This strategy is for day traders, and for those aspiring to become day traders.
Expiry trading is one of the most anticipated days for options writers and institutions because there’s money to be made on the table.
In most cases, the retail investor loses out and that’s because he is impulsive. He does not calculate and enters and exits without logic, and perhaps on the advice of others.
In any case, that is the retail investors’ problem. Here is how you can measure volatility and trade on expiry day:
I’m taking the Bank Nifty as an example. You can apply the same principle to Nifty too.
IMPORTANT – ASSUME THAT EXPIRY TRADING DAY IS TODAY
STEP 1: 9.30 AM: Check the Bank Nifty level. Let us assume it is 30085.
So, the option strike price that is closest to the spot price is 30,100.
Now check the premiums of the 30,100 strike price – of both CE and PE
30100CE = 270.00
30100PE = 149.50
EARLY MORNING ANALYSIS 1: This implies that options writers (brokerages, institutions, and professional writers) are expecting the BNF to rise because the CE premium is almost twice that of the PE premium. So the first inference early in the morning is that the bias is bullish (but this can change during the day)
EARLY MORNING ANALYSIS 2: Options writers make money because premiums drop as time decays. This implies that options writers (brokerages, institutions, and professional writers) are expecting the CE and PE premiums on the 30,100 strike price to fall by the end of the day. In early morning hours, on expiry day, it would be prudent to assume that the expected fall would be at least 20% to 30%.
Remember that options writers keep booking gains during the day, and adopting a variety of options writing strategies.
EARLY MORNING OPTION WRITING: From the premiums in the morning, you should calculate the levels of the expected rise and fall.
30100 CE is 270.00 – so it is possible that BNF may do 30,370 (30100 + 270) on the way up.
30100 PE is 149.50 – so it is possible BNF may do 29,950 (30100 – 150) on the way down
Therefore you can try your luck in writing 30,400 or above CEs and PEs below 29,800 on early morning Expiry Day.
You should monitor your position continuously and take targeted profits when the combined premium falls below your price (you are the best judge of your targets). Cover up both the CE and PE at one time, as soon as your targets are met. In case of a loss, book out as soon as it hits, don’t get emotional about it.
STEP 2: Start checking the Charts: Port the BNF on a chart and keep a close eye on it. Use this setup.
STEP 3: Every 5-10 Minutes, or when you see significant movement on the chart: Keep checking the premiums you have sold. Remember that you should keep booking and entering into new positions as dictated by the charts and the premiums.
Remember one thing – A day trader keeps monitoring the market live. Therefore if you are a positional trader, do not try this strategy or you will burn your hands and pockets.
Second – if you are an aspiring day trader, use this strategy only on paper. DO NOT enter into real trades unless you gain at least 6 months of experience in the spot trading market.
Finally remember that options writing is a dangerous game in which the big boys use a heck lot of algos and mathematical tools. Though this strategy helps you understand what the big guns are up to, you must be cautious in your approach. Selling one lot of the BNF costs you Rs 60000 in margin money and therefore writing is not everyone’s game.
Take these caveats into account before attempting any writing. Good luck.