Thread by @muralipiyer

72. #Options #Notes
After spending two months on actual trading of options(I am 7 trades wiser for which my tuition fees is close to ₹8000), it’s time to add a few more notes to this thread.

73. #Options #Notes
For a beginner who just wants to try out how options work, the command line interface type of learning is to go for currency options. You have to manually calculate everything. The payout is not in any easily viewable chart. It’s very taxing. But loss is tiny

74. #Options #Notes
My style of learning has always been about daring to make mistakes and learning from them.
Of the ₹8000 loss, one of the trades i deliberately allowed loss to go down to ₹5000. That one trade actually cost me a lot, but the learnings were wonderful.

75. #Options #Notes

I had started with limited money in the beginning.
I saw that I could easily pledge about ₹35,000 from whatever stocks and the ₹5000 liquid bees I had.
I brought in an additional ₹20,000 to start trading.

76. #Options #Notes
Yes, I was starting with far less capital than what is recommended for Options. There is a reason why experts like @ajanardhanan say a minimum of ₹10 lakhs to consider trading with options.
They are absolutely right.

I won’t recommend my way to anyone.

77. #Options #Notes
Because I started with very low capital, there were a lot of constraints. Until I plowed in my August salary, I couldn’t afford to put on an iron condor even though the IV Percentile was screaming iron condor.

78. #Options #Notes
To start with, I had used only credit spreads. I was mostly using put credit spreads without actually thinking about the theory.
I was setting trades about the 70-80% levels.
1 lot. Selling about a 25 delta put and buying a 16 delta put. I was targeting ₹2000

79. #Options #Notes
I was unknowingly doing something good.
Generally, people want stocks and indices to rise. So, the Implied Volatility (IV) is going to be higher in the put side. I came to know this only when I was exploring currency options, where IV is higher on call side.

80. #Options #Notes
First I will talk about vertical spreads. Put or call credit spreads.
When you are low on money, you can only afford to take high probability, lower returns spreads.
You can’t afford naked sells. Naked buys don’t make sense in options.

81. #Options #Notes
Because I was cash constrained, the usual rules don’t actually apply.
For every trade you are roughly committing ₹50k in margins. You shouldn’t lose more than 5% or ₹2.5k per trade.
No body is actually teaching anywhere to limit losses to this figure.

82. #Options #Notes
If you are going for spreads, be sure to get the direction right. If you get direction right, you can even exit the trade earlier with a decent money.
I’m managing winners at 50% max profit. In spreads, the next 50% will be slow because deltas would’ve fallen

83 #Options #Notes
That brings us to one of the key lessons.
Watch the deltas.
They not only tell you how close you are to the current price, but also how much benefit will be there in holding on to the trade.

84 #Options #Notes
Once deltas reach 30s, be very worried about the position. Remember the loss you can afford is about ₹2500. If deltas rose from 16 to 30, you got your direction a bit wrong.
You will also be closer to the money you can lose(your risk level)

85. #Options #Notes
Once the deltas reach single digits, there is not much benefit holding on to the trade.
You can easily exit the trade and take the profits.

86. #Options #Notes
The thing with spreads is that you should note the price difference between the two strikes.
When you are selling spreads(getting credit), watch the sold options price minus bought options price. Net premium price is product low of this difference and lot size

87. #Options #Notes
For a bank nifty with lot size 25, price difference of 80 means ₹2000. For nifty with lot size 75, it’s about 26-27 for the same ₹2000.

Say you bought bank nifty at difference of 80, you can sell when difference gets down to 40 to make a profit of ₹1000.

88. #Options #Notes
The fundamental principle of using options selling is to take calculated risks. Earn small, but earn a lot without much losses.

People who come to options to make a quick buck are welcome. A lot of option sellers are relying on you to make regular income!😉💨

89. #Options #Notes
One of the important lessons in vertical spreads is about risk reward ratio.
You want very good risk reward ratios, the only place you can have it is by selling ITM option and buying OTM option, so that BEP is at about current price.

90. #Options #Notes
Just a quick reminder.
ITM means in the money.
OTM means out of the money.
BEP means break even point.

91. #Options #Notes
The closer you are to the underlying (whether it’s index or current market price), the higher is the premium. The closer your BEP is to the underlying, the less leg room you have in that direction.

92. #Options #Notes
Try to get risk reward ratio(RRR) as high as possible to have a meaningful trade.
Or, you can manage the risk by actively keeping track. (That’s what I did. Bad!)
RRR of 1:0.33 means max loss is double max profit.
RRR of 1:0.25 means max loss is 4x max profit

93. #Options #Notes
Width of the strike(strike of buying and selling) and the amount of credit you get determines the RRR.
It’s best to collect half the credit of the strikes to get a good RRR. But that brings down the probability of profit(POP) to 50%.(directional trade)

94. #Options #Notes
For a beginner with low cash supply, it’s easier to go for an 80-85% probability trade. You can actively manage the risk, while you are planning to collect ₹1000 rupees (set a trade with ₹2000 max profit) for a margin of ₹50k.
Or about 2%.

95. #Options #Notes
When you have enough money for an iron condor, things get much better.
I had put some additional money from my salary, and I was able to do one iron condor trade.
Remember that you need to keep apart some money for management. Don’t try without ₹75k minimum.

96. #Options #Notes
Iron condor is a different ball game altogether.

Iron condor is about setting two spreads, a credit put spread and a credit call spread simultaneously on the same underlying for the same expiry date.

Needless to say, I started off with mistakes.

97. #Options #Notes
With iron condor, if we keep the widths same, the max loss is same on both sides.

So, now we can focus on the cumulative credit recieved.

My mistake: I started my trade by not collecting enough credit.

98. #Options #Notes
To get more credit, it’s nice if the underlying has a lot of IV. That’s makes the premium across spread a lot more meaningful.

Ideally, ensure that you are collecting at least 1/3rd credit. That makes RRR 1:0.33. You can lose atmost twice as your max profit.

99. #Options #Notes
Ideally, you should have a view that the index/stock will end right around the middle of the two spreads.
Our main play here is around theta decay.
Again, ideally exit when you make 50% max profit.

100. #Options #Notes
The beauty of iron condor is in the way the two spreads behave.
The index/stock will definitely move about. When it moves up, the call spread makes a bit of loss, while the put spread makes a bit of profit.
Now, if deltas are same, you make net no loss.

101. #Options #Notes
However, you will notice that the deltas are typically not the same, especially when underlying goes close to one side.
Say spreads are at 19.5/20 and 24/24.5. And you started at 22. When price goes to 23, put side will make profit, call side will be in loss

102. #Options #Notes
Since 24 is closer to 23, the delta in that side would have increased. The delta on the put side which is farther away would have fallen. For every price change, the profit/loss on call side will now be more pronounced than the loss/profit in put side.

103. #Options #Notes
Now suppose, the price moved to 21. Since 20 is closer to 21, the delta in that side would have increased. The losses on call side would have now become profit. The profit gained in put side would have evaporated and it would have gone towards loss.

104. #Options #Notes
All this while, theta which had steadily been falling is silently making money for you.

Especially in a range bound market, iron condor is the best way to make money.

105. #Options #Notes
For a small guy with limited money, I found that the number is options are really limited.

Bank nifty is the most affordable. Then there is nifty.
Stocks are not really useful. I have tried ITC, NTPC. SBIN you have to be lucky.
Most are not liquid enough.

106. #Options #Notes
With this thread going beyond 100 now, it’s time to reiterate the standard caveat.
These are my personal notes on options. If it’s beneficial to you, well and good. If you, the reader, find it useful, please thank my gurus.
I am not an expert. I’m a student.