Reminiscences of an option seller


Losing it all and starting all over again

I lost all profits I had made from my trading strategy over a period of half year, in a couple of weeks. Can you believe that? The amount was almost Rs. 3,00,000. How can I lose Rs. 3,00,000 in 2 weeks? Other than overconfidence and stupidity, there are some good reasons.

It is a bit of a story actually. During later half of Jan22, I needed to withdraw almost 40% of my trading capital to meet some requirement in family. The corpus was to be regained in about 1.5 months. So, I had decided to take a break. The brokerage cost and lack of capital to perform mean reversion trades does not really suit wannabebull style.

But after a couple of weeks, it got difficult to stay away from trading. I took trades which had nothing to do with wannabebull & no basis actually. On Feb 24th, I was trying to manage nifty calls via mean reversion style. I was so impulsive that I took hedges at 09:15:01 at market order. The cost of hedges was Rs. 60,000 which turned out to be the loss of the day. Since I never had capital, I applied for loan at CRED to manage that trade.

I subsequently wanted to recover this money and started doing wannabebull style trading but without analyzing charts. I ended up with a massive loss of over Rs. 2,00,000 on March 10th as I again was doing mean reversion trading without a plan in hand. But more than anything, I lost that much money that day because I thought I deserved to lose as I was not doing trading diligently.

No earning means learning:

  • Always believe that I am here to win, whether doing diligently or not
  • Market order at 09:15:01 is a big no
  • Mean reversion trading is a handle with care mathematical strategy. Let math instead of gut feeling drive it

I am going to resume writing on this site for another year as it definitely helps with the rhythm but won’t be posting trades in that detail. Nobody reads this site anyway and I am not trying even a bit to market it either. The objective right now is to bounce back. Not everything is bleak; I have made almost Rs. 80,000 during the past month. Preserving the winnings take utmost priority. The rest is simple.

Q2Y1 Returns

Q2Y1: Mean Reversion Trading Has Raised Hopes

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 above P&L results came during the following candles of Nifty:

The correlation is crystal clear. The returns were always good but when market was giving big range candles, I was getting close to 100% annualized returns. All thanks to mean reversion trading. This style of trading is not new to me. It was something which I did for almost 2 years before it started backfiring.  The style is extremely risky but here are some key things which I think are noteworthy:

  1. This works best between Tuesday and Thursday since hedge strike is cheap. It is better not to attempt such trades during rest of the trades
  2. Selection of mean reversion strike is on basis of DTE in my indigenous strike calculator
  3. Begin mean reversion only when setup is right else funds get depleted fast
  4. In continuation with above, paying attention to my custom indicators is the only way to know that it is ok to start adding positions
  5. Between the 3 timeframes that I use, the middle timeframe should be used for above (point # 2)
  6. The shortest timeframe always looks tempting but it is better to view it only as a pointer and take trade by looking at changes in option’s LTP
  7. If mean reversion trades are not being closed the same day, be mindful of the booked losses the previous day instead of looking at Zerodha’s current P&L on positions page
  8. If funds fall short, roll-in the strike such that overall premium is higher than earlier premium

Many of above notes came from crash of December 20th when I witnessed a drawdown beyond imagination. I hope that I don’t end up doing that again. Otherwise, my hopes are on cloud 9 right now. The CAGR for past quarter stands at 109% and overall CAGR till date is above 50%. This is phenomenal and beyond what I was aiming for.  


Selling strangles + Mean Reversion Interventions = Happiness For Life?

Time will tell. But let me stick to it until the next quarter. If mean reversion interventions are cool, I may extend to trading banknifty also.

As I am feeling confident, I am raising my target return as 20% for the next quarter.


nifty oct21W4

Oct21-W4: Nifty to take a breather and go nowhere? (Oct25 to Oct 29)

Last week’s prediction stands as one of the most perfect predictions I have made till date. Nifty exactly took resistance from my last week’s red colored horizontal resistance line. It then went to middle of this black channel.  

Now the following is my analysis for coming week based on what I am looking at (You may want to open image in new tab or save it for better view)

Even though Nifty has taken a beating on daily timeframe, its trend is still strong on weekly charts. However, I do see divergence on weekly timeframe and therefore there can be weakness. However, it may take some time for this weakness to become a downtrend. Therefore, I believe at least the first half of the coming week will go in consolidation and eventually a downtrend should commence. Honestly, I am not very sure about the coming week and this is only a half-hearted prediction

Scenarios for the week ahead (highlighted as yellow box with red and greeen lines dissecting scenarios)…

ScenarioAnticipated Price Action
ConsolidationBetween 18400 and 17850
DowntrendIf breach below 17850; to drop somewhere till 17650
UptrendIf breach above 18400; to rise somewhere till 18750

Everyone is worried about inflation even though it has not reflected on the WPI and CPI yet. However, there exists this universal consensus about inflation about chips, crude, metals, transport…comb, toilet paper, salt…basically everything. Such apprehensions usually become self-fulfilling prophecies. I wonder.

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

spanner, wrench, tool

Oct21-W3: Mean reversion strategy needs some fixing

The week was dedicated to my indigenous and highly risky mean reversion strategy. It is highly risky because there is no stop loss. If I continue to be in loss by Thursday expiry, the idea is to roll over the trades. Also, there is no way for me (or anyone) to catch the top but I take trades thinking that the entry is the top.

Even though all of the above sounds like a plan of disaster, the above is the only method in option selling on which I am highly comfortable. It is because Vega and Theta play a vital role in making profits. The main problem that I face is position sizing. If I go wrong in catching the top, the next thing to do is to perform averaging. Therefore, the initial position size is quite important.

The inability to be in control of margin compounds the problem. Even though I deploy vertical spreads for this strategy, I never quite know when I might run out of money. This whole concept of VaR and SPAN and what not makes it impossible to guess position size. Even Zerodha’s basket order is quite useless as it attempts to place limit orders instead of market orders. Limit orders typically fail to execute or worse only 1 leg gets executed, which further compounds the margin problem.

Having said all of the above, I guess I just need to keep experimenting with my position size and identify the optimal solution. The facility to bring hedges closer to strike is a solution. However, when I already have a large number of spreads and I do not have sufficient margin, exiting a hedge can make me go out of margin. Managing all this is ridiculous.

Therefore, brokers and SEBI must figure out something to make life simpler for trading options spreads. Until, then I need to somehow figure it out. I gained 2 insights this week:

  1. Don’t let Zerodha’s Average LTP fool you because it is based on FIFO method and does not show the true picture in case some loss was booked the previous day
  2. Keep hedges closer to sell strike for gaining margin benefit  

This mean-reversion strategy is my hedge against the inevitable weeks when I will lose money. Thus, I must make the most of it whenever I am deploying it.

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.