTY – “ MORNING STRADDLE ’’
 We’re going to enter ATM straddle at 09:23 at CMP
( current market price )
 We’re going to be placing a SLM order of 40 percent on
both the positions.
 We’re going to exit either at 3:01 PM , or when both side
SL is hit
 Please note that , in cases where one side SL is hit , we
keep the other one open until unless SL is hit.
 We’re going to execute this straddle from Monday to
Thursday as the premiums are very high on a Friday
which may lead to bigger drawdowns , further time
decay happens very close to the expiry.
DEVELOPING A SYSTEM
 The first thing that you must look for in any system is , its
Maximum Drawdown.
 Once you know the max Drawdown , you should now know
the Min capital required to deploy a strategy.
 Capital required shall be – “ Min cap required + Max capital
drawdown ’’
 Then check for return to MDD , higher the better ( ensure
that your strategy has atleast a RMDD of 3:1 )
 Then apply stress test on your system ( Remove the top 5
profit’s generated by your trading strategy )
 Most important , know your system ( write down each point
on a paper and stick to your trading desk or anywhere )
DETAILS OF NIFTY BANK MORNING
STRADDLE
 Entry time – 09:23
 Exit time – 03:01

 Stop loss – 40 percent ( Always place a SLM order )

 Max Drawdown – 20,000

 Return to MDD – “ 7 to 8“

 Capital required – 1,60,000 ( 1,40,000 + 20,000 )

 Days – “ Monday to Thursday ’’

 Max winning streak – 16 / ( 6)

 Note – “ The Volatility is higher in the morning , so be calm

while placing orders , use basket order to place the order’s ,
and yes make use of alarm to remind you to take trades ’’
BEFORE STARTING THE SYSTEM , YOU
MUST KNOW THAT...
 This system requires highest amount of patience.
 It is very boring

 You must know the highest losing streak , to ensure you

don’t panic during bad performance by the system
 Strictly follow the position sizing so that you have
enough cushion to deploy the strategy during tough
times.
 You may feel that the system needs high margin , but
frankly you can deploy this by simply pledging your
holdings with your broker ( Few broker’s allow pledging
of some mutual fund as well )
INTRA DAY STRADDLES IN NIFTY / BANK NIFTY
USING CPR
( CENTRAL PIVOT POINT )
 CENTRAL PIVOT RANGE ( CPR )
 Authors have called the pivot range the “meat of the
market”, while others refer to the central pivot point as the
“heartbeat of the indicator”.  In Frank ocho’s opinion, the
central pivot range is the Swiss Army Knife of pivots.  At
any given time, the range can be support or resistance, it can
forecast trending or sideways price behavior, dictate the
day’s direction, or serve as an integral part of a trend
 CPR , is the centre point of the chart , it’s like a magenet ,
where market may spend most time
 We’re going to use this quality of CPR to create intraday
straddles , which may work as both directional and non –
directional trades
DIRECTIONAL OPTION SELLING USING
CPR ( WITH AND WITHOUT
ADJUSTMENTS )
 Rules
 ENTRY TRIGGER
 A 5 minutes candle should close inside the CPR
STRIKE PRICE SELECTION AND
FURTHER ACTION..
 Once a candle closes , inside the CPR , simply sell ATM straddle
 As we know that PDH / PDL , is an inflection point , you shall stay in
the trade , until unless market stays inside the range
 For the purpose of safety ( to save yourself from any drastic move ) , we
will keep a SL as per the zone breakout range
 The purpose of putting the SL is to just ensure tht we’re saved from
any blackswan event..
 We’re also going to initiate a buy hedge for margin benefit’s in this
straddle so in worst case scenario we’re taken care by the hedge leg
 Once the zone is taken out on a closing candle basis , you MUST exit
your losing position , and held on to your winning position to eat
maximum theta
 Nifty is less volatile than bank nifty , so you can first start with nifty
as it is much calm than bank nifty
MOVE OUTSIDE THE RANGE
ADJUSTMENT
 We’re aware , that 50 percent of the zone breakout are
false , and well we can advantage of that by a simple
trick
 We know that we’re suppose to exit the losing position ,
once the market comes outside the range.
 However , what if the range breakout is Fake ?

 Well , once the market , again comes back inside the

range , you can Re – enter into the losing trade ( Which
you had exited ) , by initiating ATM options
ADJUSTMENT TRICK ( SIMPLE
ADJUSTMENTS )
OPTIONS SELLING ( HEDGE FOR
MARGIN BENEFITS )
 Spot the entry trigger
 Choose ATM option ( weekly option ) for “ Option selling

 Buy a far OTM for hedging purpose , trading between rs10 to rs

20 ( No need to put a Stop loss , keep it open till day end )
 Margin required with hedge shall be 50K for day trading.

 Whenever you’re hedging , always initiate the buy leg first ,

and then the sell leg
 When you’re exiting the trade , always exit the sell leg first ,
and later exit the buy leg
 Trade shall close in the following ways

1. Market stays inside the range , and you get exit at 3:01 PM

2. Market breaks the range , and remains trending ( Exit triggered

in one leg , another position to be exited at day end )
INSIGHTS OF THE SYSTEM
 This system works well in sideways market
 We’re choosing weekly expiry to get maximum theta
benefit
 You’ll make good money most of the time , just make
sure you don’t lose much in the trending moves of the
market
 Maximum profit’s are going to be made on EXPIRY
days.
 Always respect your exit trigger , don’t let hope come in
your trading decisions
BROKER SELECTION
 In order to take advantage of the hedging benefits with
options selling , please choose an alternative broker to
zerodha
 As zerodha doesn’t allow you to buy Deep OTM calls /
puts due to open intrest restrictions by sebi
 A good alternative is Angel broking for the same
LAST BUT NOT THE LEAST..
 Write down your observation , and conclusion of the
system
 Do a weekly review of your trades , and see whether
you’re feeling comfortable
 Start with one system first , and then move to another
system to get a grip on one system
 We will do live market session to deploy the same in one
of my trading account. ( Recording of live market
session will not be provided )