Comment on Trading India VIX - Simplified

P R Sundar commented on 01 Jun 2014, 08:46 AM

H,
Choosing the right strike price is the skill required by the trader. You go too long, your return will be very low, if you go too close, your risk will be very high. So this is a game of risk-reward. As you have already mentioned, implied volatility is the most important thing to consider. In addition price movement, time value also to be considered. Option buyers are gamblers, they invest a small amount of money, if they loose, they loose only a little, if they gain (though probability is low) they get huge profit. Option sellers are business people, they expect a decent return for their investment. Most option writers have agreement with brokers so that they do not pay exposure margin. (The margin money that you pay for writing an option consists of two margins, one span margin and the other one is exposure margin). So most heavy traders pay only half the money when it comes to selling options, compared to normal retail investors, so their return doubles. Hence they can reduce their risk and yet can get good return. So there is no fixed formula to choose the strike price (if there is any, by this time every one would have been following that), there are a number of other factors like doubling your return by making the broker to agree for exposure margin waiver, diversifying (not selling options only in one counter, sell in many counters so that your risk is diversified), using the wing strategy (For eg, Nifty is trading around 7200, one may sell 6800 Put and 7600 Call, but what I do, since I invest huge money, I sell 6800, 6700, 6600, 6500 Put and 7600, 7700, 7800, 7900 Call, I call this wing strategy), etc. For your kind information, I have made Rs 1 Crore in the month of May, considered to be very difficult month for option traders due to election results uncertainty. For any clarification, you may contact me at [email protected]
Thanks
P R Sundar

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