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 :)