Indo-Pak war and its impact on market

Which puts do you buy? like out of money, at the money…

I don’t hedge my portfolio right now so I don’t buy puts as of now. Logically, I will buy puts with the lowest implied volatility. Usually Nifty puts that expire in December (and some June series) with a strike price as round figure (9000, 10000 etc) has good liquidity even for long maturity deep out of the money contracts. so these will be what I will prefer should I decide to buy.

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One of the challenges for a long term investor who is looking to hedge using options is that success in options trading calls for a different set of mental models than the ones that work well in long only investing where time is not a huge factor.

As a long only investor I don’t need to right today or in 6M, I need to be right over a 3-5 yr horizon and that is good enough
As on option buyer I need to be right within a time frame, lower the time to maturity more accurate I will need to be and not just be directionally right

This is just my 3rd month trying out options after spending 6m starting at the screen, while I am not yet set in my views I guess if I buy puts when VIX is low I am trying to buy them cheap at a time when the market isn’t expecting a correction to hit. Strike rate for this approach is likely to be low with most options either going down in value or expiring worthless. As you rightly said a fully hedged portfolio will cost upward of 3% and that ain’t cheap.

So what I am doing for the next 12M is this - think purely as an option trader who is looking to make some money from the markets. I am clear that I will not be an option seller anytime soon. Over the next 12-18M once I start building an intuitive feel for options and have figured out the key variables I need to track, I should be able to articulate what my approach to options will be. Till then I am fine with making mistakes and paying my dues. It took me 4 years to figure out what my stock picking approach will be, I guess a similar effort will be needed to get an equally good grasp of options and to evolve the right mental models for this

Btw , One of the persons I know sells options after events for his livelihood (Out of money options - like 3-4% away from the cmp).

Before Events such as results etc. , The premium would be high.And Like 30mins after the results, he would write out of money put or call depending on Whether the results were good or bad, hold the contract from 0 to up to 2 days max.

Sounds like a good strategy, doesn’t it?

Works usually but when it doesn’t things can go really bad.

For e.g chart the Sensex between Aug 17 to Aug 25, 2015. Anyone who wrote an OTM put that was 3% away from the spot would have gotten hammered on Aug 24 when the market fell 6% in one day

On Budget day this year the NIFTY fell to 6850 intraday and then reversed from there, anyone who wrote a 2% OTM call option would have paid big time

Similarly on Brexit day when the market fell 4% intra day the guy who decided to write a call option that was 1% off the spot would have gotten hammered when the markets reversed

Strategies like this look easy as long as they work, you keep pocketing money regularly till you get caught in a tail event and then give up all the gains you’ve made over the previous 2 years in one single day

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Right. He says he has stop losses and writes options which are not illiquid (OI isn’t too low).

The guy left his s/w job with a good package. Now he’s doing full time trading (options mainly).

But yeah, writing options can be very bad if it doesn’t turn out right.

Options in general have unequal payoffs. i,e. you have several small gains followed by a large loss (or several small losses followed by a large gain, as in lottery or slot machines) and it’s a zero sum game. For every winner there is a loser. If you expect to be a winner all the time you should expect to find a loser all the time fully knowing that the person on the other side of the trade is looking at you as a loser. Any trading strategy works as long as it stops working. you need to constantly reinvest your strategies. Someone is always trying to match with you coming up with a counter strategy.
I know this is all worldly gyan but the point is I wouldn’t use derivatives for profit objectives, only for hedging. In general, I try to manage or avoid risk and not hedge it.

I have the same thoughts Yogesh, which is why I don’t trade options.

But I think it requires different sets of skills, experience and mindset from value investing. I am not surprised that options trading does work for some people. Meaning that these people do make money net-net over long periods through options.

Completely agree. Actually it becomes neagtive sum game if you consider the brokerage and taxes.
So unless you are sure you have a strategy to beat atleast half the pack no point indulging in it.
And secondly like most other zero sum games here it’s not that 50% people win and 50% people loose. Actually a small 5-10% indivuduals and prop trading firms who contribute to bulk of those 50% winning trades.

I think this time China will try all the avenue to provoke India to go for some sort of war, to get some sort of indirect benefit. It will try to get some market share from India.

Sounds like a good strategy, doesn’t it?`

Why not, if the individual can handle the greeks; if one writes an option, then it better be either covered (ie already owns the underlying) or hedged (once per hour). As mentioned by others, naked options, although exciting and profitable to an extent, can lead to a situation where one is caught with their pants down (as immortalized by Buffett - “only when the tide goes out do you discover who’s been swimming naked”).

I do not see any long term (>1y) options sold (especially on individual stocks) in our nascent F&O market. If they are available, it would be great to know. Bespoke options from an institution is akin to playing blackjack within a casino; highly rigged in their favor.