NIFTY Options Trading

5 stars based on 62 reviews

I have 2 brothers and both dabble in the stock markets and was lucky that one of my brothers mainly invests and the other trades options actively. I started my stock market career day trading in stocks with margin and also small bits of short-term trades. So I would have to thank my brothers for introducing me to the markets.

Had a few lucky trades to begin with, but was never successful trading equity, blowing up my account a few times in the process. Most of the trades were based on guts and some on tips given on TV. How did you manage to continue trading when you made these losses and for how long? I was having a good job and that allowed me to stay active in the markets, adding trading capital from my salary at the end of every month, it was a blessing in disguise. I started trading in early and this method of trading continued till May when there was a sudden fall in the market which was a big setback not only for my day trades but also on my delivery trades, which I exited in panic.

This incident was an eye opener on how trading based on news, watching TV or on a hunch can never really be profitable unless I had the news before everyone else did. This is when I got introduced to Technical Analysis and it started off with learning candlesticks.

As and when I learnt more about technical analysis, I suddenly felt that it is possible to have systems based on strategies which can run like a money making machine removing all human emotions. It also helped that I was good at shell scripting and the automation background helped me put up a few systems. You could say that I have tested over strategies from then to now.

Most of the results were based on open price, but the open price that you see to what you can actually get while trading the markets has a huge variance. What also adds to this are the slippages, brokerage costs and other taxes. Around the same time I also got introduced to Futures and Options and found out that I was better at intraday trading and hence most of my positions were never carried overnight.

This is what I have been following for the last couple of years and it has been how to trade nifty options well for me. Most of my trades are option trades and hence along with looking at technical charts, I also started mixing it with a strategy based on open interest, implied volatility and option prices. Basically the strategy using the data predicts which side of the option is skewed to move up, either calls or puts and also the strike price best positioned for this.

Since the strategy revolves around spotting traps or option skews as mentioned above, typically most of the trades would be counter trend trades. How to trade nifty options personally find that being long options really works well for such a counter trend system. There are some gut based trades, but I mostly stick with trades given by the system that I follow.

But the critical thing is to accept that we as humans can make mistakes and can get carried away, so it is best to keep only that much money in your trading account that you can afford to lose, especially when trading in options. When you hold options overnight, the time decay happens faster and if you trade in-the-money options, the absolute return when you are right on your trades is not much. Also one of the things that I avoid as an option buyer is to pyramid, that is add to existing open option positions as and when it goes in my favor.

When you buy options you are fighting time, volatility and price moves, so I personally never liked pyramiding and always how to trade nifty options when I did.

There are times when I do carryover options, but I reduce the size significantly. Also the option position carry forwarded is not because it has made a loss, so let how to trade nifty options hold it to the next day hoping that it recovers. It is mainly because the gut sometime says that there is more in the trade left to play out. Out of the money options only? That is very high leverage, are there any money management rules? Leverage is a double edged sword, but a very important part of the business.

One book which was an eye opener for me was on Position Sizing by Van Tharp. In terms of how much trading capital, I follow a unique strategy. I come up with an assumptive trading size for my account how to trade nifty options on my risk appetite, assume this is 10 lakhs. But as and when there is profit added to this Rs 1.

Usually How to trade nifty options will how to trade nifty options profits from the trading account if the account size reaches between 2 to 3lks to bring it back to how to trade nifty options. Today I can afford to take this risk having a cushion of a full time job; I might change this strategy by a small bit if I were trading full time. My trading activity picks up quite a bit as and when the market approaches expiry and is mostly in Nifty options because of the higher liquidity.

It how to trade nifty options very important to not treat this as lottery money and spend it. I look at it as a normal income and use it to supplement my financial goals. There is no system that can guarantee you return, in the last 1.

It is important to understand this and hence manage your risk accordingly. Trading is like a profession, people take it lightly especially because of the low entry barrier. To be able to reach that assumptive trading size where I can quit my job and become a full time trader. Thanks, Rajesh, for the insights and hopefully your good run in the current day challenge continues and be able how to trade nifty options trade full time soon. Love playing poker, basketball, and guitar.

Thanks Zerodha for sharing this …. It contains Lots of Value and very helpful for the people who are there in this market…. Congrats and Thanks for sharing your thoughts Rajesh!!! Wish you all the best for your future plans. Because of his natural talent he is gonna achieve greatness.

I see him as a teacher. You say correctly that Full Time job is a blessing in a disguise. But how you are able to do Day Trading with FT job? How you are able to manage daily screen time required for day trader along with FT job? How about charts-on mobile? Most of the time, the major moves happen within the first one hour of market open and again in the last one hour. Being in software industry where you have flexible timing helps a lot here and the day is still long after market hours!

For tracking other parameters on the OI and IV skew, I use the system built inside my website tripleint. An iitan is paid atleast 30 lakhs per annum sal. He does it because he has the potential. He gets satisfaction from it. Why do you play chess? I am retired aged 61, earning how to trade nifty options pension.

And i trade options. Because i am not yet brain dead. Money is not always the main motive. Wish you all the best for your future trading plans. I hope this article is very inspiring for all of us! My problem is getting uninterrupted internet connectivity and reliable tick by tick charts for intraday trading.

I am based in Mumbai western suburbs. I use the live proprietary system developed to track OI and IV skew defined in my website tripleint. Most of the analysis is how to trade nifty options on EOD charts, levels, traps and research is to select the right day for placing the trades. During the day the live Option system and price levels are used for timing the entries.

Thanks to Zerodha for publishing my interview!!! For people who have been asking details on the option trading system and methodology, please visit my website at tripleint. Thanks again for all the likes, shares and encouraging words!!! I almost have similar background as yours IIT, M. I am interested in building a trading system. Can you throw some light on how to proceed. Did you build your own trading system? Is there a mechanical way using which you how to trade nifty options for traps?

Will be very grateful of you can share your technique. Rahul — For traps, not using a mechanical way of finding it out and I have explained the details in my blog http: Under Categories you can find articles for bull and bear traps. Please find some scholarly articles at http: Each have their own advantage and disadvantage as has been explained. The articles might help you to understand how each of the parameters of OI, IV and direction decides the option price and you can then decide on which strike suits best for what you are looking for.

Best wishes to you! Mr Shirish — Thanks for your message! Expecting a return of risk free rate is far too less to consider for any business how to trade nifty options to maximize that we use the power of leverage.

Trading is to be considered more of a business and to begin with, one needs to start off only how to trade nifty options the capital one can afford to lose. How to trade nifty options all probability there will be multiple times when one goes bankrupt in the trading account and it is continuous learning and perseverance and might take a few years before one could zero-in on the strategy and markets that one would be trading profitably.

Derivatives as a product itself is designed to factor in leverage and so handling risk: Being a personal trading account, one would not want to reveal the absolute value and that is the reason why returns are talked in terms of percentages.

I have been trading from past 1. I always end up losing money just because of these traps. The most common mistake i always do is i carry my position overnight, that has killed my account literally.

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Options are contracts traded on different exchanges around the world like stocks. Options come in the derivative category i. These are known as underlying for the options. Formal definition for option is given as follows: An option is a contract that gives the buyer the right, but not the obligation , to buy or sell an underlying asset at a specific price on or before a certain date Let's look at all the keywords one by one: It means a person owning an option can exercise it if he wishes to do so.

However if he decides not to exercise the option no one can force him to do so. If the person does not exercise the option before the expiry date the value of the option becomes zero. Option in itself is not an instrument like stock that gives you something like a unit of ownership in a company. It is only a contract which gives you the right to buy or sell such instruments that are already being traded. These instruments are known as underlying for the option.

Options derive their value from the value of its underlying assets specific price: Each Option has a strike prike price. A strike price is the price at which you get the right to buy or sell the underlying certain date: Unlike stocks which continue to exist as long as the company is running, options have an expiry date after which they are not traded anymore and their value becomes zero Anything that is traded on an exchange can have corresponding option contracts also being traded provided they meet certain regulatory criterias like minimum daily traded volume, etc.

Any such instruments or a combination of such instruments can be used to construct an Option contract. Options are said to mirror the movement of its underlying but there is a premium attached to it. This premium is the value attached to the optionality of the options. Stocks are valued based on several factors like the company earnings, fixed assets, book value. There are certain factors that add premium to the value of the stocks like the fundamentals of the company, market monopoly in the product and services offering by the company, expected future growth of the company.

Similarly Options have a fair value and a premium value. Calculating the fair value of option is simple. Options are not traded at its fair value. The price of the option only tends towards its fair value as the expiry date comes closer. There is always a premium attached to its fair value. For example if the NIFTY index is at , it does not mean that you can buy the option for zero dollars, you will still have to pay some dollars to get this option depending upon the expected level of NIFTY on the option expiry date.

However if NIFTY stays at levels then the option value will tend to zero towards the expiry date. On the positive side the option value will keep increasing as long as the NIFTY is moving above Thus at least in theory options offer limitless profit and limited loss. Option trading is more a game of numbers than fundamental analysis. For the same instrument there can be multiple options for different trading levels.

Add another dimension to it and you have put and call options at each level. Add one more dimension to it and you can either go long or short on these options. So many dimensions can get intimidating at first for a new investor, but options are interesting. Let's try to understand it with the help of two simple charts given below. From the Put Options chart it is easy to understand that the price of the put option is close to its fair value for higher index levels in the range of to Option premium over fair value increases for lower NIFTY levels in the range of to , indicating that the market expects the NIFTY index to fall from the current level of to From the Call Options chart the premium over fair value for higher index levels in the range of to , is extremely high because all the theoretical negative fair value adds up as premium.

However practically the option value can at minimum be zero and not negative and hence the premium for these options will be close to zero which is the price at which these options are being traded. Thus the value of call options is either zero or close to its fair value. After making adjustments for the negative put and call premiums the charts would look more like what we usually see in the financial text books as given below NIFTY Index: Both the charts point towards a bearish market.

The market expects NIFTY which is currently at to tend to levels by the option expiry date. The high value of put options in the Index region of to shows that the market expects that this level will not be reached by the Index, hence investors are selling the index at this level hoping to cover it by squaring off at lower levels.

Similarly the high value of call options in the Index region of to suggests that the market expects the Index to reach above this lower level, hence investors are buying at this level hoping to square off when the index reaches above this level.

Thus from the above argument we can conclude that the NIFTY index will trade below level and above levels. Also note that a higher premium in the to put and call options indicate that these options are relatively expensive to their fair value, but most probably these are the levels at which most of the trading is happening and the market is most interested in.

If the Index continues to fall towards the put options will gain more premium while the call options will tend more to zero. If the market turns around and starts moving towards then the call options will start adding premium while the put option premium will start going down. Trading in options would then simply mean to guess correctly the direction in which NIFTY will move and take a corresponding position where you can earn more premium.

Another interesting column in the above table is Open Interest which indicates how many contracts are still open for the respective option. Higher Open Interest indicates more liquid option. Increasing open interest at a particular level is also considered as an indication of market expectation that the index will reach that level by the contract expiry date. One of the factors influencing the value of the options is the volatility index VIX.

VIX value provides the expected fluctuation perceived by the market over the next 30 calendar days. When the market is range-bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, call option buying a position taken on the view that the market will move higher generally outnumbers put options buying a position taken on the view that the market will move lower.

This kind of market may indicate lower risk. Conversely, when the selling activity increases significantly, investors rush to buy puts, which in turn pushes the price of these options higher. Investors also buy puts to hedge their stock exposure in the market against generally negative market trends.

This increased number of investors willing to pay for put options shows up in higher readings on the volatility index. High readings indicate a higher risk in the market place. As far as options trading goes it always pays to be well aligned with the long term market trend.

In the short term the market may flip - flop between bullish and bearish market causing the option values to fluctuate widely.

However if an investors position is well aligned with the long term trend then he need not worry about these short term fluctuations. One of the indicators of the long term trend is NIFTy future values. If the NIFTY index is being traded at a discount in the futures market then the long term trend in bearish. On the other hand if the NIFTY index is being traded at a premium in the futures market then the long term trend in bullish.

We have seen in the Option Valuation section how to analyze options from the table of numbers giving strike price, traded price and open interest for different option levels. We have also seen how to spot the most active options using option premium and open interest. Trading in options is all about taking the right position and squaring it off at the right time.

Also option premium values tend to zero close to expiry date. It is important for all option traders to keep a close tab on their investments. One cannot simply take a position in options and forget about it because its value is bound to be zero and non-tradable after the expiry date.

Hence, squaring off at the right time is of utmost importance. You can make good money in options if you play it statistically correct rather than trying to perfect each buy like we do for stocks.

There are many factors that contribute to the pricing of the options like price of underlying, volatility, open interest, time to expiry, market expectations.

The price changes wildly based of news flows into the market, which is not in our control. An investor needs to learn the trick of the game by gaining experience from trading with small investments in the begining. Market specific research and trade execution skills is required to make money in the options market. This article is only meant to serve as a basic introduction to understanding and analyzing option quotes.

A combination of put and call options can be used to trade several more complex innstruments that can earn profits depending on the market conditions. More details regarding these can be researched using other wiki articles.

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Contents 1 Options 2 Options Valuation 2.