Module 6 Option Strategies

Chapter 10

The Long Straddle

248

10.1 – The directional dilemma

How many times have you been in a situation wherein you take a trade after much conviction, either long or short and right after you initiate the trade the market moves just the other way round? All your strategy, planning, efforts, and capital go for a toss. I’m certain this is one situation all of us have been in. In fact this is one of the reasons why most professional traders go beyond the regular directional bets and set up strategies which are insulated against the unpredictable market direction. Strategies whose profitability does not really depend on the market direction are called “Market Neutral” or “Delta Neutral” strategies. Over the next few chapters we will understand some of the market neutral strategies and how a regular retail trader can execute such strategies. Let us begin with a ‘Long Straddle’. M6-C10-Cartoon

10.2 – Long Straddle

Long straddle is perhaps the simplest market neutral strategy to implement. Once implemented, the P&L is not affected by the direction in which the market moves. The market can move in any direction, but it has to move. As long as the market moves (irrespective of its direction), a positive P&L is generated. To implement a long straddle all one has to do is –

  1. Buy a Call option
  2. Buy a Put option

Ensure –

  1. Both the options belong to the same underlying
  2. Both the options belong to the same expiry
  3. Belong to the same strike

Here is an example which explains the execution of a long straddle and the eventual strategy payoff. As I write this, the market is trading at 7579, which would make the strike 7600 ‘At the money’. Long straddle would require us to simultaneously purchase the ATM call and put options. Image 1_Setup As you can see from the snapshot above, 7600CE is trading at 77 and 7600 PE is trading at 88. The simultaneous purchase of both these options would result in a net debit of Rs.165. The idea here is – the trader is long on both the call and put options belonging to the ATM strike. Hence the trader is not really worried about which direction the market would move. If the market goes up, the trader would expect to see gains in Call options far higher than the loss made (read premium paid) on the put option. Similarly, if the market goes down, the gains in the Put option far exceeds the loss on the call option. Hence irrespective of the direction, the gain in one option is good enough to offset the loss in the other and still yield a positive P&L.  Hence the market direction here is meaningless. Let us break this down further and evaluate different expiry scenarios. Scenario 1 – Market expires at 7200, put option makes money This is a scenario where the gain in the put option not only offsets the loss made in the call option but also yields a positive P&L over and above. At 7200 –

  • 7600 CE will expire worthless, hence we lose the premium paid i.e Rs. 77
  • 7600 PE will have an intrinsic value of 400. After adjusting for the premium paid i.e Rs.88, we get to retain 400 – 88 = 312
  • The net payoff would be 312 – 77 = + 235

As you can see, the gain in put option after adjusting for the premium paid for put option and after adjusting for the premium paid for the call option still yields a positive P&L. Scenario 2 – Market expires at 7435 (lower breakeven) This is a situation where the strategy neither makes money nor loses any money.

  • 7600 CE would expire worthless; hence the premium paid has to be written off. Loss would be Rs.77
  • 7600 PE would have an intrinsic value of 165, hence this is the gain in the put option
  • However the net premium paid for the call and put option is Rs.165, which gets adjusted with the gain in the put option

If you think about it, with respect to the ATM strike, market has indeed expired at a lesser value. So therefore the put option makes money. However, the gains made in the put option adjusts itself against the premium paid for both the call and put option, eventually leaving no money on the table. Scenario 3 – Market expires at 7600 (at the ATM strike) At 7600, the situation is quite straight forward as both the call and put option would expire worthless and hence the premium paid would be gone. The loss here would be equivalent to the net premium paid i.e Rs.165. Scenario 4 – Market expires at 7765 (upper breakeven) This is similar to the 2nd scenario we discussed. This is a point at which the strategy breaks even at a point higher than the ATM strike.

  • 7600 CE would have an intrinsic value of 165, hence this is the gain in Call option
  • 7600 PE would expire worthless, hence the premium paid towards the option is lost
  • The gain made in the 7600 CE is offset against the combined premium paid

Hence the strategy would breakeven at this point. Scenario 5 – Market expires at 8000, call option makes money Clearly the market in this scenario is way above the 7600 ATM mark. The call option premiums would swell, so much so that the gains in call option will more than offset the premiums paid. Let us check the numbers –

  • 7600 PE will expire worthless, hence the premium paid i.e Rs.88 is to be written off
  • At 8000, the 7600 CE will have an intrinsic value of 400
  • The net payoff here is 400 – 88 – 77 = +235

So as you can see, the gain in call option is significant enough to offset the combined premiums paid. Here is the payoff table at different market expiry levels. Image 2_payofftable As you can observe –

  1. The maximum loss (165) occurs at 7600, which is the ATM strike
  2. The profits are unlimited in either direction of the market

We can visualize these points in the payoff structure here – Image 3_Payoff From the V shaped payoff graph, the following things are quite clear –

  1. With reference to the ATM strike, the strategy makes money in either direction
  2. Maximum loss is experienced when markets don’t move and stay at ATM
    1. Max loss = Net premium paid
  3. There are two breakevens – on either side, equidistant from ATM
    1. Upper Breakeven = ATM + Net premium
    2. Lower Breakeven = ATM – Net premium

I’m certain, you find this strategy quite straight forward to understand and implement. In summary, you buy calls and puts, each leg has a limited down side, hence the combined position also has a limited downside and an unlimited profit potential. So in essence, a long straddle is like placing a bet on the price action each-way  – you make money if the market goes up or down. Hence the direction does not matter here. But let me ask you this – if the direction does not matter, what else matters for this strategy?

10.3 – Volatility Matters

Yes, volatility matters quite a bit when you implement the straddle. I would not be exaggerating if I said that volatility makes or breaks the straddle. Hence a fair assessment on volatility serves as the backbone for the straddle’s success. Have a look at this graph below – Image 4_volatility The y-axis represents the cost of the strategy, which is simply the combined premium of both the options and the x-axis represents volatility. The blue, green, and red line represents how the premium increases when the volatility increases given that there is 30, 15, and 5 days to expiry respectively. As you can see, this is a linear graph and irrespective of time to expiry, the strategy cost increases as and when the volatility increases. Likewise the strategy costs decreases when the volatility decreases. Have a look at the blue line; it suggests when volatility is 15%, the cost of setting up a long straddle is 160. Remember the cost of a long straddle represents the combined premium required to buy both call and put options. So at 15% volatility it costs Rs.160 to set up the long straddle, however keeping all else equal, when volatility increases to 30% it costs Rs.340 to set up the same long straddle. In other words, you are likely to double your money in the straddle provided –

  1. You set up the long straddle at the start of the month
  2. The volatility at the time of setting up the long straddle is relatively low
  3. After you set up the long straddle, the volatility doubles

You can make similar observations with the green and red line which represents the ‘price to volatility’ behavior when the time to expiry is 15 and 5 days respectively. Now, this also means you will lose money if you execute the straddle when the volatility is high which starts to decline after you execute the long straddle. This is an extremely crucial point to remember. At this point, let us have a quick discussion on the overall strategy’s delta. Since we are long on ATM strike, the delta of both the options is close to 0.5.

  • The call option has a delta of + 0.5
  • The put option has a delta of – 0.5

The delta of call option offsets the delta of put option thereby resulting in a net ‘0’ overall delta. Recall, delta shows the direction bias of the position. A +ve delta indicates a bullish bias and a -ve delta indicates a bearish bias. Given this, a 0 delta indicates that there is no bias whatsoever to the direction of the market. So all strategies which have zero deltas are called ‘Delta Neutral’ and Delta Neutral strategies are insulated against the market direction.

10.4 – What can go wrong with the straddle?

On the face of it a long straddle looks great. Think about it – you get to make money whichever way the market decides to move. All you need is the right volatility estimate. Therefore, what can really go wrong with a straddle? Well, two things come in between you and the profitability of a long straddle –

  1. Theta Decay – All else equal, options are depreciating assets and this particularly hurts long positions. The closer you get to expiration, the lesser time value of the option. Time decay accelerates exponentially during the last week before expiration, so you do not want to hold onto out-of-the-money or at-the-money options into the last week and lose premiums rapidly.
  2. Large breakevens – Recollect, in the example we discussed earlier, the breakeven points were 165 points away from the ATM strike. The lower breakeven point was 7435 and the upper breakeven was 7765, considering the ATM strike was 7600. In percentage terms, the market has to move 2.2% (either ways) to achieve breakeven. This means that from the time you initiate the straddle, the market or the stock has to move atleast 2.2% either ways for you to start making money…and this move has to happen within a maximum of 30 days. Further if you want to make a profit of atleast 1% on this trade, then we are talking about a 1% move over and above 2.2% on the index. Such large move on the index is quite a challenge in my opinion and I will explain why in the next chapter.

Keeping the above two points plus the impact on volatility in perspective, we can summarize what really needs to work in your favor for the straddle to be profitable –

  1. The volatility should be relatively low at the time of strategy execution
  2. The volatility should increase during the holding period of the strategy
  3. The market should make a large move – the direction of the move does not matter
  4. The expected large move is time bound, should happen quickly – well within the expiry

From my experience trading long straddles, they are profitable when setup around major market events and the impact of such events should exceed over and above what the market expects. Let me explain the ‘event and expectation’ part a bit more, please do read the following carefully. Let us take the Infosys results as an example here. Event – Quarterly results of Infosys Expectation – ‘Muted to flat’ revenue guideline for the coming few quarters. Actual Outcome – As expected Infosys announces ‘muted to flat’ revenue guideline for the coming few quarters. If you were the set up a long straddle in the backdrop of such an event (and its expectation), and eventually the expectation is matched, then chances are that the straddle would fall apart. This is because around major events, volatility tends to increase which tends to drive the premium high. So if you are to buy ATM call and put options just around the corner of an event, then you are essentially buying options when the volatility is high. When events are announced and the outcome is known, the volatility drops like a ball, and therefore the premiums. This naturally breaks the straddle down and the trader would lose money owing to the ‘bought at high volatility and sold at low volatility’ phenomena. I’ve noticed this happening over and over again, and unfortunately have seen many traders lose money exactly for this reason. Favorable Outcome – However imagine, instead of ‘muted to flat’ guideline they announce an ‘aggressive’ guideline. This would essentially take the market by surprise and drive premiums much higher, resulting in a profitable straddle trade. This means there is another angle to straddles – your assessment of the event’s outcome should be couple of notches better than the general market’s assessment. You cannot setup a straddle with a mediocre assessment of events and its outcome. This may seem like a difficult proposition but you will have to trust me here – few quality years of trading experience will actually get you to assess situations way better than the rest of the market. So, just for clarity, I’d like to repost all the angles which need to be aligned for the straddle to be profitable –

  1. The volatility should be relatively low at the time of strategy execution
  2. The volatility should increase during the holding period of the strategy
  3. The market should make a large move – the direction of the move does not matter
  4. The expected large move is time bound, should happen quickly – well within the expiry
  5. Long straddles are to be set around major events, and the outcome of these events to be drastically different from the general market expectation.

You may be wondering there are far too many points that come in between you and the long straddle’s profitability. But worry not, I’ll share an antidote in the next chapter  – The Short Straddle, and why it makes sense.


Key takeaways from this chapter

  1. Strategies which are insulated to market direction are called ‘Market Neutral’ or ‘Delta neutral’
  2. Market neutral strategies such as long straddle makes money either which way the market moves
  3. Long straddle requires you to simultaneously buy the ATM Call and Put option. The options should belong to the same underlying, same strike, and same expiry
  4. By buying the CE and PE – the trader is placing the bet on either direction
  5. The maximum loss is equal to the net premium paid, and it occurs at the strike at which the long straddle has been initiated
  6. The upper breakeven is ‘strike + net premium’. The lower breakeven is ‘strike – net premium’
  7. The deltas in a long straddle adds up to zero
  8. The volatility should be relatively low at the time of strategy execution
  9. The volatility should increase during the holding period of the strategy
  10. The market should make a large move – the direction of the move does not matter
  11. The expected large move is time bound, should happen quickly – well within the expiry
  12. Long straddles are to be set around major events, and the outcome of these events to be drastically different from the general market expectation.

Download Bull Call Spread Excel Sheet

248 comments

  1. keshav says:

    Thanks for the wonderful chapter.. Where to find the financial events sir.?

  2. Ravinder singh sandhu says:

    Thanks sir ji, you are a super man

  3. sastry says:

    Dear Sir,long and
    Please indicate the probable range of VIX- LOW VOLATALITY AND HIGH VOLATALITY in general out of your very good experience for both INDEX and OPTIONS strategies either for long or short because I am a new beginner for my guidance. Thanks and Best Regards, R V N Sastry

    • Karthik Rangappa says:

      Sastry – I’d consider ViX values around 15% as low and about 25-28% as high. However for stock it can vary…something like 40% for Infy is high and 20% can be low.

  4. suresh.ks says:

    HI,sir
    How many days will it take to complete this OPtion Strategy module and how many lessons are left?

  5. Ravi says:

    Sir when u start module – Trading Psychology and Money Management.. Which consists 90% of trading ( 60% for trading Psychology + 30% for money management)…
    U r covering only 10% of trading….
    Please Start Trading Psychology module as soon as possible..
    Its my opinion that without knowing Trading psychology and money management… No one can become successful trader ..
    Ur writing skill is superb.. I have been waiting for Trading Psychology module for 5 months…still I think I have to wait 4-5 months. ?

  6. Yes this works out perfectly when the direction of the market trend is one sided, either well up or well down.

  7. Jatin says:

    Sir, I am eagerly waiting for PDF modules. When can we get it?? As they are more suitable for printing and reading

  8. Sushreet Pattanayak says:

    Isn’t a long put straddle better than a long straddle in all scenarios? Wherein we’d be taking a long position and a put option with a strike price of the entry price for the same underlying script. You’d be saving on the call option premium so your margins would be better. Rest would work the same way. Would there be a scenario when a long straddle is better than a long put straddle?

    • Karthik Rangappa says:

      Not sure if there is anything like a ‘long put straddle’. The strategy that you are talking about – isit like buying Futures plus buying put? If yes, this would be an expensive strategy as it requires margin deposits for the futures.

      • R P HANS says:

        Sir, Long future and long put will it not be equal to long call synthetic? Its pay out will be entirely different from the long straddle.
        pl. correct if i have misunderstood the question of Shri Sushreet Pattanayak

        Just a minor thing. This module has started and its 10 chapters are over so it is better to remove the word “Coming Soon” from the module graphics.

        • Sushreet Pattanayak says:

          Hi R. Wouldn’t the payouts be similar? Your profit would be future price-strike price-premium if the script appreciates or strike price-future price-premium if the script depreciates. Am I right Karthick? If so notwithstanding margin money isn’t this a more efficient trade with respect to payouts (no CE premium)? Sorry if my understanding is off point, very new to F&O.

          • Karthik Rangappa says:

            Sushreet – I guess the best way to understand the payoff would be to actually plot it and visualize it on excel. Whenever we have more than 2 option legs, the payoff are tricky and you need to visualize it to understand how they work.

        • Karthik Rangappa says:

          Long Call and short put would make a synthetic call and its payout will be similar to that of a long futures, and yes, it is completely different from a long straddle.

          Thanks for point the graphics bit :)… we are just few more chapters away from closing this module, guess we will replaced it the module graphics at a later stage.

  9. Sushreet Pattanayak says:

    Oh also a big shout-out to you guys for Zerodha Varsity. Very lucid writing!

  10. Nivedita Natekar says:

    Request you to kindly send somebody to explain the whole procedure of buying and selling on the website

  11. Preetam says:

    Sir:
    An observation which I would like to share.
    Call Delta: 50
    Put Delta: 50
    Nifty increase from 7760 to 7791.
    VIX decreases from 17.84 to 17.42

    But increase in call option is only 9 points, whereas put option decreased by 20 points. Why is the increase in call option less than put option?

    Regards,
    Preetam

    • Karthik Rangappa says:

      Couple of reasons –

      1) When Volatility drops, premiums drop. In this case volatility dropped and market increased , both are favorable for the drop in Put premiums
      2) Call option has gone up because the markets increased, but then volatility has dropped which limits the increase in premiums.

  12. shravan says:

    how to calculate delta value and how to know that volatility is 15 % sir?

  13. SARAVANA PERUMAL D says:

    Hi Karthik,

    When will i expect the commodity module. I’m wait for that.

  14. Beena Chauhan says:

    Sir please suggest me some website name which gives me the knowledge about base metals

  15. Khyati Verdhan says:

    Hi kartik
    Please teach me some rules/ways of BTST/STBT trade

    • Karthik Rangappa says:

      The only two things to keep in mind while doing BTST – look for high volume breakouts and trade only liquid stocks!

  16. Deepak gagrani says:

    Sir can you share u comment when we can take positions on CE and PE at same time. Means just after the expiry or wait 4-5 days after the expiry and how to calculate premium.

    • Karthik Rangappa says:

      To calculate the premium you can use the B&S calculator here – https://zerodha.com/tools/black-scholes

      You can initiate the straddle anytime you wish – just make sure the volatility is low and you expect it to increase over your holding period.

      • Deepak gagrani says:

        But how much minimum volatility %. Link which u have shared.
        Not working

        • Karthik Rangappa says:

          The least volatility I’ve seen in Nifty is around 13%, hopefully this should give you a perspective.

          • Deepak gagrani says:

            Sir on 13-04 icici bank trading on 244 on days high and same time 240 PE was trading on implied volatility 27.75 and CE at 27.31. So can we buy or sell put or call. And the same time 220 PE was trading in implied volatility 34.29.so in both the scenario can we buy put and hope market will come down

          • Karthik Rangappa says:

            Well, this depends on many factors including Volatility. You will have to check how the volatility of 27.75 fares with respect to ICICI’s historical volatility. If its low and expected to increase, then yes volatility is a favorable factor for establishing a Long position.

  17. Sooraj Jogendra Mishra says:

    Karthik Sir,
    As you said long straddle is useful when event are coming like announcement of quarterly results….We come to know results dates on site like moneycontol etc but do you know any site that also tells about timing of such announcements…?? because some companies results are announced after market hours while some announced during market hours… that make me confused whiling making positions…

  18. Shanky Agrawal day. says:

    Hello Sir

    How can we exercise the option purchased. On the last expiration day can we exercise on any price prevailing on that day.

    • Karthik Rangappa says:

      Yes, you can exercise the option only on the day of the expiry at prevailing market rates.

      • SUBHANKAR SAHA says:

        BUT HOW TO EXERCISE IN SOFTWARE? THERE ARE STILL BUY AND SELL AVAILABLE IN THE OPTION SCRIP AT EXPIRY DAY(IF I HOLD IT PREVIOUSLY). SO I AM CONFUSED ABOUT WHAT TO DO IN KITE OR PI TO EXERCISE IT….

  19. Rajesh says:

    This year, I have some profit from Intra Day trading and for which I have to fill up ITR 4 for speculative income. Pls tell me what details should I provide to CA to enable him to fill up the speculative income part of the ITR 4. I plan to take the help of AERI.

  20. rohan says:

    By volatility you mean IV?
    nifty spot is at 7884, 7900CE IV is 15.7 and 7900PE IV is 15.13, is it advisable to place long straddle before 19 may election results?

    • Karthik Rangappa says:

      Yes, provided you also expect the volatility to go up in the timeframe you expect to hold the trade.

  21. Naresh says:

    Hi Karthik, Is there a workable and accessible software in which one can create a marketwatch of spreads, strangles etc and track the daily variations and its chart of premiums paid/received ? Both for current series and historic records etc. Something like show me the strangle price from 1st June to 17th June for 8100 June series. Maybe past records as well for comparison. Does options oracle do the same job ? IS it a working software ? Is it a licensed product ? Thanks

  22. CHAIT says:

    Can we check IV in real time in the charts?
    “Historical Volatility” in the studies column of KITE is not at all close to IV in the options chart of NSE. how is HV related to IV in NSE chart?
    please give clarity.
    thanks

    • Karthik Rangappa says:

      As far as I know there are no charts where you can track the live IVs. Probably the India Vix is your best option. HV is the realized volatility in the past, and IV is what the market is expecting as on now.

  23. Vishal Javakhedkar says:

    I think this strategy is better suited for bank nifty weekly option, where you will start making profit once it move 1.5 % in either direction or stocks like Bhel which generally is very volatile, and yes as you said key is to buy when volatility at the lowest.

  24. Chandan says:

    Since the premium for ATM might be higher can we take this strategy on slight OTM strike?

  25. Rajesh Gupta says:

    Thanks for such a beautiful article on option. In your this chapter point no 11.4, there is a question from your side. After initiating straddle, as the market move, will your position still remain delta neutral???. I am not sure about the answer of this question. However i think, After initiating straddle, as the market moves, the strategy will NOT BE DELTA NEUTRAL. But i don’t know how to keep it Delta neutral. Please gives us more insight on this.

    Thanks
    Rajesh Gupta

    • Karthik Rangappa says:

      You are right Rajesh. After you initiate the position, and when the market moves…the position will not be delta neutral. I will try and put up an additional chapter (but not anytime soon) related to this topic.

  26. amit gupta says:

    for long straddles,it is necessary to buy at ATM only ,or choose to buy whether the least volatility at both CE&PE .because it is quite rare to get the low volatility at ATM ,so suggest ,whether choose to buyat strike where volatility would low compare to other strikes ,whether it is otm/itm ,not necessary at ATM.Kindly suggest.

    • Karthik Rangappa says:

      If you choose low volatility strikes, then chances are you will pick two different strikes (as its hard to find the same strike at which vols are low)…and therefore it will not be a straddle.

  27. Dwaipayan says:

    I have one confusion, when you are calculating the final price of the option , you are showing the difference between the purchase price and the intrinsic value. This holds good in case of a contract , but if we compare the spot price of the contracts at the day of expiry both the call and put option values reach close to zero. Thus , when the market squares off my position will it pay me the difference on basis of intrinsic value of the option or the spot price ?

    • Karthik Rangappa says:

      I’m a little confused with your question. Can you please quote with an example? The intrinsic value will be zero, if the option is OTM.

      • Dwaipayan Chakraborty says:

        Ok let me rephrase and make it simpler, the LTP for NIFTY CE 8400 for Sep 29,2016 Expiry as on close of Sep 29,2016 was 188.3, as the price of underlying asset i.e NIFTY was 8591, the intrinsic value of the contract should be 191, so after the exchange squares off the option on expiry what is credited to my account, 188.3 or 191 ?

  28. amit gupta says:

    I have read all your chapters and find long straddles and long strangle both are similar ,only difference moneyness selection .please clear the doubt while execution of buy CE&PE in long strangle must be same time or i can execute at different time interval .and generally delta would never be zero in long strangle ,and it is also possible the liquidity and OI would not be available in one of the OTM moneyness during execution ,then what would have to do ,Should wait for time passes ,kindly elaborate with certain example ..

    • Karthik Rangappa says:

      The idea behind both the strategies is to execute them at same point. Executing at different intervals may not really give the desired outcome of the strategy.

  29. Vishal Javakhedkar says:

    Hi Karthik,
    I am able to apply this strategy on weekly banknifty and success rate has been closed to 70% but issue is with stoploss, in case bank nifty doesn’t move I am not able to take a decision when to put stoploss and because of it I am still in loss position. any input on the scenario?

  30. amit gupta says:

    Hi Karthik,

    Can you suggest books or online availability of data for knowing depth knowledge of technical analytics ,and also suggest some free trading platform so i can execute my trade ,I have done enough paper trading,in which 90% were perfect ,but when i actually started on pi ,result was different due to my sentiments .I have done day trading most of the time .so suggest accordingly .

  31. Bhaskar says:

    Hi please let me know following trade can I execute or not?

    SBI market price 250
    CAll buy OTM 235 = 1.85 rs
    Put buy OTM 275 = 1.85rs
    if sbi price moves to 270 then following is the scenario
    CAll value 235 = 0.85 rs
    Put value 275 = 3.85rs
    I can square off it and take profit or sbi should reach strike price??

  32. Sachin Jain says:

    Is it a good time to entering in Long Straddle Strategy as the market is moving very fast in either directions. Should we enter into Dec’16 7900 call and put. The call premium is 229 & put is 133.

    • Karthik Rangappa says:

      If you have the conviction, you should 🙂

      If you do not have the conviction, then you need to ask yourself – why so? Probably, you will be required read up and understand more 🙂

  33. Kavi says:

    Really very helpful chapter crack Long for straddle strategy ,easy to understand .Thank you for upload .but mostly i like to making position in sort straddle .

  34. Sandeep says:

    Thank you sir,
    I am zeroedian.
    Very good work sir.

  35. Varun says:

    Is it possible from your end to share the Nifty options data for 16 years? It’s a pain to download manually from nse site.

    • Karthik Rangappa says:

      Options is not more than 10 years old in India 🙂

      Btw, this may not be possible from our end. I’d suggest you speak to a licensed data vendor like ‘True data’ for this. Good luck.

  36. hasmukh chouhan says:

    kindly add option chain in pi including live greeks .so its very useful for option traders as provided in sharekhan

  37. Sarath says:

    Hy karthik

    “‘Delta Neutral’ and Delta Neutral strategies are insulated against the market direction.” what is the meaning of this…Delta neutral means position not making money either market move up or down right? why we use delta neutral in our strategy ? is there any perticular time ? please help karthik ,,,,i am very confusing this word “delta neutral”

    Thanks
    Sarath

  38. K R Ashok says:

    Hi,

    In the money options has very high premiums. Why can’t I short slightly ITM and collect the premiums?

  39. NK says:

    I think the below statement is incorrectly framed. 1% move over and above the 2.2% will give ~75 points to Nifty Index which will increase the premium and the profilt should be calculated on this increased premium. So the sentence “profit of atleast 1%” seems incorrect.
    “Further if you want to make a profit of atleast 1% on this trade, then we are talking about a 1% move over and above 2.2% on the index.”

    Do correct me, if i am wrong. Thanks.

    • Karthik Rangappa says:

      Are you doing this calculation based on current Nifty prices? Anyway, let me check this. Thanks for pointing anyway.

  40. Pawan says:

    as banknifty is very volatile can we make this strategy on daily basis on opening for 5 points daily

  41. Rajiv says:

    Hi Sir, for may 7th french elections, there may be volatility predicted. So on May 4th (Thursday) by 3 pm can I buy NIFTY ATM CE and ATM PE for a long staddle (for may series)? and exit on early morning trade on May 8th (Monday) by 9.20 AM. there is a one day in-between buy and sell for the volatility to go up. is this a sensible trade set up. please clarify. Thanks.

    • Karthik Rangappa says:

      Yes, you can. But its best if you can close the position just before the event. I’m saying this purely out of my personal experience.

  42. Virochan Prabhu says:

    Do we have any site where we can see all fno stocks with its current volatility to understand higher n lower volatility stock to plan for straddle ? as its difficult to check stock one by one to understand which stock has less volatility

  43. Sai Sreedhar says:

    When you say “The volatility should be relatively low at the time of strategy execution”, which volatility will you refer to. When Put Option (Implied) Volatility increases the Call Option (Implied) Volatility Decreases and vice-versa. So how would it be practical to get both side strikes at low Volatility? Or are you referring to the volatility of the underlying itself, like when there is Bollinger Bands Squeezing and Ranged/Forming of Doji candle kind-of situation? Or is it the volatility of the overall market gauged by something like Vix?
    I was wondering if this is practically achievable?

    • Karthik Rangappa says:

      Sreedhar, I’m talking about the IV of a particular strike. All else equal, the IV of a call and a put for the same strike should be same.

      • Sai Sreedhar says:

        Ah, Thanks SO much for clarifying Karthik!
        So if I understood correctly, these are the conditions to initiate the Long Straddle:
        1. Strike of CE = SPOT = Strike of PE
        2. Delta of CE = (-) Delta of PE = 0.5
        3. IV of CE = IV of PE
        How much should we consider margin of error here – I mean 1% above or below the conditions should hold good or we have to consider more room for adjustment?

        • Karthik Rangappa says:

          Yes, most importantly, I’d look for the volatility. If you are going long straddle, then it’s best if the volatility is low and expected to go higher soon. If you are shorting a straddle, it’s best if volatility is at an elevated level and expected to go down soon.

  44. SANDEEP says:

    thank you karthik rangappa.
    and also SAI shreeder for sharing valuable knowledge.

  45. ZD2412 says:

    Hi,

    For the below point:
    “The volatility should be relatively low at the time of strategy execution”

    Please let me know how to find the volatility is high or low at the given point of time. Tried reading volatility chapter but couldn’t make out.

    Example, i have to execute the trade now, i need to decide based on the volatility to find the right time, how can i do this.

    Help much appreciated and the articles are too good.

    Thanks,
    Sundar

    • Karthik Rangappa says:

      In such cases, you can quickly check the current implied volatility and compare it with the historical volatility. Both these volatilities are published on the NSE website, and I guess I have shared the links in the earlier comments.

  46. Priya says:

    Dear Karthik Sir,
    First of all thanks for this wonderful module provided by you. 🙂
    I have an issue regarding LONG STRADDLE, I’m asking with help of following example:

    On 1 March 2018, ADANIENT spot = 199.15. Thus, I decided to apply long straddle blindly 🙂 🙂 🙂
    Okay Jokes apart. Back to the point,
    I selected strike price = 200CE & 200PE. And, lot = 4000 & EXPIRY – 28/3/2018
    Buy ADANIENT 200CE = 10 premium paid
    Buy ADANIENT 200PE = 7.7 premium paid

    On 26 March 2018,
    ADANIENT 200CE = 0.1
    ADANIENT 200PE = 39.9

    (1) Can I close both these leg-positions before expiry?
    (2) Profit = (CE)+(PE) = (-9.90)+(32.2) = 22.3 Is it correct?
    (3) Can I close CE & PE positions in 1 day by taking profit of premium difference?
    (4) Is my Question No. (2) calculation is correct?

    Thanks Karthik Sir.

    • Karthik Rangappa says:

      1) Yes, you can close both the positions before expiry – in fact, I’d suggest you close this rather than keeping it open
      2) Yes, that is correct. Or you can look do this – you paid a net of 17.7 and if you square off you will get 39.8. Hence you make 22.3 as profit
      3) Yes, you can
      4) Yup.

      Good luck, Priya.

  47. Hari Haran says:

    @Karthik . Thanks for putting effort to prepare all these topics so new bees like me can an great understanding.
    I needed an help in options as all your explanation doesn’t consider STT applied after exipry. https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx.
    How do u think this will effect trading options ?

  48. neel says:

    Message from NSE
    Dear, your traded value for 06-06-2018 CM Rs 240000.
    What does it mean i have to pay this amount?

  49. Anand says:

    @karthik,
    I have one basic question, please consider below example

    BankNifty weekly expiry: 21June 26500CE
    Scenario 1: Buy Price: 50 Sell Price: 70. Profit = 20*40 = Rs 800/-
    Scenario 2: Buy Price: 50 Sell Price: 40. Profit = -10*40 = Rs -400/-

    Is the above profits correct? In your examples, we are completely subtracting the premiums paid. Please clarify

    • Karthik Rangappa says:

      Yes, you can simply take the difference between the buy and sell price of the premium, multiply it with lot size and get the P&L.

  50. Aksh says:

    When we buy a straddle. The strategy will no more be delta neutral when the market starts to move.

    If the morket moves up delta and gamma of the call option would go up. As the option will be moving from ATM to ITM. at the same time the gamma and delta of Put option wil be decreasing as the put option will be moving from ATM to OTM. which will result in net profit for every point the market moves.

    Same scenario with put option in case the market goes down.

    Am I right?

    If we apply the straddle for intraday or swing trade with a long expiry,Do u think it will be more benificial ? as the effect of theta will be less and both call and put premium will hold some value and will not expire at zero.

    This strategy is best suited when we expect the market to move a lot in either direction bcz of election result ,quaterly result, RBI rates, correction phase of market etc. If we expect the market to move substantially we should place the trade some time before we expect the maeket to move. As near the announcement or other event the IV will be high which will offset any gain which we may make. If we apply stradle before some time we expect the market to move we may even gain from high IV at the time of announcement. Am i right in thinking so?

  51. Aksh says:

    EDIT :
    When we buy a straddle. The strategy will no more be delta neutral when the market starts to move.

    If the market moves up delta and gamma of the call option would go up. As the option will be moving from ATM to ITM. at the same time the gamma and delta of Put option wil be decreasing as the put option will be moving from ATM to OTM. which will result in net profit for every point the market moves.

    EDIT : HOWEVER THIS SITUATION IS ONLY VIABLE WHEN THE MARKET MOVES TO A LEVEL WHICH CHANGES THE ATM STRIKE FROM THOSE WHICH WE HAD BOUGHT IN THE STRADDLE. AM I RIGHT?

  52. Aksh says:

    EDIT :

    In the first scenario about making gain in long streaddle for every point the market moves, i would like to add the following :

    EDIT : HOWEVER THIS SITUATION IS ONLY VIABLE WHEN THE MARKET MOVES TO A LEVEL WHICH CHANGES THE ATM STRIKE FROM THOSE WHICH WE HAD BOUGHT IN THE STRADDLE. AM I RIGHT?

    AND THIS SITUATION IS ONLY VIABLE WHEN THE % OF CAPITAL INVESTED IN BOTH CALL AND PUT OPTION IS THE SAME. AM I RIGHT?

    WILL THIS STRATEGY STILL BE A LONG STRADLE ? AS IF WE INVEST EQUAL % OF CAPITAL IN CALL AND PUT OPTIONS INSTEAD OF EQUAL LOTS , THE DELTA MAY NOT BE ZERO. I THINK IT WONT QUALIGY FOR A LONG STRADDLE

    I JUST WANT TO MAKE SURE MY BASICS ARE CLEAR

  53. deep says:

    i think long straddle works for banknifty as it is highly volatile and 200 points move is not a a big deal for banknifty

  54. Yazad says:

    Hi Sir,
    Thank you for these informative articles.. I just wanted to know how do you estimate the ‘implied volatility’ of a stock? Also for an index, is VIX the implied volatility?

    • Yazad says:

      In continuation to my above question, if implied volatility < historical volatility at the start of the month, then there is a high probability that this strategy will yield profit.. Is my understanding correct or am I missing out something?

    • Karthik Rangappa says:

      Yazad, this is a complex task and highly quantitative. Models such as GARCH (1,1) and GARCH (1,2) helps you estimate IV. Yes, VIX is the index’s IV.

  55. SHRUTI SUNIL GUPTA says:

    Sir, can this strategy used during election results?

  56. Santhosh says:

    I am proposing a hypothetical situation. I will short a straddle of the present month and go for long straddle of the next month expiry preferably after second half of the present month ( calender spread). I am expecting three things to happen.
    1. I will be benefitted by theta decay as the theta of current month will decay faster than next month. So range bound market will be desirable
    2. If there is any drastic increase in IV, i will still be benefitted as the vega of an option with more time to expire will increase faster than short month expiry option. Since I had gone long on next month expiry, I will be benefitted.
    3. If there will be a drastic movement on one side, one of my options gies ITM and I dont have to worry about the delta as the delta of deep ITM will be near to one irrespective of the time to expiry. Delta of deep OTM options will be negligible in both the cases.
    Even if it gives small profit, I am almost risk free.
    Please correct me if I am wrong

    • Karthik Rangappa says:

      1) Yes, the theta decay of the current month will be faster than the 2nd month
      2) This can be a bit tricky, your current month options can bleed. But this really depends on the way markets are position at that point and how other greeks stack up
      3) Agree, but this cant be entirely risk-free for reasons mentioned above. I’d suggest you plot this on excel and see the payoff.

  57. Santhosh says:

    1. Yes sir, you are right. Current month option can bleed high. I tried using sensibull builder. May be because of higher gamma. The rate at which the delta changes at current month may be higher than the next month. Because the IV was higher for far month options. However for me, this looks better than naked straddle/strangle!. It protects me to some extent from any black swan events. And price has to move significantly for me to incur substantial loss.
    2. I could not draw its payoff using excel as we are not certain about the options prices for the next month at the time of this month expiry. Hence used sensibull. Could not predict the volatility to use black scholes calculator. How I could do it?

    • Karthik Rangappa says:

      1) I agree, Santhosh. But a black swan event, by definition, is supposed to be extreme 🙂
      2) Hmm, I should have thought about it. B&S does not help you predict the volatility, you’ll need separate models to do that.

  58. Xavier Ghorkana says:

    Hello Sir,
    How to Calculate Implied volatility for stocks and Index?

    Thanks

    • Karthik Rangappa says:

      There are several models such as Arch (1,1), GARCH (1,1), which will help you calculate the implied volatility. However, this is quite complex.

  59. Harsh Singh says:

    Dear Karthikji
    I’ve few questions here
    1) Since we know if implied volatility increases price of options premium increases. But big doubt is that due to increase in volatility the index or stocks will fall, thereby reducing call options premium but increases put premiums. Isn’t this contradiction. Or is it so that increase in volatility only increases put premiums ?? Will call premium increases if market falls due to high volatility. Only one example of deep OTM call premium u’d shown in late August 2015 5% big market crash. Kindly cLear me this with some examples
    2) Can we implement OTM options long straddles ? In this can both put and call be slightly OTM equidistant from ATM during major events like coming elections results or two weeks before(if got such opportunity when time to expiry is long & low volatility) corporate results ? Although payoff structure, market direction, volatility and theta I’ll keep in mind…
    Thank u for giving time 🙂

  60. Manoj says:

    Hi Karthik,

    Amazing article..

    One question though..
    When we are talking about volatility in this, which one are we talking about?
    is it IV (Implied volatility) or VIX (India VIX)?
    And if its IV, how do you guage if IV would increase or decrease? does VIX has any relation to IV of each option?

    Many Thanks,
    Manoj

    • Karthik Rangappa says:

      We are talking about the IV, Manoj. You can use any basic B&S option calculator to extract this. Check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator

      • Manoj says:

        Thank for a reply Karthik.. Really appreciate it..

        Just a last time… it leads 2 questions for me then..

        1) Does that mean IV is separate value for each stock & Nifty and also differs by strike price and expiry?
        2) Does IV for each stock and Nifty have any standard gauge to assess if its low or high?

        • Karthik Rangappa says:

          1) Yes, IVs are different for each stock/strike/expiry
          2) Yes, volatility cone helps you figure this out. You should check out https://sensibull.com/ for this.

          • Manoj says:

            Hi Karthik,

            One query before actually jumping on it 🙂

            Suppose trader writes a call, lets say writes a call of strike price 12000 on Friday for next Thursday expiry (5 days to expiry).

            Now during week till next Thursday expiry,

            1) if spot moves above 12000 in intra-day, would it be termed as lost contract and call writer loses money since it touched above 12000 in intra-day?

            2) if spot closes above 12000 in one of the day before expiry, would it be termed as lost contract and call writer loses money since it closed above 12000?

            OR
            3) Only on expiry day if spot closes above 12000 then call writer lose money??

            Many Thanks,
            Manoj

          • Karthik Rangappa says:

            1) He may experience a notional loss, but then he has time till expiry
            2) Same as above
            3) Yes, he will.

  61. Satya says:

    Hi Kartik,
    Bollinger bands show volatility. Can we use that while creating a straddle?
    While creating a straddle should I check volatility of the spot or I should check for each strike(Call and put)

  62. Satya says:

    I am totally confused with the movement of option price. Right now market is 11673 up by 30points but both CE and PE are down. If I take a straddle then both are down. How the profit will come?

    • Karthik Rangappa says:

      Satya, this depends on the strike you’ve selected. Also when the volatility lowers, the premiums also come down.

  63. Satya says:

    Dear kartik
    I am a beginner to option trading and TA.
    Recently I learnt OI analysis to initiate a trade. It is fantastic. Now I am facing some challenges like analysing bank nifty. The OI change is so fast I couldn’t track and lost money heavily.
    I checked OI data from NSE INDIA.COM
    But the Oi data gets updated every 3minutes.
    Can u suggest anywhere I can check the OI changes every minute or less than that

  64. Satya says:

    Kartik
    I track OI data along with RSI, volume, MacD.
    Now after watching varsity trying for hanging man and hammar to catch the trend.
    But still I am not sure, if these set up are enough.
    Can u suggest a guideline

    • Karthik Rangappa says:

      I personally think the emphasis should be on the candlestick pattern and not really on the OI/indicators. The patterns reveal trends when they form.

      • Satya says:

        For trading prospective I get lot of noise in 1minute candlestick chart.
        Can u share the habits of successful traders.
        How do they choose a trade?

        • Karthik Rangappa says:

          That’s largely based on the experience of the trader, Satya. But yes, I do agree, 1 minute is a lot of noise. It is best to deal with 10-15mins for intraday if not for EOD candles.

          • Satya says:

            Dear Kartik,
            If i am following 10minutes candle, I am missing big moves like today. All big moves are over in a span of 10minutes.
            What should be the strategy.
            I want to learn the right approach.

          • Karthik Rangappa says:

            Well, the same big move can be in the opposite direction whipping out your gains. So at the end of the day, this is about figuring out the right balance between risk and reward. I still think 10 or 15mins works well for intraday. Maybe you should evaluate this over more trades.

  65. Satya says:

    Kartik,
    Now I agree to your views regarding 15minutes candle.
    Please suggest the other combinations of indicators which I should follow

    • Karthik Rangappa says:

      Frankly, indicators should be secondary, your primary analysis should be based on candlestick patterns 🙂
      Anyway, apart from that, I like trading setups based on indicators such as Bollinger bands and ATR.

      • Satya says:

        Dear Kartik,
        I am using Bollinger band too. When it gets narrow, a breakout follows.
        Now if I take a straddle position, will it become profitable?
        Like yesterday bank nifty moved 500 points. In the case of yesterday, what would have been day end scenario?

        • Karthik Rangappa says:

          The position needs to be initiated when the band expands…with a hope that it will narrow down (reversion to mean). If you are following BB for options, then you should also look for the volatility. This is because BB deals only with the price but straddle is also dependent on volatility.

          • Satya says:

            Dear Kartik,
            I couldn’t follow your reply.
            What I mean to say that BB narrows just before a breakout either up or down.
            If I consider to take a straddle position intraday, during this narrow period, do u think it will b profitable?

          • Karthik Rangappa says:

            Ah, sorry…I didn’t get your question earlier. When the BB is narrow then it implies that the stock is at the mean. There are two problems here –
            1) The breakout (or expansion) can happen in either direction, which is still ok considering you are setting up a straddle
            2) The stock can remain in the narrow state (at the mean) for an extended period.

  66. Satya says:

    Dear Kartik
    Can u please advice when should we go for straddle and when we should go for strangle

    • Karthik Rangappa says:

      Straddle when you expect a sharp movement in the stock almost on an immediate basis but not sure which direction. For example corporate results of a company. Strangle (short) when you expect the stock to be range bound over the defined time period. You can almost always work with a long straddle over a long strangle.

      • Satya says:

        Kartik,
        Everyday is a new day and everyday we come across cases like Yes bank or something else, which makes the market highly volatile.
        Then how do we judge the market whether range bound or directional

        • Karthik Rangappa says:

          Satya, the only differentiator is momentum. If you see momentum picking up across a wide set of stocks, then perhaps the market is setting itself in a direction. In the absence of momentum, it is range bound. You can start with this assumption.

  67. Satya says:

    Hi Kartik,
    I need a strategy for may in options. I am convinced that this is a very rare opportunity in equity markets. Can u help

  68. Satya says:

    Kartik
    Now I am learning candlestick. I have a doubt. If I am interested to take a trade in options, should I concentrate on spot candle or the strike candle

  69. Harsh Singh says:

    Dear Karthikji

    Straddles or strangles, according to theory, requires large move of market movement, large breakevens & perhaps other things into account like volatility, time etc. But what I’d seen in real trades are very different. I took many screenshots of different price actions, at different points & put that things on paper studies too from last 2 months. As u’d seen period of March is relatively low volatility months & Nifty shootup 1200 pts. April is high volatility months. My observations is that along with some questions many times on both “high & “low” volatility day there HAPPENED CONTRADICTIONS TO ABOVE THEORY.
    The gain in say call premium offset put premiums much before breakeven point happens. Both in nifty or banknifty etc.
    My question is
    I’m confused here why this happens & differ from theory, even strategy like bull call spread is showing different results from theory ?? Or is the above theory valid only for options holding till expiry day or is real time trading is different from theory… kindly feedback your experience for my doubt ?

    • Karthik Rangappa says:

      Volatility is the key factor for these strategies, Harsh. You need to assess where the volatility stands before initiating the strategy. This is more important than the directional move.

      You can hold till expiry, or do what most do – once the directional move kicks off, the square of the loss-making leg and ride on the winner.

  70. Raj says:

    Hello Karthik,
    Can you please help me to know this:
    Case 1: Low volatility and market goes up (bullish)
    I recently experimented long straddle when volatility is low (VIX) and at the rise, and buying CE + PE at the money (zero delta) works as expected.

    Case 2: Low volatility and market falls (bearish) ===> And here is where i see straddle fails at times.
    I see at times that CE loses more money than rise in PE, hence net result is a loss in long straddle.

    But again when market falls, shouldn’t the volatility increase, increasing the price of both CEs and PEs. Then why do CEs lose more value than PEs when market falls? Is long straddle not an ideal situation here in bearish markets?

    Kindly suggest.
    Thanks much

    • Raj says:

      Adding:
      Same as in Case (3) is also seen in case of high volatility and bearish fall. That is CE loses value more than PE.
      I know fall in volatility implies fall in premium. Shouldn’t CE and PE lose premium equal rate, rather than CE losing more than PE?

      Or in summary, strangle fails more often in bearish cases.

      • Karthik Rangappa says:

        Like I mentioned in my reply to your earlier comment, this depends on both Delta and the volatility, Raj.

    • Karthik Rangappa says:

      Raj, with the drop in markets, the volatility increases. With the increase in volatility, the options gain value. However, this depends on the extent of the fall and the extent of the increase in volatility. Sometimes it can so happen that loss in CE (attributable to Delta) is more than the expected gains in CE (attributable to volatility).

  71. Anshul says:

    Hi Karthik,

    First of all hats off to your amazing knowledge. I read your fundamental posts and now this technical stuff, you seem to know everything 🙂 and have put lot of effort to explain stuff in a simple way. Thanks for this.

    On quick question, Is it true that IV will increase in case of both breakout and breakdown? If thats the case consolidating stock will always benefit from long straddle assuming we are beginning of expiry hence insulated from Theta, isnt it?

    Regds,
    Anshul

    Regds,
    Anshul

    • Karthik Rangappa says:

      Thanks for the kind words, Anshul!

      In case of a breakout, I IV may actually drop. Yeah, with the passage of time, you will benefit from Theta decay.

      • Anshul says:

        Theta Decay will hurt the long straddle right?

        Also suggest me something, lets say IV is low (1st or 2nd quadrant), stock is consolidating and a breakout happens at start of the series. In this scenario can a long straddle be expected to make money?

        Since overall Vega and Theta are both against and only Delta favours the strategy hence does this mean that Long Straddle will work only when when breakdown happens?

        Getting confused with this stmt in the chapter — The market should make a large move – the direction of the move does not matter

        • Karthik Rangappa says:

          Yes, you can as the effect of theta decay is lesser at the start of the series. Here are two generic things to remember with long option strategies –

          1) Theta will have a -ve impact on long options
          2) Hedge against theta decay is more time to expiry…which means long options are best deployed at the start of the series.

  72. Satya says:

    Hi kartik
    Now I want to go for straddle ( will buy both PE and ce) only for intraday. Let’s say I have a capital of 50k. How much exposure I will get for intraday straddle buy. Same question for intraday straddle sell.

    • Karthik Rangappa says:

      I’d suggest you check the margin calculator – https://zerodha.com/margin-calculator/SPAN/

      • Satya says:

        I am not able to understand span. Because there are 2 options. One is buy and another is sell. But in my case I want to buy both buy PE AND CE.
        And want to sell I PE AND CE
        Roughly some broker are giving 20x, 50x margin for intraday Index trading.

        • Karthik Rangappa says:

          Satya, to buy options you need to pay up the entire premium required. If you want to hold the short position intraday then yes, you will get some margin advantage, but for all the overnight position you will have to pay the entire margin/premium required. The broker will have to pay a penalty in case of a margin shortfall from the client’s side.

          • Satya says:

            Kartik, that’s what I want to know. I want trade intraday straddle with a capital of 50k. How much multiple I will get exposure. How to know it and whom to contact?

          • Karthik Rangappa says:

            Satya, to know the exposure, you will have to add the stock/index name on the span margin calculator and see the margins required. Else, I’d also suggest you call our support desk for this.

  73. Satya says:

    Today I just saw my Zerodha page and it is showing that nifty at 12032 up by 209 points.
    Vix is low at 13.9
    Can u please help me to understand what is this. How come it is showing a growth of 209 points

    • Karthik Rangappa says:

      Y’day was mock trading session, Satya. Mock trading sessions are for brokers to test their systems. So the values you saw were all random.

  74. Satya says:

    I want to go for straddle. Which expiry should I choose

  75. Satya says:

    What is your opinion. I think this is a perfect point to enter a straddle. Vix is all time low. Some news and events including budget is on monday. Text book copy paste position.

    • Karthik Rangappa says:

      For a long straddle maybe. But I’d have been more convinced if the volatility was higher to a short straddle.

  76. Satya says:

    Hi kartik,
    This market is still a puzzle. And many things to learn.
    What I observed that selling a straddle doesn’t work in a trending market. It works only in a range bound market.
    Can u guide regarding choosing the strike price. For intraday straddle

    • Karthik Rangappa says:

      That’s right, in a trending market you need to be net long delta (if the trend is bullish) or net short delta (in the trend is bearish). Delta neutral works best when the markets are not trending.

  77. Satya says:

    Where to find greek values Kartik! Including delta figures

  78. Satya says:

    Kartik,
    Day before yesterday, nifty had a bearish candle. Market was waiting for direction to move up or down. International concerns pushed market below. And all indicators were negative. But market sentiment changed yesterday and it went up 100 points.
    In this scenario, let’s say yesterday morning, what could have been done to anticipate the market movements either up or down!

    • Karthik Rangappa says:

      Satya, it is tough to take a call. Most often the cues come from the price action (charts), but then when there is fundamental news, then that has a bigger impact on the market’s direction.

  79. satya says:

    Can you please give example

    • Karthik Rangappa says:

      For example, when the budget is around the corner (fundamental event), the candlestick patterns do not play a part.

  80. Satya says:

    Kartik, can u plot a sale with ideal situation.
    Like
    Range bound market
    Delta neutral straddle
    Volatility around 17
    Gamma?
    Theta?

  81. PL Subramanian says:

    Karthik
    I have reading your varsity article. They are very good and flow is interesting.
    I have a question
    How would I manage margin? Zerodha or any broker holds to a big amount as margin. If I carry over a position say Put Spread to next day my money will be held? Is there any way to handle it. Zerodha had products BO and CO but that works for intraday only.. please advise

    • Karthik Rangappa says:

      Thanks.
      If you intend to carry forward a position, then you will have to have the entire margin required for it. In fact, any shortfall in the margin, the exchange will levy a penalty on the broker.

  82. Satya says:

    I mean to say an example of an ideal scenario where we can take a position.
    Like described in text book

  83. Satya says:

    Kartik
    I have a query. Today nifty closed to 11950. Then why PE and CE for 11950 became zero. What is the rule. Can u please elaborate on this topic

    • Karthik Rangappa says:

      You must be looking at the weekly expiry. Options that are out of the money and at the money expire worthless, hence the value was 0.

  84. Satyam says:

    Sir Please add other strategies also like iron condor and iron butterfly

  85. Satya says:

    Kartik,
    I have a query regarding Friday 12th July nifty movement. There was a movement of 100 points. Most of the time nifty stayed above pivot. But I couldn’t identify a single candle which was a clear buy. May b my limited knowledge. I am following 5minutes candle.
    Can u please check and elaborate the candles to understand the move.

    • Karthik Rangappa says:

      Satya, if there was no trade opportunity, then it is fine that way. There can be a movement in the market, but if the market does not present you with an entry opportunity, then there isn’t much that you can do.

  86. Satya says:

    Dear Kartik, my question was “Did i miss any candle?
    I am a student, therefore I want know, if my observation was right or wrong.

  87. Francis says:

    Hi Karthik,
    First of all Thank you for an amazing series of modules in zerodha varsity.It gave a lot of insight to newbies like me.
    My question.
    1)Is it a good idea to buy a long call option with 1 or 2 years of expiry, instead of buying stocks/etfs ,if it is available at low volatility.
    2)And in case if market direction reverses buy a put option to hedge it on a short series like monthly expiry,still holding the long term call option.
    3)Is the overall strategy a good one.
    4)is there any other factors to be considered to make it a more safe bet.
    note:- I work in U.S. and as far as know long term u.s etfs and stocks options have good liquidity as compared to nifty.

    • Karthik Rangappa says:

      1) If you have such a long term view, you’d rather buy the stock right? Anyway, if you do get the pricing right, then maybe its worth it. I’ve never explored this much by the way (simply because we don’t have such a market in India)
      2) The costs would go up, not sure if you will have any added advantage after considering the cost/tax benefit
      3) Yes, provided you get the pricing, tax, and cost angle right
      4) Frankly, I can’t think of any now, have to spend some time understanding these long-dated option contracts (also called leaps)

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