Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

How the ATM Put Options Can be used to identify a rough Weekly Support with High Probability?

1 min read

Put Options very popular tool among option sellers to make most of the money during bull markets and the most popular tool among option buyers during the bear markets. However what if I say Put Options premiums can be used to predict the support for the Weekly expiry traders thereby having a better view of the market activity?

Why ATM Put Options?

In the world of stonks always go up, theoretically selling naked put options (not recommended) maximizes the returns as ATM Put options hold the maximum time value compared to selling OTM Options. And also put options are used as a hedge by most institutions to protect their downside risk from any extreme negative events (which is a losing game most of the time)

Nifty Weekly ATM Put Options – Backtesting Rules

In order to understand the ATM Put Options better, we are going to do simple backtesting on Nifty Weekly options, and what if every Friday evening one could sell a naked put option around the market closing i.e at 3:25p.m around the weekly close, and hold the positions till the expiry?

So I thought of doing simple backtesting in Nifty weekly options for the period Apr 2019 to May 2022 using Quantman – Options Backtesting Tool and it turns out to be profitable results.

Selling ATM PE (Backtesting Results)

The Equity curve is not interesting though. But the surprise comes with the winning probability of 74.57%. That is a very high odds out of 151 weeks only 39 weeks are non-profitable weeks. And March 2020 had done some deeper damage.

ATM PE Profitable Heatmap

Selling ATM PE Pnl Heatmap

Most of the losing periods are attached to rapidly increasing IVs (mostly crisis periods) and sudden negative news events that make selling put options unattractive during those crisis periods.

Nifty ATM Puts Selling Observation

Out of 151 trading weeks, approximately 60% of weekly options (91 weeks) ended with zero premiums – i.e on the weekly expiry Nifty spot closes above the ATM PE strike price

Out of 151 trading weeks, approximately 14% of weekly options (21 weeks) ended with marginal profits – i.e on the weekly expiry Nifty spot closes above the ATM PE breakeven levels measured during Friday evening.

Let’s take the current trading scenario. Nifty Spot on Friday closing (27th May) is around 16352 levels and so the ATM PE is 16350 which on Friday closing the premium trades around Rs172/lot and so the breakeven levels comes around 16178. So one can conclude that for the current week expiry (Thursday closing) Nifty closing above 16178 has a winning odds of 74% approximately.

Conclusion

Measuring the breakeven levels of ATM Weekly Put options around the Friday closing or post the Friday closing gives a better view of the Market Supports to tackle the weekly expiry with a better support level with a high probability of success and the odds of breaching the ATM PE levels are very high during expanding IV periods(crisis periods).

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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