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Reminiscences of an option seller

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.

percentage base effect

Aug21-W2: Rollover of bad trades can cause recovery

The last week’s disaster was quite something. I have had such experiences earlier also while selling options. After such events, I try to create scenarios which can bring some recovery. Even though I knew that the whole idea of this weekly option trading model would work only when I don’t let such disasters happen, I ended up making the same mistake.

As part of my earlier experience, I know that the next useful step towards recovery is to rollover the options and in fact, try to double down on number of lots. This step should be taken only when there is more than 100% confidence that the trade will go right. Even then, it is rarely possible to obtain complete recovery of loss.

Keeping all of the above in mind, I did go for rollover on Thursday. I had high hopes of a complete recovery but I remained extremely alert. I must have analyzed charts 20 times before finalizing the rollover decision on Thursday.

On Friday, I kept analyzing market behavior. Instinct and analysis told me that Nifty may not drop more from Monday. I thus reluctantly booked profit on Friday itself and made peace with whatever recovery was done.

However, I still wanted more. I wanted to squeeze as much as possible this week so that my P&L book can reflect numbers in greener color. This led to whipsaws as I kept adjusting strikes. Nifty’s direction and volatility was all over the place. Even though I had predicted this, my strikes were problematic. I just did not have it in me to take risk and kept paying adjustment brokerage.

Anyhow, the week’s recovery is ok. Rolling over turned out to be a good decision. This only happened since I was very alert during market hours. This alertness was not there for past 3 weeks during which I incurred drawdowns and the humongous loss. Staying vigil helps and hopefully, profits in future weeks shall quickly take overall CAGR to above 15% and beyond.

nifty index 50 mistakes

Aug21W1: Being penny wise pound foolish in Nifty Trading

The writing was on the blog, and that too for last 2 consecutive weeks. I was not respecting my stop losses for last 2 weeks but Nifty was kind enough to let me go. Nifty index 50 got ferocious this time. It punched me in my face and simply kept punching till end of Thursday.

It was not like I did not have a clue about it. Even though I wrote that maybe the market will continue to do nothing, I had a bad feeling on Tuesday morning. Nifty index 50 was breaking out of a key resistance level, meaning that an uptrend was in an offing.

However, an important personal task needed urgent attention. I had almost hit the ‘exit’ button on my call options but then I decided to finish the personal task and exit later. When I came back, the loss was above my stop loss limit. I decided to wait as I had now started believing that ‘wait’ is quite a strategy by itself. Over the last 2 weeks, waiting made everything right.

As per my weekend analysis, I had a notion that Nifty index 50 would not breach 16150. I was holding 16150 CE and decided to wait till Thursday EOD. By Wednesday, the market was near 16300. My unrealized loss was beyond what I could digest. I lost all sense of analysis and was literally in hope mode. I realized my loss on Thursday and officially confirmed myself as an idiot.

This is not new. My wife had warned me about this happening when I decided to dive into this type of trading. I kept assuring her that I have a stop loss system and I will stick to it. Over the last 8 weeks, my wife kept asking me about my stop loss on trades. I kept saying that I had it under control. I obviously did not.

Option selling math is what attracts people to selling options. For example, CME research states that 76.5% of all options held to expiration at the CME from 1997-1999 expired worthless. Then, there is the standard deviation rule i.e. selling strikes beyond 1 standard deviation from current spot price carries approx 33% chance of winning.

But the reality is the story of man whose name is Victor Niederhoffer. The story is a big and heavy read but a must read for any option seller. Then, there is another case of James Corder’s OptionSellers.com whose apology video is really heartbreaking

So if these great traders blew up their accounts by selling naked options, what is the chance of a naïve me making money out of it? If I continue to behave like this, I don’t.

And therefore, I need to behave differently. Here’s how:

  1. KEEPING A DAMN STOP LOSS ORDER: Until today, I did not keep SL orders because they almost always get triggered. But I need to keep them, perhaps at a level which should ideally be unreachable.
  2. KEEPING TRACK OF SPOT: There is a way to know when Nifty spot price has reached too close to strike. Even if SL is not triggered, it is ok to exit the position
  3. KEEPING TRADING CHARTS TIDY: Over the last 2 weeks, I made a mess out of the charts. I casually stated that it is all useful but it never is.
  4. STUDYING TIMEFRAMES WITH PURPOSE: I do use multiple timeframes to study charts. However, I have found myself to be mixing things up. I need to know which TF to use and how.

My weekly returns from this type of trading cannot compensate for the kind of loss which I took this week. I need to be mindful that I do not become penny wise pound super foolish again. And I have a good feeling that I won’t.

trading psychology

Jul21-W5: Anticipation of big trading move deserves strike correction

The highlight of last week’s Nifty Index 50 moves happened during July 28, 2021. It more than made up for all the deadness since July 22nd. I think law of inertia skews trading psychology of novices in a big way. It definitely got the better of me.

With Friday, Monday and Tuesday being dead days, I had a notion at back of my head that I don’t need to see charts. I can’t be too tough on myself though as I literally had no time to check charts as I was preparing for a job interview. But lesson learnt, I must check charts twice a day if I have open positions or close them if I really don’t have time,

While it is easy to do chart analysis in hindsight, but it was absolutely clear on July 27th that a big move was about to happen. I must remember that this method of option strangle trading is a mix of predictive and reactive analysis. Therefore, I should have closed my positions on July 27th and waited for market to set the direction.

But I did not and July 28th morning never gave me a chance to make any corrections. With job interview from 9 to 10 AM, I checked market by 10:15 and understood I could not do anything. While the Put Options were at a loss of more than 500%, call options were not giving any profit. All thanks to vega.

I checked my blog for making sense of what market was doing. I made some minor adjustment to drawings and patiently waited for market to take bounce. I meanwhile could not help but think that if I would book over Rs. 10,000 of loss, it would mean going back by 3-4 weeks. Luckily, the market respected the expected support level and put options eventually went back in green.  

This entire headache could have been avoided if I had made correction on Tuesday itself. This has happened twice now in consecutive weeks. I need to watch charts more carefully and press the exit all button if I am having a bad feeling about stuff. This is like the movie ‘minority report’. I must pre-empt drawdown before it happens because mitigating it later does not work.

nifty index 50 gap

Jul21-W4: Gap openings deserve strike correction

Last week’s movement by Nifty index 50 was unexpected. On July 16, it left an impression of scaling all time high. But July 19th came as a surprise with a heavy gap-down opening. The market never really recovered from the shock and went very low on Tuesday. I did expect such a downfall in such a scenario.

However, I did not react appropriately on both days. On Monday morning, I did the right thing by leaving 15450 put options as it is. The put option later recovered completely and in fact became profitable. That was the moment when I should have closed it and taken a safer strike.

On Tuesday, the market started punishing me for my mistake. It kept falling relentlessly and at one point of time, I was looking at a loss of more than Rs. 4,000. This is equivalent to approximately 0.63% of deployed capital. The options’ LTP was also trading more than 200% of price at which I had sold them. It all meant that I should have taken the loss.

The only thing that kept me holding on these strikes was my blog post wherein I had mentioned that the market should pause around 14600. I held my nerve and luckily, the market started retreating. At around 14650, I exited my put options at loss and moved to safer strike.

This entire headache could have been avoided if I had done made correction on Monday itself. But I thought that since Wednesday was a holiday, theta decay would be brutal on Tuesday. However, option greeks are tough to anticipate. It seems that vega rose so much that even my call option was showing loss.

Lesson noted. Also, I need to respect my stop loss and if possible, book it when LTP doubles from my selling price rather than waiting for it to triple. There is a rule of thumb that if loss is more than 2% of capital, trade should be closed. Pro traders keep it at 1% or even 0.5%. I am not entirely sure if the rule applies to the style of trading I am doing. I am not sure if I am trading anyway.

boring nifty index 50

Jul21-W3: Boring Nifty Index 50 makes money

If Nifty Index 50 does not move much (which happens more often than not as expected), it can leave trend following traders frustrated and option buyers miserable. But there is nothing better than a boring market for option strangle seller.

A boring market means that the options’ LTPs do not rise. It simply decays consistently with time. All you have to do is sit and witness the accrual of unrealized profits. But after booking profit, I think that my brain does not assess risk management properly.

Suppose that the premium of a position which I sold on Friday was 7. Now, if I close that position on Monday, I would think that I should not take a new position whose premium is more than 7. It is because Monday’s premium should relatively be lower than last Friday’s premium.  

But this is not true. Option pricing is very dynamic and while we cannot measure the biasness of institutional option sellers, we can always measure VIX. A rising VIX can allow Monday premium to be more than Friday premium even if all other factors are same.

There is no rule of thumb and whenever I should take trade, I should remain mindful of the ‘now’ than the ‘past’ or ‘future’. And this is what books on meditation also preach. But practice is always more different than theory.

Intra-day option selling is another area which I wish to master. Though the opportunities might be few, each opportunity holds potential of good profit. I need to take the risk of taking closer to money strikes. I missed one such opportunity on July 10. I hope for more chances in future. The market will not remain boring forever.