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Reminiscences of an option seller

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.  

nifty index 50 greed and fear

Jul21-W2: Volatility compression is scary but should not be scary enough

I have always given high importance to the role of volatility in factoring option trades. I used to be a mean reverting option seller wherein even I would try to catch the top. Even if the stock doesn’t reverse or simply consolidated, I would make money since volatility will crash. I have barely traded the opposite scenario wherein volatility is bare minimum.

Volatility is cyclical in nature. If it is compressed now, it will blast later. But timing of that blast is quite an unknown aspect. If volatility is dead, it can stay dead for a long time or it might only give a dead cat bounce. Therefore, remaining scared of that volatility blast can give a wrong impression about current state of market.

And this is what happened to me last week. I took nifty index 50 strangles which were far far OTM than they should have been. Selling such options are safe but then one can park money in FD for this much safety. The notional loss of last week is huge. Had I sold options at appropriate distance last Thursday, I would have made good money by Tuesday. But fear got the better of me.

On the contrary, since I did not make expected money by Wednesday, I started doing just the opposite. I sold strikes which were near to money, just for the sake of reaching CAGR of 35%. While my objective is simply to beat CAGR of 15% or Nifty’s return, whichever is higher, I have been tasting 35% or more and did not want to slip. And thus greed got the better of me.

Fear and greed…greed and fear…market is a function of simply these 2 emotions. Price and volatility are nothing but a reflection of these emotions. Despite knowing it all, I made mistakes. I always do. The market forgave me this time. And I better pay my respects and learn.

The simple learning is this. I have a strike calculator. It is indigenously built and is proprietary stuff, I suppose. Since it is self-created, I do not believe much in it. I did not take the strikes which calculator was advising and made a mess of the week. Another learning is that I should also try to observe volatility behavior when it is low.

Important takeaways. I hope I remain committed to them.

nifty index 50 market volatility

Jul21-W1: Volatility reversion to mean is money

Though my view on Nifty for the week was quite bullish, I was already holding strangles since Jun 23rd. The strangles started giving nice profits due to absence of any action on Jun 24th and Jun 25th. By end of Jun 25th, I rolled in the strikes while again having no idea what could happen on Monday.

In hindsight, I should not have had such a bullish view since stochastic on daily timeframe was never going up. Market respected the momentum indicator and started slipping since Monday. However, the pace was not enough to cause any damage to puts. In fact, the put options remained in profit despite the fall.

The sluggish movement of market until Thursday meant that all I had to do was roll-in options on both sides. This helped me in earning a handsome profit for the week ending July 1st. In fact, July 1st must be one of the most boring expiries over the past couple of years.

However, the law of averages spares none. It is incredibly risky for option sellers to hold positions in such a tightly squeezed market. I am therefore forced to take positions which have very little premium in them. So, the coming week may not be as profitable. Absence of volatility might make the next couple of weeks difficult for me.

mean reversion strategy

Jun21-W4: Reversion to mean is money

My view on Nifty 50 index for the week was mostly neutral with a tinge of bearishness. Thus, I began Jun 18th by selling calls but by the end of day the market was looking quite poised. So, I created a strangle and had no clue what could happen on Monday.

Mondays now are turning out to be ridiculous. They usually used to be dead but now they start the week with a bang. Jun 21 was again one of such weeks. There was a nice gap down which gave me opportunity to sell more puts as Nifty was far away from its intra-day mean.

Now adding more positions is something that I can do today with the power of converting a delivery (NRML) position to intraday (MIS) position. Unfortunately, SEBI is all set to snatch this power soon. Until then, I guess I should make the most of it. I ended Monday again with strangles. In my subconscious, I knew it was not a good move as I knew market was going to be positive.

But I did not exactly expected this much positivity. Tuesday was a gap up day which made my call options go in red. In scenarios like these, the other side i.e. put options don’t return as much profit as the call options show loss. Based on my homework, I believed that Nifty won’t cross resistance and mean reversion might save again.

Luckily, Nifty didn’t go up further and by Wednesday, I took 1st July strangles. Since I took positions early, I am pretty excited about next week’s P&L results. I am determined to trade Nifty strangles every week, with a hope to maintain CAGR as a high double digit positive number.  

Apr21-W2: Time is money

Despite having taken hundreds risky trades, I did have butterflies in my stomach before taking the first relatively safe nifty trade of wannabebull.com. It may have been because of performance pressure since I did want the first week to not only be green, but meet the target CAGR of 15% also. And there’s my learning straightaway. The minute you start keeping expectations from a trade, your mind starts making wrong decisions.

The first trade should have been a no-brainer. Since market opened negative, selling calls was a sound option. But I had reasons to hold bias for uptrend (more details here). So instead of selling calls, I sold puts on the first sign of pullback. It did not take long for Nifty to break the swing low and I had to sell calls. The feeling of being stupid soon converted to panic as I saw loss of more than 400% on those puts. That’s my max stop loss limit.

But then the voice at back of mind said that the strategy was not only about being directionally correct, it is also about theta decay. Why not wait until 2:45 PM before booking loss? But then, what if Nifty falls more? Well, the intraday ADX seemed to be topping out. And so I decided to hold on. The decision somehow worked.

But then the same problem happened on Tuesday when I sold call options during the first 5 minutes of opening, thinking that it was going to be a repeat of Monday. The market rebounded sharply and those calls now needed help of theta decay again. Moreover, RBI meeting on Wednesday meant that option premiums were going to remain inflated. Luckily, Wednesday and Thursday brought the power of theta decay in full glory and the week was not only saved, I ended up earning more than target ROI (more details here).

All thanks to time!! Unfortunately, I have complete lack of it till end of month now. Even during these Covid times, my landlord is forcing me to change house while my office work is getting a bit hectic. Considering these factors and the relatively high monitoring that I had to do over the week, I have decided to pause trading till end of this month. It is ironic that I am pausing before even properly beginning but just like the week did not exactly go as per plan, life too does not work as per wishes.

Meanwhile, I shall continue to write views on Nifty and blog posts while also working on WordPress stuff. Nifty trading to be resumed when the time is right. After all, its all about time and timing anyway.

Welcome to WannabeBull.com

This website’s main purpose is to act as a log of ideas and trades which I undertake on weekly basis. Maintaining logs is one of the most important aspects of being a disciplined trader. However, since log maintenance is not exactly a very exciting or motivating activity, I decided to build this website to stay diligent and entertained at the same time. I will keep these logs simple so that readers would be able to understand and perhaps take such trades on their own if they wish so. Lastly, I hope to receive feedbacks from this website to improve trading skill or devise new strategies.

My trading strategy is highly conservative in nature. I will be selling far out of the money weekly options in direction of the trend. I may sell options on the other side as well if things don’t go according to plan. I believe that even if my analysis is wrong, theta decay of options can help in making money. I would be keeping a stop loss between 200 to 400% of my selling price, depending on time to expiry. I have observed that the strategy holds potential to give a return of more than 15% on annual basis. It does not require a lot of monitoring also.

Here’s a breakdown of the site’s pages:

  • Plan: Posts here shall briefly describe
    1. What happened to Nifty in previous week
    2. Daily timeframe chart with support / resistance levels
    3. Possible scenarios for week ahead
    4. My bias and trading action plan  
  • Trades: The page shall mainly display screenshots of P&L and order log, along with ROI numbers. In case a trade goes in loss or if I faced any challenge, I would be writing my experience
  • Blog: This is the page to vent out my wishes, experiences and learning. Posts here can be absolutely random

There shall be a new post on all the above 3 pages every weekend. Since the 3 are correlated, I shall be using a common heading syntax so that it is easy for reader to know what ‘trade’ and ‘blog’ is an outcome of ‘plan’. The syntax is <Month><Year><week> wherein week number is governed by Thursday.   

  • Education: I like to document whatever I learn in fundamental and technical analysis. I shall now be using this page for the same purpose, but this is only for new learning and not what I already know. However, I would be more than happy to write on any topic if I receive a reader’s request. Thus, the frequency of posts here shall be random.  
  • Watchlist: This page shall contain daily timeframe charts of selected large cap and mid cap companies which are fundamentally sound and make sense for long term investment. I am planning to track these and either take positional trades or invest for the long run. At least one post per month can be expected from this page.

Most people who trade options do it for the purpose of getting rich overnight. While it is possible, this website would not be able to serve that purpose. At the risk of being discriminatory, I believe that this strategy is best suited for women who are looking for work-from-home careers and also for anyone who wants a tiny little second stream of income. Selling options in India is a costly business as 1 lot needs an approximate margin of Rs. 1,25,000. Thus, meaningful trading requires an initial investment of at least Rs. 5 lakhs.

I feel or at least hope that blogging shall keep me consistent and profitable. All screenshots on ‘Trades’ page shall be unedited images. It would be great if I can connect with more experienced traders who have been selling weekly options so that we can share ideas. If you are one of them, please leave a comment here or connect using the form at bottom of home page.