Comprehensive Approach to Options Writing - Maximizing Premiums

Comprehensive Approach to BANKNIFTY Options Writing - Maximizing Premiums

Introduction:

In this trading idea, we'll explore a strategy for writing both out-of-the-money (OTM) and in-the-money (ITM) put and call options in the BANKNIFTY index. This strategy aims to take advantage of time decay and market conditions to generate consistent income.


Objective:

The primary objective of this strategy is to collect premiums by selling options, taking advantage of time decay, and managing risk effectively. It involves writing OTM and ITM options to accommodate different market scenarios.

Strategy Components:

1. 
   

Out-of-the-Money (OTM) Option Writing:

Call Options: When the market is in a stable or bullish trend, consider writing OTM call options. This strategy generates income as long as the market remains below the strike price of the call options. If the market rises sharply, you may be assigned, so it's crucial to have a plan in place to handle such situations.

Put Options: In a stable or bearish market, write OTM put options. This generates income as long as the market stays above the strike price of the put options. Be prepared for assignment if the market falls significantly.

1. In-the-Money (ITM) Option Writing:
   

Call Options: In a strongly bearish market, you can write ITM call options. This allows you to collect higher premiums as the options have intrinsic value. However, be prepared for assignment if the market rebounds.

Put Options: When the market is strongly bullish, consider writing ITM put options. These options also offer higher premiums due to their intrinsic value. Have a plan in place to handle assignments if the market reverses.

Risk Management:

Use stop-loss orders or defined risk spreads to limit potential losses if the market moves against your positions.
Diversify your option writing across different strike prices and expirations to spread risk.
Regularly monitor market conditions and your positions to adjust as needed.

Writing both OTM and ITM put and call options in BANKNIFTY can be a profitable strategy when executed with careful consideration of market conditions and risk management. However, it requires constant monitoring and adjustment to adapt to changing market dynamics. Remember to consult with a financial advisor and perform thorough research before implementing any options trading strategy.

Now Lets Get into Real Chart Examples :

Chart Reference :


On August 16th, we initiated a strategy involving the writing of both call (CE) and put (PE) options on the BANKNIFTY index (CA.PA). We chose to write options at both the at-the-money (ATM) and in-the-money (ITM) levels.

Specifically:

For the ITM (in-the-money) call option, we selected a strike price of 44,000, which was below the current market level. This means the call option had intrinsic value due to its position below the market price.

For the OTM (out-of-the-money) call option, we went with a strike price of 45,000, which was reasonably above the market level. This call option had no intrinsic value but had a chance to gain value if the market moved in its favor.

Regarding the ITM (in-the-money) put option, we chose a strike price of 44,000, which was above the current market level. This put option had intrinsic value as it was already in a profitable position.

Lastly, for the OTM (out-of-the-money) put option, we opted for a strike price of 43,500, which was reasonably below the ITM price of 44,000. This put option had no intrinsic value but had potential if the market moved favorably.

This approach allowed us to explore different market scenarios by combining both ITM and OTM options for both calls and puts. It's important to manage these positions carefully, considering potential assignments and market movements. Always stay vigilant and be prepared to adjust your strategy as needed based on market conditions.


On 16th Aug 2023 : (OTM)
Call price was 370 to 460,Put price was 1025 to 1178

Lets assume we enter writing 45000 CE and 43500 PE @ 400 (CE) and 1150 (PE)
Total Premium Collected is 1550 on this OTM Writing .

On 16th Aug 2023 : (ATM/ Near ITM)
Lets assume we enter Writing 44000 ITM CE and PE @ 1000 and 600 respectively

Now each day due to time decay and since we had taken both strangle and straddle together .There will be a balance of this strategy even if the price moves between 43500 to 45000.

Only when the price goes beyond this range we need to adjust for making sure to get the win of this stragtegy .

Withing the entry price range if the market moves .This will be to our favour .

Lookout the DailyPnl Chart below of 45000 CE and 43500 PE that shows the outcome of this Entry on 1.Day the position taken 2. on worst day of market move 3. On Expiry day



and here is the outcome of 44000 ITM CE and PE on 1.Day the position taken 2. on worst day of market move 3. On Expiry day


This clearly shows even if the market move violently we shall easily adjust this and get out the strategy with decent win outcome .

Please write your inputs in the comment on your take of this strategy or if you have better learning about option writing .

Reference of Entry and Expiry and how the ATM and ITM position .Here we did not use any indicator for entry .With indicator we can position well the ATM ITM CE PE writing entries with informed decision by the Indicator.
Thanks and Reading .