In option trading a common belief is that most of the time the option buyers will lose money and option sellers will earn money. Hence the big players will always try to sell the options rather than buying it. These big players will somehow manipulate the underlying stock value so that their options will expire worthless.
For example,
A Buys Nifty 5100 CE @ 50 with an anticipation that NIFTY will go up.
B Sells Nifty 5100 CE @ 50 with an anticipation that NIFTY will go down.
Assume nifty trades at 5200 two or three days before expiry, the big players ‘B’ will try to manipulate the stock so that the nifty expires below 5100. In option trading, the game is always to bring maximum loss (Pain) to the option buying group.
The Open Interest will give you clear picture at what strike there are more option buyers and sellers. This OI is used to calculate the Option Pain.
This theory is significant only during last 5 days of option expiry.
If this theory holds, then you can reap maximum profits in short duration.
How to trade Option Pain
Assume the option pain of NIFTY is at 5100 two days before expiry and the spot trades at 5250, you can expect NIFTY to go down towards 5100. The spot need not close below 5100, but may trade around 5100 so that the option sellers can close their positions..
- Take positions when the spot is near option pain.
- When the Option pain value is higher than the spot price use bull call spread
- When the Option pain value is lower than the spot price use bear put spread
- Naked out of money Call write and Put write.
5 comments:
The theory looks great. But can u explain how to assume Option pain of Nifty is at 5100 when the spot trades at 5250 in order to Buy the 5100 Put?
Dear Vinod,
As you rightly said, I have also lost money by buying call/put options and decided to shift to sell options. My idea is to sell call/put options at the start of the series fixing the strike price as Nifty spot+200 for call and Nifty spot -200 for call. For example, for January series I prefer 5300 call and 4900 put. When ever Nifty spot moves above 5300 a future will be bought and a future will be sold Nifty spot declining below 4900 to save the margins received. I am still hesitating to do it as there is no protection for 100 or more points gap up or downs opening. If you get some more idea it can be implemented.
Dear Vinod,
From where can I download the Options Oracle free software please?
hi vinod ,
can you tell me how to calculate option pain?
Hi Sundar,Ashok
u can get the Option pain value from Options Oracle s/w. download it from http://www.samoasky.com/
Hi Nandi,
Im working on a strategy...I also employ similar strategy like urs wih one difference instead of buying Nifty lot when price goes above 5300 i buy 1lot Minifty now itself. But not come up with a best one.
Thanks
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