We have previously discussed how to make big gains on the expiry day in Nifty using open interest and options chain data. We have seen that all out of the money or OTM options become zero “0” after the expiry. It has also been noted that more than 90% of options expire out of the money. So there is a huge profit opportunity for the option sellers, who are also known as option writers. This post, I will discuss, Nifty and Weekly Bank Nifty options writing strategy, that is used by professional traders.
In another word the market always expires in a way, that favors the option writers most and hits the options buyers most. So the market expires at a point where there is the least pain for the options writers and maximum of max pain for the option buyers. That point is called Max Pain. You can get Nifty and Weekly Bank Nifty Max Pain data live at the Options Max Pain page in our site. To access the page go to MARKET DATA –> OPTIONS MAX PAIN.
So we have understood that on the expiration day price often moves to a point that creates maximum pain for the option buyers. Our options max pain chart shows the point live. You can refresh the page time to time and have an idea where the market is going to expire.
How To Trade Directionally Using Max Pain?
- These trades start just before few days of expiry and close on expiry day.
- If the market is trading 100-200 points from the max pain point, traders can take a directional trade towards the max pain point. Check the image below:
- Suppose the Options Pain is at 9600 and market is trading at 9500 before 1-2 days of expiration, traders can buy calls in anticipation that market will expire at 9600.
- Similarly, if market is trading at 9700 before 1-2 days of expiration, traders can buy puts for the targets close to 9600.
How To Write Options Using Max Pain?
- We can create our Nifty or Weekly Bank Nifty options writing strategy using options pain.
- Suppose the options pain is at 8600 and market is trading close to the options pain before few days of expiry within a 100 points range.
- We have an idea that the market is going to expire near 8600.
- We can simply short 8700 / 8800 calls those are out of the money and also short 8500 / 8400 puts those are also out of the money.
- We can hold the trades till expiry or book profit beforehand as per our convenience.
Due to the weekly Bank Nifty contracts, Weekly Bank Nifty options writing strategy can be created more frequently using Max Pain as we can create a trade setup every week in the Bank Nifty weekly options. We will do a case study on this.
Case Study – Bank Nifty Options (11th January 2018):
The current Max Pain of Bank Nifty index is hovering at 25500 on 6th January 2018. Today is Friday, so market will again open on Monday. See the Bank Nifty Max Pain below:
Now let’s add the 11th January expiry Bank Nifty options on the Market Watch. Let us assume that Bank Nifty will expire at 25500-25600 on 11th of January. 11th January series 25700 call option costs Rs. 138 and 11th January 25500 put option costs Rs. 71.65.
Let’s short both the options. Total premium received Rs. 138 + Rs. 71.65 = Rs. 209.65 (rounded to Rs. 210). So premium received per lot is Rs. 210 x 40 = Rs. 8400. In case Bank Nifty expires between 25500-25700 we will receive the whole premium as both the options will expire worthlessly.
Margin Required For This Weekly Bank Nifty Options Writing Strategy:
Zerodha Margin Calculator shows that we need Rs. 1,43,326 margin for writing these two options. So potential return in these 2 days is Rs. 8400 from a capital of Rs. 1,43,326. That is a return of 5.86% in just 4 trading days. You can test this weekly Bank Nifty options writing strategy at your end. However, I suggest you trade with real money only after rigorous research at your end. I will be happy to answer your questions on this topic.