When to write (short) options

 
In my 2nd article, I’m going to share information regardng when to write options and how beneficial it is to write options provided it satisfies certain conditions:

1. when the trend is uncertain
2. when the stock/index is sideways(highly perferable)
3. Good liquidity(volume) in options
4. Prefer to write options from Thursday EOD and also Friday and cover them on Monday. (I will explain this in detail)
5. Write options of next series from one week before of the expiry of the current series itself.
6. STRICTLY AVOID WRITING NAKED OPTIONS.(MEANS ONE SIDE)
7. Try to choose ATM and OTM options and prefer both sides have some what equal premiums approximately. Make sure you choose options both sides which are preferable if they are equal distance from the underlying asset. I will explain this point also in detail.

Above all, strictly avoid writing naked options. In other words don’t write options only on one side. NEVER EVER. Naked options are high risk category. Achieving target is always secondary but before jumping into a position, first we need to consider the risk. The risk in naked options is unlimited.

Of-course even if one write options both sides still the risk is unlimited but it would at least cover the premium of other side to some extent.

Always write options with strict STOP LOSS both sides according to the levels of the underlying stock. In other words according to the support and resistances of the underlying stock.

The more the market or stock is sideways the more the options tend to lose premium coz of time factor. so, the more the premium loses the more is our profit.

so, what type of shorting is preferred. I prefer short strangles first and then short straddles. Of-course there are so many other strategies available but these two are preferred. In other strategies the risk is very very less and also the profit is also very very less. sometimes no profit at all. so, prefer these two strategies – Short strangle, short straddle.

What happens in other strategies is we need to hedge the position almost 100%. If that is the case of hedging then there is no risk and where there is no risk there is no profit. If at all any profit it would be negligible to the time we spent in trading and to the amount locked and the time we have to wait for that small return. sometimes even after days, the profit would be 0. so prefer those two strategies.

In the above conditions, I mentioned to short options mostly every Thursday EOD and Friday of the week. WHY? Reason is simple. Options tend to lose premium by TIME. This is the main reason how writers are profited at the cost of retailers. 🙂  We get two holidays here..sat n sun. Options tend to lose premium in these two days mainly. so, prefer shorting before not only weekends but also any other holidays for the exchange. Luckily today is Bakrid holiday and only tomorrow one trading day left for the week and again sat, sun holidays. So, yesterday itself i wrote options in Nifty. So, on Friday and Monday I will reply how much premium I’m eating. 🙂
So, this point is clear.

Now lets come to the 5th condition. (5. Write options of next series from one week before of the expiry of the current series itself.)  Why I mentioned one week before itself for shorting next series options. Coz, by the expiry time already the premiums of the current series 90% eaten. So, not much left to eat. The premiums of the next series look very attractive and this is the reason why I prefer them in the last week of the current series. Again, the same reason, Options tend to lose premium as time passes by.

Coming to the 7th condition to prefer ATM and OTM options. Do prefer OTM mainly. OTM are less risky and can give good returns. The main reason behind OTM options to short is…we have certain concepts like gamma, delta, theta etc..(these doesn’t need focus at this point). But, in other words, the change in premium in OTM options is less proportionate to the change in the price of the underlying stock and its volatility. Those who are comfortable with levels they can even prefer ATM options.

Next to the 3rd condition about good liquidity. Yes, it is always needed mainly if we short stock options or deep OTM options of other series. Because of less volume the bid and offer rates vary much. So, prefer those having good liquidity.

When the trend is uncertain and when the market or the stock is in sideways options tend to lose premium heavily.

Try to write options both sides(MUST), with strike prices having equal distance(approx) from the underlying asset and also if both the premiums are almost equal then too good to short.

EX: If nifty is 6300 then prefer 6500ca and 6100pa if you short strangles preferring OTM. choose either current series or next series based on the premiums.

same with stocks..lets take Reliance. What a beautiful stock it has been since 12 months for the writers to eat premium in RIL options. The more this stock is beautiful to the writers the more I can say it is the most underperformed stock in FNO segment since one year after its split. It is least risky pick and lot size is only 250.

The disclaimer of risk in shorting options will always be there. Happy trading. 🙂

Regards
Priya.