The Bhagavad Gita of Option Trading

Trading Options with Purpose

Rajiv LB Roy
 Copyright © 2023 Rajiv LB Roy

All rights reserved

No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without
express written permission of the publisher.

Cover design by: Rajiv LB Roy

Author email: rajiv.revenue@gmail.com
 Dedication

This book is dedicated to my mother, Miri Ray, for your love, blessings,
encouragement, support and upbringing, which taught me how to persevere
in difficult circumstances.
 Acknowledgement
To God for your blessings and for inspiring me to write a book.
To my wife, thank you for your support during the writing process and
for showing me love and care.
To my family, especially my brother-in-law Dr. R. C. Roy, for fostering
me in pursuing my passion and believing in me.
 PREFACE
You may be wondering why "The Bhagavad Gita" is mentioned in this
book. Let me explain why. In the ancient Hindu classic known as the
Bhagavad Gita, Lord Krishna and Arjuna have a conversation. Lord
Krishna teaches Arjuna how to live a moral life and fulfill his military
duties. The wisdom and insights from the Bhagavad Gita are widely
respected.
The title of this book, "The Bhagavad Gita of Option Trading: Trading
Options with Purpose," highlights the idea that options trading, like life
itself, requires purpose, discipline, and a deep understanding of the
underlying principles. This book draws inspiration from the Bhagavad Gita
to provide traders with a framework for approaching options trading with
clarity and a sense of purpose.
The Bhagavad Gita is known for teaching balance and detachment.
Similarly, successful options trading involves a balanced strategy where
traders carefully weigh the risks and benefits of each trade while keeping
emotions in check. The concepts from the Bhagavad Gita can help traders
develop the balance and impartiality needed to thrive in the fast-paced
world of options trading.

“Karmanye vadhikaraste Maa Phaleshu Kadachana,

Maa Karmaphalaheturbhurma Te Sangostvakarmani”

The Bhagavad Gita says in Chapter 2, verse 47, "You have the right to
work but never to its fruits." "Do not be motivated by the fruits of action,
nor be attached to inaction."
The phrase emphasises the need of remaining unattached from the
outcome of one's activities. This means that while trading options, traders
should focus on their trading strategies and tactics rather than becoming
overly attached to particular transaction results.
This is crucial because emotions can cloud judgment and lead to poor
trading decisions. If a trader becomes too attached to the outcome of a
trade, they may hold onto a losing position instead of cutting losses and
moving on to the next opportunity. This can result in increased losses and
negatively impact overall trading success.
By focusing on the process rather than the outcome, traders can
maintain discipline in their trading strategy and avoid making irrational
judgments. This means adhering to a set of rules for trading regardless of
how individual trades turn out. This disciplined approach can ultimately
improve traders' consistency and performance in the market.
The saying "You have the right to work, but never to the fruits of work"
underscores the importance of focusing on the trading process rather than
fixating on the outcome of any one trade. By remaining disciplined and
objective, traders can enhance their chances of long-term success in the
field of options trading.
"The Bhagavad Gita of Option Trading: Trading Options with Purpose"
aims to provide traders with a comprehensive guide to understanding the
basics of options trading, analyzing the option chain, interpreting FII, DII,
and Pro traders' data, developing option trading strategies, and adjusting
those strategies using real-world examples.
The book starts by teaching the foundations of option trading, including
terminology, option types, option Greeks, and other variables that impact
option prices. It then moves on to option chain analysis, which involves
studying the information in option chains to identify profitable trades. An
important part of the book is the study of FII, DII, and Pro Trader data and
how it helps in spotting market trends.
Additionally, the book covers various option strategies such as bullish,
bearish, and neutral strategies, explaining when to use each strategy based
on the current market conditions. Real-world examples are provided to
illustrate how these strategies can be successfully applied.
Finally, the book discusses how to manage existing option holdings,
including strategies to minimize risk and maximize returns in different
market scenarios. Adjusting option strategies is a key aspect of successful
option trading. We will explore how to modify your strategy if the market
doesn't move as expected or goes in the opposite direction.
Throughout the book, I emphasize the importance of having a purpose
for each trade. In my opinion, effective option trading requires a solid
understanding of the market and a well-defined strategy to achieve specific
goals.
 This book covers everything you need to know about buying and selling
options. Whether you are a novice or an experienced trader, it will help you
grasp the fundamentals of options and navigate complex option strategy
adjustments. After reading this book, you will be able to identify market
trends and adapt your strategy effectively when the market doesn't move as
predicted.
I believe this book will be a valuable resource for traders at all levels
who want to trade options with purpose and confidence.
 OPTIONS: AN INTRODUCTION
Options are versatile trading tools that can be used in any market
condition, whether it's bullish, bearish, or even range-bound. While options
were once considered risky and suitable only for experienced investors with
significant capital, they have now become increasingly popular and
accessible to traders of all levels.
Options offer unique advantages, such as leveraging your investments
and turning a small capital into substantial gains. They can also serve as a
form of insurance to protect your investments in case of market downturns.
Therefore, it is essential for every trader and investor to understand and
utilize options effectively.
In this book, you will learn about various aspects of options trading,
starting from basic calls and puts to more complex option spreads. You will
gain a comprehensive understanding of index options and stock options.
Additionally, you will discover how to assess the market using data from
Foreign Institutional Investors (FIIs), Domestic Institutional Investors
(DIIs), and open interest build-ups on option chains.
By the end of this book, you will have a thorough knowledge of options
trading. You will be able to execute basic strategies and explore advanced
techniques like straddles and spreads. Importantly, you will also learn how
to adjust your option strategy based on real-life scenarios when the market
doesn't go in your favour.
Whether you are a beginner, intermediate trader, veteran, or professional
money manager, this book will equip you with the necessary knowledge
and skills to navigate the world of options trading successfully.

What is an option?
An option is a contract between a buyer and a seller that grants the
buyer the right, but not the obligation, to buy or sell an underlying asset at a
specific price (known as the exercise price or strike price) on or before a
predetermined date. It is considered a derivative because its value is derived
from the underlying asset, which can be a stock, index, commodity, or other
financial instrument.
 To better understand the concept of an option, let's use the example of
buying an apartment. Suppose you find an apartment in your desired
neighbourhood that costs ₹1 crore, but you don't currently have enough
funds to purchase it. However, you don't want to miss out on the
opportunity, so you negotiate with the builder for an option contract.
In this scenario, you pay an upfront fee of ₹1 lakh to the builder for the
option to buy the apartment for ₹1 crore within a six-month period. Now,
consider two possible outcomes:

1. The market value of the apartment increases: If, within the six
months, the apartment's market value rises to ₹1.10 crore, you
can exercise your option and buy the apartment for ₹1 crore.
Since the builder is obligated to honor the option contract, you
can sell the apartment immediately for ₹1.10 crore, resulting in a
profit of ₹9 lakhs (1.10 crore - 1.00 crore - 1 lakh).
2. The market value of the apartment decreases: Conversely, if
the market value of the apartment drops to ₹90 lakhs, you have
the choice to not exercise your option. In this case, you would not
proceed with the purchase, and you would only lose the upfront
fee of ₹1 lakh paid for the option. Thus, you avoid incurring a
loss of ₹10 lakhs (the difference between the option price of ₹1
crore and the reduced market value of ₹90 lakhs).

From this example, two key points about options become evident.
Firstly, purchasing an option grants you the right to enter into a contract but
not the obligation. You can choose whether or not to exercise the option
based on market conditions and your desired outcome. Secondly, options
are contracts based on underlying assets, which explains why they are
considered derivatives. The underlying asset in the apartment example is
the flat itself. In the financial market, underlying assets are typically stocks
or indices.
When a buyer purchases an option, they pay the seller a fee known as
the premium. The premium is the price negotiated and established when
options are traded on various exchanges. For instance, if you want to
purchase an ITC 350 call option with an August expiration date for ₹5, you
have the choice (but not the obligation) to buy 1600 shares of ITC (the lot
size of ITC is 1600 shares) at ₹350 per share before the option expires. In
this case, the premium would be ₹5, and ₹350 would be the exercise price
or strike price.

Types of option
Indeed, call options and put options are the two main types of options
contracts. Let's further explore these types:

1. Call Option: A call option provides the buyer with the right,
but not the obligation, to purchase an underlying asset at a
specified price (strike price) within a predetermined timeframe.
The buyer pays a premium to the seller for this privilege. By
holding a call option, the buyer anticipates that the price of the
underlying asset will rise. If the price of the asset increases above
the strike price, the buyer can exercise the option and profit from
the price difference. However, if the price remains below the
strike price or the option expires, the buyer may choose not to
exercise the option and will only lose the premium paid.
2. Put Option: A put option grants the buyer the right, but not the
obligation, to sell an underlying asset at a predetermined price
(strike price) within a specific time period. Similar to call options,
put options also involve the payment of a premium by the buyer
to the seller. The buyer of a put option expects the price of the
underlying asset to decrease. If the price falls below the strike
price, the buyer can exercise the option and sell the asset at a
higher price, thus generating a profit. However, if the price
remains above the strike price or the option expires, the buyer can
choose not to exercise the option and will only lose the premium
paid.

In the options market, there are four types of participants based on the
positions they take:

1. Call Buyers: These are individuals or entities who purchase

call options, acquiring the right to buy the underlying asset at the
 specified price within the designated timeframe.
2. Call Sellers: Also known as call writers, they are the sellers of
call options. They receive the premium from the buyer in
exchange for the obligation to sell the underlying asset if the
buyer exercises the option.
3. Put Buyers: Put buyers are those who purchase put options,
granting them the right to sell the underlying asset at the
predetermined price within the specified timeframe.
4. Put Sellers: Put sellers, or put writers, sell put options to
buyers. They receive the premium and take on the obligation to
purchase the underlying asset if the buyer exercises the option.

It is important to note that while option buyers have the right to exercise
their options, option sellers (writers) are obligated to fulfill the terms of the
contract. The distinction between buyers and sellers is crucial in
understanding the rights and obligations associated with options contracts.

Styles of Options

Options can be categorized into two main styles: American options and
European options. Here's an overview of each style:

American Options:

American options provide the holder with the right to exercise the
option at any time before its expiration date, or on the expiration date itself.
The flexibility of American options allows the holder to choose the most
favorable time to exercise the option, depending on market conditions.
American options are commonly traded for equities and indices. The
majority of options traded on U.S. exchanges are of the American style.

European Options:

European options, on the other hand, can only be exercised on the

expiration date of the contract. Unlike American options, they do not allow
early exercise. The exercise of European options can only occur at the end
of the option's lifespan. These options are frequently traded in the over-the-
counter (OTC) market and are commonly found in European markets.

It's worth noting that the exercise style of options can vary depending
on the underlying asset and the market in which they are traded. In the
Indian market, for example, all equities and index options are exercised as
European options. Weekly options in India expire on Thursdays, while
monthly options expire on the final Thursday of each month.

Understanding the distinction between American and European options

is crucial for options traders, as it affects the flexibility and timing of
exercising the options.

Uses of options
Investors and traders utilise options primarily for two reasons:

1. Speculation
2. Hedging

Speculation:
Speculation is the practise of buying and selling stocks for short periods
of time in order to outperform long-term investors. Speculators take risks in
anticipation of future market movement in the hope of making large
rewards that exceed their risk. Speculators seek to benefit by forecasting the
price movement of a securities in the near future.
Because the option is an incredibly versatile trading tool, speculators
never fall behind in using its adaptability. The main advantage of trading
options is that you are not limited to benefitting from rising market moves.
You can earn even if the market is heading downward or sideways.
Option trading allows you to make a lot of money rapidly. However, if
your estimate is inaccurate, you might lose a large quantity of money. If you
are an option buyer, you must precisely estimate not just the direction of the
security's price movement, but also its magnitude and timing. To succeed,
you must properly predict whether the price will go up or decrease, as well
as how much it will vary over time.
 The finest component of option speculating is the use of leverage. A
single contract might provide you ownership over hundreds of shares. On
the other hand, this is why it is dangerous too. A considerable movement is
required for the security to produce a profit.
For instance, if you wanted to acquire stocks in firm ABC at the current
share price of Rs. 100 and you had ₹1 lakh to invest, you could buy 1000
shares. You might sell the stock and make a profit of ₹10,000 (10% return
on your initial investment) if the stock price increases by ₹10.
On the other hand, your profit might have been far bigger if you had
used leverage to purchase the stock option. You may purchase 20,000
quantities of call option on the aforementioned stock with a strike price of
₹100 for each option, allowing you to purchase 2,000 shares of stock
(taking a lot size of 1,000 shares into account). You may use your option to
acquire shares at ₹50 and then immediately sell them for ₹60 if the price
increases to ₹110. Your profit in this scenario would be ₹2,00,000. The
return on your initial investment of Rs. 1 lakh would have been 100% this
time.
That is the power of leverage. When employing options, a trader may
trade with little capital and control more shares with a lower investment.
However, if your guess is wrong, you might lose a lot of money. To succeed
in option trading, you must make very precise stock movement predictions.
Hedging:
People use options as a secondary way to hedge their assets. It is a great
investment hedging tool. This option is comparable to an insurance policy.
Unlike our vehicle or house, we insure our assets to protect against
unforeseen disasters; our portfolios may also be protected against a
downturn. If you are dubious about your stock picks, you should either
hedge your position or avoid from investing. Options are routinely used by
large financial institutions to safeguard their interests. Individual investors
might benefit from it as well. Assume you want to invest in the chemical
industry as a result of the Chinese industrial crisis in order to profit from the
stock's rise. However, you also want to keep your losses to a minimum.
Therefore, buying options allows you to cost-effectively reduce the
downside risk while still taking full advantage of the upward movement.
Let's look at an illustration of how options-based hedging works to
control portfolio risk. Consider that you have 1000 shares of the stock ABC
and are concerned about a decline in value. Therefore, you want to use
options to hedge your portfolio. If you wish to sell that stock at the
specified strike price regardless of how much the market price of the stock
declines, you could purchase a put option on it. As a result, by paying a
premium, you have protected yourself from any more losses below the
strike price. This is how using this conservative method; you can reduce
your potential market losses.
 SOME TERMINOLOGIES
The realms of investing and trading are packed with numerous
sophisticated jargons to give the impression that only professionals or
specialists can handle equities. Despite their frightening and confusing look,
they are only a few simple ideas expressed creatively. Given the unique
nature of options trading within the financial business, it is important to
become familiar with the language used in options trading. Before
beginning to trade options, it is critical to understand and be comfortable
with the terminology. In following portions of the book, the terminology
will be discussed one at a time.

Option premium:

The option premium is the fee that an options buyer pays to an options
seller in exchange for the right to purchase (in the case of a call option) or
sell (in the case of a put option) an underlying asset at a certain price (strike
price) within a specified time period. on other terms, the option premium is
the price of an option contract on the open market. The premium is
basically the option's cost, and it is decided by a variety of criteria,
including the underlying asset's current price, the strike price, the time to
expiry, and the projected volatility of the underlying asset. The premiums
for Out-Of-The-Money (OTM) options are made up entirely of extrinsic
value, while those for In-The-Money (ITM) options include intrinsic as well
as extrinsic value.
The premium may be thought of as insurance since it protects the buyer
from negative fluctuations in the price of the underlying asset. The seller,
on the other hand, receives the premium and bears the risk that the buyer
would exercise the option, resulting in a loss for the seller.

Lot size:
In general, lot size refers to the quantity of an item purchased for
delivery on a given date. A lot size is the number of stocks purchased in a
single trading transaction. A lot is the smallest number of stocks that may
be acquired or sold in an options trading transaction. SEBI (Securities and
Exchange Board of India) determines the lot size for F&O traders. It
regulates market price quotations by using lot size. Because the lot size is
fixed, traders are constantly aware of the cost of each unit. There will be no
price standardisation or bulk uniformity if no specified lots are used.
To better understand lot size, consider the following example.

A lot for ITC is made up of 1,600 shares. As a result, traders may only
buy it in multiples of 1,600. The value of the options contract is determined
by the product of the number of units and their respective prices. As a
consequence, if the ITC option price is 10 and a 1,600-lot amount is
purchased, the transaction is worth 10X1,600, or ₹16,000.

SEBI determines the lot size for each stock and index that is allowed for
derivative trading. It is crucial to recognise that lot sizes vary. Shares come
in a variety of lot sizes.

Intrinsic value:

In finance, intrinsic value is the actual value of an asset determined by

its basic characteristics and underlying cash flows. In the case of a stock,
the intrinsic value would represent the current value of the company's
expected future profits and cash flows.

The intrinsic value of an option is what the option would be worth if it

were exercised immediately. In other words, it is the difference between the
current market price of the underlying asset and the strike price of the
option. The intrinsic value of any stock, is always positive and can never be
negative.

The intrinsic value of an option acts as a minimum value or floor since

the option's price should never be less than its intrinsic value. The
remaining value of the option, if any, is known as the time value, and it
indicates the potential rise in value if the price of the underlying asset
changes before the option expires.
 Extrinsic value:
Extrinsic value, often known as time value, is the portion of an option's
premium that is due to variables other than intrinsic value. In other words, it
is the premium that an option buyer is ready to pay in return for the
possibility that the option could change in their favour before it expires.
The time remaining before expiry, the predicted volatility of the
underlying asset, and the level of interest rates all have an impact on
extrinsic value. Changes in market conditions, such as changes in supply
and demand for the option, shifts in market sentiment, or changes in the
degree of implied volatility, can all have an effect on the extrinsic value of
an option.

Extrinsic value is a variable amount that can change over time, as

opposed to intrinsic value, which is a fixed amount based on the current
market price of the underlying asset and the option's strike price. All else
being equal, an option's extrinsic value tends to decline as it approaches
expiration. This is because there is less time for the option to benefit the
buyer and, as a consequence, less ambiguity about its potential value.

Strike price:
The strike price, also known as the exercise price, is the price at which
the holder of an option can purchase or sell the underlying asset before or
on the expiration date of the option, depending on the kind of option. A call
option's strike price is the amount at which the holder has the right but not
the obligation to buy the underlying asset. The strike price of a put option is
the price at which the holder has the right but not the obligation to sell the
underlying asset.
A variety of factors, including the strike price, affect the intrinsic value
of an option, which is the difference between the current market price of the
underlying asset and the strike price. If the option is in-the-money (ITM),
suggesting that it has intrinsic value, the option buyer might exercise it to
profit. If the option was out-of-the-money (OTM), the buyer would not
exercise it since it has no intrinsic value and would result in a loss.
The strike price is often specified when the option is issued, and it is
one of the elements that determines the option's premium, along with the
current market price of the underlying asset, the time to expiry, and the
predicted volatility of the underlying asset.

Spot price:
The word "spot price" refers to the asset's current market value at the
time of the trade, such as the price of a commodity or financial instrument.
The spot price, as opposed to the future price, is the price at which an asset
can be acquired or sold for delivery at a later date.
In the context of equities, for example, the spot price of SBIN is the
current market price of SBI share price that may be purchased or sold for
immediate delivery, in contrast to a futures price, which is the price at
which the stock can be bought or sold for delivery at a future date.
Numerous factors, including supply and demand dynamics, geopolitical
happenings, changes in interest rates or currency rates, and the overall state
of the economy, can all have an influence on spot pricing. Spot pricing may
be used as a benchmark or point of reference to determine the worth of
other financial instruments or contracts on occasion.

Bid and Ask Price:

The bid price and ask price are two important prices mentioned in
financial markets for assets such as stocks, bonds, derivatives, and
currencies. These prices reflect the most recent highest asking price (bid
price) a buyer is prepared to pay for an asset, as well as the most recent
lowest offering price (ask price) a seller is willing to accept for the same
item.
At any given time, the bid price is the highest price that a buyer is
willing to pay for a security. It shows the market price at which a buyer can
sell the securities. In other terms, it is the amount of money a buyer is
willing to pay to obtain an asset from a seller.
In contrast, the ask price is the lowest price at which a seller is willing
to sell the asset at any particular moment. It shows the market price at
which a seller may purchase the security. In other terms, it is the amount of
money that a seller is ready to take in order to sell an item to a buyer.
The bid-ask spread, defined as the difference between the ask and bid
prices, defines how much it costs to buy or sell an item in the market. The
quantity of supply and demand for the item, as well as other market
conditions, may all influence the bid-ask spread. Assets with higher levels
of liquidity typically have bid-ask spreads that are closer together, whereas
assets with lower levels of liquidity typically have wider spreads.

Moneyness:
Moneyness is the current price of an underlying asset in relation to the
strike price of a derivative contract. It exposes the intrinsic value of a
particular choice in the present. It notifies the option buyer whether or not
exercising the contract will result in a profit or loss. Moneyness is classified
into three categories based on where the spot price is in reference to the
strike price. As an example:
ITM (In-The-Money): If the option has a positive intrinsic value and the
contract is set to expire today, it is referred to be an In-The-Money or ITM
option. It is referred to be an ITM option for a call option if the underlying
price is above the strike price, and a put option if the underlying price is
below the strike price.

Out-Of-The-Money (OTM): A contract is considered out-of-the-money

(OTM) if the intrinsic value of the option is less than the market price and
the contract expires at that price. The spot price is lower than the strike
price for call options and higher than the strike price for put options.

At-The-Money (ITM): An option is At-The-Money (ITM) if the strike

price and current market price are the same. The same is true for call and
put options.

Open interest:
Open interest refers to the total number of contracts for a certain futures
or options contract that are still open and have not yet been resolved by
delivery, offset, or expiration. In other words, it represents all open
contracts that have yet to be closed or completed. Open interest is a helpful
statistic for determining the degree of activity and liquidity in a certain
futures or options market. It may provide traders and analysts with insights
on market mood and trends, as well as assist them evaluate the level of
interest in a certain asset or contract.
When numerous market players are actively trading an asset or contract,
it has a high open interest. This can increase liquidity while also making it
easier for traders to initiate and exit positions. Conversely, low open interest
may indicate that there is less interest in the asset or contract, making it
more difficult to find counterparties to trade with and potentially leading to
larger bid-ask spreads and less attractive pricing.

Furthermore, open interest might disclose information about potential

future price movements. Increases in open interest, for example, may
suggest higher interest in the asset or contract and a potential price increase,
whilst decreases in open interest may signal declining interest and a
potential price reduction. However, open interest alone cannot be used to
anticipate price changes since it overlooks other elements that may
influence market pricing, such as supply and demand dynamics, current
economic circumstances, and geopolitical events.

Option chain:
A table or matrix that shows all available options for a certain
underlying asset, such as a stock, index, or commodity, is known as an
option chain. It gives a detailed breakdown of the various options contracts
available for that asset, including strike prices, expiration dates, and option
premiums. Option chains often comprise information such as the underlying
asset's symbol or ticker, the date of the option contract, the option type (call
or put), the strike price, the option premium or price, and the option's
implied volatility. Other information, such as open interest and volume for
each option contract, may also be included.
Option chains are a significant tool for options traders and investors due
to their ability to quickly compare and analyse various options contracts
based on characteristics such as strike price, expiration date, and implied
volatility. Use these tools to identify potential trading opportunities, balance
risk and return, and develop trading strategies.
Option chains are available on the majority of financial and trading
platforms. As new options contracts are issued and existing contracts expire
or are settled, these chains are updated in real time. The option chain is
provided free of charge by the National Stock Exchange (NSE), however
users must refresh the page to obtain real-time data.

Time Decay:
Time decay, also known as theta decay, is the progressive decrease in
the value of an option contract as its expiration date approaches. It indicates
how rapidly the extrinsic value or time value of an option depreciates as the
option approaches its expiration date. Time decay happens because options
have a finite lifespan, and as the expiry date approaches, there is less time
for the underlying asset to move in a positive direction for the option to be
lucrative. This decrease in time to expiry decreases the amount of time
value left in the option, lowering the option's total value.
The rate of time decay is affected by the time till expiry, implied
volatility, strike price, and current value of the underlying asset. Options
with more time left before expiry frequently have a higher time value and,
as a result, a slower rate of time decay, whereas options with less time
remaining before expiration have a lower time value and a quicker rate of
decay.
Time decay is an essential issue for options traders to grasp since it
affects the profitability of options positions as well as trade timing. The
impact of time decay on positions must be addressed when traders develop
trading strategies in order to profit from a change in the underlying asset's
price.

Volatility:
Volatility means how much a price changes over time. It helps us
understand how risky or uncertain an investment is. We measure volatility
by looking at how much an investment's price has gone up and down in the
past. If volatility is low, it means the price is more stable and won't change a
lot. But if volatility is high, the price is more likely to go up or down
quickly.
There are many things that can cause volatility, like changes in how
people think about the market, the economy, or important events happening
around the world. Volatility can be both good and bad for investors. It can
be risky because it's hard to predict what will happen, but it can also create
opportunities to make money.
Investors and traders use volatility to understand how much risk there is
and to make trading plans. They look at volatility to figure out how risky an
investment is. They might also use it to find times when the price is low and
buy, and times when it's high and sell.
There are two types of volatility: historical and implied. Historical
volatility looks at how the price has changed in the past. Implied volatility
(IV) tries to predict how much the price might change in the near future.

Legs:
In options trading, the term "legs" means the different parts of a strategy
that uses multiple options contracts. For example, when you do a spread
strategy, you buy one call option with a lower price and sell another call
option with a higher price. This strategy has two legs: buying the cheaper
call option is one leg, and selling the more expensive call option is the other
leg.
Another strategy is called a straddle. It involves buying both a call
option and a put option with the same price and expiration date for a
particular asset. This strategy also has two legs: buying the call option is
one leg, and buying the put option is the other leg.
By looking at the legs of a strategy separately, traders can quickly
understand the possible risks and rewards. They can make changes to their
investments as needed to get the desired outcome.

Spread:
A spread is a multi-leg options strategy that includes simultaneously
buying and selling two or more options contracts on the same underlying
asset. A spread is employed to possibly improve a trader's potential profits
while lowering their risk exposure.
Options spreads can take several forms, including:
Vertical spreads: These include the purchase and sale of option
contracts with the same expiration date but differing strike prices. A bullish
vertical spread is formed by purchasing a lower strike price call option and
selling a higher strike price call option, whereas a bearish vertical spread is
formed by purchasing a higher strike price put option and selling a lower
strike price put option.
Horizontal spread: This is the purchase and sale of option contracts
with the same strike price but separate expiration dates. A horizontal spread
can be used to profit from differences in implied volatility across options
contracts with different expiry dates.
Diagonal spread: This involves buying and selling options contracts
with different strike prices and expiration dates. A diagonal spread can be
used to create a risk/reward profile tailored to the trader's specific
objectives.
 OPTION GREEKS
Option Greeks are a set of elements that help us understand the different
risks involved in trading options. They are named after Greek symbols and
are important for option traders. The Greeks, like Delta, Vega, and Theta, are
used to figure out how risky a portfolio is. They help traders calculate the
potential profit or loss of a trade when the price of the underlying asset
changes, which helps them manage risk.
The Greeks measure how sensitive the price of an option is to different
factors that affect its value. The Black Scholes Model is a popular
mathematical model used to price options.
There are five main Option Greeks: Delta, Gamma, Vega, Theta, and
Rho. Each Greek is sensitive to different parameters and helps calculate the
price of an option. In the upcoming parts of this book, we will learn more
about each of these Greeks and how they work.

Delta
Among all the Greeks used by options traders, Delta is the most common
one. Delta measures how quickly the price of an option changes when the
price of the underlying asset moves. It tells us how sensitive the option price
is to changes in the stock price.
If the market goes up or down by 1 point, Delta measures how much the
option premium will change. For both call and put options with the same
strike price, we calculate Delta separately. Call options have a positive Delta
value, while put options have a negative Delta value. The value of Delta for
call options ranges from 0 to 1, while the value for put options ranges from
-1 to 0.
Let's use an example to better understand the Greek Delta. Assume that
the current market price of a stock, let's say XYZ, is ₹100. The table below
shows the various Delta values for call options. The values in the table are
speculative. It is prepared purely as an example.
 The values of Delta for call options are higher for in-the-money (ITM)
strikes than out-of-the-money (OTM) strikes, according to the above table.
Consider an ITM option with a strike price of 90. The delta is worth 0.70
rupees, and the premium is 15. In other words, if the price of the underlying,
XYZ, goes to ₹101, the new premium of the 90 strike will increase to
₹15.70 (₹15.00 + 0.70), taking other aspects into consideration. On the
contrary, the option price will instead drop to ₹14.30 if the stock price drops
to ₹99. (₹15.00 – 0.70).
Take yet another put option example for the same stock. At various strike
prices, the accompanying table includes possible values for the option price
and delta. In this case, the ITM put option's Delta value bears move values,
but it does so negatively. It indicates the Delta has a negative co-relation
with option premium for put options. It is evident from the table that option
prices are more sensitive to price at ITM strikes than at OTM strikes.

For demonstration purposes, we'll use the same strike price, 90, which is
now an OTM option. It states that the premium is ₹3.00 and that the Delta is
just ₹0.30. According to the definition of Delta, if the stock price rises to
₹101, the price of the ₹90 strike will reduce by ₹0.30 and the new price will
be ₹2.70. (₹3.00 – 0.30). But, if the underlying price drops to ₹99, the
option price will rise by ₹0.30.
Also, it can be seen from the aforementioned table that the value of Delta
for a call option is almost 0.50 for at-the-money (ATM) options, less than
0.50 for out-of-the-money (OTM) options, and greater than 0.50 for in-the-
money (ITM) options. The value of a put option, on the other hand, is - 0.50
for ATM strikes, larger than - 0.50 for ITM strikes, and less than - 0.50 for
OTM strikes. The graph below will give you an idea of how the Delta values
for call and put options change depending on the spot price.

Gamma
The option Greek gamma is the rate of change of Greek Delta. A call
option's gamma, which is always reported in percentage terms, shows how
the delta changes as the underlying asset moves by one point. Its basic
definition is the rate of change of Delta. Gamma can be thought of as
acceleration if Delta is speed at which the option premium changes. It serves
as a gauge for the stability of Delta.
Let's use an illustration;

Suppose that ABC Company's stock is currently trading at ₹100.

Assume the following hypothetical values for the various variables for the
₹100 call option:
Stock price Delta Gamma Option premium
100 0.50 0.1 0.60

According to the definition of gamma, a change of one rupee in the

underlying asset will cause a change in delta of ₹0.10. The values of the
various variables will be as per the following table if the stock has now
moved to ₹101.
Stock price Delta Gamma Option premium
101 0.60 (0.50 + 0.10) 0.09 (say) 10.60 (10 + 0.60)

The gamma values are influenced by the proximity of the strike prices
and the expiration time. When comparing at-the-money options to out-of-
the-money and in-the-money options, the value is significant for at-the-
money options and gradually declines. In addition, gamma value is greater
for contracts with near term expiration and decreases for those with far term
expiration. The accompanying graph demonstrates the relation among the
gamma value, strike price and time to expiry.
 Vega
Vega is the change in option price for every 1% change in implied
volatility (IV). And implied volatility is the market's prediction of a potential
movement in the price of an asset. Vega affects time value but not the
intrinsic value of the option. Implied volatility and it are positively
correlated. This implies that Vega rises in parallel with an increase in the
expected volatility of a security. Also, whereas the value of Vega is negative
for short option positions, it is positive for long option positions. The table
that follows demonstrates how implied volatility and consequently the
option price affect Vega value.
 Moreover, unlike Gamma, the Greek Vega option's value peaks for at-
the-money options while steadily decreasing for both in-the-money and out-
of-the-money options. However, the value of Vega is also influenced by the
period of expiration. The Vega has more value for long-term expiry than for
short-term expiry. To better understand their relationship, look at the chart
below.
 Theta
Even while all other factors remain constant until the contract's maturity,
the price of an option depreciates. Theta is the measure of how much an
option's value declines. Hence, the Greek Theta is the amount of decline in
call and put option prices for a change of one day in the maturity time. It is
also known as time decay and is expressed as a negative number. Due to its
negative value, theta, also known as time decay, is the number one enemy of
option buyers. Instead, it is the best buddy of option writers.
 An at-the-money option premium decay is displayed in the graph above
with more than three months to maturity. When ₹4 declined for the
following 30 days while other factors remained constant, the option value
only depreciated by ₹3 from 90 to 60 days. The value of the premium
decline rate for the final 30 days before expiration drops to zero from ₹11.
As the time value nears its expiration, it falls off more quickly. This
sensation is comparable to the hot summer sun on an ice cube. The temporal
value of an option diminishes with each passing second. Moreover, the loss
of time value happens more quickly close to maturation.
The value of Theta also relies on the strike price. Theta has a high time
value for at-the-money strikes, but it has a lower value for in-the-money and
out-of-the-money strike prices. This indicates that OTM options are least
sensitive to Theta value while ATM options are more sensitive to time value
decay than ITM options. However, keep in mind that Theta's value is always
negative.
 Rho
Rho is an option Greek that measures how an option's price changes
when there are changes in interest rates. It tells us the expected price change
of an option for a 1% increase in interest rates. Rho is usually positive for
call options, which means the price of the option will go up when interest
rates rise. On the other hand, Rho is often negative for put options,
indicating that the price of the option will decrease when interest rates go up.
This relationship exists because interest rates affect the cost of carrying
an asset over time. The cost of carry includes things like interest rates,
storage costs, and insurance fees. When interest rates go up, the cost of
carrying an asset also increases, which can lead to higher prices for the
underlying asset. As a result, call options on the underlying asset may
become more expensive.
It's important to note that Rho is usually only meaningful for longer-term
options because short-term interest rate changes don't have a significant
impact on option prices. Longer-term options that are "in the money" are
more sensitive to changes in interest rates. Short-term options are less
affected because interest rates don't fluctuate frequently. However, for long-
term options, the cost of carrying can have a big impact on their value.
It's worth mentioning that Rho is not always a major factor in option
pricing, especially for options on stocks. This is because interest rates often
have a smaller effect on stock prices compared to other factors like company
earnings, market sentiment, and overall economic conditions. However, Rho
can be more important for options on assets that are sensitive to interest
rates, such as bonds or currencies.
 OPTION CHAIN ANALYSIS
What is open interest?
Open interest refers to the total number of options or futures contracts that are still
active and have not been closed, expired, or exercised. It shows how many contracts
are currently being traded. Open interest is also sometimes abbreviated as OI.
When a buyer and a seller come together to open a new contract, the open interest
increases by one contract. On the other hand, if both the buyer and the seller close
their contract position, the open interest decreases by one contract.
However, if a buyer or a seller transfers their position to another buyer or seller,
the open interest does not change.
In summary, open interest tells us how many contracts are still active and being
traded, and it changes when new contracts are opened or existing contracts are closed.
It appears that the concept of open is simple but puzzling. Don't worry; the
following example will clear up any confusion you may have regarding open interest.
Open Change
Day Activity
Interest in OI
‘A’ buys 1 option and ‘B’ sells 1 option
Day1 1 1
contract
‘C’ buys 3 options and ‘D’ sells 3 option
Day2 4 3
contracts
‘A’ sells his 1 option and ‘D’ buys 1 option
Day3 3 -1
contract
‘E’ buys 3 options from ‘C’, who sells his 3
Day4 3 0
option contracts

The table above depicts, both "A" and "B" establish fresh positions on the first
day, resulting in the creation of one open interest. In other words, "B" writes a
contract, and "A" purchases it. Both 'C' and 'D' created three additional positions on
the second day. As a result, open interest climbs to four contracts, and the change in
open interest is three (3 new positions established today). Look at the trades on the
third day; 'A' and 'D' both squared off their previous holdings. As a result, open
interest will be reduced by one contract. Finally, on the fourth day, ‘C’ leaves from his
holding by transferring all his three number of contracts to a new trader, ‘E’. As a
result, there will be no change in open interest, and the total outstanding open interest
will stay the same, i.e. three contracts.
 What is volume?
Volume is the total number of shares or contracts traded during a single trading
session. Volume simply refers to the quantity of transactions. It also displays how
active an option or futures contract is. Volume is occasionally used by traders to
gauge the strength of a price shift. More volume in the derivative contract suggests
more liquidity. It means that there are enough buyers and sellers in the market. Before
making any trading choice in the near term, it is usually essential to examine the
contract's liquidity.
Anyway, volume appears to be very straightforward, right? Please be patient!
Most new traders get confused by open interest and volume. Let we first explain this
topic. Look at the analogous scenario below –
Open
Day Activity Volume
Interest
‘A’ buys 1 option and ‘B’ sells 1 option
Day1 1 1
contract
‘C’ buys 3 options and ‘D’ sells 3 option
Day2 4 4
contracts
‘A’ sells his 1 option and ‘D’ buys 1 option
Day3 3 5
contract
‘E’ buys 3 options from ‘C’, who sells his 3
Day4 3 8
option contracts

At first, both 'A' and 'B' establish a new position, and so open interest and volume
become one. Similarly, on the second day, 'C' and 'D' make additional deals, bringing
total open interest and volume to four. On the third day, both 'A' and 'D' square off
their previous positions, reducing open interest to three. However, since transactions
occur between them, the total volume equals five. Finally, 'C' exits the market by
selling three contracts to a new trader, 'E'. As a result, while open interest remains
constant, final volume increases to eight since three transactions occurred between
them.
Important lessons:

We have already covered open interest and volume with examples. The following
points will help you differentiate open interest with volume.

In contrast to open positions, volume represents the number of

transactions.
Volume always rises, although OI can rise or fall.
Open interest reveals a contract's level of activity.
Volume indicates how liquid a specific contract is.
 Professional traders use volume to determine a trend's underlying
strength.

Interpretation of Open Interest Data

Open interest is a measure of the total number of outstanding contracts for a
particular futures or options contract. It indicates the total number of contracts that
have been bought or sold but not yet settled by delivery or an equal-and-opposite
trade. Following are some uses of open interest:

1. Trend Analysis: A specific futures or options contract's trend can be

examined using open interest. In general, it is regarded as an upward trend
when open interest rises along with prices. On the other hand, if open
interest is falling while prices are rising, this can be a sign of a possible
price reversal.
2. Liquidity: A market that has a lot of buyers and sellers is said to be
liquid when there is a high level of open interest. It is simpler for traders to
enter and exit positions on a market that is liquid since it typically has
narrow bid-ask spreads and cheap transaction costs.
3. Support and Resistance: Open interest can also be used to identify
potential support and resistance levels for a particular futures or options
contract. For instance, if open interest is high at a certain price level, it can
mean that traders are making purchases or sales at that level aggressively,
making it a possible support or resistance level.
4. Option Trading: Since it indicates the number of outstanding option
contracts that could potentially be exercised, open interest is particularly
crucial in the trading of options. When an option contract has a high open
interest, it may be a sign that there is substantial interest in that contract,
making it a potentially appealing alternative for trading.

You studied open interest and volume in the previous chapter. It's time to examine
open interest in order to determine the current state of the market. It is a very useful
tool for determining how prices are moving. For a better approximation of the
derivative market's price movement, one should take into account data from both
futures and options contracts. As a result, we will first talk about how to understand
futures OI data, then options OI data, and lastly, how to combine them to determine
the market trend.

Interpretation of futures open interest data

 While examining the futures open interest data, four situations can be visualized.
These are –

1. Price Increase + Rise in Open Interest

There is potential for price rise. More traders enter into long positions as the price
rises, increasing open interest. It suggests a bullish trend.

2. Price Decline + Development in Open Interest

There is potential for price decline. More traders enter into short positions when
the price declines, increasing open interest. It suggests a bearish sentiment.

3. Rise in price + Drop in open interest

There is weakness in pushing the price higher. When prices rise, short sellers
believe that the price will rise further and quit their positions, which causes open
interest to decline. It denotes either a bullish reversal or short covering.

4. Price Decrease + Fall in Open Interest

There is weakness in the price decline. When prices drop, buyers fear that the
price will fall further more and sell their positions, which reduces open interest. It
denotes a bearish reversal or long unwinding.

Interpretation of options open interest data

Futures open interest may be easily and quickly analysed. However, it can be
challenging to understand option open interest. Let's attempt to provide a clear and
concise explanation of the interpreting process. I'll go over the reasoning behind this
interpretation as well. Let's first analyse the call and open interest separately before
combining them to forecast the price movement.
First, let's examine the call open interest statistics. The interpretation is quite
similar to that of futures OI. While assessing the call OI data, you will also obtain
four scenarios below.

1. Rise in CE + Rise in OI
 The rationale for raising the call premium is strong. More traders enter the trading
floor as the call premium rises, increasing the build-ups of open interest. It suggests a
build-up of long calls or bullish sentiment.

2. Drop in CE+ Increase in OI

There is potential for falling the price of call premium. Open interest rises as
additional option sellers enter the market to implement trades and desire the price to
drop even further as the call option's premium decreases. It alludes to what is known
as short build-up or bearish sentiment.

3. Increasing CE+ OI decline

There is resistance to raising the call price. When the call premium rises, the call
writers cover their positions out of fear of raising the price, which results in a decline
in open interest. It denotes call short covering or a bullish reversal.

4. Drop in CE+ OI decline

There is a vulnerability in lowering the call premium. As the price of a call option
declines, buyers reduce their open interest because they decide to sell their positions
out of worry that the price will continue to fall. It signifies a bearish reversal or call
long unwinding.
It appears simple and engaging to analyse call open interest. Given that they are
identical, if you enjoyed it, you will love the interpretation of put open interest as
well. Let's look at it.

1. Increase in PE + Rise in OI

There is support for raising the put premium. More traders enter the trading floor
when the put premium rises, which results in a building of open interest. It indicates
put long build-ups or a bearish sentiment.

2. Drop in PE+ Increase in OI

There is strength in falling the put premium lower. Open interest rises as more
option writers make trades and expect the price to continue falling as the put option's
premium decreases. It indicates put short build-up or bullish sentiment.
 3. Increase in PE+ Reduction in OI

The upward movement of the put option price is weak. Put writers cover their
positions when the put premium rises out of a fear that the price will rise, which
reduces open interest. It alludes to put short covering or a bearish reversal.

4. Drop in PE+ OI decline

There is weakness in lowering the put price. Put option buyers quit their positions
as the price of the option drops out of fear that it may fall even further, which reduces
open interest. It suggests a bullish reversal or put long unwinding.
The interpretation of open interest appears fantastic. To assess the total market
sentiment, we will now merge the call and put OI. Only the market sentiment will be
confirmed if both options reflect the same market emotion, such as bullish or bearish.
Did I confuse you? Not to worry! To avoid confusing you any further, let me blend
the two interpretations first. If you have any questions, the following example can
help you to understand them.

1. Call long build-up + Put short build-up

The price can be moved higher. The put writers simultaneously push the price
upward while the call buyers want the market to rise. It alludes to the bullish
sentiment.

2. Put long build-up + Call short build-up

The price can be moved down with some force. Put purchasers want the market to
decline, and call writers want the price to decline even further. It suggests a bearish
sentiment.

3. Call short build-up + Put short build-up

There is limited room for price movement in either direction. The put writers
support the price falling while the call writers prevent the price from rising. This is a
market that is completely range-bound or sideways.

4. Put short build-up + Call long liquidation

 There is less force in moving the price upward. The call buyers' decision to book
profits could cause a slight correction, but the put writers will prevent the price from
dropping. It signifies a sideways market with a positive tilt.

5. Call short build-up + Put long liquidation

There is less intensity in moving the price downward. The price does increase
because of put long unwinding, but the call writers suppress this increase. It
represents sideways market with a negative bias.
These five types of emotions are typically displayed by the market. Additionally,
the market can occasionally become quite volatile. A volatile market is one that has
abrupt price changes, which can go both up and down. Markets typically experience
this type of movement because of quick news events, such as elections, budget
sessions, and sudden announcements of significant government policies, among
others. An index called India VIX is used to measure the market's level of volatility.
Market volatility is anticipated to remain high if the index value is high, and vice
versa.
In this manner, the intraday market trend can be determined by examining futures
or options open interest. You can also predict the short-term trend if you routinely
monitor the OI building on a given security. When future and option data show a
bullish attitude, go for opening a long position; if both interpretations point to a
bearish emotion, open a short position. Avoid trading in a sideways market unless you
have a sound sideways market approach. It is sometimes better to wait for an
opportunity than to enter a bad trade.

Identification of Support and Resistances Using Open

Interest Data
So far, the interpretation of future open interest and options open interest has been
done in a methodical manner. But did you know that? Options open interest is a
fantastic tool for identifying support and resistance. To determine this, look for a high
level of open interest on both the call and put sides. The highest call OI implies a
strong resistance for that expiry, while the biggest change in OI is thought to
constitute intraday resistance. Otherwise, take the biggest change in call OI to be
resistance1, and the highest outstanding OI to be resistance2. Similarly, the biggest OI
on the put arm may work as expiration support, whilst the highest shift in OI may act
as intraday support. Furthermore, biggest change and remarkable OI might be
considered for support1 and support2, respectively. When the peak and change in OI
coincide, it is considered to as strong support or resistance.
Now, you may be wondering why the highest call and put OI are regarded as
strong resistance and support. Let me explain why. Consider maximum call OI
initially. The call sellers took positions on a specific strike because they anticipate the
price will not rise over that level. As a result, it will function as a barrier until the
holdings are liquidated. The same argument may be employed on the put side as well.
The put writers believe that the price will remain above that level until their bets are
covered.
Support and resistance, however, may also break. Let's look at an example to
understand how a support or resistance breaks. Consider that the Nifty is trading at
17700 and that the highest call OI is at 18000 strikes, while the greatest put OI is at
17500. The Nifty will therefore encounter resistance above 18000 and will find
support at 17500 levels, according to this. Let's say the cost of 17500 put options is
Rs. 60 at the start of the expiration. This implies that the put writers will lose money if
the Nifty drops below 17440 (17500 – 60). The index will fall around 17400 levels as
a result of the put seller being forced to square off their bets.
The highest positions, however, were taken by call sellers at the 18000 strike. If
the call premium is ₹40 for 18000 strikes at the beginning of the expiry, the call
writers will be at breakeven when the index reaches at 18040 (18000 + 40). Beyond
that point, option sellers who are short covering will push the Nifty higher to 18100 or
more. Supports and resistances are thought to break in this manner over time.

Few Examples
The interpretation of open interest for futures and options appears to be quite
simple and exciting on paper. But is it really that simple on the market? Let's examine
a few instances. Real option chain data for several market conditions are shown here.
Example 1
It is a chain of Nifty options with a 2nd March 2023 expiration date and the
screenshot was taken during the market hour on 27th February 2023. At that moment,
the index's spot price was 17,310 (rounded off). To determine the direction of the
market, first consider the call OI, then the put OI, and lastly combine the two.
 The call open interest
The call OI shows a significant drop in call premium and a significant increase in
open interest. According to OI interpretation principles, call option short build-ups
have occurred, which indicates a bearish sentiment.
 The put open interest
On the other hand, open interests were simultaneously added to OTM put options
and put premium increases. Trading seems to have resulted in long positions via put
options. The ITM (In-The-Money) put options also exhibit outstanding short
coverage. Put long and short covering both point to a negative market outlook. Hence,
by combining call and put options, it can be predicted that the index would decline
soon, indicating that the market may continue to be quite bearish.
 Example 2
The Nifty option chain shown below was also in effect on 29th September 2020,
when it was trading at 11,228 (rounded off). The information relates to OI building
for the index's 1st October expiration.
 The call open interest
Examine the call option side initially. Both the open interest and call option price
have significantly increased. Nothing but extraordinary buying in the call option is
being done here. The volume indicates that option traders are diligently purchasing
options. If call options are being purchased, this indicates a bullish perspective.
 The put open interest
Keep an eye on the put side right now as there are more open interests and a
declining option price. It looks that the put option traders have taken a short position
in the index. The huge volume in this instance also suggests that the writers of the put
are very active. As a result, traders of call and put options want the price of the Nifty
to increase. Massive short coverage in at-the-money and in-the-money call options
have also occurred, pushing the index higher. If no overnight breaking news
materialises, the index may therefore continue to trend strongly upward.
 Example3:
You have seen the option chain for markets that are moving, or when market
sentiment is strongly bullish or bearish. The two option chains described in the
previous two examples belonged to the Nifty index. Now, let's look at a stock option
example. See the option chain data for ASHOKLEY below. Data was collected on
March 3, 2023, and it will expire on March 29, 2023. Even though there isn't a lot of
open interest build-up, attempt to comprehend the potential interpretations. Prior to
2021, the NSE option chain showed open interest in numbers of shares of that specific
security. Open interest is now displayed as number of contracts. If you want to view
the open interest in the quantity, you simply multiply it by the lot size, which is 5,000
for ASHOKLEY. This explains why the option chain for ASHOKLEY appears to
have sparse open interest building.
 The call open interest indicates that writing occurred, and the put open interest
also indicates that put writers were active. Call writers will prevent price increases
and put sellers will prevent ASHOKLEY price declines. The stock is therefore
anticipated to move in a range-bound scenario for the upcoming trading sessions.

How to Identify Short Term Market Trend?

 Before going any further, allow me to mention a few market participants in the
Indian market who are crucial in influencing market price, viz. FIIs DIIs and Pro
traders. Here is a quick description of each:

Foreign Institutional Investors (FII): Institutional investors who are based outside
of India and invest in the Indian stock market are known as FIIs. These investors
include mutual funds, pension funds, and hedge funds. FIIs are able to significantly
affect Indian markets by bringing in foreign cash. Regarding the sum of money, they
are permitted to invest in Indian debt and equity markets, there are a number of rules
and limitations.

Domestic Institutional Investors (DII): Institutional investors with a presence in

India, like mutual funds, insurance companies, and banks, participate in the Indian
stock market as DIIs. They are prominent market participants in India and have a big
say in how the market behaves. Additionally, there are rules and limitations that apply
to DIIs.

Professional Traders (Pro traders): Pro traders are people or businesses who
conduct trading operations on the Indian stock market on a full-time basis. To make
trading judgements, they may employ a range of trading methodologies, including as
technical analysis, fundamental analysis, and quantitative analysis. Proprietary trading
companies, high-frequency traders, and algorithmic traders are a few examples of
professional traders.

It is worth mentioning that the FII, DII and Pro traders are the most sophisticated
market participants in India. They are competent and experienced, have strong
research teams, and plenty of trading capital. In essence, they make informed
decisions when trading. As a result, they frequently make money from the market.
The good news is that their data is publicly available and is closely monitored by
market participants as it can provide insights into investor sentiment and market
trends. It is generally believed that markets move in the direction that they perceive.
The market will remain bullish if they establish long holdings and become bearish if
they build short positions. Doesn't that sound great? What if you are aware of the
positions they are developing in the marketplace? It won't be simple for you to guess
the market's direction, though. Yes! You can determine the short-term trend by just
following them because they hold their positions for a limited number of trading
sessions much of the time. How do we find out about the positions they have taken is
the following question? Exactly this is what we'll be talking about in this section.

FII, DII & Pro Traders Position in Derivative Market

 You need to do some research in order to understand what the major players in the
market are doing. Frequent monitoring of their positions is required. Nothing is
simple. Thankfully, the data is made available to us each day as the market closes by
the NSE (National Stock Exchange of India). On their website, after-hours data is
frequently updated. The data must be downloaded and processed in a way that you
can understand. Break the information down in a way that you can grasp.
First, download the data from the NSE website. The procedures are listed below.

1. Go to www.nseindia.com and select Daily Market Reports under

RESOURCES tab as shown in the image below.

2. Next, select the Daily Reports category in the DERIVATIVES area

and download the Participant wise Open Interest (csv) file.
 This csv file contains end-of-day (EOD) transaction data for the derivatives
market. These are cumulative positions taken on stock futures and options as well as
index futures and options by various market participants, including FII, DII, Pro, and
Client. The positions in index futures and options that are listed in the sheet refer to
NIFTY and BANKNIFTY positions with weekly and monthly expirations. You can
now extract the data as needed. First, have a glance at the sheet.

The sheet is complex and contains a lot of information. I'll explain it so that you
may comprehend it better. You can ignore the stock future & stock options' data since
you just want to determine the direction of the NIFTY & BANKNIFTY. If you
examine closely, DII has relatively little exposure to index options, hence the value of
their data is small. In addition, since clients are traders in addition to FII, DII, and Pro
traders, you can disregard their statistics. The majority of them are retail traders and
they are pitiful at market analysis. But the prediction will be more accurate if you
consider more facts. In any case, you'll be able to create a simpler sheet immediately.
Copy the Future Index Long and Future Index Short values for DII, FII, and Pro
from the downloaded sheet, then paste them into the calculation sheet as indicated in
the figure below to finish preparing the page. To maintain the sheet, the calculation
sheet must first be constructed.

The "Net" column lists the traders' net positions (DII, FII, & PRO). It is
determined by deducting the Future Index Short column from the Future Index Long
column. Positive net positions signify a long build-up by them, whilst negative net
positions suggest a short build-up. Positions in Index futures are determined in this
manner.
Now let's compute the positions taken by the major participants in the index
option market. Again, to do this, you must copy the Call Long, Put Long, Call Short,
and Put Short data of FII & Pro traders from the downloaded file, then paste it on the
calculation sheet.

On the preceding sheet, the Net Call is (Call Long - Call Short) and the Net Put is
(Put Long - Put Short), while the Net OI is just the total amount invested (Net Call –
Net Put). Once more, positive net positions suggest building up long bets, while
negative positions indicate building up short positions by FII and professional traders.
It is important to note right now that we cannot determine the market trend by
focusing solely on one-day positions. We must monitor the build-up of positions for at
least a few days. This means that you must regularly update and maintain a data sheet.
Look at the next couple of steps to maintain the sheet now.
Check out the information on the master sheet first. It comprises NIFTY &
BANKNIFTY closing prices as well as cumulative, expiry, 10 day, and daily positions
created by various market participants on Index futures and options. The various
components of the sheet will be covered later. Let's first update the spreadsheet. In
order to add a new row to the master sheet, copy the index futures and options data
from the computation sheet and paste it one at a time. Because the data in the
calculation sheet also contains a formula, remember to paste the data as "value" (paste
special as value). To obtain the combined positions, simply add the values of DII, FII,
and/or Pro traders to the index futures and index options columns.

Let's look at an example to better understand what the various values on the sheet
imply. The combined index futures position as of March 3, 2023 is -80027, which
means the major participants (DII, FII, and Pro) have combined a total short position
in the index futures of 80,027 contracts. Similar to this, as of March 3, 2023, they had
long positions totalling 93,246 contracts in index options, including all expiries. The
10 days net position represents their positions over the previous 10 days. It is derived
by deducting the position of 10 days ago from the position today. The upper sheet's
purple-coloured row indicates the spot that is 10 days earlier. Likewise, how daily
position is determined by subtracting yesterday's position from today's cumulative
position, expiry position is determined by subtracting last expiry day data from
today's data.
After a significant amount of more copy, paste, addition, and subtraction activity,
we have finally finished creating the master sheet. The master sheet is completed. In
order to forecast the general market direction, we will now focus to the analysis of
this data. Look at the daily open interest build-up for both index options and futures
first. If these pieces of information indicate that long holdings have been amassing
over the past few days, the market is likely to turn bullish soon. Conversely, short
positions suggest that the market may decline. Yet, it provides the appearance that
there is no clear direction among the major players and the indices is predicted to
trade in a range-bound zone if index future shows long build-up and index option
shows short build-up and vice versa.
 For illustration, have a look at the open interest range from February 3rd to
February 13th, 2023, on the sheet below. At that time, traders made short bets in index
options while simultaneously accumulating long positions in index futures. The
market should decline, according to options traders, and the market should rise,
according to futures traders. Hence, throughout the course of ten trading sessions, the
NIFTY index fluctuates between 17,854 and 17,771 and the BANKNIFTY index
between 41,499 and 41,282.

Now consider a different illustration. According to the graphic below, from

October 21st through November 1st, 2022, large long holdings on index futures as well
as index options was created by FII, DII, and professional traders. As a result, the
NIFTY index rose from 17,576 to 18,145 and the BANKNIFTY index rose from
40,584 to 41,290 within just six trading sessions. That is the aura of examining open
interest. It gives us a more accurate picture of the market than any other tool
available. Moreover, remember to have a look at the expiry and 10 days net position
for the index futures and options. You will have even more clarity regarding the
upcoming market trend as a result.

FII, FPI & DII Position in Cash Market

 As we have discussed in the earlier section, Foreign Institutional Investors (FIIs)
are entities that pool money from various sources and invest it in the financial markets
of another country. For example, when American hedge funds invest in the Indian
stock market, they are considered FIIs. However, they have some restriction to invest
in equity of Indian companies. For example:
(i) FII are permitted to invest up to 10% of a single company's equity.
(ii) The maximum investment limit in Indian companies is 24% of paid-up
capital. If individual companies obtain shareholder approval, the
maximum limit can be raised to 30%.
(iii) The maximum investment limit in public sector banks is 20% of paid-up
capital.
Foreign Portfolio Investment (FPI) is the purchase of foreign financial assets by
an investor. It consists of a variety of financial assets such as fixed deposits, stocks,
and mutual funds. The investors hold all of the investments in a passive manner.
Foreign Portfolio Investors are investors who invest in foreign portfolios.
Foreign portfolios raise volatility. As a result, the risk is increased. The goal of
investing in foreign markets is to diversify the portfolio while also earning a good
return on investment. Because of the risk they are willing to take, investors expect
high returns. Foreign Portfolio Investment is a popular investment option these days.
Individuals, corporations, and even governments invest in foreign portfolios.
DII is an abbreviation for "domestic institutional investors." DIIs are a type of
investor who undertakes to invest in financial assets and securities of the country in
which they currently reside. DII investment decisions are influenced by both political
and economic trends. Domestic institutional investors (DIIs), like foreign institutional
investors (FIIs), can have an impact on the economy's net investment flows. There are
four types of domestic institutional investors. They are: Mutual Funds, Insurance
Companies, Local Pension Funds and Banking & Financial Institutions.
Let us first observe how the FII and DII cash market data appears on the NSE
website. Then we'll look at data processing and interpretation.

The above screen displays the trading activity of the major players for one day
only, and we cannot gauge market sentiment based solely on one day data. In order to
assess the market trend, we must observe the position build-ups for at least a few
days. Therefore, we will maintain a sheet of their daily position once the data is
available on the NSE website.
 Take a look at the positions established by the major players from July 18th to
August 17th, 2022. FII/FPIs are consistently taking long positions in the equity cash
market, while DIIs are trying to take small profits. However, FII/FPI long positions
are more aggressive than domestic investors' sell positions, resulting in a positive net
position figure. As a result, the Nifty has risen from 16,150 to 17,940 in the time
specified. That is the allure of watching the major players consolidate their positions.
Look at the table below to see the positions the major players created from 9
January 2023 to 9 February 2023. The market appeared to be falling because FII and
FPIs were selling the companies they had in their portfolios. Nonetheless, DIIs were
actively purchasing equities in the belief that excellent stocks were being purchased at
fantastic prices, which the market generally favours. Both buying and selling pressure
were present concurrently on the equities market. As a result, the index Nifty
remained stable between 18,101 and 17,893 during that time. In this manner, you can
forecast market trends by only examining the positions taken by the key firms.
 We discussed how to identify market trends using major players' derivative and
cash market data in this section of the book. Although we examined the data
separately, it is always advisable to assess market sentiment by combining both data
sets. Rather than assessing the data individually, combining them provides a more
complete picture of the market.

How to Gauge Market Sentiment using Put Call Ratio

(PCR)?
Any F&O trader will immediately identify a widely used terminology as the Put
Call Ratio (PCR) if you ask them. As the name would imply, it is the ratio of puts to
calls, although we will go into that more specifically later. Understanding put call
ratio options and how to find it for a stock are the more important questions. Reading
put call ratio charts is particularly crucial since the alterations they show are important
predictors of future market movement. The PCR ratio is a popular indication of
market direction used by most traders.
What is Put Call Ratio?
Put call ratio (PCR) is a well-liked derivative indicator that was created expressly
to assist traders in determining the general mood (sentiment) of the market. Either the
open interest for a given period or the volume of options traded is used to determine
the ratio. More puts were traded during the day if the ratio is greater than 1, and more
calls were exchanged during the day if the ratio is less than 1. The PCR can be
computed for the entire option segment, which includes both specific stocks and
indexes.
How to Interpret Put Call ratio?
The put call ratio is mostly utilised as a contrarian indicator. Fundamentals are
less important in the short term than emotions are. Very high or low PCR are
indicators of market greed and fear. Contrary to popular belief, PCR is typically going
in the wrong direction. Put options are traded more frequently than call options when
the PCR is high. But it is true that a seller is also necessary for a bought option. A
transaction must involve both the buyer and the seller at the same time. Without a
seller option contract cannot be bought into and vice versa. The meaning will be quite
different from the case of buying options if you think of options as sold rather than
bought. Put options are purchased more frequently when the PCR is more than one,
hence the market should decline. But in practise, the market usually rises in these
situations. Only if you suppose that options are being sold rather than bought can you
justify this. When the seller undertakes a significant amount of risk for a small
amount of reward and also uses a significant amount of cash, the argument seems to
be rather straightforward: option writers are smarter than option holders. Thus, you
can conclude put option writers are more active than call option writers if the PCR is
greater than one. Hence, the market seems positive, and more put option sellers are
anticipated to support the upswing. In contrast, PCR values below one show that more
call option writers are active than put option sellers, which could cause the market to
decline even more. The market may top out and see a reversal or a correction when
PCR is too high, since put option sellers may become fatigued. Similar to this,
excessively low PCR signals an oversold market that may experience a sharp pullback
or reversal. In conclusion, the PCR can be understood as follows.
Put/Call
Interpretation
Ratio
Put call
Bullish sentiment. It indicates that put writers are actively writing
ratio more
during dips in anticipation of the trend strengthening.
1.00
Put call Bearish sentiment. It indicates that call option strikes are being
ratio less 1.00 aggressively sold by option writers.
Put call Overbought situation. The put writers are exhausted and might
ratio around book profit. A correction or reversal of the upward trend could
1.50 happen.
Put call
Oversold circumstances. The downtrend may have reached its
ratio around
bottom and a pullback is about to occur.
0.50

Nevertheless, the interpretations are speculative, and the PCR range stated here is
not set in stone. The PCR range and interpretations can vary from trader to trader. Just
my prior trading experiences were used to inform the aforementioned interpretations.
Someone may have the right interpretation if their alternative interpretation yields
positive consequences.

How to Estimate Trading Range with Implied

Volatility (IV)?
It's fascinating to discover that Implied Volatility (IV) provides many insights, the
most valuable of which is the expected levels of movement. I'll talk about how we can
use Implied Volatility to get a better estimate of this range. However, first, let me
define Implied Volatility (IV). The volatility figure implied by the options premium is
denoted by IV. A simple calculation yields the IV.
Option premium calculation involves the following

1. Stock Price (Known and Definite Information)

2. Strike Price (Factual Input)
3. Volatility (Unknown & could have many answers)
4. Time to Expiry (Known and Definite Information)
5. Risk Free Interest Rate (Not a lot impactful)

Given an option premium and inputs 1, 2, 3, and 5, the volatility figure calculated
and it is referred to as Implied Volatility. The good news about IV is that it does not
represent historical volatility, but rather volatility anticipated by option traders. This
figure represents the annualised volatility forecasted by Options. This means that if
this figure is 20% and the stock on which we are trading options is trading at 100 then
the stock is expected to trade at 100 +/- 20%, or in the range of 80 to 120.
If you want to estimate the trading range for fewer days, say one month, you can
reduce the IV figure proportionally to represent the smaller part of the year.
Proportionate reduction means that if the rent for a year is ₹12,000, the rent for a
month will be ₹1,000. The difference in proportionate volatility reduction is that time
cannot be multiplied directly. Volatility can be scaled (apportioned) by multiplying or
dividing by the Square Root of time.
 Assume there are 252 trading days in a year, you want to find the range for 30
trading days, and your IV is 20%.
30 days of IV reduction = 20% / Square Root (252) X Square Root (30)
= 20% / 15.9 X 5.5
= 6.9% ~ 7%
So, using this simple calculation, we can estimate that option traders are expecting
7% volatility. This means that for a 100 rupees stock, a trading range of 93 to 107 is
an expected range indicated by IV for the 30 trading days. This calculation is also
applicable to index. Instead of simply selling options with a range assumption based
on historical data, option writers can now sell higher strike call and lower strike put
options based on the range indicated by Expectation of future volatility during the
option's life.

Max Pain Theory

Maximum pain is a term used to describe the somewhat controversial Maximum
Pain Theory, which states that investors who buy and hold option contacts until the
expiration date will incur a maximum loss. The occurrence is based primarily on two
assumptions.

1. The first assumption is based on price movements, which are the result
of traders legitimately buying and selling stock options for hedging
purposes. During the last few days, the index has moved closer to the strike
prices at which the option buyer suffers the greatest loss.
2. The second assumption is that option sellers, such as large institutions
that hedge large positions in their portfolios, will manipulate the market.
Because they are large institutions, they can manipulate index prices,
resulting in no obligation to fulfil contracts and thus hedging their payouts
to buyers.

Alternatively, as the strategy nears its end, different groups compete based on
purchasing power to drive prices towards a more profitable closing price.
When market makers reach a net positive position of call and put options at a
strike price where option holders stand to lose the most money, this is known as max
pain. Option sellers, on the other hand, may profit the most if they sell more options
than they buy, causing them to expire worthless.
The Maximum Pain Theory is a bit contentious. The theory's naysayers disagree
on whether the maximum pain behaviour of close stock prices is accidental or the
result of market manipulation. The latter reason raises more serious concerns about
market oversight.
Max Pain Calculation
 To understand this, consider a simple example. For the sake of this example, I'll
assume the market has only three Nifty strikes available. I've taken note of the open
interest for both call and put options at each strike.
Strike Call Option OI Put Option OI
17900 1,41,963 1,33,103
18000 1,26,673 1,38,707
18100 1,00,174 58,663

Case 1: Markets expire at 17900.

Keep in mind that if you write a Call option, you will only lose money if the
market rises above the strike price. Similarly, if you write a Put option, you will only
lose money if the market falls below the strike price.
As a result, if the market closes at 17900, none of the call option writers or sellers
will be out of money. This means that call option sellers with strikes of 17900, 18000,
and 18100 will keep the premiums received.
Put option sellers, on the other hand, will be in big trouble. Let us begin with the
18100 PE sellers.
18100 PE seller would lose 200 points if Nifty expires at 17900. Because the OI is
58,663, the loss in Rupees is –
= 200 X 58,663 = ₹1,17,32,600/-
18000 PE Seller will lose 100 points, in terms of Rupee it would be
= 100 X 1,38,707 = ₹1,38,70,700/-
17900 PE seller won’t lose any money.
So, the total amount of money lost by option seller if the markets expire at 17900
is –
Total money lost by Call Option seller + Total money lost by Put Option seller
= 0 + 1,17,32,600 + 1,38,70,700
= ₹2,56,03,300/-
Remember that the total amount of money lost by Call Option sellers equals the
sum of the amounts lost by 17900 CE sellers, 18000 CE sellers, and 18100 CE sellers.
Similarly, the total amount lost by Put Option sellers is equal to the sum of the
amounts lost by 7700 PE sellers, 7800 PE sellers, and 7900 PE sellers.
Case 2: Markets expire at 18000
At 18000, the call option sellers listed below would lose money -
17900 CE sellers would lose 100 points, which we can multiply by the Open
Interest to get the Rupee value of the loss.
100 X 1,41,963 = ₹1,41,96,300 /-
Both 18000 CE and 18100 CE seller will not lose money.
The 17900 and 18000 PE seller wouldn’t lose money
The 18100 PE will lose 100 points, multiplying with the Open Interest, we get the
Rupee value of the loss.
 100 X 58,663 = ₹58,66,300/-
So, the total loss for option sellers if the market expires at 18000 is –
= 1,41,96,300 + 58,66,300
= ₹2,00,62,600/-
Case 3: Markets expire at 18100
At 18100, the call option sellers listed below would lose money -
17900 CE sellers will lose 200 points, with a monetary value of -
200 X 1,41,963 = ₹2,83,92,600/-
18000 CE seller will lose 100 points, with a monetary value of -
100 X 1,26,673 = ₹1,26,67,300/-
18100 CE sellers will keep the premiums received.
Because the market expires at 18100, all put option seller will keep the premiums
received.
As a result, the total loss of option seller would be -
= 2,83,92,600 + 1,26,67,300 = ₹4,10,59,900/-
So far, we've calculated the total rupee value loss for option writers at each
possible expiry level. The above calculations can now be summarised in a table
format –
Call Put Loss of Loss of Total loss
Strike
Option OI Option OI Calls (₹) Puts (₹) (₹)
17900 1,41,963 1,33,103 0 2,56,03,300 2,56,03,300
18000 1,26,673 1,38,707 1,41,96,300 58,66,300 2,00,62,600
18100 1,00,174 58,663 4,10,59,900 0 4,10,59,900

Now, we can easily identify the point at which the market is likely to expire. We
have identified the combined loss that option writers would experience at various
expiry levels. According to the option pain theory, the market will expire at the point
where option sellers experience the least amount of pain i.e. the least amount of loss.
According to the table above, this point is 18000, where the combined loss is
around 2,00,62,600 which is less than the combined loss at 17900 and 18100.
That's all there is to the calculation. However, for the sake of simplicity, only three
strikes were considered in the example. However, there are numerous strikes for any
given underlying, particularly the Nifty. Calculations become cumbersome and
confusing, necessitating the use of a tool such as Excel.
As a result, real open interest build-ups of the Nifty option chain were calculated
on March 23rd, 2023 for the March 29th expiry. Only ten strike prices and strike
prices with 100 multiples are considered for simplicity. Take a look at the image
below.
 It assumed that the market would expire at that point for all available strikes and
then computed the rupee value of the loss for CE and PE option writers. This number
is shown in the final column, titled "Total Pain." Once you've calculated the total pain,
you can simply identify the point at which the option writer loses the least amount of
money. This can be determined by plotting a 'bar graph' of total pain. The bar graph
would look something like this -

As you can see, the 17100 strike is where option writers would lose the least
money, hence in accordance with the theory of option pain, this is the strike where the
market for the March series is most likely to expire.
Now, how can you put this knowledge to use now that you've determined the
expiry level? Well, there are many applications for this knowledge. The majority of
traders identify the strikes they can write using this maximum threshold for pain. As
17100 is the anticipated expiration level in this scenario, one can choose to write call
options above 17100 or put options below 17100 and keep all of the premiums.
 OPTION TRADING STRATEGIES
You should have a solid trading plan in place before you begin trading
options. There are numerous choice strategies accessible, as was previously
described. You need to be aware of your trading or investment goals in order
to choose the best strategy. Once you've determined your trading objectives,
pick a plan of action that will get you there. Investors who want to safeguard
themselves against potential losses on securities they already own will
choose a different approach than those who want to benefit from the greater
leverage that options might offer.
Option strategies can also be used, depending on the state of the market.
Very bullish or bearish, moderately bullish or bearish, and range-bound
market behaviour are all possible. At this point, I feel compelled to say that
options are a fantastic trading tool that can be used to create a variety of
strategies for any market situation. I covered a few strategies for each market
emotion in one of my prior book, "Option chain analysis: The CT scan of
derivative market." Those were fairly straightforward but effective
approaches. Here, I'll go over a few additional tactics with various legs to
choose from.
As you can see, selecting the best option strategy is crucial to success in
option trading. In this case, let me tell you that managing your holdings
when the market doesn't move in your favour is more crucial. As no one can
foresee market movement with 100% accuracy, managing deals that aren't in
your favour is even more important for long-term success. Option strategy
adjustments refer to the management of option positions when the market
moves counter to your perception of the direction. It gives option traders the
ability to turn a losing deal around and make a profit. The goal of option
strategy adjustment is to increase a strategy's potential for profit or to
recover money from a losing deal.
The two methods for making adjustments are as follows:

1. Adding or removing additional option positions while keeping

the strategy's option Greek values, particularly Delta, constant.
2. Realigning the current positions with a new option strategy.
 In this book, we will explore option strategy for various market outlooks
as well as changes in case the market begins to go in the opposite direction
of what you had forecasted. Let's first familiarise ourselves with the many
market outlooks that are now in use. As follows:
Bullish market
Bearish market
Moderately bullish market
Moderately bearish market and
Range-bound market.
I'll demonstrate a couple option strategies for each possible market
situation. However, before continuing, you should understand what an
option trading payoff chart is. Options traders use this tool in order to
visualise the risks and rewards of their trades and to decide on their trading
strategy with intelligence.

What is a Payoff Chart in Option Trading?

A payoff chart is a blueprint of an option strategy that shows the
potential outcomes of the strategy at expiration. A payoff chart, commonly
referred to as a profit and loss diagram or risk graph, shows graphically the
potential gains and losses connected to an options trading strategy at
expiration. Options traders can use this tool to visualise potential results of
their trades before they execute them.
The security price at expiration is plotted on the x-axis of a standard
payoff chart, and the profit or loss from the options position is plotted on the
y-axis. The chart normally has two lines, one for the potential profit or loss
of the options’ position and the other for the breakeven point. The stock
price at which the option position does neither profit or lose money at
expiration is known as the breakeven point.
The payoff chart for a long call option position, for example, would
show a profit if the stock price at expiration is higher than the strike price of
the call option plus the premium paid. Conversely, the chart would show a
loss if the stock price at expiration is below the strike price plus the premium
paid. The breakeven point for this position would be the strike price plus the
premium paid.
To help you understand, I'll give you an example and walk you through
the process of creating a payoff chart for a call long option strategy.
 Here are the steps to follow:
Determine the Strike Price: The price at which the option may be
exercised is known as the strike price. Pick a strike price that fits in with
your trading objectives and strategy.
Determine the Premium: The premium is the cost incurred when
purchasing a call option. It is the price of the option and it reflects the
biggest possible loss for the trade.
Identify the Expiration Date: The expiration date is the date on which the
option contract expires. It is important to note that the payoff chart assumes
that the position is held until expiration.
Calculate the Maximum Profit: The maximum profit for a long call
option strategy is unlimited, as the stock price can rise indefinitely. The
profit at expiration can be calculated as the difference between the stock
price at expiration and the strike price, minus the premium paid.
Maximum Profit = (Stock Price at Expiration - Strike Price) – Premium
Paid
Calculate the Breakeven Point: The breakeven point is the stock price at
which the position neither gains nor loses money at expiration. It can be
calculated as the strike price plus the premium paid.
Breakeven Point = Strike Price + Premium Paid
Plot the Payoff Chart: Once you have calculated the maximum profit
and breakeven point, you can plot the payoff chart. On the x-axis, plot a
range of stock prices at expiration, and on the y-axis, plot the profit or loss
of the position. The payoff chart will show a profit if the stock price at
expiration is above the breakeven point, and a loss if the stock price is below
the breakeven point. The profit potential is unlimited, while the maximum
loss is limited to the premium paid.
Given below is an illustration of a payoff chart for a long call option
strategy with a 100-strike price, a ₹20/- premium, and a 30-day expiration
date:
Here are the calculations and the resulting chart:
Strike Price: ₹100/-
Premium: ₹20/-
Expiration Date: 30 days from now
Maximum Profit = Unlimited
Breakeven Point = Strike Price + Premium = ₹100/- + ₹20/- = ₹120/-
 The table below shows the profit or loss at expiration for different stock
prices:
Stock Price at Expiration Profit or Loss
₹70 or below -₹20/-
₹80 or below -₹20/-
₹90 -₹20/-
₹100 -₹20/-
₹110 -₹10/-
₹120 (Breakeven Point) ₹0/-
₹130 ₹10/-
₹140 ₹20/-
₹150 ₹30/-
₹160 or higher ₹40/- or higher

The chart below represents the same data graphically:

The figure shows that while the potential for profit is limitless, the
maximum loss is restricted to the premium paid. The sum of the strike price
and the premium paid, or the breakeven point, is ₹120/-. The trade will start
to make money if the stock price rises above the breakeven level.

Option Strategy Adjustment

 The act of modifying an existing option position in reaction to market or
underlying stock price movements is referred to as option strategy
adjustment. In order to control risk, secure earnings, or grab fresh trading
opportunities, option traders may modify their strategy. The aim of the
adjustment is to enhance the position's overall risk-reward profile.
There are various reasons why an option trader may need to adjust their
position, including:

1. Changes in the price of the underlying stock: If the stock price

swings against the option position, adjustments may be required to
minimize losses or capture fresh chances.
2. Changes in implied volatility: Traders may need to make
adjustments to their positions in order to profit from changes in
implied volatility, which can have an impact on the value of
options.
3. Expiration approaching: As options approach expiration,
traders may need to adjust their positions to avoid or mitigate
potential losses.
4. Change in the underlying stock's outlook or fundamentals: If
the underlying stock's outlook or fundamentals change, the option
position could need to be modified.

Here are a few typical methods for adjusting option positions:

1. Rolling: In this process, a current option position is closed out

and a new one is started with a different strike price or expiration
date. For instance, if the underlying stock has increased and is now
close to the option's strike price, a trader can roll a short call
option to a higher strike price.
2. Hedging: This involves opening a new position that is
designed to offset the risk of an existing position. For example, a
trader may buy a put option to hedge against a long call option
position if they are concerned about a potential decline in the
underlying stock price.
3. Scaling: This entails adjusting positions by adding or
eliminating them in reaction to changes in the market or the price
of the underlying stock. For instance, if the price of the underlying
 stock has increased and the trader thinks that the price may drop
soon, they may sell part of their long call options.
4. Closing: If the trader decides that the position is no longer
lucrative or that the risk is too great, he or she must close out the
entire option position.

It is significant to remember that any adjustment to an option strategy

involves careful consideration, analysis, and evaluation of the market
situation and prospective results. Before making any alterations to their
option positions, traders should have a clear grasp of their objectives and
risk tolerance. We are going to discuss several option strategies in various
market scenarios, along with adjustment procedures, in the next chapters of
this book.
 OPTION STRATEGIES FOR
BULLISH MARKET
A market that is projected to experience more price increases is said to
be a bullish market. Investors in this market are enthusiastic about the
prospects for the economy, their specific sector or the asset they are trading
in the future. In a bullish market, traders search for chances to purchase
assets in the hope that their value will rise, then sell them at a higher price to
profit. In the long run, they can decide to hold on to these assets in the hope
that their value would increase.
A bullish market may have a rising trade volume, robust stock demand,
and optimistic expectations for corporate earnings and economic
development. Bullish markets may, however, also go through times of
volatility and corrections, which traders need to be aware of and ready for.
There are several ways to identify a bullish market from a trader's
perspective. Here are a few methods traders frequently employ: Candlestick
patterns, volume, moving averages, price trends, option chain analysis, etc. It
is advisable to pay attention to the option chain in order to determine the
market trend as we will be trading in the derivative segment.
Let me present an option chain that depicts a very positive market
sentiment. An option chain for the Bank Nifty index is shown in the image
below.
 Out-of-the-money and near in-the-money options on the call segment
show long build-up while deep in-the-money options show short covering.
On the put side, however, both in-the-money and out-of-the-money options
show a short build-up with high volume. So, the market ends up being quite
positive, at least for a short period of time. In such market conditions, you
can either write a naked put option or purchase a straightforward call option.
Yet, there aren't many sophisticated spread approaches that may be used in
this type of market condition. But I like to trade using a few basic techniques
since they can be quickly altered if the market moves in the other way of
what we think it will. Hence, I'll either buy a straightforward call option or
sell a put option. Let's examine each of these strategies in turn.

Call Long Strategy

The Call Long strategy is a popular investment strategy used in the stock
market. It involves buying a call option with the anticipation that the price of
the underlying asset will rise, garnering the investor a profit.
A call option offers the buyer the right, but not the obligation, to buy a
particular underlying asset at a fixed price (known as the strike price) within
a predetermined time frame (known as the expiration date). The value of the
call option rises along with the price of the underlying asset, enabling the
buyer to sell it for more money than they paid for it and make a profit.
When an investor anticipates that the price of the underlying asset will
increase in the future, they would often adopt the call long strategy. The
option chain indicated above suggests that the price of the Bank Nifty index
should rise during the next few days. Consequently, a trader may consider
developing a call long strategy in order to make profit in this move.
The choice of the strike price is a crucial factor in the success of any
option strategy. Thus, attempt to choose a strike price that would produce the
best results. At-the-money options, in my opinion, offer a respectable profit.
The Bank Nifty spot is 41,251 in the option chain above. So, you have a
choice between 41200CE (call option) and 41300CE. Consider that you
picked up 41300CE.
The strategy:
Buy 41300CE
Premium: ₹220/- (rounded off)
Total debit: ₹220/-
Maximum profit: Uncapped
Maximum loss: Total debit times lot size = 220.00 X 25* = ₹5,500/-
(*25 being the lot size of Bank Nifty contract)
Breakeven point (BEP): Strike price + Total debit = 41,300 + 220 =
41,520
 Since it is a straightforward buying strategy and your maximum loss is
known, it doesn't need to be adjusted if the market isn't in your favour. In
that situation, you can sell a call option to receive some credit. Nevertheless,
in order to achieve that, you will need some more margin funds. If not, you
can place a stop-loss order to safeguard your cash.

Put Short Strategy

Another well-liked stock market trading technique is the put short
approach. It entails selling a put option with the hope that the price of the
underlying asset will rise or hold steady, giving the trader a profit.
A put option offers the buyer the right, but not the responsibility, to sell a
certain underlying asset at a predefined price, known as the strike price,
within a given timeframe, known as the expiration date, while the option is
open for trading. The value of the put option rises if the value of the
underlying asset falls, enabling the buyer to sell the asset for more money
than they paid for it and make a profit.
When an investor thinks that the price of the underlying asset will rise or
stay stable in the future, they will often adopt the put short strategy. An
investor might sell a put option on the stock of a certain company, for
instance, if they think the stock price won't fall.
The Bank Nifty option chain shown above indicates that the price may
either rise or hold above the 41,000 mark. So, a trader may think about
writing a put option rather than purchasing a call option. Options trading
gives you so much flexibility that you can also make a bullish trade by
selling put options. To trade this sentiment, you can sell either an ATM or an
OTM put option. You might also choose ITM options if you have more faith
in the direction of the market. But if you're a beginner trader, it's best to
write OTM options since they have a lower risk profile.
The fundamental drawback of writing options is that, while it
theoretically allows for infinite risk exposure, the maximum profit potential
is constrained to the premium collected. If the price of the underlying asset
decreases, the put option's value will increase, and the investor may have to
buy the underlying asset at a higher price than they sold the put option for.
This can result in a loss, so it's important for investors to manage their risk
by setting stop-loss orders or using other risk-management strategies like
option strategy adjustments. Let's examine the strategy in more detail.
 The strategy:

Sell 41200PE
Premium: ₹225/- (rounded off)
Total credit: ₹225/-
Maximum profit: Total credit times lot size = 225 X 25 = ₹5,625/-
Maximum loss: Undefined
Breakeven point: Strike price – Premium received = 41,200 – 225 =
40,975

The payoff chart for this strategy shows that the highest profit you can
get is ₹5,625/-, which you will receive in full if the index expires above the
short strike level. Also, it demonstrates that you will make at least a profit
above 40,975, which serves as the strategy's breakeven mark. But, if the
index expires below it, you will lose money. If Bank Nifty keeps falling, the
loss can go indefinitely. You lose more money the further the index falls. As
previously said, writing options offers the possibility of both restricted profit
and unlimited loss.

Adjustments
Markets occasionally don't move in the direction you think they should.
Then, even when you are unable to generate a profit, you must manage your
positions such that you do not lose money. To achieve this and balance the
trading portfolio, you might need to create a few new positions. Adjustments
of option strategy are what this is known as, and trust me, if you don't know
how to fine-tune your positions, you can't be a good option trader. In any
case, I'll show you how to manage your trades in the event of such bad luck.
Given that you had an optimistic outlook on the market in this case, you
sold 41200PE for ₹225/-. Sadly, if market starts heading lower, your short
positions would result in loss. If you believe that the market may find
support at a lower level and reverse, you might consider rolling down
(closing your current trade and starting a new trade at a lower strike) your
positions in order to reduce the loss. What happens if the market doesn't turn
around and break a crucial support? It might drop any lower, at which point
your rolled position will start to lose money. Your initial trade resulted in a
loss that you have booked, and this new trade will result in more losses for
you. Is it not? Thus, maintain your current stance without changing it. Sell a
call option instead that has the same Delta value as the put option instead.
Consider that you began adjusting when the Bank Nifty tested the 41,200
mark, which would suggest that the sold-put option is now an ATM option.
You can sell a call option with the same strike and expiration because the
value of the Delta ATM option is almost equal to 0.50. Your current overall
position is now a short straddle strategy with a neutral Delta. Your holdings
will start making you money if the market turns around or consolidates at
that point.

Suppose,
The premium of 41,200PE has become ₹250/- and
The premium of 41,200CE is ₹250/-
Therefore,
Total premium received = 250 + 225 = ₹475/-
Lower breakeven point = 41,200 – 475 = 40,725
Upper breakeven point = 41,200 + 475 = 41,675
Maximum profit = 475 X 25 = ₹11,875/-
Now take a look at the updated payoff chart that is below. The new
breakeven threshold is 40,725, which is 250 points below the previous
breakeven point. But at the same time, you will acquire a breakeven
threshold on the upside also. Your maximum earning potential has now
increased to ₹11,875/-, which is a significant increase from your previous
profit potential of ₹5,625/-. But the index must expire at 41,200 levels for
you to realise the maximum profit. In the event that the market doesn't move
in the way you expect, this is how the naked option position can be
managed.

During this adjustment process, several questions may have arisen in

your head. You can utilise some of the modification tactics we shall discuss
later, so I am confident that these will allay your concerns. You can apply
many adjusting techniques to one plan as well. Just continue reading.
 OPTION STRATEGIES FOR
BEARISH MARKET
A bearish market is one in which prices are dropping and are anticipated
to do so in the near future from the viewpoint of a trader. Investors on this
market are gloomy about the prospects for the economy, their sector, or the
specific asset they are trading in the future.
In a negative market, traders search for chances to sell assets in
expectation of a decline in value, then purchase them again at a discount to
profit. To profit from the declining prices, they can also keep their cash on
hand or short sell their assets. A bearish market may have a decline in
trading volume, sluggish stock demand, and a pessimistic forecast for
corporate earnings and economic growth.
Let's first look at an option chain for this market sentiment. This time, I'll
demonstrate the option chain of Nifty index. The index's current market
price is 17,310 (rounded off), as shown in the image below. The data for the
2nd March, 2023 expiry is shown in the option chain of the screenshot, which
was taken on 27th February 2023. The option chain makes it very evident
that the index will continue to trade negatively for at least a few days.
 Buy a put option or sell a call option are the two simplest yet most
profitable option strategies that can be employed in such market conditions.
Let's go over each technique individually using payoff charts.

Put Long Strategy

Another common stock market trading technique is the put long strategy.
It consists of buying a put option in the hope that the price of the underlying
asset will fall, registering the trader a profit.
A put option offers the buyer the right, but not the obligation, to sell a
certain underlying asset at a predefined price, known as the strike price,
within a given timeframe, known as the expiration date, while the option can
be exercised for trading. The value of the put option appreciates if the value
of the underlying asset falls, enabling the buyer to sell the asset for more
money than they paid for it and make a profit.
Investors frequently employ the put long strategy when they anticipate a
decline in the value of the underlying asset. The option chain showed above
indicates that the price of Nifty should decrease soon. An implementation of
a put long strategy is possible in this market situation.
Though it may seem like a low-risk approach, buying put options is
actually a high-risk strategy, therefore investors should only use funds they
can afford to lose. To reduce risk and increase possible returns, careful study
and analysis must be done before adopting any investing strategy.
The time decay factor must also be taken into account while trading
options. Due to their short lifespan, put options lose value as they get closer
to expiration. Traders should therefore be aware of the expiration date and
manage their risk appropriately by placing stop-loss orders or employing
other risk-management techniques.
Right now, you know what a put long strategy is. So, let's formulate a
plan. As was previously mentioned, trading at-the-money-option (ATM) is
always recommended when buying options. So, I will rather purchase
17300PE, which bears a ₹83/- (rounded off) premium.
The strategy
Buy 17300PE
Premium: ₹83/-
Total debit: ₹83/-
Maximum profit: Uncapped
Maximum loss: Total debit times lot size = 83 X 50 = ₹4,150/-
Breakeven point (BEP): Strike price – Total debit = 17,300 – 83 =
17,217

If the market doesn't move in your favour, this approach doesn't need to
be adjusted because your maximum loss is limited to ₹4,150/-. You can
short a put option at a lower level, as described in the call long technique, to
gain some premium. If you want to protect your capital in any other case,
you can set a stop-loss. If the index moves against your expected direction,
we will need to make adjustments to the strategy we will discuss next.

Call Short Strategy

Another prevalent stock market trading tactic is the call short method. It
involves selling a call option with the hope that the price of the underlying
asset will fall or stay steady while generating a profit for the trader. If the
value of the underlying asset declines, so does the call option's value,
enabling the seller to repurchase the asset at a profit by paying less than they
originally asked for it.
When an investor expects that the price of the underlying asset will
either decline or remain stable in the future, they would often adopt the call
short strategy. However, if the value of the underlying asset rises, so will the
call option's, and the seller might be forced to pay more for the underlying
asset than they did for the call option. Investors must control their risk by
employing stop-loss orders or other risk-management techniques because
this could result in a loss.
In the aforementioned case of bearish market sentiment, you might sell a
call option, instead of purchasing a put option. If you closely examine the
option chain, the implied volatility (IV) is a bit high. As a result, the call
premium of the options increases in cost. In this case, you should attempt to
trade by selling call options because greater premiums can be earned this
way. You have the option of selling call options at-the-money or out-of-the-
money because, if the market moves in the desired direction, the Greek,
Theta, will degrade more quickly. As was previously mentioned, theta decay
is advantageous for option sellers. If you are a relatively inexperienced
trader, it is best to stay away from selling in-the-money options as they carry
some risk. To choose this approach –
Sell 17400CE
Premium: ₹67/- (rounded off)
Total credit: ₹67/-
Maximum profit = Total premium collected times lot size = 67 X 50 =
₹3,350
Maximum loss = Undefined
 Breakeven point = Strike price + Premium received = 17,400 + 67 =
17,467
Let's examine this strategy's payoff chart.

The payoff chart shows that if the index expires anyplace below 17,400,
your maximum profit will be ₹3,350/-. Above that price, your profit will
decrease, and at 17,467, the breakeven mark for this approach, your trade
will result in a loss. As you are aware, selling options has an unlimited risk
potential, and you will begin to lose money if the Nifty expires at a price
higher than 17,467.

Adjustments
In contrast to the earlier put short method covered in the section above,
you can change your call short position if the index begins to move in the
opposite direction of the one you predicted. You can manage your positions
by making some adjustments in this situation as well. Here, all you have to
do is sell a put option with a strike price of 17,400 for the same expiration to
execute a short straddle strategy. The fact that you can sell a put option at
any other strike prices now is important to note. Making a straddle while
modifying the strategy is not at all required. The significance of Delta is very
significant. You can choose a strike with a delta value that is nearly identical
to the original strike's current delta value. The adjusted approach may
occasionally turn into a short strangle or even an inverted short strangle in
order to achieve the main goal of making it a Delta neutral strategy. Take a
peek at the new strategy now.
 Suppose,
The premium of 17400CE is ₹100/- and
The premium of 17400PE is ₹100/-
Therefore,
Total premium received = 100 + 67 = ₹167
Lower breakeven point = 17400 – 167 = 17,233
Upper breakeven point = 17400 + 167 = 17,567
Maximum profit = 167 X 50 = ₹8,350

The breakeven point has moved from 17,467 levels before adjustment to
17,567 levels as can be seen in the payoff chart above. But you will also
receive a lower breakeven point, which is at 17,233. Before, there was no
lower breakeven point. Moreover, the maximum profit potential has raised
from ₹3,350/- to ₹8,350/-. In case the market doesn't move in your favour,
you can change your loss-making trade into a successful one in this method.
Now, the topic of when to modify a plan of action can come up. When the
price will challenge your breakeven is the solution. In this situation, you
must execute a trade adjustment when the Nifty price reaches 17,467 or
higher. You will undoubtedly incur a loss if you close the deal at that point.
Your buffer on the upside will now be provided by the additional position.
You can make a significant profit if the market turns around after a certain
point and the contract expires around 17,400 level.
So, you might be wondering what would happen if the index continued
to rise. In that case, you must close the extra position by realising a profit
and open a new one at a higher level. By doing this, you will receive
additional premium and raise the upper breakeven point to a new high. In
this manner, you can turn a losing trade into a profit or greatly reduce the
loss.
 OPTION STRATEGY FOR
MODERATELY BULLISH MARKET
Prices are growing in a market that is moderately positive, but at a
slower rate than in a market that is very bullish. Investors in this market are
typically optimistic about the future prospects of the economy, their sector,
or the specific asset they are trading, although they may also have a few
concerns or worries.
Traders may search for chances to purchase assets that have the potential
to increase in value in a moderately positive market, but they may do so
carefully and with a more conservative investing plan. Instead of waiting for
a significant increase, they can decide to capture some profits when the
market increases.
From a trader’s perspective, a market that is somewhat optimistic has a
firm support level beneath its current price and is predicted to see a small
price increase soon is called a moderately bullish market or a sideways
market with positive bias. More likely than decreasing is the possibility of
the security's price increasing.
In a market that is somewhat optimistic, traders must be aware of
possible dangers and have a clear trading strategy that takes into
consideration the specifics of the market. If the market turns more bearish or
more bullish, they might also need to modify their strategies. Several
strategies, like the following, are suitable for such market conditions.

1. Bull Put Spread

2. Call Debit Spread
3. Long Call Calendar Strategy
4. Covered Call Strategy
5. Call Ratio Back Spread Strategy
6. Stock Repair Strategy etc.

Since I believe it's necessary to thoroughly understand a select number of

strategies rather than knowing everything a little bit at a time, I'll just
concentrate on three for current market trend. How many different tactics
you are familiar with is not as significant as how well you are familiar with
them? Now let's learn a few common methods and how to adjust them if the
market isn't on our side.

Bull Put Spread Strategy

A Bull Put Spread is an options trading strategy that involves selling put
options at a higher strike price and buying put options at a lower strike price.
Traders that are optimistic on the underlying asset and foresee an increase in
price or stability utilise this method.

The Bull Put Spread operates as follows:

Sell a Put Option: The trader sells a put option with a higher strike price
(generally ATM or OTM option), which indicates that if the option is
exercised, they are required to purchase the underlying asset at that price.

Purchase a Put Option: When a trader purchases a put option, they can
sell the underlying asset at a lower price if the option is exercised.

Net Credit: The trader obtains a net credit when they sell the put option
with the higher strike price and buy the put option with the lower strike
price, meaning that the premium from the sale of the higher strike put option
is more than the premium for the lower strike put option.

Maximum Profit: The net credit received represents the maximum profit.
This occurs when both put options expire worthless and the price of the
underlying asset is higher than the higher strike price at expiration.

Maximum Loss: The maximum loss is capped at the difference between

the strike prices less any net credit that was received. This happens when
both put options are exercised and the value of the underlying asset is lower
than the lowest strike price at expiration.

Breakeven Point: The breakeven point is the short strike price minus the
net credit received. The trader will start making a profit if the price of the
underlying asset rises above this point.
 The Bull Put Spread is a low-risk, low-reward trading technique that is
appropriate for traders who are moderately bullish on the underlying asset.
This method can be applied in a range of market situations, but it works best
when the price of the underlying asset is anticipated to stay constant or rise.
However, it carries risk, just like any trading methods, and should only be
employed by competent traders who are aware of the possible downsides.
You will understand the strategy well if you use an example. So that you
can picture the strategy, let me show you an option chain for such a market
perspective. This Bank of Baroda option chain was logged on February 2,
2021, at a stock price of ₹74. (rounded off). The chain displays various
options' component parts until the expiration on February 25, 2021.

The strategy:
Buy 70PE; Premium: ₹2.90/-
Sell 72PE; Premium: ₹3.90/- (Rounded off)
Total credit = 3.90 – 2.90 = ₹1.00/-
 Maximum profit = Total premium collected times lot size = 1 X
11,700* = ₹11,700/- (*11,700 being the lot size of Bank of Baroda option
contract)
Maximum loss = (Width of spread – Total credit) times lot size = (2.00 –
1.00) X 11,700 = ₹11,700/-
Breakeven point = Short strike – Total credit = 72.00 – 1.00 = 71.00
The payoff chart for this approach will appear as follows at expiration.

When the stock expires at a price above ₹72/-, the aforementioned chart
predicts a maximum profit of ₹11,700/- and a maximum loss of ₹11,700/-.
This approach will begin to pay off if the stock trades above the 71 mark and
begins to lose below it. The breakeven point for this strategy is the stock
price of 71/-.

Adjustments
In the event that the stock doesn't move in the desired direction, there are
numerous modification strategies accessible. Many traders simply "roll
down," or close, their positions, using the same method but at a reduced cost.
Your loss will increase if the stock price drops much more. In doing so, you
would be contravening the adjustment ethos by recording a loss in the initial
deal. Adjustment's primary goal is to turn your lost trade into a gainful one.
And you would regret selling your earlier positions if the price turned
around.
The best course of action is to create an additional credit spread on the
opposing side in order to modify a bull put strategy. That signifies to lessen
your loss, perform a call credit spread. Just keep in mind to maintain the
spread the same on both sides. The call spread should be the same amount as
the put spread in our case, which is ₹2.00. By doing this, you reduce the
directional risk by putting the entire Delta value near to zero. If the stock
price drops to the breakeven level, or ₹71, you can create a call credit spread
by simultaneously selling 75CE and buying 77CE.
Let's suppose –

Premium of 77CE is ₹2.80/- (Buy) &

Premium of 75CE is ₹3.40/- (Sell)
Credit received = 3.40 – 2.80 = ₹0.60/-
Total credit = Credit of put spread + Credit of call spread = 1.00 + 0.6 =
₹1.60/-
Lower breakeven = 72.00 – 1.60 = 70.40
Upper breakeven = 75.00 + 1.60 = 76.60
Maximum profit = Total credit received times lot size = 1.60 X 11,700
= ₹18,720/-
Maximum loss = Difference between long option and short option less
credit received times lot size = (2.00 – 1.60) X 11,700 = ₹4,680/-
Check out the payoff chart below now.

The modified strategy's payoff resembles a short iron condor strategy's

payoff. As a result, the maximum loss potential, which was formerly
₹11,700/-, has been drastically reduced to ₹4,680/-. In addition, the lower
breakeven has decreased to ₹70.40. But, after adjustment, you will also
obtain an upper breakeven point. But thanks to new credit received, your
maximum profit potential has now climbed to ₹18,720/-. You will be able to
make a significant profit if the stock recovers at a specific point and expires
between ₹70.40 and ₹76.60.

Call Debit Spread Strategy

A Call Debit Spread is an options trading strategy that involves buying

call options at a lower strike price and selling call options at a higher strike
price. This strategy is used by traders who are moderately bullish on the
underlying asset and expect the price to increase.

Here's how the Call Debit Spread works:

Purchase a Call Option: If the trader purchases a call option with a

lower strike price and the option is exercised, they will have the right to
purchase the underlying asset at that price.

Sell a Call Option: The trader sells a call option with a higher strike
price, which means they are obligated to sell the underlying asset at that
price if the option is exercised.

Net Debit: The trader incurs a net debit when they purchase the lower
strike call option (usually ITM or ATM) and sell the higher strike call option
(usually OTM) since the premium for the lower strike call option was higher
than the premium for the higher strike call option.

Maximum Profit: The difference between the strike prices less the net
debit paid is the maximum profit. This happens when both call options are
exercised and the value of the underlying asset is higher than the higher
strike price at expiration.

Maximum Loss: The maximum loss is capped to the net debit that was
actually paid. This happens when both call options expire worthless and the
value of the underlying asset is below the lower strike price at expiration.

Breakeven Point: The breakeven point is calculated by adding the net

debit paid to the lower strike price. If the price of the underlying asset
increases over this level, the trader will begin to benefit.

The Call Debit Spread is a low-risk, low-reward trading method that is

appropriate for investors who are only somewhat positive on the underlying
asset. This method can be applied in a range of market situations, but it
works best when the predicted price rise of the underlying asset is expected
to be moderate. This strategy is also known as the “bull call spread”. Let's
use an example to better grasp the method. To clarify it more, we'll use the
identical Bank of Baroda option chain.

The strategy:
Buy 75CE; Premium: ₹4.50/-
Sell 80CE; Premium: ₹2.80/-
Total debit = 4.50 – 2.80 = ₹1.70/-
Maximum profit = (Width of spread – Net debit) times the lot size =
(5.00 – 1.70) X 11,700 = ₹38,610/-
Maximum loss = Net debit times lot size = 1.70 X 11,700 = ₹19,890/-
Breakeven point = Long call strike + Net debit = 75.00 + 1.70 = 76.70

The payoff chart shows that if the stock price rises over the short strike,
which is ₹80, a maximum profit of ₹38,610 can be realised. The profit is
limited if the stock expires above that price. If the price drops below the long
strike price of ₹75, you might lose up to ₹19,890/-. Your maximum loss is
also specified because it is a net debit approach. The strategy's breakeven
point is ₹76.70, below which your technique starts to lose money.
 Adjustment
In contrast to the earlier strategies, this one can be altered if the stock
price starts to move against you. Also, you can build up a variety of
strategies to reduce your losses here. Yet the simplest approach to get some
more credit is to sell an additional call option. In this scenario, pick a strike
so that it transforms your debit strategy into a zero (or almost zero) debit
strategy. This indicates to choose a call option with a premium of about
₹1.70/-. Let us suppose, if the price of Bank of Baroda's shares drops to
₹70, the call option with a strike price of ₹76 will be worth a premium of
₹1.60/-.

The new strategy

Sell 76CE; Premium: ₹1.60/-
Net debit = Previous debit – New credit = 1.70 – 1.60 = ₹0.10/-
Lower breakeven = Earlier BEP – Additional credit received = 76.70 –
1.60 = 75.10
Upper breakeven = Width of spread + New short strike – Net debit = 5
+ 76.00 – 0.10 = 80.90
Maximum profit = (New short strike – Long strike – Net debit) times
lot size = (76.00 – 75.00 – 0.10) X 11,700 = ₹10,530/-
Maximum loss = ₹1,700/- on downside and undefined on upside

If you look at the payoff chart right now, the maximum downside risk
has been greatly decreased from ₹19,890/- to just ₹1,700/- only.
Additionally, the breakeven point decreases to ₹75.10 from ₹76.70 before
adjustment. However, it results in a higher breakeven point of ₹80.90 and
lowers the maximum profit potential to ₹10,530/- only. In this case, it's
crucial for you to remember that protecting your cash should come first
when a prediction goes wrong, with profit afterwards. Only when there is
money in your trading account you do have a chance of recovering your
wealth. Every adjustment has certain advantages as well as disadvantages.
You might be wondering what would happen if the stock price started to
rise and challenged the upper breakeven point at this point. As you are
aware, everything is possible in the stock market. The possibility exists that
the stock will find support at the lower level and rebound from there. In that
instance, simply square off the newly created second short position while
modifying the strategy. By doing this, the call debit spread technique that
you first used will now be considered a strategy. Therefore, even if the
market doesn't work in your favour, you can still profit. At the very least,
you'll be able to protect your capital.

Long Call Calendar Strategy

The Long Call Calendar Spread is an options trading strategy that

involves buying a call option at a later expiration date and selling a call
option at an earlier expiration date. Traders who forecast a gradual, but not
necessarily immediate, bullish or appreciative movement in the underlying
asset use this method.

The Long Call Calendar Spread operates as follows:

Buy a Call Option: If a call option with a later expiration date is

purchased, it will grant the holder the right to purchase the underlying asset
at the specified price.

Sell a Call Option: If a call option with a sooner expiration date is sold,
the trader will be required to sell the underlying asset at the price specified in
the option if it is exercised.

Different Strike Prices: The two call options should have similar or
identical strike prices, but the premiums may vary based on the remaining
time until expiration.
 Net Debit: The trader incurs a net debit by purchasing the call option
with the later expiration and selling the option with the earlier expiration.

Maximum Profit: The maximum profit is achieved when the price of the
underlying asset is at the strike price of the sold call option at the time of its
expiration. This is due to the fact that the bought call option keeps its value
and generates a profit while the sold call option expires worthless.

Breakeven Points: The breakeven points are calculated by adding and

subtracting the net debit paid to the strike price of the bought call option.
The trader will start making a profit if the price of the underlying asset rises
above the lower breakeven point sustains below the upper breakeven point.

The Long Call Calendar Spread is a low-risk, low-reward trading

technique that is appropriate for investors who think that the underlying
asset will become bullish moderately. This approach is adaptable to a range
of market conditions, and it works best when the trader believes that the
price of the underlying asset will be comparatively steady in the near future.

If you trade index options, you can also do so with weekly options. You
can sell the current week's call option and buy the next week's call option on
the same index, such as Nifty, Bank Nifty, or Fin Nifty.
We will use the identical Bank of Baroda option chain that was worked
out in the preceding techniques to better show the calendar spread strategy.
The stock may remain in this price range since the option chain suggests a
mildly bullish sentiment and because there is a moderate resistance at the
₹75.00 price level. Hence, if you want to choose a long call calendar spread,
you might use this strike price.

The strategy:
Sell 75CE (February series)
Premium: ₹4.50/-
Buy 75CE (March series)
Premium: ₹5.80/- (say)
Total debit = 5.80 – 4.5 = ₹1.30/-
Maximum profit = Maximum profit is realized if it expires at ₹75.00
but the exact amount is undefined
Maximum loss = Net debit times lot size = 1.30 X 11,700 = ₹15,210/-
 When the stock price on the expiration date equals the strike price of the
call short option, the maximum profit is possible. Because the long call has
its greatest time value when the stock price reaches the strike price, this is
the point of greatest profit. Again, the price disparity between the two
options is at its biggest because the short call option expires worthless at
expiration. It is important to note that it is impossible to predict the precise
amount of the maximum profit because it depends on a number of elements,
including the volatility of the price of the long call option. So, the payoff
table above provides an approximation of the greatest earning possibilities.
Since this is a debit spread strategy, the maximum risk is equal to the
spread's cost, or the net debit amount. The money used to pay for the spread
is lost if the stock price abruptly deviates from the strike price, as the
difference between the two options approaches zero. Assume that if the
stock price drops significantly, the cost of both call options approaches zero
and their net difference equals zero. On the other hand, if the stock price
rises quickly, both calls go deep in the money, and their values eventually
equalise, there will be no net difference.
Two breakeven marks are shown on the payoff chart, one above and one
below the spread's strike price. The stock prices on the short call's expiration
date at which the long call's time value equals the strategy's actual cost are
theoretically the breakeven points. As there are numerous factors that affect
the time value of the long call, it is impossible to predict with certainty
where the breakeven point will be.

Adjustments
 Due to the fact that calendar spreads have two breakeven points, you
must modify your strategy whenever the stock price approaches either the
upper or lower breakeven point. I’ll demonstrate each of the two adjustment
methods separately. Let me reiterate that there are other procedures to
modify a calendar spread in addition to these.

Adjustment 1
First of all, as you were developing your strategy, your attitude towards
the stock was either somewhat positive or neutral. Imagine that the stock
price starts to fall and puts your lower breakeven point in jeopardy. In any
case, pay close attention to the Greek values, especially the Delta at that
specific moment; if the Delta value of any option reaches a level of 0.30 to
0.35, it's time for a change. The long call option will invite some loss at that
point, while the short call option will provide some profit. In order to receive
more credit, close the short position and take a profit off the table before
opening a new short position close to the stock price. Theta decay will be
minimal because the long call option is a far month contract, allowing you to
maintain the long position. If the stock price declines any lower, one can
keep tweaking the strategy by following the same processes. It is not advised
to change the strategy more than twice due to the growing gap between the
Delta values of two strikes. As the technique was initially Delta neutral, the
greater the difference between them, the more unbalanced the strategy will
become, and if the stock price were to reverse for whatever reason, you
might sustain a significant loss.
Consider closing the 75CE sold option for ₹3.20 and selling the 73CE at
the same expiration for further credit. Suppose, the contract premium is
₹4.20. Thus, the sold option will have a booked profit of ₹1.30 (4.50 –
3.20). The chart below will now represent the adjusted payment.
 The lower breakeven mark, which was previously at ₹72.00, has been
moved to around ₹67.20. This is as a result of receiving the extra credit from
selling 73CE. At ₹16,640, the maximum profit potential has now increased.
Moreover, the upper breakeven mark has decreased from ₹78.00 to ₹75.70.
In the event that the stock begins to decline, you can still manage your plan.
Now, I'll let you know when the stock price approaches the higher breakeven
point.

Adjustment 2
Let's say the stock price is approaching the upper breakeven point, and
you believe it will continue to rise. It's appropriate to consider making
modifications at that point, when both call options are in-the-money and the
value of Delta is between 0.65 and 0.70. You must manage your positions so
that losing trades are turned into winning ones since you run the risk of
losing a lot of money if the stock rises above ₹78.00. At a price level of
₹78.00, a long option with a March expiration will result in some profit, but
a short option with a February expiration will result in some loss. Hence,
you must sell a call option around the stock price for the March series (say
77CE) and terminate the short position (75CE Feb. series) by registering
some loss. Choose the strike price so that the positions' mark to market
(MTM) will be close to zero. Your total positions now represent a bull call
spread for the stock, which means the upside risk is capped.

Suppose,
You have closed the 75CE (short position) at ₹6/-
 The price of 75CE (long position) is ₹7.40/-
Price of 77CE (Mar. series) is ₹6.50/-

Therefore,
Loss booked = 4.50 – 6.00 = – ₹1.50/- per share
Unrealized profit = 7.40 – 5.80 = ₹1.60/- per share
MTM of the strategy = 1.60 – 1.50 = ₹0.10/- per share

The new strategy

Sell 77CE; Premium: ₹6.50/-
Buy 75CE; Premium: ₹7.40/- (existing position)
Total debit = long premium + loss booked – short premium – MTM
profit = 7.40 + 1.50 – 6.50 – 1.60 = ₹0.80/-
Maximum profit = (Width of spread – Net debit) times the lot size =
(2.00 – 0.80) X 11,700 = ₹14,040/-
Maximum loss = Net debit times lot size = 0.80 X 11,700 = ₹9,360/-
Breakeven point = Long call strike + Net debit = 75.00 + 0.80 = 75.80

The benefit of calendar spread adjustment with bull call spread is that,
unlike in the past when it was at ₹78.00, there is no breakeven point on the
upside. This means that if the stock price rises further, you would be able to
make the maximum profit of ₹14,040/-. But at the same time, the lower
breakeven point has moved to ₹75.80. However, the maximum risk potential
has been decreased from a maximum loss of ₹15,210/- to only ₹9,360/-. If
you believe the stock price will continue to rise, this is among the greatest
calendar spread adjustment strategies.
 OPTION STRATEGY FOR
MODERATELY BEARISH MARKET
A moderately bearish market is a market where prices are falling, but at a
slower pace than in a strongly bearish market. It is a market where investors
may still have some hope or optimism despite having a generally pessimistic
assessment on the future prospects of the economy, the sector, or the specific
asset they are trading.
Prices are declining in a market that is somewhat negative, but at a
slower rate than in a market that is very bearish. It is a market where
investors may still have some hope or optimism despite having a generally
pessimistic assessment on the future prospects of the economy, the sector, or
the specific asset they are trading.
In a market that is only mildly negative, investors may hunt for chances
to sell assets that will probably fall further, but they may proceed carefully
and with a more conservative trading approach. In order to benefit from the
declining prices, they can also try to hang onto cash or short-sell assets.
Some of the characteristics of a moderately bearish market may include
modest price declines, moderate trading volume, and a mix of negative and
positive economic indicators. The market may experience some short-term
rallies or pullbacks, but overall, the trend is downwards. So to speak, as
opposed to a market that is slightly positive, it is range-bound and has a
negative tilt. In this type of market situation, the market may drop at any
time. In a sideways or downward market, the following strategies might be
used:

1. Bear Call Spread

2. Put Debit Spread or Bear Put Spread
3. Long Put Calendar Strategy
4. Put Ratio Back Spread Strategy
5. Married Put
6. Long Put Ladder Strategy etc.
 Because simplicity is the greatest approach in option trading, we will just
discuss three simple yet profitable strategies in a mildly bearish market. As
we previously discussed, we don't need to be an expert in every strategy to
earn from the market.
Let me first give you a general picture of an option chain in a market that
is somewhat negative. The snapshot of the INDUSINDBK option chain
shown below was obtained on February 11, 2021, when the spot price was
₹1,022.30. The option chain shows that there has been a call option short
building and a put option long liquidation. As a result, the stock price may
fluctuate in a limited area with a negative skew. In the case, we can use a
bear call spread technique to trade in this trading environment. Let's talk
about the plan:

Bear Call Spread Strategy

The Bear Call Spread is an options trading strategy in which a call option
with a lower strike price is sold and a call option with a higher strike price is
simultaneously purchased. Traders that are negative on the underlying asset
and anticipate a decline in price employ this approach.
 Here's how the Bear Call Spread works:

Sell a Call Option: If the option is exercised, the trader must sell the
underlying asset at the lower strike price specified in the call option they are
selling.

Purchase a Call Option: The investor purchases a call option with a

higher strike price, which entitles them to purchase the underlying asset at
the higher price in the event that the option is executed.

Expiration Date: The expiration dates for both call options should be the
same.

Net Credit: By selling the lower strike call option and buying the higher
strike call option, the trader collects a net credit (i.e., the premium collected
from selling the lower strike call option is greater than the premium paid for
buying the higher strike call option).

Maximum Profit: The highest profit is limited to be as much as the net

credit taken in. This happens when both call options expire worthless and the
value of the underlying asset is below the lower strike price at expiration.

Maximum Loss: The maximum loss is restricted to the difference

between the strike prices minus the net credit collected. This happens when
both call options are exercised and the value of the underlying asset is higher
than the higher strike price at expiration.

Breakeven Point: The breakeven point is the short strike price plus the
net credit collected. The trader will start making a profit if the price of the
underlying asset falls below this point.

A limited-risk, limited-reward strategy, the bear call spread is

appropriate for traders who are negative on the underlying asset. Due to the
fact that this approach was developed for a net credit, it is also known as a
“Bear call credit spread”. This strategy can be applied in a range of market
circumstances, and it's particularly helpful when the trader anticipates that
the price of the underlying asset will be largely unchanged or slightly
declining in the near future.
 We will take into account the option chain of INDUSINDBK as
displayed above to construct the strategy.

The strategy
You can sell 1040CE since it has a sizable amount of open interest,
which acts as a powerful resistance, because the option chain suggests that
the stock price of INDUSINDBK may decline in the near future. For the
bear call spread to be built, you must simultaneously purchase 1100CE.
Sell 1040CE; Premium: ₹44/- (rounded off)
Buy 1100CE; Premium: ₹25/-
Net credit = 44.00 – 25.00 = ₹19/-
Maximum profit = Total premium collected times lot size = 19.00 X
900 = ₹17,100/-
Maximum loss = (Width of spread – Total credit) times lot size = (60.00
– 19.00) X 900 = ₹36,900/-
Breakeven point = Short strike + Total credit = 1,040 + 19 = 1,059

If the stock expires anyplace below the stock price of ₹1,040, or the sold
strike, this method yields a maximum profit of ₹17,100/-. Above that price,
the likelihood of profit decreases, and the strategy's breakeven point is at
₹1,059. Before reaching breakeven, the approach will begin allowing losses
up to a maximum of ₹36,900/-. It is important to note at this time that the
reward to risk ratio is greater than 1:2 and therefore starting the approach is
not advised. But I'm merely demonstrating the trade to you for illustrative
purposes. But you can make the trade if you are more certain about the
downward movement.
 Adjustment
As no one can forecast market movement with 100 percent accuracy, you
must take precautions if the stock price tries to move in the opposite
direction of what you projected. In that situation, you cannot remain
motionless with your hands folded. To convert your loss into profit, you
must do several actions. If the stock price crossed the breakeven point, you
must intervene and make changes. I'll demonstrate how to leverage your
holdings in this situation.
You must use a put option to create a credit spread if the stock price of
INDUSINDBK increases and crosses ₹1059 (the breakeven). Contrary to
bull put adjustments, you must keep the same spread on both sides. The
width of the put spread should be the same as the previous strategy's spread,
which was ₹60. You can purchase 980CE and sell 1040PE simultaneously.
Let’s Say,
Premium of 940PE is ₹9/- (Buy) &
Premium of 1000PE is ₹20/- (Sell)
Credit received = 20.00 – 9.00 = ₹11/-
Total credit in the modified strategy is = Credit of put spread + Credit of
call spread = 19.00 + 11.00 = ₹30/-
Lower breakeven = 1000 – 30 = 970
Upper breakeven = 1040 + 30 = 1070
Maximum profit = Total credit received times lot size = 30.00 X 900 =
₹27,000/-
Maximum loss = Difference between long option and short option less
credit received; times lot size = (60.00 – 30.00) X 900 = ₹27,000/-
 If you closely examine the payoff, you will see that it is nothing more
than the payoff chart for a short iron condor approach. With some tweaking,
the strategy has now evolved into a short iron condor. The payoff indicates
that the breakeven point has changed from ₹1,059 to ₹1,070. On the
downside, though, you will also reach breakeven at ₹970. Prior to
modification, the greatest profit potential was just ₹17,100/-; now, it is
₹27,000/-. That is the key benefit of changing the strategy. Also, the
maximum risk of the approach has dropped from ₹36,900/- to just ₹27,000/-
as opposed to before the alteration. By opening a few more transactions, you
can also reduce your maximum loss while increasing your possible return.

Bear Put Spread

The Bear Put Spread is an options trading strategy that involves buying a
put option with a higher strike price (normally ITM or ATM option) and
simultaneously selling a put option with a lower strike price (normally OTM
option). This strategy is used by traders who are bearish on the underlying
asset and expect the price to decrease.
The Bear Put Spread operates as follows:
Buy a Put Option: The trader buys a put option with a higher strike price,
which gives them the right to sell the underlying asset at that price if the
option is exercised.
Sell a Put Option: The trader sells a put option with a lower strike price,
which indicates that if the option is exercised, they are required to purchase
the underlying asset at that price.
 Expiration Date: The expiration dates for both put options should be the
same.
Net Debit: The trader pays a net debit when they buy the higher strike
put option and sell the lower strike put option since the premium for the
higher strike put option was more than the premium for the lower strike put
option they sold.
Maximum Profit: The maximum profit is limited to the difference
between the strike prices minus the net debit paid. This occurs when both put
options are exercised and the value of the underlying asset is lower than the
lowest strike price at expiration.
Maximum Loss: The maximum loss will be limited to the net debit that
was actually paid. This happens when both put options expire worthless and
the value of the underlying asset is higher than the higher strike price at
expiration.
Breakeven Point: The breakeven point is determined by subtracting the
net debit from the higher strike price. If the value of the underlying asset
drops below this level, the trader will begin to benefit.
The Bear Put Spread is a limited-risk, limited-reward strategy, and it's
suitable for traders who are bearish on the underlying asset. Due to the fact
that this method requires the traders to pay for the trade, it is also known as a
“Put debit spread”. This tactic can be applied in a range of market scenarios,
and it's particularly helpful when the trader anticipates that the price of the
underlying asset will be largely unchanged or slightly declining in the near
future.
Let's use the same option chain for INDUSINDBK as an example to
show how to use a bear put spread. As the stock's current market price is
₹1022, it is possible to purchase a put option that is at-the-money, or
1020PE. The trader has the option to sell 960PE to obtain some credit in
order to make the spread.

The strategy
Buy 1020PE; Premium: ₹45/- (rounded off)
Sell 960PE; Premium: ₹21/- (rounded off)
Total debit: 45.00 – 21.00 = ₹24/-
Maximum profit = (Width of spread – Net debit) times the lot size =
(60.00 – 24.00) X 900 = ₹32,400/-
Maximum loss = Net debit times lot size = 24.00 X 900 = ₹21,600/-
 Breakeven point = Long put strike - Net debit = 1020 – 24 = 996

The aforementioned chart indicates a maximum loss of ₹21,600/- in the

event that INDUSINDBK's stock price rises to or above ₹1,020, the price at
which the put option was sold. Yet regardless of how much the stock price
rises, that is the worst loss a trader may sustain. If the stock price drops
below ₹1,020 till ₹996, the strategy's breakeven threshold, the potential loss
gradually decreases. If the stock declines even more from this price point,
you will start to make money. Your maximum profit, however, is limited to
₹32,400 and may only be booked when the contract expires at or below
₹960. You have sold the put option at this price.

Adjustment
If the stock turns out to be bearish, the above method will produce a
respectable profit, and the risk to reward ratio is also acceptable. The
difference between the long and short options’ Delta in the original approach
is 0.20 if the long option has a Delta value of roughly 0.50 and the short
option has a value of roughly 0.30. This distinction will now serve as a
benchmark for determining when to modify the approach. Imagine the
difference has now decreased to half, or 0.10, suggesting that it is time to
intervene with the primary method of loss elimination. Let's say the stock
price at that time was ₹990. Although there are other options to prevent such
a negative move, the ideal one is to sell a put option in order to obtain some
extra credit. Selecting a put option results in a credit that is almost equal to
the debit of the initial strategy, bringing the overall value of Delta down to a
range of 0.20. Suppose that the premium for 980PE is 23/- rupees, or almost
the same as the net negative of the core strategy.

The new strategy

Sell 980PE; Premium: ₹23/-
Net debit = Previous debit – New credit = 24.00 – 23.00 = ₹1/-
Upper breakeven = Earlier BEP + New credit = 996 + 23 = 1,019
Lower breakeven = New short strike – Width of spread + Net debit =
980 – 60 + 1 = 921
Maximum profit = (New short strike – Long strike – Net debit) times
lot size = (1020– 980 – 1) X 900 = ₹35,100/-
Maximum loss = undefined

The customised strategy's payoff chart shows that the breakeven point
has moved much upward from its previous value of ₹996 to ₹1,019, and the
greatest part is that the maximum upside loss potential is limited to the
amount of the debit paid, or ₹900 only. However, if the share price of
INDUSINDBK drops below ₹921, the maximum risk is unknown. The
maximum profit potential was ₹32,400 before adjustment; it is now
₹35,100. Only when the option contract expires between the stock price
range of ₹960 and ₹80 can the maximum profit be realised. In the event that
the bear put spread doesn't go your way, this is one of the finest adjusting
strategies to use.

Long Put Calendar Spread

 The Long-Put Calendar Spread is an options trading strategy that
involves buying a put option with a longer-term expiration date and selling a
put option with a shorter-term expiration date. This strategy is used by
traders who expect the price of the underlying asset to decline in the short
term or remain relatively stable.

Here's how the Long-Put Calendar Spread works:

Buy a Put Option: The trader buys a put option with a longer-term
expiration date, which gives them the right to sell the underlying asset at a
specific price if the option is exercised.

Sell a Put Option: The trader sells a put option with a shorter expiration
date. If the option is exercised, they are then required to purchase the
underlying asset at that price.

Underlying Asset: The underlying asset for both put options should be
the same.

Net Debit: The trader costs a net debit when they buy the longer-term put
option and sell the shorter-term put option since the premium for the longer-
term put option was higher than the premium for the shorter-term put option.

Maximum Profit: The maximum profit is achieved when the price of the
underlying asset is at the strike price of the sold put option at the time of its
expiration. This is due to the fact that the bought put option keeps its value
and generates a profit while the sold put option expires worthless.

Breakeven Points: To get the breakeven points, add and subtract the net
debit paid from the put option's strike price. If the price of the underlying
asset falls below the upper breakeven point or stays above the lower
breakeven point, the trader will begin to profit.
We'll use an example to help you grasp the concept a little better. The
option chain as displayed in the aforementioned example indicates that
INDUSINDBK is anticipated to trade range-bound or slightly bearish. So, a
calendar spread with a put option can be created to profit from the stock.
While developing the plan, make a note of the Delta values for each strike so
that you can make educated selections during the adjustment phase. If you
select options that are out-of-the-money options, the Delta values will vary
from 0.40 to 0.60. Nonetheless, if adjustment is required, we shall discuss it
later. Let's get acquainted with the technique first for the time being.

The strategy
Sell 1000PE (February series)
Premium: ₹36/- (rounded off)
Buy 1000PE (March series)
Premium: ₹55/- (say)
Total debit: 55 – 36 = ₹19/-
Maximum profit = Maximum profit is realized if it expires at ₹1000 but
the exact amount is undefined.
Maximum loss = Net debit times lot size = 19 X 900 = ₹17,100/-

The highest profit is realised if the contract expires at the strike price
where the put option was sold, according to the payoff chart. This is so that
when the stock price and strike price coincide, the far expiry put option has
its highest time value. Nevertheless, because the premium of the long-put
option varies on a number of variables and return is reliant on the long
option as well, it is impossible to compute the precise profit.
The payoff also specifies that the strategy's cost, or a maximum loss of
₹17,100, is the maximum loss that could occur. Due to the fact that it is a
debit strategy, the maximum loss is only capped at the net debit. In addition,
it shows the approximate breakeven point on both the upside and downside.
The long-put option makes it hard to estimate the precise breakeven
positions, as was stated in the call calendar spread.
 Adjustments
The long-put calendar spread's payoff chart shows two breakeven points,
which indicates that you should modify your strategy if any of them is
challenged. Hence, in case any one side of the breakeven is tested, I'll
demonstrate some potential management techniques.

Adjustment 1
Let's assume that in the first scenario, the price of INDUSINDBK is
rising and that any of the Delta values reduce to approximately 0.20,
triggering adjustment. If you want to keep things simple, consider
controlling the technique when the stock price approaches your upper
breakeven threshold. The near-term short option makes some money at that
point, while the long-term long option suffers some loses. Close the short put
option, taking a portion of the profit off the table, and then open a second
short position of the same kind close to the stock price, where the Delta is
about 0.40. By doing this, you will earn some extra credit. Also, since the
long-put option is a far month contract, there will be less premium decay,
allowing the position to be held open.
Imagine that after a few days the stock's spot price is ₹1050 and the
premium for 1000PE is ₹20. Hence, write off the sold option's profit of ₹16
(36 – 20) and start a new short position at the 1040 strike price.

The modified strategy

Sell 1040PE (Feb. expiry)
Premium: ₹35/- (say)
Buy 1000PE (Mar. expiry)
Premium: ₹55/- (existing position)
Total debit: 35.00 – 55.00 + 16.00 = ₹4/-
Maximum profit = Maximum profit is realized if it expires at ₹1040 but
the exact amount is undefined.
 The payoff graph shows that the lower breakeven point has moved from
₹968 to ₹1018. The upper breakeven has also significantly changed. With
the adjustment, there has been a significant movement in breakeven points.
Although the greatest profit potential in a calendar spread strategy cannot be
predicted with precision, it will be close to ₹12,600/- assuming the volatility
stays within the same range till expiration. The contract can expire at the
short strike price of ₹1,040 to receive the highest profit. One crucial thing to
keep in mind about the modified strategy is that, despite being a net debit
strategy, the maximum risk has also increased on the downside. This is
because, as you are aware, writing options entails an unknown risk potential
and the short strike is above the long strike. Also, the risk of the maximum
upside has significantly decreased. A put calendar spread can also be
adjusted if it approaches the lower breakeven point.

Adjustment2
Greek Delta values were almost 0.40 in the initial plan, and if any of the
values rise near 0.70, it's appropriate to alter the strategy. Assume that the
market begins to decline and that one of the Delta values is 0.68. You must
manage the approach such that the downside risk is limited if you believe the
stock price will continue to fall. You can achieve this by changing the
strategy into a bear put spread, which implies closing the short position in
the near term and opening a short position with a put option on the March
expiry. Hence, cut off trade 1000PE (Feb. series) by taking a loss and open a
new short position at a strike price close to the stock price. Choose a strike
so that the modified strategy's MTM is as near to zero as possible. Assume
that the premium for 980PE (Mar. series) is ₹65.00, that of 1000PE (Mar.
series) is ₹70.00, and that of 1000PE (Feb. series) is ₹50/-.
Premium of 1000PE: ₹50/- (closed position)
Premium of 980PE (Mar. series): ₹65/-
Premium of 1000PE (long position): ₹70/-

Therefore,
Loss booked = 36 – 50 = – ₹14/- per share
Unrealized profit = 70 – 55 = ₹15/- per share
MTM of the strategy = 15 – 14 = ₹1/- per share

The new strategy

Sell 960PE; Premium: ₹65/-
Buy 1000PE; Premium: ₹70/- (existing position)
Total debit = Long premium + Loss booked – Short premium – MTM
profit = 55 + 14 – 65 – 1 = ₹3/-
Maximum profit = (Width of spread – Net debit) times the lot size = (20
– 3) X 900 = ₹15,300/-
Maximum loss = Net debit times lot size = 3 X 900 = ₹2,700/-
Breakeven point = Long call strike – Net debit = 1000 – 3 = ₹997

What makes changing calendar spread through debit spread so attractive

is the downside breakeven, which was previously capped at ₹968. Now,
there is no breakeven on the downside. But, as expected, the upside
breakeven point has decreased to ₹997 which was earlier at ₹1035. The
maximum risk is now only ₹2,700 as opposed to ₹17,100 previously. The
current maximum profit potential is a fixed sum of ₹15,300. Before, the
highest profit was around ₹13,006 due to the long option contract premium's
dependence on it. In this way, by following a few easy procedures, you can
turn a losing trade into a gainful one.
 OPTION STRATEGY FOR
SIDEWAYS MARKET
A "range-bound" or "flat" market, often referred to as a sideways market,
is one in which the price of a specific asset, such as a stock or index, stays
within a very small range over time. With no discernible upward or
downward movement, the price may swing back and forth between specific
levels in a sideways market.

Investors' uncertainty regarding the price direction of the asset is a

common feature of the market sentiment in a sideways market, which lacks
direction or trend. Due to the lack of clarity regarding the market's direction,
investors may be reluctant to purchase or sell, which can lead to low trading
volumes and little price change.

When there is no significant news to move the market, it frequently

trades in a range or in a sideways fashion. Sometimes, following a sudden
uptick or downtick, the market trades in a small area. It is merely a little
pause for the market. You may refer to it as the period of breathing, and then
the tendency might continue or perhaps change. This phase can, however,
occasionally become very prolonged.

Traders can utilise a variety of methodologies, such as range trading or

mean reversion, to benefit from a sideways market environment. Range
trading is the practise of purchasing an item at the lower end of its trading
range and selling it at the upper end in order to profit from price fluctuations
within the range. Taking bets against the present price trend in the hope that
the price would eventually return to its average value is known as mean
reversion. There are several option techniques that may be used in this
market situation. We will discuss a couple of them that are straightforward
and simple to implement but quite powerful. Here are just a few of them:

1. Short strangle
2. Short straddle
3. Iron condor
 4. Iron butterfly
5. Double calendar spread etc.

Now, let's take a look at each of the techniques with adjustments

individually.

Short Strangle
Selling call and put options with the same expiration date but different
strike prices is known as the "Short Strangle" options trading strategy. The
strike price of the put option is below the current value of the underlying
asset, whereas the strike price of the call option is above the current value of
the underlying asset.
The purpose of the Short Strangle strategy is to profit by accumulating
the premiums from the selling of the call and put options while also
benefiting from a sideways market sentiment, where the price of the
underlying asset is anticipated to remain reasonably stable within a given
range.
The price of the underlying asset must stay within the range specified by
the call and put options' strike prices until the options' expiration date in
order for a Short Strangle to maximise profit. In this case, the trader keeps
the premiums received from the sale of the call and put options when both of
them expire worthless.
However, there are pitfalls attached to this approach. The trader might
have to sell the underlying asset at a loss if the price of the underlying asset
increases noticeably over the call option's strike price. The trader may also
be compelled to purchase the underlying asset at a price that is higher than
the market price if the price of the underlying asset falls sharply below the
strike price of the put option.
As the price of the underlying asset can move as high or as low as it
wants, a Short Strangle's potential loss is virtually limitless. The use of
adjusting procedures is therefore necessary. The potential loss can be
reduced by using stop-loss orders. However, if the stop loss is activated, you
lose the amount, but if the strategy is adjusted properly, the loss can be
significantly decreased.
Let's use a real-world scenario to illustrate the method. The option chain
below shows that the NIFTY index will move in a range. The option chain
screenshot was taken on April 3rd for an expiration date of April 6th, 2023.

The market price of Nifty is currently 17,348 and there is a large amount
of open interest on both call and put options. Also, the option chain's ITM
and OTM options have seen a significant amount of call writing. Significant
put writing has occurred on the strikes 17,000, 17,100, 17,200, and 17,300
on the put side. Call option sellers will prevent the market from rising, while
put option sellers will prevent the index from falling. As a result, the market
is intended to trade in a specific area. You can concurrently sell 17,500CE
and 17,200PE to create a short strangle strategy in this scenario. Despite the
fact that the 17,400 strike has the largest call open interest, it is advised
against selling such a close strike because it might be tested at any time.

The strategy
Sell 17500CE; Premium: ₹24/- and
Sell 17200PE; Premium: ₹31/- (rounded off)
Total premium received = 24 + 31 = ₹55/-
 Maximum profit = Total credit times the lot size = 55 X 50 = ₹2,750/-
Maximum loss = Undefined
Lower breakeven point = Lower strike – Total credit = 17,200 – 55 =
17,145
Upper breakeven point = Upper strike + Total credit = 17,500 + 55 =
17,555

The preceding payoff graph makes it evident that even if the Nifty moves
in the range of 17,145 to 17,555 before the expiration, you won't lose money
using this approach. In fact, if the index expires inside the range of the strike
prices you sold, the method will generate maximum crop of ₹2,750/-.
Beyond that, your profit will start to decline until it reaches breakeven, and
if the price fluctuates further, you could lose money. Despite the fact that this
technique has a modest maximum profit potential, the likelihood of
achieving this profit is relatively high. Because of this, the strategy is one of
the most often used within the community of option traders. It is important
to note that if the index moves erratically outside of the range, there is an
unlimited risk of loss. The adjustment strategy will be used in this situation.
We will now study how to alter this technique in the event that the market
moves unpredictably outside of the breakeven zone.

Adjustment

In a short strangle, you must sell out-of-the-money options with a Delta

value that typically falls between 0.20 and 0.30. Since the overall value of
the Delta is near to zero, it is a Delta neutral strategy. The majority of tactics
used in range-bound scenarios are Delta neutral. As a result, you must adjust
your strategy whenever the Delta of any one of the strikes doubles. Also, if
you are a conservative trader, you can change your strategy if one of the
breakeven points is breached. Let's assume that when the method was
developed, the Delta of the two strikes was roughly 0.20 for each. When the
Delta of either 17200PE or 17500CE becomes 0.40, you must then make the
necessary adjustments.
As you are aware, if the market rises, the Delta of a call option will rise,
and when the market falls, the value of a put option will rise. Consider a
bullish market where the value of the Delta for the 17500CE ticker is 0.40 in
a short period of time. In that situation, you can take a small profit on the put
option that you sold and start a new short position with a put option with a
higher strike. You must choose a strike so that the total Delta of the approach
approaches zero. If all else fails, you can sell a put option that will pay you a
premium equal to that of the call option.

Say, when Nifty price climbs up –

Premium of 17500CE is ₹50/-
Premium of 17200PE is ₹10/- and
Premium of 17400PE is ₹48/- (new option to be sold)
Booked profit = 31 – 10 = ₹21/-
MTM loss = 50 – 24 = ₹26/-

New strategy

Sell 17400PE; Premium: ₹48/-

Sell 17500CE; Premium: ₹33/- (existing position)
Total premium received: New short premium + Profit booked +
Existing short premium – MTM loss = 48 + 21 + 24 – 26 = ₹67/-
Maximum profit = Total credit times the lot size = 67 X 50 = ₹3,350/-
Maximum loss = Undefined
Lower breakeven point = lower strike – total credit = 17,400 – 67 =
17,333
Upper breakeven point = upper strike + total credit = 17,500 + 67 =
17,567
 Looking at the payoff chart after modification, the top breakeven point
has changed from 17,555 to 17,567. Due to maintaining the same open call
option position, you would believe that the breakeven point hasn't changed
significantly. Nonetheless, the maximum profit potential has expanded from
₹2,750/- to ₹3,350/-. Lower breakeven has moved from meaningfully
17,145 to 17,333 at the same time.
Your thoughts may have wandered to the following notion: what should
you do if the price of the Nifty continues to rise? Simply move the put
option higher in that event, and you can keep doing so until the short call
strike. Thus, short straddle will be the outcome of the strategy. Follow the
short straddle modification stages, which will be covered in the book's later
part, if the approach still requires adjustments.

Short Straddle
A short straddle is an options trading strategy that involves
simultaneously selling a call option and a put option at the same strike price,
with the same expiration date, and on the same underlying asset. Because the
trader is selling the options rather than buying them, the technique is known
as a "short."
When a trader sells a call option, they receive a premium from the buyer
of the option in exchange for the right to purchase the underlying asset at the
strike price at any time before the expiration date. In exchange for the right
to sell the underlying asset at the strike price at any time before the
expiration date, the trader who sells a put option receives a premium from
the buyer.
However, if the underlying asset moves significantly in either direction
before the expiration date, the trader could experience substantial losses. If
the asset price rises above the strike price of the call option, the trader may
be obligated to sell the asset at a loss. If the asset price falls below the strike
price of the put option, the trader may be obligated to purchase the asset at a
price higher than the market price.
Generally, the short straddle strategy includes a large risk if the asset
price fluctuates significantly in either direction but can be beneficial if the
underlying asset is relatively steady. When using a short straddle, as with
any trading technique, it's crucial to carefully weigh the risks and potential
profits.
In contrast to short strangle, where options could be sold on two separate
strikes, short straddle requires that all options be sold at the same strike
price. The other terms, which include the same underlying and expiration
dates, will not change. When the market appears to trade in a constrained
area, this practice is used. The amount of credit obtained determines the
highest profit potential, and the possible loss is limitless because writing
options carry unlimited risk.
To determine the short straddle approach, let's use the same option chain
as before. The current price of the Nifty is 17,348. This is quite close to the
17,350-strike price and carries a nearly same premium. Hence, in order to
create a short straddle, we can simultaneously sell 17,350 call and put
options, which is also an ATM strike.

The strategy
Sell 17350CE; Premium: ₹81/- (rounded off)
Sell 17350PE; Premium: ₹80/- (rounded off)
Total premium received: 81 + 80 = ₹161/-
Maximum profit = Total credit times the lot size = 161 X 50 = ₹8,050/-
Maximum loss = Undefined
Lower breakeven point = Sold strike – Total credit = 17,350 – 161 =
17,189
Upper breakeven point = Sold strike + Total credit = 17,350 + 161 =
17,511
 According to the graph above, if the index matures at 17,350, the price at
which the options were sold, a maximum profit of ₹8,050/- can be made. As
the price moves further from the sold strike price, the turnover gradually
falls. On the downside, the approach begins to lose money around 17,189,
while on the upside, it is 17,511. You will earn if Nifty expires anywhere
between these two breakeven areas. Beyond these two stages, the technique
is exposed to unrestricted risk. It is evident from this payoff chart that the
approach only produces a profit when the market moves within the range.
What happens if the index crosses one of the breakeven points and makes a
significant move? In this situation, you must make certain changes to the
plan in order to justify your defeat. The adjustment approach listed below
can help you safeguard your capital in such a bad situation.

Adjustment

Typically, options bearing a delta value in the range of 0.50 were sold at
the money when using the short straddle method. So, you only need to keep
the strategy in place when the Delta of any one of the options dramatically
increases. As a general rule, the adjustment procedure begins when the value
of Delta for any one of the strikes rises to 0.75 to 0.80. If not, the trader can
wait until one of the breakeven is contested. The Delta value for 17350PE
will rise if the Nifty price declines since the strike becomes an in-the-money
option at this point. Let's assume that the value of the 17350PE's Delta when
the index declines is 0.75. This is the time you should step into the strategy
for alteration. In this scenario, the short put option will result in some losses
while the short call option will provide some profits. So, you have to book
some profit off the table and sell one call option with the value of Delta
almost equal to 0.75.
Now imagine that the Nifty has fallen to 17,200 levels; at that point, the
premium for 17350PE becomes ₹180/- and the premium for 17350CE is
₹20/-, while the premium and delta for 17100CE are ₹260/- and 0.75
respectively. Then, in order to earn more premium, book a profit on the
17350CE option and establish an additional short position on 17100CE.

Now,
Premium of 17350CE is ₹20/-
Premium of 17350PE is ₹180/- and
Premium of 17100CE is ₹260/- (new option to be sold)
Booked profit = 81 – 20 = ₹61/-
MTM loss = 80 – 180 = – ₹100/-

New strategy
Sell 17100CE; Premium: ₹260/-
Sell 17350PE; Premium: ₹80/- (existing position)
The adjusted strategy has now become an inverted strangles, meaning
both options are now in-the-money options. This is a crucial thing to note.
As a result, even if you obtained a credit for ₹340/- (260 + 80), the amount
of intrinsic values must be subtracted from the real credit.

Therefore,
Net credit = Credit received – Width of the spread = 340 – 250 = ₹90/-
Maximum profit = Net credit times the lot size = 90 X 50 = ₹4,500/-
Maximum loss = Undefined
Lower breakeven point = Put strike – Net credit = 17,100 – 90 =
17,010
Upper breakeven point = Call strike + Net credit = 17,350 + 90 =
17,440
 The lower breakeven, which was earlier at 17,189, has been drastically
reduced down to 17,010 with the aid of this adjustment process. At the same
time, the upper breakeven also dropped down by 71 points. Previously, the
maximum profit possibility was ₹8,050/-; however, the likely amount is
₹4,500/- only. Also, over a 250-point range, the likelihood of receiving the
maximum profit has increased. You will be able to harvest the most if the
index expires at any point between 17,100 and 17,350 levels. Likewise, if
the short straddle approach fails, you can change to the lower breakeven
level. You can close the short call trade and start a new short at a lower level
in the event that the Nifty plunges even further. But keep in mind to consider
the Delta value of the other option (i.e. put option in this case). You must
abandon the technique whenever the value reaches a level close to 1, at
which point the option will function as a futures contract.
So, here's a thought that might cross your mind: how can the straddle be
adjusted if it tests the upper breakeven? The solution is straightforward: try
modifying your put option strategy by taking the same actions. Close the
short put option that is making you some money and start a new short
position but with a higher strike, like we just did.

Short Iron Condor Strategy

The short iron condor is a popular options trading strategy used by

traders who expect the price of an underlying asset to remain stable within a
certain range. It combines the short call spread with the short put spread, two
vertical spreads. It is a four-legged strategy consisting of a bull put spread
and a bear call spread. With this approach, all options should have the same
expiration date and the short put's strike price should be lower than the short
call's strike price. A hedged variation of the short strangle technique is the
short iron condor spread.
In order to execute a short iron condor, a trader must simultaneously sell
a put option with a strike price lower than the current value of the underlying
asset and a call option with a strike price higher than the value of the asset.
As a result, a price range is created in which the trader anticipates the
underlying item will stay.
A put option with a strike price even lower than the put option sold and a
call option with a strike price even higher than the call option sold are
likewise purchased by the trader. In the event that the price of the underlying
asset swings outside of the expected range, this is done to reduce the greatest
loss that the trader could sustain.
This tactic generates a credit as its final outcome, which is equal to the
discrepancy between the premiums obtained from selling the call and put
options and the premiums paid for the higher and lower strike options.
The trader will maintain the credit earned through the strategy if the
price of the underlying asset stays inside the band indicated by the short call
and put options. However, if the price of the underlying asset moves beyond
the range, the trader could face losses that are limited to the difference
between the strike prices of the higher and lower strike options and the net
credit received.
The trader will maintain the credit earned through the strategy if the
price of the underlying asset stays inside the band indicated by the short call
and put options. The trader could experience losses, however, that are only
as great as the difference between the strike prices of the higher and lower
strike options and the net credit obtained if the price of the underlying asset
moves outside of the range.
Overall, using the short iron condor technique can help traders produce
profits in a steady market while reducing their risk of loss. To reduce risks,
traders must, however, carefully watch the market and modify their positions
as needed.
The four legs of the iron condor approach will be as follows, using the
same strangle as in the preceding method:
Sell 17500CE; Premium: ₹24/- and
 Sell 17200PE; Premium: ₹31/- (rounded off)
Buy 17700CE; Premium: ₹3/- (rounded off)
Buy 17000PE; Premium: ₹8/- (rounded off)
Net credit = (24 + 31 – 3 – 8) = ₹44/-
Maximum profit = Total credit times the lot size i.e. 44 X 50 = ₹2,200/-
Maximum loss = Difference between the strike prices of either spread
less the premium received at initiation times; the contract size = (200 – 44)
X 50 = ₹7,800/-
Lower breakeven point = Sold lower strike – Total credit = 17,200 – 44
= 17,156
Upper breakeven point = Sold upper strike + Total credit = 17,500 + 44
= 17,544

The maximum risk in the short strangle strategy was not specified, but as
it is a hedged strategy, the maximum loss is limited to ₹7,800/- only. Both
the far out-of-the-money bought call option and the far out-of-the-money put
option will hedge against risk on the upside and downside, respectively.
Hedging has also resulted in a maximum profit potential that is now only
₹2,200/- as opposed to ₹2,750/- in a pure short strangle. Iron condor, in
contrast to short strangle, is used in a range-bound market. But what if the
market suddenly begins to move intermittently? The best thing about option
trading is that you can adjust any strategies if the market deviates from what
you had anticipated. So, you can adjust the iron condor spread in the event of
adverse movement to cut your losses or turn it into a profit.

Adjustment
 In contrast to the short strangle, the short iron condor is likewise a Delta
neutral strategy, which means that its overall Delta value is close to zero.
When there is a significant imbalance in the value of the strategy's Delta, the
correction operation is started in the short strangle strategy. When the
difference between the Delta values of any option combination, such as a
bull put spread or a bear call spread, is twice, you must modify an iron
condor. Alternatively, you can wait until the market reaches one of the
break-even points and use the identical steps as for the short strangle
adjustment.
Imagine that you have chosen a weekly option strategy and the Nifty
price is falling and the overall Delta doubled. Close the pair of call options
in that situation as it will generate some profit and create a new bear call
spread with lower strikes. Attempt to keep the spread's width constant with
the initial approach.
Say, back then
Premium of 17500CE is ₹6/-
Premium of 17700CE is ₹1/-
Premium of 17200PE is ₹48/-
Premium of 17000PE is ₹18/- and
Premium of 17250CE is ₹70/- (new option to be sold)
Premium of 17450CE is ₹10/- (new option to be bought)
Booked profit = (24 – 3) – (6 – 1) = ₹16/-
MTM loss = (24 - 3) – (48 – 18) = – ₹9/-

New strategy
Sell 17250CE; Premium: ₹70/-
Buy 17450CE; Premium: ₹10/-
Sell 17200PE; Premium: ₹31/- (existing position)
Buy 17000PE; Premium: ₹8/- (existing position)
Total premium received: New short premium + Profit booked +
Existing short premium – MTM loss = (70 – 10) + 16 + (31 – 8) – 9 = ₹90/-
Maximum profit = Total credit times the lot size = 90 X 50 = ₹4,500/-
Maximum loss = Difference between the strike prices of either spread
less the premium received at initiation; times the contract size = (200 – 90)
X 50 = ₹5,500/-
 Lower breakeven point = Lower sold strike – Total credit = 17,200 – 90
= 17,110
Upper breakeven point = Upper sold strike + Total credit = 17,250 + 90
= 17,340

The payoff shows that after adjustment, the highest profit potential has
grown by two times. Moreover, the maximum risk has been decreased
significantly from ₹7,800/- to ₹5,500/-. The upper breakeven is now 17,340
and the lower breakeven has moved to 17,110. At this stage, if the breakeven
does not drastically decrease, it appears pointless to change the strategy. Is it
not? But, shifting the breakeven is not the only goal of option strategy
adjustment; you also need to consider other factors, such as maximum risk
and reward. After adjustment, the risk to reward ratio in this situation works
in your advantage. You will be able to maximise the strategy's benefits if the
market bounces in any way and expires in your profitable zone.

Short Iron Butterfly Strategy

Another well option trading method called the Short Iron Butterfly is
employed to profit from a range-bound market with little volatility. When
traders foresee that the price of the underlying asset will remain largely
steady inside a given range, they utilise this technique. The Short Iron
Butterfly entails selling two option contracts with identical strike prices and
buying two additional option contracts with different strike prices. This
method is nothing more than the short straddle technique with hedges.
The Short Iron Butterfly functions as follows:
 ✓ Sell an at-the-money (ATM) call option: This means that the strike
price of the call option should be equal to the current market price
of the underlying asset.
✓ Sell an at-the-money (ATM) put option: This means that the strike
price of the put option should be equal to the current market price of
the underlying asset.
✓ Buy an out-of-the-money (OTM) call option: This means that the
strike price of the call option should be higher than the current
market price of the underlying asset.
✓ Buy an out-of-the-money (OTM) put option: This means that the
strike price of the put option should be lower than the current
market price of the underlying asset.
All four options contracts should have the same expiration date.
A profit zone is formed around the two sold strike prices using the short
iron butterfly strategy. When the underlying asset's strike price coincides
with the sold options' expiration price, the maximum profit is realised. The
underlying asset must go above the strike price of the purchased options for
the maximum loss to occur at expiration. The strike prices of the sold
options plus or minus the premium received are where the breakeven points
occur.

In low-volatility markets, the Short Iron Butterfly strategy is a low-risk,

low-reward trading method. The trading expenses for this technique can be
substantial because it calls for using four different options contracts. The
losses may also be considerable if the underlying asset goes through a
significant price change. Consequently, before employing this method,
traders should carefully weigh the risks.
To show the Iron butterfly spread, we'll once more use the identical short
straddle approach that was previously described.
The strategy
Sell 17350CE; Premium: ₹81/- (rounded off)
Sell 17350PE; Premium: ₹80/- (rounded off)
Buy 17650CE; Premium: ₹5/- (rounded off)
Buy 17050PE; Premium: ₹11/- (rounded off)
Net credit = 81 + 80 – 5 – 11 = ₹145/-
Hence,
Maximum profit = Total credit times the lot size = 145 X 50 = ₹7,250/-
 Maximum loss = Difference between the lowest and middle strike prices
less the net credit received at initiation; times the contract size = (300 – 145)
X 50 = ₹7,750/-
Lower breakeven = Centre strike – Total credit = 17,350 – 145 = 17,205
Upper breakeven = Centre strike + Total credit = 17350 + 145 = 17,495

The payoff chart makes it evident that if the option expires at the short
strike price of 17,350, the highest profit might be ₹7,250/-. If the price of the
Nifty goes away from the centre strike, the profit potential gradually
decreases. When the price of the index crosses 17,495 on the upside and
17,205 on the downside, the strategy begins to produce negative returns.
Only when it expires above the call long strike or below the put long strike is
the maximum risk constrained to ₹7,750/-. This is one of the most
straightforward option strategies for range-bound markets. The biggest
difficulties arise whenever the underlying exhibits a strong movement in any
direction. In this case, the trader might manage the approach to cut the loss
as much as possible. To learn the adjusting methods to use when the Nifty
experience a sudden movement, keep reading.

Adjustment
Since the short iron butterfly is also a Delta neutral approach, you can
make modifications as soon as the Delta's value starts to deviate. Some
traders will think about making adjustments if the call or put spread's value
doubles. To be honest though, there isn't any set amount of time for an exact
adjustment. Many people wait until one of the breakeven points has been
violated in order to keep things simple. Nevertheless, let's learn the method.
The short iron butterfly strategy's adjustment resembles a straightforward
short straddle in many ways. The only distinction is that you must combine
either the put option pair or the call option pair. Consider a scenario in which
the index turns bullish and attempts to test the upper breakeven mark. When
you build a bull put spread at a point where you can get a net premium
equivalent to the bear call spread, you should book profit on the put option
pair. This will offer you some profit. Suppose that the call option pair and
the 17350PE and 17050PE option pair each have a net credit that is almost
identical.
Say,

Premium of 17350CE is ₹160/-

Premium of 17650CE is ₹35/-
Premium of 17350PE is ₹36/-
Premium of 17050PE is ₹4/-
And
Premium of 17550PE is ₹190/- (new option to be sold)
Premium of 17250PE is ₹26/- (new option to be bought)
Now,
Booked profit = (80 – 11) – (26 – 4) = ₹47/-
MTM loss = (81 – 5) – (160 – 35) = – ₹49/-

New strategy
Sell 17550PE; Premium: ₹190/-
Buy 17250PE; Premium: ₹26/-
Sell 17350CE; Premium: ₹81/- (existing position)
Buy 17650CE; Premium: ₹5/- (existing position)
Both of the options are now in the money because the strategy has
changed to an inverted strangle strategy. Because of this, even though you
have a total credit of ₹240/- [(190 - 26) + (81 – 5)] the intrinsic values must
be subtracted from the actual credit.

Therefore,
Net credit = Credit received – Width of the spread = 240 – 200= ₹40/-
Maximum profit = Net credit times the lot size = 40 X 50 = ₹2,000/-
 Maximum loss = Difference between the strike prices of either spread
less width of the spread, less the premium received at initiation; times the
contract size = (300 – 200 – 40) X 50 = ₹3,000/-
Lower breakeven point = Sold call strike – Net credit = 17,350 – 40 =
17,310
Upper breakeven point = Sold put strike + Net credit = 17,550 + 40 =
17,590

Look at the payoff chart's upper breakeven point first; after modification,
it has moved to 17,590 from 17,495. The lower breakeven point has also
shifted upward at the same time. You may have observed that the greatest
profit potential is now only ₹2,000/- instead of the previous ₹7,250/-. Here,
the maximum risk is now just ₹3,000/- instead of ₹7,750/- as it was before
the modification. Above all you have got a wider range of 200 points for the
maximum reward. On the other hand, in the past, it was a certain price (i.e.
17,350) that was extremely challenging to really reach. This is one of the
biggest benefits that may be attained with a short butterfly adjustment. You
can take a chance and alter your strategy one more time if the market keeps
rising. Only twice may the short straddle or short iron butterfly be modified.
No matter how successful the approach is, it is always advisable to stop
using it after two tries because each option will have a Delta value that is
approximately equivalent to one. Always keep in mind that modifications
have a cost, and making extreme adjustments can hurt your trading portfolio.

Double Calendar Spread

 The double calendar spread is simply an expansion of calendar spread
technique. Combining a long-call calendar spread with a long-put calendar
spread is the approach. Hence, four option legs are traded concurrently in a
double calendar spread. The strategy can be described as the deployment of
a short strangle strategy in the near-term expiry along with the purchase of a
pair of long-term call and put options in order to hedge it. One has the choice
to buy the option at the same strike in near-expiry as the option sold at the
current expiry. But, buying and selling at the same strike is not at all
essential. You have the opportunity to purchase a near-expiry option bearing
the same premium as a sold current option.
The goal of this strategy is to take advantage of time decay and benefit
from the difference between the premiums received from the sale of the
near-term options and the premiums paid for the longer-term options. The
largest profit is only permissible to be the difference between the two
calendar spreads less the net debit used to open the position. If the
underlying asset price is at or close to the strike price at the time the near-
term options expire, the maximum loss is confined to the net debit used to
open the position. The breakeven point is the strike price of the near-term
options plus the net debit paid for the position.
When the market appears to be in a calm situation but the volatility is
anticipated to rise soon, a long double calendar spread is used. This approach
works well when the market appears to trade in a range yet has excessive
volatility. It is not advisable to establish the strategy when there might be a
contraction in volatility. Let’s know the strategy better with an example.
 The Nifty index's option chain on April 3, 2023, when it was trading at
17,348, is shown in the image above. The option chain illustrates the open
interest build-up for 6th April expiry and it indicates that the index may
remain sideways till the option expires. Hence, for this expiry, a sideways
strategy like a double calendar can be established. Due to the fact that the
double calendar is a horizontal spread strategy, you also need to buy options
in the long-term expiry. Let's examine the option chain for the upcoming
expiration, which is the 13th April expiry (below image). On April 3, 2023,
both screenshots of the options were taken simultaneously.
 In double calendar spread, one has the choice to buy the option at the
same strike in long-term expiry as the option sold at the near-term expiry.
But, buying and selling at the same strike is not at all essential. You have the
opportunity to purchase a long-term option bearing the same premium as a
sold near-term option. Thus, you can set up a double calendar spread on this
underlying in the manner shown below.

The strategy
Sell 17500CE (6 Apr. series)
Premium: ₹24/-
Sell 17200PE (6 Apr. series)
Premium: ₹31/- (rounded off)
Buy 17500CE (13 Apr. series)
Premium: ₹76/- (rounded off)
Buy 17200PE (13 Apr. series)
Premium: ₹71/- (rounded off)
 Net debit = 76 + 71 – 24 – 31 = ₹92/-
Maximum loss = 92 X 50 = ₹4,600/- (approx.)

The maximum profit potential and breakeven points in a calendar spread

cannot be determined with any degree of accuracy since they depend on the
premium of long options with a far expiration. But, because one of the short
options expires worthless and the trader receives all of the premium, the
maximum profit can be made at either ₹1,810/- or ₹2,290/-, which is where
the short positions were established. Additionally, the long option will have
maximum time value and the difference in price between the long and short
option is the greatest. The greatest risk associated with this technique is
nearly equal to the cost of the trade. This is because the net difference in
option premium between each option pair approaches zero when the price of
the underlying moves sharply in any direction. The highest loss in this
illustration is roughly ₹4,600/- only.

Adjustment
Double calendar spread adjustments are quite similar to short iron condor
modifications. If you design a strategy with an overall delta value close to
zero, you will need to make adjustments if the delta value suddenly changes.
When the delta difference reaches ± (20 to 25), you can start making
adjustments. Otherwise, you can watch for the index to test a particular
breakeven threshold. Suppose that in a few of days, the price of the Nifty
would rise substantially to 17,500 and touches the upper breakeven.
Sometimes, even though the upper breakeven is far from the spot price, you
can make minor adjustments to the approach if you believe that the
underlying will continue to rise in the near future, particularly if it has been
maintaining above the important psychological level.
In this case, you can simply roll up your put option pair for some more
credit to take some cash off the table. This implies to close out a pair of
17200PE options and to open new positions using the same type of options
on the 17450 strike.

Suppose, at that time

Premium of 17500CE (6 Apr. series): ₹52/-
Premium of 17500CE (13 Apr. series): ₹117/-
Premium of 17200PE (6 Apr. series): ₹6/-
Premium of 17200PE (13 Apr. series): ₹35/-
Premium of 17450PE (6 Apr. series): ₹47/- (new option to be sold)
Premium of 17450PE (13 Apr. series): ₹101/- (new option to be bought)
Booked loss = (30 – 6) – (71 – 35) = – ₹12/- (per share)
MTM Profit = (117 – 76) – (52 – 24) = ₹13/- (per share)

New strategy
Sell 17450PE (6 Apr. series): ₹47/-
Buy 17450PE (13 Apr. series): ₹101/-
Sell 17500CE (6 Apr. series): ₹24/- (existing position)
Buy 17500CE (13 Apr. series): ₹76/- (existing position)
Total debit = Net debit + Booked loss – MTM profit = {(101 – 47) + (76
– 24)} – 12 + 13 = ₹107/-
Maximum loss = Net debit times lot size = 107 X 50 = ₹5,350/-
Maximum profit = Maximum profit can be realized at the short strikes
 Although the amount is approximative, the maximum earning potential
has grown to ₹4,160/- from ₹2,290/-. The two strikes where the short bets
were established are where the maximum profit can be made. The potential
profit is higher for the call short strike in this instance than the put short
strike. The lower breakeven point has also shifted somewhat, from 17,140 to
17,355, while the higher breakeven point has risen from 17,590 to 17620.
Nevertheless, because long option holdings are involved, it is difficult to
figure out the precise breakeven points. The strategy's net debit, or ₹5,350/-,
which was ₹4,600/- before the alteration, limits the maximum loss potential.
This has caused not just the upper breakeven point to go upward but also the
profit potential. Yet, as I previously stated, any modification also has certain
drawbacks. The potential for maximum risk has also marginally increased
after modification.
 OPTION BUYING VS. OPTION
SELLING
Let's start by learning some fundamental information about the options
market. There are four different categories of market participants in the
options market, as we previously learned at the beginning of the book. They
are put buyers, put sellers, call writers, and call buyers. On the flip side of
every option transaction, someone is selling it and vice versa. When
purchasing a call option, you anticipate that the premium and underlying
price will rise. You will sell your call option at higher price and earn the
difference amount. The call writer simultaneously hopes that the underlying
will expire below the strike price and lose all of its value so that they may
keep the entire premium. Who is going to win between the buyers and sellers
is the current situation? To understand it, you must be aware of the variables
influencing the option's pricing.
The price of the option is influenced by a number of variables, but the
three main variables that have the most impact are price movement of the
underlying, implied volatility and time before expiration. Let's now go over
the benefits and drawbacks of purchasing and selling options while taking
each component individually into account.

1. Price movement: As we have covered in the early chapters of

the book, there are five different market perspectives that can be
indicated by a security's price: bullish, bearish, sideways positive,
sideways negative, and range-bound. When does an option buyer
now make money? Only when the price of the underlying becomes
significantly bullish will a call option buyer benefit, and only
when the price of the underlying drops sharply would a put option
buyer profit. On the other hand, the call writer won't lose money
unless the security has a sharp uptrend. In the remaining four
market conditions, the seller will prevail. Therefore, an option
seller's chance of winning a trade is 80%.

Let's use a payoff chart to illustrate the differences. We will

consider the call long and put short payoff charts as described in a very
bullish market.
 Look at both strategies' breakeven points (BEP). Option writers
benefit greatly from the BEP reduction of 545 points that occurs when
selling put options as opposed to purchasing call options.

2. Time to expiry: Option is a decaying asset. With time, the

option premium fades away. Even if the other variables that
influence option pricing, such as the security's price and volatility,
are the same, the option will be worthless when it expires. time
decay is the biggest enemy of option holder, commonly known as
theta decay. However, it is an option seller's best friend.

Only if the option is In-The-Money at expiration will the option

buyers earn. Because of this, the price of an option and its remaining
time are always associated. The more the time left to expiry, more
chances for an option to be In-The-Money. Options having a longer
expiration date are more lucrative. However, as time goes on, it loses
value because the likelihood of being successful decreases day by day.
In the above example, time decay will allow the put writer to collect the
premium even if the Bank Nifty price remains unchanged.

3. Volatility: Implied volatility (IV) is a fairly complicated

subject, so we won't get into it in great length in this book.
Volatility, put simply, describes how a security's price might vary
from its typical value. The price of an option is directly
proportionate to the implied volatility, making it a measure of
implied volatility. When IV rises, the price of the option rises as
well, and vice versa. It is true for both call as well as put option.

When purchasing an option, the buyer wants to sell it for more

money than they paid for it. This will occur if the option's implied
volatility is initially low and then rises. Option writers, on the other
hand, prefer to sell options when prices are high and then repurchase
 them when prices decline. This happens if the option's implied volatility
is high and then starts to decline. However, based on what we have
observed, implied volatility tends to decrease over time. IV behaves in
a manner that is comparable to elastic. Stretching it tends to cause it to
return to its original position. Rarely, however, can a low IV over time
have the opposite effect. Thus, if you can write the option when your
IV is high and square off your position when it returns to normal, you
should do so. Additionally, since there is less chance of an increase in
IV than a decrease, there is also less chance that an option seller will
lose money as a result of an increase in IV.
The best way to write options is to pledge the shares and mutual funds
that are currently in your demat account. Additionally, you have the option
of mortgaging your bank fixed deposits to obtain margin from your broker.
These long-term investment assets in your accounts will be dormant. There
may not be a better use for these assets if you can utilize them to write
options for additional revenue. This, in my opinion, is the greatest benefit
that selling options can provide. You are using the same capital for trading
and investing. What more can the derivatives market provide?
The majority of the approaches presented here are option writing
strategies since writing options has several advantages and risk may be
greatly minimized when selling options. However, adjustment knowledge is
a prerequisite for earning money through option writing. I encourage you to
trade options by writing if you are competent at adjustments. You must be
familiar with option selling if you want to profit from the derivatives market.
Buying options successfully requires tremendous expertise, which most
traders lack. To survive in the options market, you must understand option
writing.
Now, you might be wondering why, doesn't everyone sell options if there
are so many benefits to doing so and every circumstance favor option writer?
The answer is risk. When selling an option, the writer assumes all possible
risk. Option writing is more complicated than it immediately appears. If you
write an option expecting to get the entire premium upon expiration, you
could occasionally be proven wrong. If the news is unfavorable or there is a
lot of volatility, you might lose everything. Option writing occasionally
requires adjustment if the market doesn't move in your favor. As was
covered in the book's prior part, an option writer must modify their strategy
as needed.
 CONCLUSION
In "The Bhagavad Gita of Option Trading: Trading Options with
Purpose," we looked at the fundamentals of option trading and
demonstrated how to spot short-term trends using information from FII,
DII, and professional traders. Along with real-world examples and adjusting
methods for each strategy, we also covered a number of noteworthy trading
strategies for each market condition.
Through this learning process, we have discovered that trading options
involves a greater understanding of market movements and the underlying
assets than just buying and selling options. We now know that trading
options with a purpose entails having a defined strategy in place as well as
the flexibility to adjust it as necessary to adapt to changing market
conditions.
One of the most important lessons from this book is that trading options
is a long-term investing strategy that takes patience, discipline, and an
openness to learning rather than a quick method for getting rich. The ability
to recognise market patterns, have a well-thought-out trading strategy, and
have a firm grasp of option trading's fundamentals are all necessary for
success, as I have shown.
There is plethora of strategies accessible to reap the rewards from
option trading, but it is not required to be familiar with them all, which is
another crucial lesson we have learnt. Choose a couple of them, and
become an expert in those tactics. Before trading with real money,
thoroughly understand them and back-test them. Let me share with you a
crucial fact about trading options: understanding the technique by itself is
not enough to generate income. How successfully you manage the strategy
when the market is not on your side is more essential. The key component
to successful option trading is the adjustment of the option strategy.
It looks quite simple and exciting to learn an option strategy and
adjustment approach by reading a book or watching a YouTube video. But
there will be many difficulties you must overcome in real life. Don't be
discouraged then; simply read the plan again and see if you missed
anything. If so, repeat the process correctly this time. As I stated, the most
crucial quality for a successful option trader is self-control. Since no one
can foresee the market with absolute certainty, self-discipline is the only
formula for success in trading. You can occasionally need to take losses as
well and book them. That is an inherent aspect of trading. But over the long
run, your profit should outweigh your losses, and you can do so by
exercising self-control.
The majority of strategies in this book are illustrated with the help of
weekly option chains. However, the same techniques are also applicable to
weekly and monthly options. Trading in long-term expiries is advised for
tender foot traders so that they have adequate time to make adjustments.
Another important lesson we have learned the importance of data. We
have emphasised the value of using data to make wise trading decisions
throughout the whole book. As we've seen, we can spot short-term trends
and make better informed trading decisions by looking at the option chain
and monitoring the trading activity of FII, DII, and Pro traders.
Overall, "The Bhagavad Gita of Option Trading: Trading Options with
Purpose" is a thorough introduction to option trading that covers the
fundamentals, advanced strategies, and adjustment methods. Whether they
are novice or experienced traders, it is a must-read for anybody interested in
option trading. Readers will be well-equipped to handle the complicated
world of option trading and make wise trading decisions with this book as
their guide.
Last but not least, if you think the book is worth reading, don't be shy to
express your thoughts in the review area so that your fellow traders may be
inspired to do the same. Let's educate every retail trader and turn them into
professional traders.
 Disclaimer
The option approaches covered in this book are solely meant to be
informative and educative; they shouldn't be interpreted as trading or
investing advice. None of the information presented here should be
interpreted as a recommendation that a certain trading strategy is suited for
a given individual. This book's analytical technique, suggested strategies
and adjustment techniques are founded on past price trends and data.
Nothing in this book's lessons is implied or guaranteed to bring a profit by
the author. Trading options carries risk and is not suited for all investors.
The author is NOT a SEBI registered adviser, to sum up. Each strategy
or adjustment method mentioned in this book comes directly from the
author's own experience. The author recommends everyone to be aware of
potential risks associated with trading stocks and options. All opinions and
trade mentions in this book are the author's own. Prior to executing a trade,
he advises every trader to conduct independent research and ensure that
they are aware of all the threats. He is in no way promising that these trades
will be profitable.
 About the Author
Assistant professor turned full-time trader, Rajiv LB Roy is an author,
Youtuber and an Udemy course instructor. He has a bachelor degree in
Mechanical Engineer with an M. Tech from a Central University. After
finishing his degree, he spent two years working in the oil and gas industry.
Later, he devoted almost seven years working as an Assistant Professor in
the Mechanical Engineering department of a University. He has written
three more books on the stock market, including "Option Chain Analysis:
The CT scan of derivative market," "Option Strategies with Adjustments:
The Nuts and Bolts of Option Trading" and "Day Trading for a Living:
Nine back-tested intraday trading strategies for consistent earning”. All of
the books have seen significant success on the Amazon marketplace. Also,
in the month of November 2021, the book "Option Chain Analysis" rose to
the position of #1 bestselling in the education category on the Kindle store.
Subsequently he is a mutual fund distributor registered with AMFI
(Association of Mutual Funds in India). Also, he has two popular YouTube
channels with plenty of subscribers: Updex and Updex Assamese.