Of-late I have received queries on how to choose the strike prices and how to choose which options to buy or sell, for that matter. So here is my view.
Before even opening your trading account keep in mind one thing – your trades has to hedged. Hedging plays the same role role for your capital as life insurance does for your life. So, always hedge.
Now, before placing a trade try to gauge the sentiment of the stock market; try to see if the market is bearish or bullish. This will help you in making a decision on which option you should buy or sell
Go to the Nifty Option Chain and see which Nifty values have the highest Open Interest. Open Interest is the number of contracts open at any particular time. Higher the Open Interest, heavier the sentiment.
Check this on both Call and Put sides. This will help you judging the broad range of the market.
For example – In the current scenario 9600 Put Option and 10,000 Call Option has the Higher Open Interest; so you know that this is the broad range of the market this month.
Within that broad range see which options have the highest Change in Open Interest. This will help you narrow down the range.
For example – 9750 Put Option and 9900 Call Option has the highest Change in Open Interest; so in immediate term these will be the range.
Now you take a trade. If you are bullish, Buy Call Option and hedge it with Put Option. In the current scenario – I would buy 2 Lots of 9900 Call Option and hedge it with 1 Lot of 9750 Put Option.
I use the ratio of 2:1 for hedging purposes. If I am Bullish, I ll buy 2 Calls and hedge it with 1 Put. If I am Bearish I ll buy 2 Puts and hedge it with 1 Call.
You should place Stop Losses and it should be placed in terms of Nifty value and not option value.
An expiry month starts from 1st Friday of a month till last Thursday of the month. When you enter last week of the expiry don’t buy options but sell them. This is because premium is eroded at a much faster rate.
So if you are bullish and last week of expiry is there; don’t buy a Call but Sell a Put option. If you must Buy then Buy ‘In the Money’ Options and not ‘Out of the Money’.