Make Money in BankNifty using Options Selling in a Range Market
Hello hello this is Vivek Bajaj, co-founder of stockedge and elearnmarkets today we will again discuss rule-based trading, systematic trading, and options trading this is a very confusing trio. As I have said before, that if you do not have a systematic way of trading then you might not stay for long in the previous videos, we have talked to many experts, and they have shared their experiences and method please watch the previous face2face videos to understand the rule-based and systematic capsule I have started so today my guest is less than 30 years of age and he is 29 years and he is doing rule-based systematic trading for the past 5 years he is following the market for a long time but he is in the core market for the past 5 years we discussed systematical and rule-based trading, and I was impressed. that he knows so much in a young age, so why not take it from him and give it to you people so let's start this, we have with us Sourabh. Hey Sourabh! Hi Vivek ji, Hello Sourabh! How are you? thank you for inviting me to your face 2 face. I am honored to be here
It is my pleasure to host you because you are few of them who are successful even before turning 30 when I was 27 I was not even sure what to do in the market but you are 29 and you know how to use techniques and stay in the market so tell us something about yourself as you are well qualified. We would love to know about your journey and then we will move on to rule-based systematic trading I come from a Marwari family that does not consider trading as an occupation. When they ask me what do I do I say trading, so they ask me but what job do you do so they do not take trading seriously. I have given workshops in top houses like IIT, IIM I have given lectures in systems trading and I also come on CNBC at 12 pm. So after coming on TV I got some recognition and people started thinking that I am doing something
I come from a computer science background and use a lot of data. I realized that it was not my cup of tea systematic trading, options trading, and other things I have an edge in consistency and making money in the market we have a team of core traders and computer scientists and we deal with systems driven trading you have done CFA so you have studied stocks, fundamentally before systematic trading, you must have learned about technical. In CFA, they do cover technical analysis you have used systematic and rule-based in options trading. So I want to know how did you feel that this is not your cup of tea and you need to step out?
I realized that people only gave information about Rakesh Jhunjhunwala or warren buffet because the information was very limited now everyone has access to information. I am a firm believer in examples to back it the next quarter you see the results are bad I see people value fundamentals but many people buy stocks in the next 5 years, things will change. Our purpose is to make money by buying stocks and to go up I am not buying to wait and hold I realized that technical analysis gives you an edge and an idea of how to trade I realized that I cannot do future trading day and night because that was stressful for me then at least I am able to manage the damage I am able to capture the time value, time decay, so I realized options is something that gives you an edge so you can make money in the market, for me options has an edge and doing it via systematic management I will request you to speak in Hindi for the wider audience because your information should be given to more people okay Vivek ji, I will try to speak in Hindi so it is great talking to you, I can see your smile and feel that you have a lot of information. So now I will make you the presenter so take us on this journey so this is your presentation so I will directly start with the presentation so today I will talk about nondirectional trading. You all do directional trading such as this stock will go up this is about nondirectional trading that how can you can make money without any directional sense we can do this with the help of time decay, which I will explain in the end..but today's topic is non directional trading
non directional trading is capturing time decay and managing the deltas so what is that I will explain you, but why do we need to do it in the first place why do you want to trade non directionally because markets are 80% raise and 20% trending sorry to interrupt but I will be asking you idiotic questions in between because I might not be able to understand few technical terms so should I start again? No no it clear till now..you can proceed but why should we do nondirectional trading..as I said market is in 80% raise and 20% trending If you see this data then this is bank nifty's 14 year old data It says plus-minus percent and some total vocabulary if you see then the calculation shows 80% raise in the bank nifty this means that the market has no big movement, it only works 2-5% 2020 was a volatile year, so most of the time the market is in a raise if we have data and we know how to play in the range market and have knowledge in time decay then we can make money so generally range market has different ranges so it becomes difficult to make money so using the time decay concept we can make money in the range market that's right Vivek ji, and I would like to tell the viewers that if they are trying to trade trend policy system they can also do it with nondirectional trading system so when the market is choppy they can also make money through nondirectional trading system overall the drawdown will be less very true, fantastic. Let's proceed
I want to show you another data from the bank nifty so it is high. The probability of price going 4% higher than the open it is 0.75 in bank nifty which means in 4% intraday, 90% is not there so we can do directional trading here knowing that the market will not give a big move so we can use this information to trade non directionally I have given 2 data points...first was that the market can range for the week and intraday percent can move is very rare okay so what is time decay...if you will see this
there is a chart of expiry. It shows the expiry and when it is coming near to expiry so if you see the chart it has a premium option and when it is coming closer to the expiry if it goes till 0 then it means that the market is volatile if everything is constant then option with time is decaying premiums decay with time and we will use this in our trading and why does this happen, when you take options then 2 things happen intrinsic value and extrinsic value..intrinsic value is all about time and if the market is flat then the money keeps going down so keeping this strategy in mind we will trade in future okay got it so you can see the market is in the range all the time, the intraday is not moving so there are these 3 things, so how do we earn money with time decay so we will sell call and put both but the biggest question is when and what to sell so let's discuss that there is another statistical concept that I want to explain to the audience in a simple way if today's open is under the range if today's open is between the high and low..I will repeat it again..if it is between the high and low. High is 30,000 and low is 29,500
so we will say open is within yesterday's range when this happens then violin plot happens...this says how the distribution is distributed the data is wide and the white dot is the median the data is distributed around so if you see then the it is distributed between -2 to 5 those small data that has tail are very rare so we don't want to trade every day but only when the open is in yesterday's range that time the market is sideways and it is telling us the market plot so to make it simple when the market is in range then the chances of range-bound us more we have to take the straddle when the market is open more chances of range-bound wow fantastic that's a great input..let's move ahead so let's talk about the system how we will trade when the market is favorable then it is better to trade the straddles because the market is becoming more range bound if today's open is within the previous day range ..I will again explain this in simple terms if yesterday's high and low is within the range and if it has not opened till 9:25 if the high and low has not broken down so we will make an ATM straddle based on the open price in straddle you will sell the call and put I will give more examples for everyone so at 9:25 we will make an atm straddle and sell the call and put if the market is in range and the high and low is not broken that was the first point now the second point is that you know options is unlimited risk so we need to have a stop loss also stop-loss will be the 10% of the combined premium so many people do not know how to use combined premium so I will tell you the trick on how to trade this assume that the premium of straddle is 200 10% of 200 is 20 so if your premium is 220 your stop-loss is hit so this is your basic logic..we trail also using the same trend
I will explain this in my excel so first condition is that it should stay within the open range today's open should be between the high and low and previous day's high and low should not break we can trade only if these 2 conditions are true suppose this condition is true taking a hypothetical example suppose the high was 30,000 and the low was 29,500 and yesterday low suppose today's open is 29,700 if you see it is within the range then the first condition is true so till 9:25 everything is in range so how we will trade, we will make the straddle when the range is open so we will sell the call and put in the same price why are we selling because we want to capture the time decay options has time value so if you are selling something then time value will help in making money you can earn profit that's how you can earn profit we are selling both call and put because we are not taking any other direction if we are taking the hypothetical example then we will also take the real example the premium for both put and call was 200 so your combined premium is 400 400 will be the premium so in 9:15 you took a decision and sold both of them option selling has unlimited risk so if you do not have risk management then you can never be a good trader risk management is a prime thing in option selling so your stop loss is 10% of combined premium so the 10% of the combined premium 400 is 40 so we will wait for your stop loss and we are selling the option so we will make money when the premium of the options will be less if the premium is 440 then we need to get out of the trade so if your bank nifty is 440 then the loss will be you will lose 1000 in one stop loss if the premium was more then the stop loss would be more correct..okay So this is clear, then let;s move on I also said that we are in trail using 10% so you took the trail and used the money..many people will ask how did you use the combined premium in the end we will also discuss how we can trade without using the combined premium but we will discuss based on the combined premium will tell you how to trade this even without an algo so trade using 10% and you have also taken the stop loss suppose the premium was 9:25 once you will understand this you will realize that their not much left to understand so after 10 pm assume this premium becomes 350 so how your stop loss will be trailed..it will be done using 10% so at 10, your premium is 350 when your premium was 440 then your stop loss was is it high or low, so we will make a straddle and go on with the nifty suppose it was 51 so you will sell 24,200 okay..fine.. both are satisfied need to make straddle this is the chart of bank nifty..you can see how it is going, sideways you can see the chart it is opening where it is closing so we made a straddle of 24100 and it was made at the premium of 26500 we stopped trailing here and if you see then there is a spike here so our combined stop loss of 10% has become a hit so we made an exit here around the premium of 180 so if you see then in this trade it is 20 to 140..you made a profit of 80
so this is the power of management.. that the market was flat and we still made money next, we will talk about 30 january 2018 I am opening the chart so you get a better perspective why have you selected specific dates? these are the days when the market has gone in my favor and I have also selected the days when it did not go in my favor so this strategy is not for every day or every week? most of the time the market is in the open range if I ask you the accuracy of this trade...not in exact numbers but what is the accuracy percentage of this system basically loses will happen options so we will look into it from our variant and we also backtest from our end that is a little complicated so I will not explain that in 12 months we are profitable 10 months October was bad for us..the market went up and then down so few months are bad but some months are excellent like December there was no need to do anything in December because the market was sideways so can we add the component of Vix..that we should not do it? no, we should not add because in march 2020 it was really high in the same month, vix was high and we could not do it so when the vix is going from high to low then only we can make money if I am selling call and put then I will think about it as a bearish instrument it is bearish when it is completely going down I understood so let's take another example this chart is from 31st January and the bank nifty is 27500 that's why we will straddle 27500 bank nifty was continuously going down so you get the entry around 500 more than the delta, the time decay was the dominating factor if you see then the movement in the market was slow, so it was possible to make money another date if you see 6th June 2018, then the open is 26266 and it has opened in this week now we will again trade that day and see what happened got entry at 9:15 at around 340, decay was good and the closing was at a good time that day the market went up and down and the market was pretty flat okay got it let's see the last example when the trade was in favor let's see what happened in 2019 so on 18th April, the open was between high and low so our condition is satisfied so we will see what happened on that day the banner was going down in the intraday it decayed and then it closed properly so if you see when the market is sideways, you can make money through plan B now I will show you examples where there was loss..and I have said risk management is necessary for options selling
so can we move forward? yes I am more interested to know how can we stop the loss of money like you said I have given you examples of days when I made money it will not be the same every time..option selling has a lot of risks involved but with risks, we also have an edge here and from the violin plot, we got to know that the market is not always sideways in options selling even if you are doing one wrong trade you can get out of the market I would like to share the most important risk that I have experienced in all these years if there is a big movement then there is a risk as I said in the first slide about delta that it is a movement underline the movement of the price is delta that is our risk because we are selling options the second risk is vix or volatility, which keeps changing if there is an event such as surgical strike that changed it even if the market was flat, the premium increased 3rd is the gamma risk that occurs when the delta shows some change on the expiry day you must have heard zero hero trade expiry another risk is option freeze that usually happens on the expiry day in the end, I will tell you when not to trade a large movement that is underlined option traders will remember the date of 20th September 2019..so what happened that day you see this bank nifty chart you can see what is going on here as I have written, in options selling you eat like a chicken but shit like an elephant if someone is selling 2 rupees premium so they will get 2 rupees in return every time so options selling is risky that's why I said to eat like a chicken and shit like an elephant..I am not trying to scare but that is the reality if you take the risk lightly then making money will be difficult as I said before you can make money in these 2 days if you see then my name is written and it is my chart I sold in 169 and in 220 my stop loss was a hit I got out of the market but the loss was not so big that's why I wrote cut losses quickly, if you are doing options trading then you need to cut your losses you cannot wait for the market to get better, I have seen people losing 80% of the profit they were thinking that it increased 5% so how it will increase more that day the market did not stop loss will happen but you need to cut them it is not only about one trade, but we need to make money in every trade. This is the advantage of a systematic trading system do not judge yourself due to 2-3 trades and start changing your system to make money..it is about a series of trade
so we have to be consistent like casinos then only we can manage risk can't we stop the loss by doing hanuman chalisa? no, I don't think so, if someone was doing hanuman chalisa on 20th September 2019, see what happened the next day we cannot trade with hope, small loss is easy to manage if you do a big loss then 2-3 months will be wasted and your confidence will also get low now let's see another example..21 september 2019 straddle of 29600 went from 350 to 850 in 40 minutes you must be thinking that if the trade was not cut then it would be a loss of 500 it will take 20-15 days to earn a profit suppose the stop loss took you out of the trade the day you learn how to cut losses or get out with a small loss then you will be a good trader will show you another example, if the market is trending and if the previous day was broken even then if you are making money, you have to look at the bank nifty charts if you are trading this premium then it should go down if the premium is going down then you are making money..I have seen the market closing at a straddle of 500 most of the time the break out occurs so what is more problematic sometimes we get a decay after many high lows Understood so that day you will see that the straddle closed really on the top it is about the delta and the bank nifty there is a spike in the straddle the 200 rupees straddle in the open is now 350 at 10:10 pm there was a stop loss it was a total loss of 140 points the market was sideways after a long time of opening in selling you can have a loss when there is a movement it spiked and the 350 raised to 700 that day the premium was already spiking the combined premium was already at risk how do we counter event-based volatility through this system I think you read my mind because this is my next slide only you can use the same concept in nifty because many people I know are doing in bank nifty another think I want to say is that whenever you are trading just back with data you can see how the technology is advancing, data analysis is popular. If you back it with data then it is more useful even if you are doing directional or nondirectional trading, then follow a system and don't bring your emotions in between, and do it consistently. then you will see more success in the market..another thing I want to share is
the tool I use extensively is I chart if you see the straddle and strategy charts then it gives a plotted chart okay that's great i use this chart when I trade, and when will the market become bearish when it is below moving average so you need a strategy so that day the combined premium will be above the moving average you can do it on your own if you are selling the straddle then you need to make sure that the premium is going up if you are trading you can use IChart and also trading guide this is a free tool so you can get straddle charts you can get an idea that if the combined premium is going down then you can try these are the additional points, and you can also add your own system market is generally in range so risk management is very important so sourabh, you must be using some algo system for the stop loss so how will you do this stop loss the spike in bank nifty as you can see here you got 100 points, there you will also get 50 we get more spike in big investments so let me give you a summary the main thing is when to sell and what to sell we have to see when it is favorable for the put option so you will sell both call and put that is the open range stop loss is the 10% of the combine premium and you need to trail so what will you do? we will add slm from the current market price it will only happen if there is a bigger trade you are doing this for risk management you always need to keep the stop loss in the system it is not necessary that what is suiting sourabh will also suit you but this video was recorded to give you an idea he made a model, backtested it, made rules, and used it if you follow and pen this down then this can become a great strategy we will do a Live for all the learners and we will answer all the questions for them Fantastic, so this last question was the most important part. People who watched it till the end are lucky thank you so much Sourabh, you have a great smile and someday I would like to do a Live with you I do a Live every Wednesday so we will be able to connect with them and they will ask some questions and ask the question then I would like to advise the viewers to learn these strategies and use them and they can ask if they have any queries fantastic, thank you so much for this session..I hope the audience will like it so please share this video I will also provide his youtube link where he is teaching many principles free of cost so you can take your advantage. So bye bye Sourabh take care and god bless you!