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3 simple rules to follow in expiry week while trading options

My last piece of investor advice would be to stay vigilant while at the same time remain disciplined. Reason being that while trading derivatives there is always a thin possibility of a very big loss.

July 21, 2018 / 02:24 PM IST
Market

Market


Shubham Agrawal

Quantsapp Private

Trading equity derivatives especially options in expiry week has always had its own share of excitement as well as a peculiarity. What makes it special is the decaying time value which is in top gear and the noise that gets created by futures participants trying to roll over their positions.

Let's start with futures rollovers. Here, investors square up their future long/short trade the current expiry and create the same in next expiry. Just one little piece of advice in this rather simple trade is the compulsion to execute both trades at the same time.

It is not at all wrong to execute one leg of the two trades first and the next after some time in an attempt to recover cost, especially when we are rolling over long futures that are trading at a premium.

More often than not such trades do not entail any stop-loss mechanism and one is prone to taking a bigger dent in one's position. Instead, make use of spread contracts that trade rollover costs directly and try to cut corners through it.

Close

Now, let’s look at what sort of alteration would options trading require and why. But first, let us address directional single option trades. The ultra-speedy decay in time value makes it a war between the gain due to a favourable move and loss in premium due to every passing hour.

To counter this, three simple rules:

1.) Tighten the horizons as much as you can,
2.) Avoid carry forward of single long option trade into next session, and

3.) Select slightly in the money strikes especially towards the end of the day

What if one expects the view to materialise over the next couple of days? Well then, resort to net option short strategy like ratio spread.

For a bullish view, sell 2 higher strike calls for every call bought. For a bearish view, sell two lower strikes puts for every put bought.

Make sure there is at least a difference of two strikes between the ones bought and sold and there is an absolute stop loss mechanism deployed as an exit strategy.

That stop-loss number could quite simply be the net premium paid in the trade. This is to safeguard one from any unwanted volatility pushing the stock way too much in the direction of favour such that the losses from the extra option sold puts the trade at a net loss.

Lastly, there is a trade that’s liked by expiry traders, though it is not one of my favourites, when they think volatility will be low. In this case, sell both call and a put ideally of the strike nearest to the current market price.

Undertake the trade with two rules: 1) No matter what, restrict the trade to intraday; and 2) Keep a stop-loss at the net premium received as a paisa lost more than that would make the trade uneconomical.

My last piece of investor advice would be to stay vigilant while at the same time remain disciplined. Reason being that while trading derivatives there is always a thin possibility of a very big loss.

Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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