Many new entrants in this exciting world of Options trading do get attracted to traders who have made huge profits by buying that right option at the right time or those who have been making consistent profits by selling that right option at the right time.
One of the most widely debated issues in options trading has been what pays off more – Net Buying of Options or Net Selling of Options. Well, almost two decades of history of Indian options trading has taught us: ‘It Depends!
Depends on what?
Three major conditions help us choose if a Buy Option will be a better bet or a Sell Option.
Before we see that, for Selling Options one is required to be skilled enough to understand the unlimited risk profile of it and know how to handle it just in case it goes wrong.
First Condition: Time
We all know options keeps losing a part of its premium due to passage of time. However, the time value loss on the option premium is not constant.
The nature of time value loss from option premium is slow in the beginning of the expiry and picks up speed as it comes closer to the expiry and is at a great speed in the last few sessions of expiry.
Hence, if we are in the early part of the expiry, be a net buyer, while towards the end of the expiry, be more on the selling side.
Second Condition: Implied Volatility
Implied Volatility in plain English is the expensiveness of the option. A figure easily available in many free tools on the internet. It is the expected that volatility figure obtained from the premium of the option.
Implied volatility also has its own characteristic, it broadly moves in a range. Here, instead of sharing what to do, let me share what not to do.
But, before that, there is an index of Implied volatility of Nifty options called India VIX. The value of this index is publicly available. If VIX is observed close to a recent high, it is advisable not to Buy options.
One the other hand, if we have the same index is close to recent lows, it is advisable not to Sell options. There are certain theories that do guide Selling options when Implied Volatility is at higher extreme and Buying when its otherwise. However, finding these extremes is a separate topic of discussion itself.
Third Condition: Trend
It is not difficult to find what the trend is, as being no expert on price analysis also one would be able to see whether the recent bottom has been higher than the previous one along with the recent top being higher than the previous one. If so, the underlying is an uptrend and if it is otherwise then the trend is down.
It is advisable not to Sell Call Options in an uptrend and most importantly (the source of maximum trading casualties) not to Sell Put Options in a down trend.
Finally, just be observant of conditions and choose Option Buying or Selling opportunity as they give an extra edge just by being in the right trade setup.