Monday, April 27, 2015

DerivativesTrading - Selling options in NSE

It is a myth that Options Selling is always done by big institutions such as investment bankers, hedge funds, arbitrators; let us also understand how it can benefit retail investors to generate fixed income.

5 Step system for selling options (Calls and Puts)
1. Never ever sell an Option (a Put or a Call) if there is a catalyst or event
2. If sold (against point 1), make sure this Catalyst or Event does not happen too soon for stock to react. i.e. option expiry should be very close to Event (not letting stock to consolidate)
3. Never sell option Cheap:
Though it is sold far out of money, low option premium is not worth the risk you are exposed to
4. Only sell option when volatility is high:
Sell when volatility is high and is about to get contracted by the time option expires. Reason being, when volatility is high, premiums are very high and it drastically drops when volatility drops.
5. Define exit plan:
As options sellers can be exposed to infinite loss (puts are better as stocks cannot go lower than 0)

More to come....

1 comment:

  1. Hi Vineeth,

    I came to know of your blog from notetomyself blog. Can you advise
    aa) the complete thought process before you do a options selling.
    bb) what will be the minimum investment needed from a trader point of view.
    cc) what is the brokerage company you use and what are the commissions they charge.