Prashant Mullick⚡ Profile picture
May 27, 2018 17 tweets 12 min read Twitter logo Read on Twitter
A lot of chatter on my TL about the #edge in #OptionsTrading, specifically #OptionSelling.
A lot of good information but some mis-information being spread as well.

A #thread.
First off, #OptionSelling by itself is NOT an edge.

Simply by selling an instrument that decays in value over time, doesn't give one an edge towards profit. It is accompanied by short gamma and rising #volatility working "against" you.

The #volatility #edge or premium expresses itself when the underlying moves "less" than the move that is priced in the options.

Historical Volatility (HV) quantifies the actual moves of an underlying
Implied Volatility (IV) quantifies the expected/implied moves of the underlying over the period of expiration.

When over a time period the values of IV consistently stay above the HV, you can say that there is a #volatility #edge to be extracted.

Like in this HV & IV chart of the $SPX or even the $NIFTY.


Diversified indices show existence this #volatility premium.

In the Indian markets, some individual stocks show this as well but only over small periods of time (few months of expiration).

See data for $ITC and $INFY.


Specifically, take a look at the chart for $ITC.

Enough periods of time where the HV is much higher than the IV.

#OptionSelling here in this zone (Feb-Sep 2017) would be a nightmare.


Things can get even worse with even an underlying as large and widely traded as $HDFC.

The entire year of 2017 presented almost no #volatility #edge in selling options.


Coming to the favorite underlying of them all, the $BankNifty, also the topic of discussion due to its popularity created by the presence of cheap weekly options.

Can you see any premium of the IV over the HV even with this one?


So what makes so many traders rush in to trade the $BankNifty weeklies?

Weekly expiration cycles presents unique trading opportunities in itself.

With a one week life-cycle, pretty much the entire monthly expiration can be traded in super fast forward. ⏩


But I've mentioned this one before. #ExpiryTrading


Any trading strategy needs to be tested for its ability to survive or allow the trader to survive the range of various market movements.

Taking on the #blowup risk with #ExpiryTrading doesn't make the cut for us.


Coming back to the bad rap on #OptionSelling this weekend, most of the flak faced is due to some trader's talking up #ExpiryTrading naked cheap OTM options as a means to build an investable trading portfolio.


Instead, here is some good reading on #ExpiryTrading that will keep most traders in good stead, especially those who value risk.…


I certainly do not recommend #ExpiryTrading to new #OptionsTrader.

I will recommend they start with #OptionSelling after they've taken the time to understand the math behind #OptionsPricing.

So finally, instead of being enamored by fat +ve MTMs, skip that lure and supposed adrenalin rush and work on understanding how #OptionsPricing works.



It is boring work, and you might spend a few long nights at it. But once you come out to the other side, you just might thank me for it.


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More from @VohiCapital

Sep 16, 2018
Don't get into #OptionsTrading with less than 25L if primary engine is #OptionSelling

Don't create focus on return in trades.

Read 20 tweets
Aug 13, 2018
Traders need to check their ledger not daily MTM PNL statements.

Selling of deep ITM options to hide and carry forward losses is a common practice amongst unscrupulous "sub-brokers" illegally managing others money in #OptionsTrading.
There are no mandates from @SEBI_India on allowing "sub-brokers" or any party to trade and manage client funds in #OptionsTrading.

Certainly no mandate to take leverage of the sorts usually taken.
@SEBI_India Even AIF Category 3 norms don't allow leverage upwards of 2.

Beyond that, even an AIF cannot solicit funds from the public openly.

More on these norms here:…
Read 4 tweets
May 29, 2018
The God of #Options #Greeks is often disregarded and has no mercy, especially on #Options #expiration day.

A #Thread on #Gamma.

The primary feature of #Options is their non-linear payout.

Most traders understand that #OptionsPricing is dependent on the price of the underlying, but the response is non-linear. #Gamma is the variable that describes this non-linearity.

Loosely, if #Delta is the speed of the #Options position, #Gamma is the acceleration.

Read 15 tweets
Mar 12, 2018
Some of my #takeaways & #notes from various #DECMA sessions this weekend. (1/n)
By @madan_kumar
- Build a rock solid trading plan
- Treat trading like a business
- Limit your time spent with the trading business
- Take the extra time that trading allows you to have and spend it with your family
By @Raminations
- Use all experiences positive and negative for building future plans
- Understand the products you are trading to the smallest details
- If a position or trade is giving you sleepless nights, get out of it immediately the next morning.
Read 19 tweets

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