Almanac of a 100% options buyer :

As many of you know, I am an options buyer. I never sell naked options. Nothing wrong with naked selling, it's simply that I do not have that level of knowledge or is comfortable doing so (1/n)
We will be discussing buying BankNifty options on expiry day. I have certain systems which tell me whether to trade that expiry and whether to buy options expecting a large move (2/n)
Now comes the part where I have to decide how much to buy. Say I have an equity of 25 lacs and I decide to allott a certain % of that equity on this strategy. The most I will allocate will be around 2%, which is 50k (3/n)
Backtesting my strategy tells me that if I play 10 expiries where my systems ask me to trade, I will be probably right 3 times( worse case scenario) and lose 7 times (4/n)
I must #survive 10 expiries. So 50k/10 = Rs.5000(1R) per expiry. Again, since I will be losing 1R per wrong trade, the rest 3 correct trades must give me atleast 3R as profit per correct trade. So 3 correct trades = 3*3R= 9R, 7 wrong trades =7*1R=7R, net 2R as profit (5/n)
So, my system must have a 30% win rate with an expected RR of 1:3 . If you can improve the win-rate or the RR, returns will be higher(6/n)
Losing 5000 on an expiry day will not kill me, I will not lose sleep. But if we get a move like the last 2 expiries, the equity trebles or quadruples in no time. 5000 is 0.25% of my equity (7/n)
My trade yesterday was a 26100PE-26700CE strangle bought at 12, which meant a volume of 400 each side. My average exit price was 215 (8/n)
As my equity increases , 0.25% of my increased equity is more than 5000. So risk per expiry will increase, volumes will increase. Slowly my equity should increase as time goes by and my systems work (9/10)
So rather than betting on all a hero or zero trade, which more often than not ends in zero, slow and steady rise in equity with controlled risk is what will save an options buyer. Hence, #money_management are the keys to the kingdom (n/n)
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