Monday, March 22, 2010

Trading Options on NIFTY

I was betting on increased volatility as ATR and Nifty VIX were at low levels. Additionally, as there was no time left in March contract, I did not want to make the bet that volatility would increase in the next 5 days. In hindsight, it would have worked too.

On Friday, when Nifty was trading at 5250, I bought a strangle at 5000 & 5500 in the April contract for Rs. 4015. 

However, immediately after making the trade, I realized the biggest issue. I underestimated the amount I will be charged to make the transaction (Rs. 106 on 1 leg for 1 contract through ICICI Direct). I will be paying approx 424 or 10% of my bet in transaction costs.

As trading ended on Monday, I had a profit of approx Rs. 100 but after factoring in transaction charges I am making a loss of Rs. 331.50.

I am still expecting the market volatility to increase. Nifty VIX is close to its historical lows and ATR is also at low levels. But another problem is the time decay of options. At some point I will have to make a decision to stick with my view or cut my losses.

These are conflicting objectives, if market volatility does not increase then I lose the time value of my options and they expire worthless. So, I should be selling them as soon as possible. However, if I sell them too soon (at a loss) then I lose if the market volatility increases (as is my view).

After reading so much theory on options in my risk management class, I must say the practical aspects of trading are totally different. Theory says if you expect volatility to increase buy straddles (lower risk but more expensive) or strangles (higher risk but cheaper). Practically, there are so many things to think about, transaction charges, time value etc.

I think Rs. 4,015 is a small price to pay for this education :)


  1. you could have sold some March options to hedge your theta risk...

  2. I had adopted Reverse-iron butterfly Strategy
    on March17 as volatility could improve some how. So to take a minimal bet i adopted Reverse-iron butterfly strategy when nifty closed near 5198 on March 17th

    And here are my observatory results after march expiry

    Risk management in this case is not bad...
    Nifty Gained 30pts overall in 5 trading session till expiry. And I lost RS5.95×50 = Rs 297.5

  3. you over concentrated on IV ignoring Theta. Dont blame academics for it. ps. All MBAs do it and down the years find basics is what run the business.(like me)

    2. got yr link through Timamo.blogspot where you posted Advance =Decline ratio excel file. Can you add a column to NIfty Spot price to it and possible another for future. If indeed do email me at

    3. ICICI is expensive, try others.