Option Selling FAQs

 

 

 

 
 
We had been getting a lot of queries through email, message (SMS and Whatsapp) in option selling.  We are extremely blessed to get such overwhelmed response. In order to serve you better, we thought of coming up with FAQs wherein I can group the questions so that it would be helpful to all of us.
 
1)    Does option selling have unlimited loss?
 
Every trade carries some amount of risk. Especially it is general assumption that option selling has unlimited risk.  It is 100% true that naked option selling carries unlimited risk.
 
However one can sell options with defined risk.
                                   
2)    Is Option Selling only for big players?
 
By theory, anyone can do option selling if they are able to margin. Since margin requirements are high, generally it does not entertain retail people.
 
3)    Is Option Selling only way to make money in market?
 
A big “No”, there are various methods by which one can make money. Example Trend following, momentum trading, pair trading and etc
 
4)    When there are other ways to make money, why should I do option selling?
 
With other model, there is a chance of big drawdown. In option selling, POP (Probability of profit) is high and hence there will be less drawdown.
 
5)    Cannot I make money in option buy?
 
I would not say “No”. It is tough to make money in option buy consistently because there are many enemies for option buyers. They are time value, less probability of wining, liquid cash (Collateral not acceptable), penalty of higher STT if option goes ITM and etc.
 
6)    What is ideal capital one should have for option selling?
 
One should have 10L to start option selling in orthodox way. However you can test your swimming skills in option selling with 5L capital as well.
 
7)    What are the assets I can pledge and use as collateral for option selling?
 
Approved MF (Both equity and debt, stocks and Fixed Deposit). To get the list and to pledge, talk to your broker.
 
8)    Which broker will accept MF/FD as collateral?
 
By NSE rule, any broker can accept MF/FD as collateral. If you are unable to find out broker, please contact us
 
 
9)    Why there is not much tipster for option selling?
 
Tipster most likely will target retail people because retail people are more than big boys in count.
 
Obviously a tipster cannot sell option selling tips to retail people because one should have good capital and expect less return.
 
10)  What is risk defined strategy?
 
          There are various bookish definitions for it. In nutshell, every shorted option will be hedged by long option.
 
11)  What kinds of people are doing these risk defined strategies?
 
Big boys (Institutional Players, Big fund houses, HNI and Few bless retail people)
 
12)  Why there is not much training for option selling?
 
Most people are in stock market with high expectation with less capital. Hence it would not suit to market participants. Obviously there will be less supply as demand is very limited.
 
There are very few folks who do training in option selling (With risk defined strategies).
 
13)  How do I tune myself to do only risk defined strategies?
 
Assume that you have 100 Crores. Will you sell CE option for 50 Croe and PE option for 50 Crore? I can hear that you are saying a big “No”.
Person with 10L capital is mostly interested in short strangle. 
 
Knowingly and unknowingly strangle sellers are taking unlimited risk.
However one can do naked option selling with limited capital. Read this article full.
 
14)  How do I get trained in risk defined strategies?
 
 
15)  Why is this risk-defined strategy not popular among people?
 
First of all, option selling was less popular in retail crowd as return is limited and risk is unlimited.  Now risk defined strategy will give very less return that regular naked option selling. It is not surprise to me if it is not popular.
 
16)   What are the risk defined strategies?
 
There are countless names in option strategies. But in short you can classify in 2 categories.
 
One is vertical spreads wherein both shorted and long options will be in expiration and another one is horizontal spread wherein both shorted and long options will be in different examination.
 
17)   Can you give examples for these categories
 
a.     Vertical Spread (Example: Credit Spread, Debit Spread, Iron Condor, Butterfly and etc)
b.    Horizontal Spread(Example: Calendar Spread, Reverse calendar spread and etc)
 
18)   Which spread is good? Vertical or horizontal?
 
It depends on various factors (Market view, Implied Volatility, Time to Expiration, Margin available and other positions).
 
Both are equal good as they are risk defined strategy.
 
19)   What return generally one can expect by following risk defined strategies?
 
There is no assured return in market. However with proper risk management, one can work towards goal of getting 18-24% return per year at initial stage.
 
Later it is up to an individual how you make better return.
 
20)   Can you make living out of trading in risk defined strategies?
 
In trading, you are not supposed to have any pressure. It does not matter what trading style you follow. I highly recommend not to rely trading for living expenses (At least for two years)
 
21)  Who can do naked selling?
 
There is no second opinion that naked selling will give better return than risk defined strategies, but it carries unlimited risk if there is a big gap up or down.
 
However if one wants to do naked option selling, these are some guidelines
 
·       Never deploy all your capital
·       Should have mindset to accept the loss if capital is wiped out
·       Should be able to pump in more capital if capital is wiped out
·       Should take the profit out so that only capital will be under risk, not the profit
·       One can aim to get 30-40% return in naked selling
·       Black swan may come many years once, however it is better not to accumulate the capital
 
Thanks for reading this article. Leave your comments/feedbacks for us to get improved.
 

 

Jegathesan Durairaj, a mathematician by qualification, an Ex-software professional and now a full time Risk Defined Option Writer. With his Open Book Strategies, he is the most known identity in twitter as itjegan, with huge followers. He had won Zerodha 60 Day Challenge – 10 Times round-the-clock. He is one of the prime Option Writing Trainer and tutored close to 1000 members till now.

He is the Mastermind of CapitalZone РActive Option Trading where Traders can avail Trading Chart with customised indicators, FNO tools and Payoff analysis. His keynote is to provide whole FNO deets to be handy for Traders in a sole place.

Now he is taking more heed on hedging portfolio in Option Writing where we might subject to more market risk. He is streamlining his strategies often and improving perpetually. At this time unfolding ways to measure good-quality Trend Following System.

Conducting workshop in all Metro Cities (Delhi, Mumbai, Bangalore, Chennai and Coimbatore) often based on queries from Traders.

 

 

11 comments found

  1. Really interesting and very well explained. Very informative. I have some queries and will come back. Thanks Jegan. Please keep your good work

  2. Thank your of this FQA. all these queries was in my mind, now its cleared.
    Eagerly waiting to attend your training tomorrow at chennai.

      1. Well, time and again the same query yet to be answered!
        Diagonal put Calender: sell crrrent month ATM put to buy next month otm put with the premium earned
        . if the underlying say nifty expires at the same level at the expiry the written put will be worthless crediting the whole.premium to the account.
        The next month put will have some residual value as.profit due to slower time decay.
        If.market rises the next month pu premium will decay curtailing profit then why is the rise perceived better as compared to fall?

  3. Sir.. I’ve been trading nifty futures only. Is there any way to hedge futures with option before big event? I am waiting ur kind informations.

  4. Excellent primer in easy to understand language for beginners. Very straightforward answers and no attempt to sell. Its really refreshing that you are interested in educating people and not after getting their business. Please keep up the good work.
    Regards

Comments are closed.