Reminiscences of an option seller

desert, drought, dehydrated

Oct21-W2: Low volatility week doesn’t make much money

I was pretty much clueless about how Nifty was going to behave during the week. The macro trend is obviously bullish but momentum indicators on daily timeframe have been a bit weak lately. The exact in the middle position with respect to a parallel channel added to the confusion.

This is the easiest setup to create option selling positions. Just sell on both sides with a hope that everything will consolidate. In case price starts breaking out in 1 direction, reduce risk accordingly while adding to the other side.

I did all of the above but I was barely able to money. I hardly closed any positions on Friday and Monday. Whenever I did, the next strike of choice did not come at a valuation which would make money. However, I contended with what came to me. I did not move strikes closer to money.

Eventually, the ROI is above 15% but hey, my true interest is in getting return more than 30% on weekly basis. I guess I can’t have that on all weeks especially when VIX is trending down. I need to calm down and stay happy with what I get, especially when I had disastrous results during first 13 weeks.

I should start looking at banknifty for mean reversion trading setups if I need to quench my greed. Maybe not until week # 26, I suppose. It is not because I would not be able to manage both Nifty and Banknifty but mainly because I still lack enough funds to properly perform mean reversion trading. I have to fund my account a bit more.

market, marketplace, buying

Oct21-W1: Letting the market forces decide strike selection

My view for the week was a boring consolidation. I would say that I was not correct as market was mildly bullish. In fact, it broke above the resistance range. However, that happened on Tuesday.

I have observed that any positions taken before Tuesday don’t give that much trouble if carried till Thursday. However, this idea should not be mixed with the notion that any position taken on Tuesday or later is safe for Thursday expiry. These are 2 different things.

With the support of some money management policies, I was able to not play keep my positions safe but also able to make good money (at least by my humble standards). The trick was to keep matching option premiums on both sides. If call option premium was at 7, I would sell a put strike whose LTP was 7 and vice versa.

This worked well until Wednesday. The call options started showing a loss of more than Rs. 3000 but the intra-day charts were signaling strong possibility of mean reversion. I exited my put positions and added more to the call positions. This averaged the overall selling price and I eventually exited the call positions at breakeven. Subsequently, I sold OTM strangle for Thursday expiry.

The high ROI for the week is mainly attributed to high VIX. I wonder how much would be the ROI if VIX was somewhere around the typical 13 mark. For the time being, let me make do with what I can.

I learnt one important fact, thanks to Twitter and Zerodha. The basket order feature of Zerodha helps in enjoying margin benefit of selling options with hedge. I should really make use of this feature especially when I am selling far OTM positions. The increased utilization of margin can help in making more money. Thanks again Zerodha for being best at technology and for the reply on twitter.

fireworks, pyrotechnics, new year

Sep21-W4: Make money while the VIX shines

While thinking on what I did right the past week, I realized that I made money primarily because of high India VIX. It obviously makes sense to do selling during such times. I wondered if I could use India VIX chart to my advantage.

Yes, I can. Like everything else, India VIX follows principles of mean reversion and on an appropriate timeframe, the stochastic is working beautifully. This is the key reason I was able to book a lot of profit on Thusday as VIX crashed and met the average.

Given the fact that Nifty has to eventually meet its averages on weekly timeframe, this is an important learning for the next few weeks. If Nifty is to correct, IndiaVIX will remain on the higher side. A closer tracking of India VIX charts can help in timing of selling the options.

During the beginning of my trading week i.e. September 27th, I could have sold some more lots. The opportunity struck once again on September 28th and this time, I completely missed the bus. This is despite the fact that I had made an absolutely right prediction about market movement.

I should not complain much as the past 3 weeks have been quite kind to me. I should stick to basics and perhaps, profit maximization objective can wait. The focus on capital preservation and consistency remains for now.

So my Tradingview now opens with charts for Nifty spot, Nifty future and India VIX. It may sound like a case of over-analysis but I believe this is actually the bare minimum. Fireworks work well in unison.

u-turn is prescribed, austria, street sign

Sep21-W4: The edge is in selling ATM options during mean reversion

Since I began wannabebull model, the biggest skepticism which I have been having is that option sellers win 90% of the time but lose it all during bad time. I know I am human and I will make the mistakes which will make me lose all profits. I have already made many such mistakes and this website has kept track for all of them.

The only way to counter this inevitability is to make an equivalent big gain once in a blue moon. The conventional approach of traders is to trade with trend. Basically, hold something and watch it grow over time. This does not work during option selling. Even if I roll-in strikes, the ROI will not be extraordinary.

There is only one way to make extraordinary returns in option selling. Sell as many near the money strikes as possible when you know mean reversion is inevitable. This is easier said than done of course. It literally means catching the top which is a mission impossible.

But high-risk-high-reward is the name of the game. I think I can play this game with following couple of hypthesis  

  1. If price is above average on both higher timeframe and lower timeframe. Additionally, EMA crossover on lower timeframe should not have happened recently. Target here is smaller EMA of intra-day timeframe
  2. Divergence on higher timeframe with target being smaller / bigger EMA of higher timeframe depending on divergence indicator’s look-back period.

Both above hypothesis require some more back-testing and custom indicators. I shall be doing that next week. This is worth the effort because ROI is sky-high. Such occasional ROIs can super help in the long run. Also, if I get good at trading mean reversions, I shall be day trading with such setups.

The only catch here is that no matter how thorough I get with my mean reversion setup, I won’t be able to catch top. Therefore, the trade will have multiple entries. I will have to build my short positions. one after the other. Here, ATR can help in knowing when to average my entries.

The theory is fail-proof only if I have unlimited capital. I hope I never again run into a situation when I hit the tilt.

hand, write, regulations

Sep21-W3: Trading option spreads is confusing in this SEBI’s world

With great enthusiasm, I bought hedges against short options on Monday. The whole idea was to trade more number of lots. The downside was additional brokerage and bearing sunk cost of hedges. I had a hunch that the payoff would be bigger.

After buying 700 quantities of hedges for calls, I decided to sell some additional call options. However, I hit my margin limit and could only manage a total of 600 quantities on short side. Now, it was the turn to do the same trick on put side.

However, Zerodha blocked me to buy hedges for puts. I kept getting this error that buy orders are blocked due to OI limit prescribed by SEBI. I tried all permutations and combinations but to no avail. I then turned to my know-it-all wifey who explained that Zerodha’s algorithm is perhaps factoring the extra hedges which I have on the call side.

To test the theory, I exited the extra hedges on call side and voila, I was now able to buy put options. I was dumbfounded by this and wrote them a tweet to seek explanation. I did get a reply with the same reason that my wife gave me.

I am however dissatisfied with the reply. It is impossible to know beforehand how much margin will option spread trading or iron condor really need. Zerodha’s margin calculator does not have facility to compute weekly option margins. For the same set of positions, I cross-checked margin requirements on Opstra and Upstox. Surprisingly, the margin requirement values were different.

How can margin requirements differ from broker to broker? Isn’t there a standard prescribed formula by SEBI? To mess things further, SEBI gives a SPAN file 5 times a day to broker and margin can vary by a lot during the day.

How am I supposed to know capital requirement for trading? The only solution for now is to follow cycle of sell some options à buy hedges à sell more options à buy hedges and so on. After each cycle, keep checking if my margin is within limits. While the approach may work for optimally using my margin, it is a disaster in terms of cost as I will end up paying a lot of brokerage.

Is this how SEBI envisioned the process of weekly option trading? Is this how a retail trader is supposed to work and that too after paying enormous tax for all of this? While Zerodha has an alternative based on its tie up with Orbis, I stand to lose my facility to pledge holdings. All this is very discouraging, to say the least.

caricature, imagination, hand drawing

Q1Y1: Nifty Option Trades need more introspection

It is time for introspection. This is a business and will be reported as such on my ITR as well. I am expected to make advance tax payments also every quarter. Thus, 13 weeks is a logical time to take a pause and look back at what I have done.

The 13 weeks of trading correspond to following candles on weekly timeframe.

And the following is a representation of result:

The correlation is crystal clear. The returns were good when market was consolidating during the months from April to July. As the market went in uptrend in week of August, I was never quite in control of situation. Even though profits were posted in 10 out of 13 weeks, the 3 loss making weeks were good enough to wipe out all the gains.

There is a saying: “Option sellers eat like chicken and shit like elephant”

I ended up vindicating that saying, even though I knew this problem all along. It is for this reason that I have kept my target CAGR at 15% for the time being. The idea was that if I am able to beat this target, I will raise it up. For the time being, I have failed to achieve target. The next step is to aggregate my learning and trade better from now on.

So I learnt:

  1. Make strike adjustments whenever gap-up / gap-down happens
  2. Check charts twice a day
  3. Keep SL-M orders
  4. Keep taking as many SLs as warranted
  5. Keep charts tidy
  6. Be mindful of candle behavior across timeframes
  7. Roll-in strikes aggressively during trending market but not more than adjusted ATR during consolidating market
  8. Stop counting money
  9. Pre-empt SL positions and close them early (simple to say, tough to do)
  10. Exit positions when volatility compresses a lot

Last week, I realized that I should be doing iron condors instead of strangles. I earlier used to think that brokerage and cost of hedges would not compensate for additional gains via more lots. I think that theory is wrong and deserves a trial. If theory holds true, I would effectively be multiplying my gains by 1.5 to 2 times. That would be a huge boost to CAGR. I would be testing the theory in coming weeks.

But the whole point was to trade in direction of market. That is written loud and clear on my website’s home page. Yet, I ended up taking positions on both sides. The urge to eat laddoos on both sides needs curbing. I must respect trending market and stay directional.

Also, I need to stop sharing these posts here and there. I may not acknowledge consciously but my subconscious mind is asking me to keep this website as a log only. I am not gaining any feedback by sharing posts anyway. While log is an absolute must as it helps me in bringing clarity to my thoughts, the log deserves solace at least for now.

step, path, shoes

Sep21-W2: Time to move on

The entire objective of this week was to compensate last week’s loss of Rs. 11,500 and make some more if possible. The objective was noble but the methodology was abject. I myself knew that the momentum was tremendous and was not confident of mean reversion happening soon.

As my fears started becoming reality, the next resort was to hold on. Basically, I went into an unchartered territory. I was not trading anymore. This was sheer gamble. Either I was going to recover everything or lose a lot.

The writing on wall started going in favor of latter. By Tuesday morning, I was sick and tired of this trend. I have seen such scenarios earlier so many times. ITM options bleed money like a deep cut on forearm. I now had unrealized loss of close to Rs. 30,000. I knew I needed to close the position.

It was around 1030 when Nifty made the day low and my position was showing a loss of Rs. 3000 to 5000. The temptation to break-even was so high that I ignored the risk of pullback. Due to office calls, I was not able to completely focus on charts anyway.

The market pulled up fast and how. It made day high and I admitted defeat. The swing of emotions and money was too much to take. I booked a loss of over Rs. 35,000. I informed my wife who responded by saying: “So it is ok not to book loss of 3,000 and even better to book loss of 30,000?”

I did not have answer to the question. How could I tell her that I was gambling and I did not have a plan B if things went wrong? Having positions on the other side of trend can only be managed by averaging out. And I did not have the funds to do all that.

Eureka!! Spreads. I sold ITM call option spreads and found that only 25% of capital was being used. I could now do averaging if market still went against me. Fortunately, there was no need for it as Nifty fell a bit on Wednesday and I managed to recover around Rs. 25,000

Eventually, I ended the week in loss but not all is lost. Amidst all this commotion and despondency, I have realized that I need to use hedges to make the maximum of margin availability. I am super excited to trade iron condors and option spreads from next week. Let bygones be bygones. It’s time to move on.

counting money

Sep21-W1: When money is going away, stop counting it

I was very skeptical last weekend while writing this blog. I was carrying OTM positions but they did not have much premium in them. The charts too were showing that volatility was compressed by a lot. I convinced myself that the positions that I have are quite far. I now have tight SL rules and I will take the loss if it comes.

On Monday morning, I told my wife that an impulse candle is coming on perhaps a 75 minute timeframe. She checked with me what I was exactly trying to say? I said that there may not be a zig zag movement. It will be a unidirectional linear blast. My wife said that if that is indeed the case, it is going to be a bull trend.

So it is not that the last week’s massive move was a surprise to me. I took the SL on Monday itself, and felt good that I am now acknowledging and taking SLs. But it was the next thought which ruined it all. The thought was to recover the loss of Rs. 3150.

So, I sold call options just 100 points away from the strike on which I had booked loss. If all went well, I would have recovered loss completely while gaining whatever I was making from put options. But on Tuesday, my SL was hit on this new strike as well.

My mind, body and soul were not willing to take 2 SLs in the same week. I believed in the power of theta and decided to let it go. And Nifty literally let itself go. There was no stopping it. The relentless and merciless trend made positions go in deep red.

On Wednesday afternoon, I booked loss on 17150 CE and moved to 17200 CE since it seemed like a safe strike. I kept fluctuating between these 2 strikes on Wednesday and Thursday. By Thursday EOD, I decided to roll-over 17200 CE and await mean reversion.

Much of the reason for taking this decision was that this is what I did after loss during first week of August also. I recovered about 50% of loss during second week due to rollover. Stupid memories. The market does not work this way.

I have now left myself at the mercy of Nifty. The charts do not look promising. I may have to rollover 1 more week. Despite knowing it all, I have let myself enter this ridiculous situation. This is bad trading, but I now know I am more ready to face such trend in future. Just need to somehow mitigate this ongoing loss.    

counting money

Aug21-W3: When money is coming, stop counting it

Last Friday was a gap-down event. I remained glued to screen for the first 15-20 minutes. I booked profit on the call options.  I also sold additional put options with intent to make some intraday money. But the deadly ‘validation pending’ problem of Zerodha spoiled the entry and trade had to be closed at no profit – no loss. I then made content by selling OTM calls.

The gap-up opening on Monday made me think of aggressive roll-in of my puts. And I went a bit too aggressive. I ended up selling a strike which was not OTM enough. However, I kept holding the strike and eventually it became comfortable.

This led me to an important introspection. How much of an aggressive roll-in is aggressive enough. I cannot be subjective about it. I have now formed a rule that I will not roll-in more than the ‘adjusted ATR’ value of my indigenous model.

I am not sure if this new rule of mine makes sense in a trending market. In my last blog, I had written about the advantage of aggressive roll-in. Maybe I will know more once I trade such a market. I guess there is no way other than trial and error.

On Tuesday, my self-created alert system shouted ‘oh no’ on my call position. After taking that mega loss during first week of August, I built some checks in my indigenous system. The ‘oh no’ alert indicates that trade might go wrong.

However, my call position was still green and still contained a lot of premium. I got greedy and chose to ignore the warning. It turned out to be a bad bet and I had to book loss later. The good takeaway is that I hit the stop loss button. This is a good sign. I hope I can fix my weakness of not booking losses.

For the time being, I should stop looking at premium i.e. I should absolutely stop counting how much would I make if I hold this option to expiry. I remember doing so a lot of times earlier also. This just makes mind go wrong. Perhaps I should take positions blindfolded.  

rolling options

Aug21-W3: Rolling in put options aggressively makes money

During this week, I felt comfortable with my bias as Nifty kept trending up nicely. This gave me the confidence to sell put options aggressively. Especially on Friday, I sold relatively expensive put options by my standards.

The other thing that helped was that I had no clue about NSE’s holiday on Thursday. My wife told me about it on Wednesday. So, I kept selling with an extra day in ‘days to expiry’ value of my indigenous model. This meant that I was selling extra premium options anyway.

The put options kept giving steady profits. This is the expected behavior. What I mean is that for X% change in price (in favorable direction of option), put options return more profit than call options. I think this is because option sellers already factor the velocity at which market can fall and price put options more expensively anyway.

I was listening to a webinar about option trading. The speaker said that buying call options was the safest bet between the 4 possibilities of option trades (i.e. buy call, buy put, sell call and sell put). He was absolutely against the idea of selling, as is everyone for obvious reasons.

He further said that buying puts might be enticing because if it works, it rewards very handsomely. However, price falls less often as compared to rise in price. Therefore, most of the put options expire worthless.

Based on his above comments, I have a hypothesis. It goes like this

“Between selling of call and put options, selling put options has higher probability of success along with better return on capital”

I wish I could extend the hypothesis to option buying also. But I believe it would become apple to orange comparison.

Anyhow, I have made a note. If market is expected to trend up and if it does so, I am going to sell put options aggressively. It brings good money. There is nothing better in life than a trading strategy that brings good money. Or maybe the best thing in life is good food. Yeah, it’s the latter.