With the increase in margin requirement due to SEBI rules, there has been an increasing demand for Option Buying Strategy. In this article we will cover about a Bank Nifty Intraday option buying strategy that can be either traded alone or clubbed with Short straddle intraday strategy.
In one of our earlier article, we explained how Option seller has more advantage over option buyer.
Now consider, you did some analysis on the market movements and finalize that Market is bearish now, and it is expected to go down in the coming days.
As an Option buyer, he would buy the put option since his view is bearish and the Option seller would short the call option.
We know that there are only three possible scenarios in markets.
- Market tends to be in uptrend in few days and downtrend in some days and most of the time it stays in range bound.
- Who bought the put option based on his bearish view in markets, if the markets starts moving upwards, then he would lose money.
- If the market goes down as expected, then the option buyer who bought the put option makes money.
- But if the market neither goes up nor goes down, the option buyer losses money as the premium decays when there is no trend.
So option buyer can make money only one out of three scenarios. Only when the direction is right and the movement is swift, he makes money.
- Who shorted the call option based on his bearish view in markets, if the markets starts moving upwards, then he would lose money.
- If the market goes down as expected, then the option seller who shorted the call option makes money.
- If the market neither goes up nor goes down, the option SELLER makes money as the premium decays when there is no trend.
So option Seller can make money two out of three scenarios. Statistically, over the longer run, the option seller tends to make higher returns.
However, if we could initiate Option buying only when there is a higher probability of making money, then there is a chance that option buyer will also make money in long run.
Let’s consider the rules; As per our Short straddle strategy, the rules are straight forward, we short the ATM ce and pe at 9:20 am based on Bank Nifty spot price. We use 25% stop loss based on executed price, when that is hit, we exit one leg and continue to hold the other leg till eod. So when trending move happens in Bank Nifty, we exit one leg with minimal loss, but other leg continue to decay, and we end up making higher profits.
This short straddle strategy has yielded very good profits, you can check the live profits made by this strategy in last 8 months here http://performance.squareoffbots.com/
Now let’s discuss the option buying rules: We need to observe the ATM call option and put options premiums at 9:20 am. Consider, if ATM call option trading at Rs.100, then when it hits 25%, that is if it crosses Rs.125, then we buy this call option with 25% stop loss. If SL not hit, we exit by eod.
Consider this live example Bank Nifty trades at 31495 at 9:20 am, so ATM strikes are 31500 ce and 31500 pe. So as per short straddle we short both these options.
It got executed around 31500 ce at Rs.356 and 31500 pe at Rs.365 respectively. Now as per option buying rules, when any of these two strikes hits 25% SL, we will initiate the option buying. So buy trigger for ce is Rs.445 and pe is Rs.457. The moment it touches this level, we buy the respective options with 25% stop loss from executed price.
When tested this option buying strategy in stockmock, it generated around Rs.5.6 lacs gross profits from 2017 to till date.
And the good thing is, if combine Bank Nifty short straddle with this option buying setup, then the total gross profits made is more than Rs.12 lacs in last 4 years. Soon all our existing paid bot subscribers (https://squareoffbots.com/) will be able to execute it through our trading bots. We will add this option buying setup to the trading bots, so users just have to enter the lot of size as input, the bot will automatically place entry and stop loss.