Option Scalping Trading Technique, explains Shubham Agarwal

F&O Cues

Scalping by the meaning of it indicates removal of very small part of the object. This makes it simple to understand the subject matter of Option Scalping as a trading technique that involves capturing very small moves.

We will understand a few drivers that could make an option move with such a speed that makes option scalping worthy enough to take advantage of. Then we can define the trade setup that needs to be identified. Lastly, we will look at the entry and exit criteria.

The reason for such trading opportunities lies in the fact that Options are responsive to the probability of them expiring “In The Money” (ITM).

ITM strikes are basically lower Calls and higher Put strikes when compared to the current market price.

2 Factors define the amount of responsiveness.

1. Closeness of the Strike to the Current Price. 102.5 Call and 97.5 Put will be more sensitive to move in the stock than 105 Call and 95 Put.

2. Time of the Expiry. Closer Strikes too will be very sensitive in the final days of expiry.

This makes the selection of the Options to trade very easy as well as the time of trading for scalping trades. We want to trade the closest higher strike Call and closest lower strike Put option as close to expiry as possible.

My experience is last 2 days of expiry and the expiry day itself are good days to trade. For index like Nifty, we get this every week whereas for Stocks we get this every month.

This brings us to the next point, what makes the moves possible. As stated, Option premiums respond to the probability of them expiring ITM.

For Example, with 1 day left for expiry a rather low volatility stock may give us similar opportunity.

Suppose the stock is trading at 1040 and 1050 Call trading at 1.5.

A small move to 1050 can turn the 1050 Call to 5.

Option turns around giving over 300% returns. Impressive but it still is scalping trade. We will not put all our life savings into it. It does make it worthy.

Now let us look at the trade set-up. Usually, stocks and indices will have very high open interest in strikes which are very close to current market price in the last days of expiry. One more thing to note is that such cases as soon as they near such high open interest strike, the momentum increases led by traders who are holding the open interest in that strike.

Finding such trade set-up is not that difficult. Look for high open interest strikes in last 2-3 days of expiry. We have a trade ready as soon as we spot one.

For the entry and exit of the option scalping trade, we select the same high open interest higher strike Call or lower strike Put. Once the momentum is felt get into it the trade by buying the option when the stock or index is just slightly below the Call strike / above the Put strike. Exit is wait till the stock/index cross the strike or the end of day.

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