Saturday, 11 February 2017

How to trade Nifty options?

If you are still trading Nifty futures, you have to give a serious thought to it.  If you want to turn profitable or increase your profitability you have to switch to option trading.  I had written a post some time back on How trading options can make you profitable illustrating a point that even if your 50 to 55% of the trades are making profits, you either will still be in a loss or in very negligible profits with trading futures because of the cost that involves in future trading.

If you want to switch to option trading, this is how you can do it.  You should continue to look for the setups on the future chart as you normally do.  Once you find a setup and decide on the level, you should look for the corresponding level on the option strike and take a position there on that option strike instead of future.

Let me give you an example to help you understand it better.  Here is last Friday's Nifty Future chart. As marked, lets suppose, we want to enter long at the Nifty future level 8805.

Now instead of entering at that level, we will open the 8700CE chart and look for the corresponding level there on the 8700CE, like this and will take the position there.

Now lets do some math.  Suppose, you are trading with 2 lots of future and in a month you take on average 40 trades (2 trades per day), you will end up paying to government and exchange Rs. 130*2*40 = Rs. 10400 per month plus brokerage plus internet cost plus charting subscription if any.

So you may not be making any money from day trading but the government and other service providers for sure are earning around Rs. 11000 from you monthly. It is a big recurring cost and you have to pay this amount as long as you continue to trade, again no matter what, whether you win or lose. There is no escape from it.

Now if you decide to trade options, you will pay only Rs. 1600 and save around Rs. 9000 per month. If you are trading with 10 lots, you will save around Rs. 50000, a mind-boggling figure which will be getting added to your overall profitability. 

Another important thing to note is that we will trade with in-the-money option strikes only and we will buy the options only.  In the past, I used to prefer selling options because of other good reasons but I have learned with my experience that buying options can be done too.  There were only few occurrences per month where selling options had an edge over buying it.  Apart from that, overall it did not make much difference. 

Also we will take position in 2 lots of options in place of 1 lot of future because options tend to move around half of what future moves most days of the month.  Only closer to expiry, options move same as future, so during those few days, we can trade with 1 lot of option instead of 1 lot of future.  In the above example, 8700CE (in-the-money) moved in favor from 137.50 to 154.5 or 17 points whereas Nifty future moved from 8805 to 8828 or 23 points. In this case, it moved more than half of what future moved and generated more profit than future.  Option generated 34 points (2 lots) whereas future made 23 points overall

Lets have a look into the margin requirement. Buying this 8700CE requires (137.5*150=Rs. 20625) which is less than the intraday margin requirement for trading 1 lot of future around Rs. 25000.  So in this front, it requires less capital too.

Now if you are still in some doubt or struggling to understand the trading system better, do not know how to trade, subscribe to Champion Day Trader video tutorial, learn how to trade options and turn profitable.

12 comments:

  1. Superb post Uday.
    Just a simple decision of changing from Nifty Futures to Nifty Options can make a lot of traders profitable.

    ReplyDelete
  2. Nice explained URD
    There is a news raising stt on option
    Trading is it true..0.017% to 0.5% ??
    Thank you ..!!

    ReplyDelete
    Replies
    1. Rudramuni

      Last year they increased it. This time there is no such proposal. Currently it is charged on selling only at 0.05% of the premium amount.

      URD

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  3. Sir very well explained

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  4. Sir why did you buy ITM call option ? Why to buy 8700ce instead of 8800ce?

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    Replies
    1. Vinod

      Buying ITM is the part of the strategy that we follow. You can go for 8800CE if you like.

      URD

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  5. Thanks a lot Daveji for this highly informative post.

    ReplyDelete
  6. calculation seems to be missed.

    10400 for Nifty fut and only 1600 for Nifty optios, how you calculate it?

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  7. I calculated the pricing in Zerodha and it comes out to be around half (Rs 74 for Options and Rs 140 for Futures).I could not get ur Rs 1600 calculation.

    Thanks.

    ReplyDelete
    Replies
    1. Anon

      You seem to have not read the post properly or could not understand it. When you do that and put the comment, you waste your time as well as mine.

      Per lot Rs. 20 is calculated for option. Brokerage is not included because it varies from broker to broker plus it is very negligible cost in trading. My broker is SAS Online and you can calculate the government charges on option trading like here on their site,
      http://imgur.com/a/HOlwK

      https://sasonline.in/brokerage-calculator/

      All government charges, exchange charges for option trading comes to around Rs. 20 for a round trip. So I calculated it like 20(charges) * 2(lots) * 40(trades) = 1600 per month.

      URD

      Delete
    2. Thanks. Got your point now.

      Delete