Are you the one trading heavily into options? If no then skip this article as it does not make sense to you.
If you trade in options, may be you can read this.
NSE introduces weekly expiry of bank nifty options from JUne 2016
As you know, option premiums is the sum of intrinsic value of the underlying plus the time value of money.
The longer the time to expiration, for a given value of underlying, the premium will be higher. This the premise on which you must read and understand what the change to weekly options can do for you.
With the weekly expirations, the time value of money has drastically come down for a new contract from 28 to 35 days depending on the expiry period or when the last Thursday falls in a month. With the weekly options the time to expiration is 7 days or 5 trading sessions.
Therefore the probability of making or losing money in premium due to time value was higher earlier. Now, because of the premium reduction, due to weekly options, you can consider trading and benefit out of this. However care should be exercised as there is risk of volatility and hence risk of losing the premium paid.
Also the time of buying and selling the options do matter. You can consider this option.
One of the widely traded index option is the bank nifty option. and normal day the fluctuation can be 0.25% to 0.5% and many days it is around 1%. Hence a 1% variation in one day can give you opportunity to trade .
Here is what you do. Let us assume the bank nifty spot is 17500. On the first day of the contract ie. on Friday, you can use a strangle option and buy a put option for a strike price of 17200 and a call option for a strike price of 17800. you can stretch the stike prices so that the premium you pay is managed well. It is possible that you can buy both options with a total premium of 60.
When the bank nifty opens on Monday or Tuesday the effect of 1 to 2% in either direction can give you good premium for one of the options and based on the directions, you can possibly make a decent money . Let us take last Friday, 17th June 2016, 18200 call option of bank nifty was available for 40 and later came down to 22 and 17300 put option was available for 30 and went up to 35. If you had bought them you could have paid Rs 70 though it is higher, as it is difficult to judge the movements on both sides. It is therefore good to buy both these simultaneously.
ALSO Note that both these options are out of the money options and hence they are available cheaper.
Therefore exercise care.
Today when the market opened the put option went to 110 and the call option ended with 12 and you could have got at least 110 from the sale of put of option, even if you don’t sell the call option there by making 110- 40-30 which is Rs 40 and with a lot size of 30 it is 1200. Assuming the brokerage though on the higher side could be 436 leaving with a profit of 764 on an invest of 2100 which is around 30% . I have tried and watched this for the last 3 weeks and there is a possibility of a money play here.
However, take care of the directions of change and movement of the market & the brokerage. Since the time to expiration is very short, you may end up losing the whole money.
The purpose of writing this is to make people aware that there are good opportunities, if you are an option trader and weekly bank nifty has changed the game to T 20 from ODI.
For any clarifications please feel free to contact me.