__Contents on Basic F&O:__

Contents on Basic F&O \(contained in Volume\-I of our Book\) caters to explain about all the basic features concerning Futures and Options as derivative instruments, from trading perspective\. 

Basic F&O also expounds on the varied behavioural aspects of Options, which is the backbone of trading in Options\. Most of the learning material generally available only confines itself to the academic understanding of Greeks and other Options influencing factors, but we have endeavoured to take special care to bring forth the practical understanding about these factors and its significance with respect to its usage from trading perspective\. 

Topics pertaining to Basic F&O covers unique concepts pertaining to behavioural aspects of Options\. This volume also provides detailed guidance on the procedural aspect of F&O trading by explaining different order types, which would enable the trader to effectively initiate and manage trading positions by employing relevant order types basis the action required in trading\. 

Basic F&O also elucidates about trading rules \(*which we are calling as ‘Golden Rules of Trading’*\) which will be kind of a guide for the beginners to set their preparations & expectations right and also a guidance note for the practicing traders to ensure proper checks & balances while trading FNO, and to prepare traders in advance to be mindful of possible situations, risks and temptations pertaining to trading and a guidance note to effectively handle such scenarios through proper risk management\. 

A brief summary of the key topics covered under Basic F&O head, are outlined below:

- *Introduction to Futures & Options, their meaning and usage in trading*
- *Key features of FNO like Expiry series and Lot size etc for different underlying like Indices, Stocks, Commodities & Currency etc\.*
- *Important concepts pertaining to both Futures & Options like LTP, Open Interest, liquidity, volume, bid & ask price and bid & ask quantity\. Long & Short buildup and Unwinding etc\. *
- *Important concepts pertaining to Options like Options Chain, ITM\-ATM\-OTM, calculation of Intrinsic Value & Time Value, Greeks, PCR, Maxpain, Max Concentration of OI etc\. *
- *Long & Short in Futures*
- *Long & Short in CE & PE, calculation of Breakeven to determine profit & loss area*
- *Differences between Long Options & Short Options positions*
- *Options Behaviour \(impact of Expiry, momentum & volatility on Options and other behavioural aspects of Options\)*
- *Tradability of premium & discount between Futures & Spot*
- *Tradability of discount in ITMs *
- *Calculation of future price of Options during their lifetime*
- *Procedural aspects of initiating and managing trading positions*
- *Golden rules of trading \(Do’s & Don’ts \)*

Thus, Contents under Basic F&O \(covered under Volume\-I of our Book\) contains a full comprehensive learning on all essential features of FNO from trading perspective, which every trader must know, so as to be able to trade equipped with thorough knowledge on various factors which makes an impact on Futures & Options\.

__Merits of FNO Trading__

In the context of FNO trading, the most basic and utmost significant questions which need to be addressed is: __why should someone consider FNO trading ? __Entertaining the thought  of considering FNO trading as a career option, appears to be even more dreadful, especially because the success rate in FNO trading \(from profitability perspective\) is less than 10%\. Therefore, such hard facts about FNO trading, would obviously make someone ponder, if exploring FNO trading is worth giving it the time, money & attention it demands ?

Most of us are aware that FNO trading is a very risky proposition, a zero sum game \! However, before it is discarded outrightly \(on the aforesaid ground\), it merits outlining the undisputed advantages it contains, which are obviously the points of attractions for retail traders \(causing many to flock towards it without putting the checks & balances in place before taking plunge into FNO trading\)\.

__*Advantages of F&O Trading:*__

To talk about the merits of FNO trading, the following brief pointers, would suffice in order to appreciate the advantages it offers as one of the straight\-forward clean ways in which BIG MONEY can be made:

1. FNO trading \(unlike investing, which is dependent on bull market\)  can help a trader to make money in all kinds of market situations, whether bull, bear or sideways\. So, a FNO trader is never out of market\.
2. Investment portfolios can take a huge hit due to several adverse market conditions, *viz geopolitics, wars, inflation & recession, domestic issues, scams, non\-compliances & irregularities and so on and on*\. However, FNO trading is not deeply or permanently impacted on account of such situations, infact such opportunities offers a great deal of opportunities to smart traders to make killing profits \(sometimes even with very low capital\)\.
3. FNO trading can be done with a bare minimum requirement of a computer, and a reasonable capital amount, which can be done from anywhere \(with internet access\) anytime\. However, all other business ventures or employment opportunities needs adherence to a time schedule or a fixed place of operation and most of the business ventures would require huge expenses \(both one\-time and recurring expenses on various factors *viz manpower, machinery, office space etc*\) and cash reserves for operations until breakeven\. Thus, FNO trading offers an opportunity to start\-off with reasonably okay capital, least of infra  requirement with anytime\-anywhere operational flexibility\.
4. Most of the employment and business opportunities remain subject to various out\-of\-control factors \(*viz\. pandemic, recession, wars, geopolitics, health issues, demand & supply factors, dearth of material, pricing issues, change of technology or style, job loss, competition etc*\)\. However, FNO trading is an ongoing thing in most of the situations, as markets apparently seems to be the last of the things to close down \(*ofcourse, in case of extreme situations like war etc\.*\) and keeps offering opportunities to a trader to keep making money in ever\-changing/ evolving situations\.
5. No formal education is needed to start\-off with trading\. A drop\-out or somebody not inclined towards academics or somebody with below average resources can also take up FNO trading as an option for regular income or wealth creation\.
6. The stock market offers to all retail FNO traders equal opportunities; there is no discrimination \(on any ground whatsoever amongst the retailers\), politics, groupism, favouritism, bossing\-over, peer pressure, exploitation, unreasonable target pressure, performance pressure, unfair compensation package  etc, which an employee may have to face during the course of his career pursuit at some time or the other, are completely absent in this method of money making\.
7. FNO trading, probably, is one of the few ways which offers clean opportunities to make BIG Money in quickest time even with low capital\. While, on the other hand, in most of the employment\-oriented careers, the compensation structure is barely able to provide even saving opportunities \(post taxation & inflation\); thus, financial freedom or wealth creation is certainly impossible through most of the employment\-oriented careers\.
8. Money making through FNO trading has no retirement age\. Even people who are differently abled or those who are unable to pursue otherwise lucrative career options due to any kind of ailments \(even if bed\-ridden\), can also opt for this method of income generation, not just for earning their livelihood but for wealth creation\.
9. Starting a business venture or embarking on an entrepreneurial journey itself may be a risky proposition, requiring lot of hard work, R&D, investing good amount of time & money\. Inspite of having a good idea, the success of a business plan may still be dependent on a lot of factors \(which may or may not be within the control of a person\)\. However, success in FNO trading seems achievable with proper learning, knowledge, skill development, practice, discipline and risk management\. Thus, success in FNO trading is dependent on self\-evolution & learning \!

Today, owing to the fact that information is readily available, we know of few names who have made huge money from trading FNO, and are regularly making BIG Money consistently through FNO trading\. Cherry\-on\-the\-cake is that these names have made fortune for themselves through trading in FNO, inspite of starting from a very humble background or even with low capital or without pursuing any formal studies in finance / capital markets\. These success stories offers a great deal of confidence that the much\-longed for financial freedom by the mid\-income group and the desire to live\-their\-dream by the retailers can certainly be fulfilled through FNO trading \!

__*Success mantra in F&O Trading:*__

The aforesaid base case, clearly establishes that FNO trading has huge advantages over conventional employment\-based careers or business pursuits, and also  seems to offer great opportunity for wealth creation and can therefore be considered as a full\-time career\. Having said this, we must remember that the success rate is less than 10% in the space of FNO trading\. So __how can an average person achieve his financial goal through FNO trading ?__

The answer for the said question can be derived by evaluating the success stories of FNO traders who have made for themselves a fortune from FNO trading\. The commonalities in most of these success stories boils down to the fact that: undoubtedly, FNO trading is a complex subject, but silver lining is that it can be learnt by any average person \(even by those who do not have any finance or maths background\)\. 

Having said above, it must also be clearly understood that knowing Strategies alone is not sufficient to be profitable in a trade, as the market can be unexpectedly very volatility \(especially on Expiry Days\) and there can be numerous factors beyond the knowledge and control of a trader which may influence the trade plan or outcome of a Strategy\. Therefore, every trader must first acquire the relevant knowledge and then devote time to develop his trading skill by testing different Strategies in different market conditions, by practicing first on some virtual trading platform and then starting with real trades in just one or two Lots\. We have also discussed about this aspect of learning and skill development in detail in our __Chapter: Golden Rules \(‘Dos’ & Don’ts in Trading’\)__ contained in Volume I of our Book on Basic F&O\.

__*Our FnKnow Bot:*__

In our sincere attempt to provide most relevant content, with anytime access with zero external dependency through most advanced technology of our times at least possible price for the stock\-market traders of India, we have  developed our specially curated contents relating to trading, and have made the same available through our Fnknow Bot which is empowered with state\-of\-the art Artificial Intelligence, so that learners from all over the parts of India can learn in simplified manner all the practical aspect of stock\-market investing and trading\. 

We have currently been offering Learnings through our AI empowered FnKnow Bot on: FNO trading and Technical Analysis\. On FnKnow Bot, an enthusiast and inquisitive Learner will find instant resolution of his / her  queries and doubts, 24x7, 365 days without the need of any mentor and overcoming the barrier of taking multiple subscriptions on other platforms\. With just one subscription, the user gets access to whole Learning Content on more than one Knowledge Domain, with the flexibility of understanding the complex concepts and complicated financial jargons in user’s own heart language\. 

We will endevour to add more and more Knowledge Domains relating to stock\-market investing and trading, also to add more subjects & topics under existing Knowledge Domains, and also more Indian language support, besides other features to make learning experience unique, useful and cost\-friendly\.

Main objective of creation of our custom curated contents provided through FnKnow Bot, is to help shorten the learning curve of the traders, which in turn would contribute in minimizing their trading losses to a great extent\. We, sincerely, believe that with the learnings provided through our FnKnow Bot, when practiced over a period of time with discipline and risk management, many serious learners would eventually evolve as a successful trader & investor\.

We sincerely hope and desire that the learnings provided by us through our__ AI powered FnKnow Bot__, will be instrumental in shaping your trading career and fast\-forward you towards achieving your financial goals\.

__Complete Knowledge Pack, useful for all traders across the Globe__

Thus, equipped with all the aforementioned Basic and Advanced concepts on FNO, our Learning Material makes a comprehensive learning kit on FNO trading\. A beginner obviously must begin with studying the basic concepts on FNO; and those who are well acquainted with various aspects of FNO may explore to armour themselves with the various hedge designs, adjustment techniques, various Strategies & trading rules, all encapsuled in one single platform, being offered as one stop\-learning solution for all FNO Learnings\. 

*While the Learning Contents provided on this platform makes reference of Indian Indices and F&O instruments, however, the fact of the matter is that all the learnings, concepts, techniques and Strategies provided here can be adopted and implemented by a F&O trader anywhere in the Globe wherever European Options are traded\. Thus, the knowledge provided on our platform can very well be used by traders across the Globe for their learning purposes and enhancing their knowledge base\.*

__Speciality of our Content on FNO Trading__

__Acquiring relevant knowledge about FNO concepts & trading, which is practically required, is the first step towards exploring FNO trading as a source of income or financial freedom__\.

This learning about practically relevant aspects of FNO trading, unfortunately, is not very widely available\. Most of the learning materials on FNO are academic knowledge driven, which is a big drawback, as the practically relevant matters relating to FNO trading gets lost like a needle in a hay stack\. Moreover, such materials are presented in a manner as if only the finance wizards are suitable for learning FNO concepts and no one else\. Thus, learners find it extremely difficult to be able to start making sense of what is being explained in such materials\.

__*The speciality of our Content:*__

It is our sincere endeavour to  present to the keen learners, a learning material which is comprehensive, in easy\-to\-understand simple language, and focussing only on practically relevant aspects of FNO trading, explaining them with real case studies and examples\. __With this vision, especially curated content of FNO Trading & Concepts has been developed__\.

__None of the contents of the book is AI generated material\. Entire content of the book have been self\-composed, based on extensive learning & research\.__

__*Powerful Knowledge Pack:*__

__Our specially curated content on FNO Trading__ is an attempt to help retail traders to shorten their learning curve in knowing about FNO concepts as one ought to know, in order to eventually evolve as a successful trader\. 

Concepts about FNO, which are practically relevant from trading perspective, and various unique concepts, techniques and Strategies pertaining to FNO trading, have been carefully crafted and  incorporated to develop a powerful knowledge pack for serious learners\. 

The learning contents of FNO are suitable for both beginners and pro, and have been all\-encompassing covering all the Basic Concepts to Advanced Concepts & Strategies\.

__Advanced Concepts in our Learning material__

Further, our Learning content covers all the Advanced Concepts and Strategies pertaining to FNO Trading\. As part of these Advanced Concepts \(contained in Volume\-II of our eBook\), we have focussed on creation of hedge and construct of FNO Strategies, employing different behavioural aspects of Options in order to play a particular market trend/ dynamics\. 

We have also expounded about different Adjustment techniques that can be considered by traders in the event of trend reversal adversely impacting their running trades\. Our Advanced learning material provides detailed explanations of about \+30 Conventional Strategies \(*like Straddle, Strangle, Bull CE Spread, Bear Put Spread etc\.*\) so as to give an insight into the construct & logic behind these Strategies and possible adjustments which can be considered for these Strategies\. 

Besides, these Conventional Strategies, the Advanced F&O Concepts \(as contained in Volume\-II of our eBook\) also provides a detailed discussions on about \+20 Customised Strategies and about 10 different Expiry Day Strategies, which can be used profitably to play different market situations\.  

A brief summary of the key topics covered pertaining to Advanced Concepts are outlined below:

- *Introduction to the concept of hedging and creation of simple hedge designs & trading Strategies*
- *Adjustment Concept & techniques*
- *Detailed explanation on \+30 Conventional Strategies \(like Straddle, Strangle, Bull CE Spread, Bear Put Spread etc\.\) along with possible adjustments*
- *Detailed explanation on \+20 Customised Strategies with possible adjustments, to play different market conditions*
- *Detailed explanation on about 10 Expiry Day Strategies, to play intraday momentum on Expiry Day of Options*

__Basic Concepts in our Learning material__

The Basic Concepts caters to explain about all the basic features concerning Futures and Options as derivative instruments, from trading perspective\. Basic F&O \(contained in Volume\-I of our eBook\) also expounds on the varied behavioural aspects of Options, which is the backbone of trading in Options\. 

Most of the learning material generally available only confines itself to the academic understanding of Greeks and other Options influencing factors, but we have endeavoured to take special care to bring forth the practical understanding about these factors and its significance with respect to its usage from trading perspective\. Our Learning content covers unique concepts pertaining to behavioural aspects of Options\. It also provides detailed guidance on the procedural aspect of F&O trading by explaining different order types, which would enable the trader to effectively initiate and manage trading positions by employing relevant order types basis the action required in trading\. We have also provided in detail various factors formulating trading rules \(*which we are calling as ‘Golden Rules of Trading’*\) which will be kind of a guide for the beginners to set their preparations & expectations right and also a guidance note for the practicing traders to ensure proper checks & balances while trading FNO, and to prepare traders in advance to be mindful of possible situations, risks and temptations pertaining to trading and a guidance note to effectively handle such scenarios through proper risk management\. 

A brief summary of the key topics pertaining to the Basic Concepts covered in our Learning material, are outlined below:

Thus, all the Basic Concepts pertaining to FNO are provided for full comprehensive learning on all essential features of FNO from trading perspective, which every trader must know, so as to be able to trade equipped with thorough knowledge on various factors which makes an impact on Futures & Options\.

__*What the learners must do to become successful F&O Trader:*__

While, learning about practically relevant aspects of Trading & Technical Analysis is certainly the first step; but to evolve as a successful FNO trader is a process which will require besides acquiring knowledge \(both about FNO & Technical Analysis\), skill development which comes with practice, developing trading psychology, inculcating discipline & following risk management\. 

Knowledge can be acquired but all other aspects which are required to eventually evolve as a successful trader, will have to be developed by a learner by own self by keen observation, evaluation, discipline, patience & exercising restraint\.

__*No short\-cut to Success in F&O Trading:*__

To be successful in any discipline of life, one needs to persevere, devote time, attention and resource; and the same applies to FNO trading as well\. 

In the present times, with advent and advancement in AI \(*artificial intelligence*\), people misunderstand that through AI or algorithm trading, one can by\-pass the need for learning relevant aspects and concepts relating to F&O trading\. This is absolutely incorrect and the truth is that one can neither randomly employ any AI tool for their learnings \(even ChatGPT gives wrong responses in relation to F&O trading related queries\), nor can someone safely rely on algo set\-ups for all their trading needs\. It is therefore an absolute requirement to walk that extra mile for learning F&O concepts & trading in a structured manner by devoting time and being patient, than to opt for dangerously unreliable short\-cuts\. 

Thus, __to overcome the aforesaid limitations and shortcomings, we have made this attempt to provide our specially curated contents on FNO Trading made available through our Fnknow Bot which is empowered with state\-of\-the art Artificial Intelligence, so that learners from all over the parts of India can learn in simplified manner all the practical aspect of FNO trading and find instant resolution of their queries and doubts, 24x7, 365 days without the need of any mentor and overcoming the barrier of taking multiple subscriptions on other platforms__\.   

__With proper knowledge: sky is the limit__

Infact, empowered with __appropriate knowledge about F&O concepts, techniques and Strategies, trader eventually can build their own algorithms using AI tools for coding algos; rather than considering AI trading tools or algos as a substitute for learning__\. Ultimately, success in the trading career lies in the time\-tested approach of taking small steps of learning, one at a time, and making gradual progression in this trading career and evolving as a knowledgeable self\-reliant trader; and definitely not through random hit & try approach\.   

While, the journey of becoming a successful FNO trader may not be very easy, but we know that it is not invincible, it can be learnt by people from all walks of life, has undisputed advantages over conventional employment\-oriented career or business ventures and last but not the least  \- the reward in FNO trading, if done properly, has no limits \(as can be deduced from genuine success stories\) \!

We sincerely believe that every FNO learner must make best use of the learnings being imparted and disseminated by us through our AI powered FnKnow Bot, which will well\-serve not only the __learning needs of curious learners, but also serve as a reference material for referring to varied concepts for the inquisitive minds__\.__ __The learning content provided through our FnKnow Bot, has been composed basis applicable market norms, in F&O segment of Indian capital markets, as of July 31, 2023 only\.

We hope you will enjoy & cherish the learnings provided through our FnKnow Bot, and that it will contribute to shorten the learning curve and help you to build a successful trading career\.

Wishing you success,

With Best Wishes & Compliments,

__Team Aineura__

[__www\.aineura\.in__](http://www.aineura.in)

__*Content Disclaimer on F&O Contents and Technical Analysis Contents provided on FnKnow Bot:*__

*All the information, concepts, teachings, strategies, techniques, trading plans, graphs, charts, data, trading patterns, technical analysis, use of indicators and risk management advice and other learnings / contents pertaining to the various Knowledge Domain provided on / through FnKnow Bot, including about F&O Trading and Technical Analysis \(collectively “*__*Learnings*__*”\), are intended solely for informational and educational purposes only\.*

*All the Learnings presented in and through the domain of *[*www\.aineura\.in*](http://www.aineura.in)*  or *[*www\.fnknow\.com*](http://www.fnknow.com)*  or through our FnKnow Bot or through any digital media / online device, social media handles, emails, blogs, messaging services, online posts etc\. \(collectively “*__*Platforms*__*”\) are based on the  personal learnings, studies, research, experiments, experience and real trades of our educational partners & collaborators, including Mr\. Amit R\. Charan \(the “*__*Author*__*”\)  \(collectively, called “*__*Content Creators*__*”\)\. *

*Our Content Creators or Aineura Infomarkets Private Ltd\. \(the “*__*Company*__*”\) or any of its employees, representatives, officers, directors, affiliates, investors, supporters, partners, collaborators etc\. \(collectively “*__*Related*__* *__*Parties*__*”\) makes no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the Learnings provided  through any of the Platforms\. Therefore, if you wish to apply ideas and contents contained in any of the Platforms, you are taking full responsibility for your actions\. You must consult with a financial advisor before making any investment / trading decisions based on the Learning acquired through any of the Platforms\.*

*Trading in Futures and Options involves substantial risk of loss and is not suitable for all investors/ traders\. Past performance is not indicative of future results\. The Author and all related Parties do not guarantee any specific outcome or profit from the use of the information / Learnings contained on any of the Platforms\. You should carefully consider whether F&O trading is suitable for you in light of your financial condition, risk appetite and investment / trading objectives\.*

*The Learning materials / contents has been composed basis applicable market norms, in F&O segment of Indian capital markets, as of July 31, 2023 only\. The information, contents, data, concepts presented in any of the Platforms, may become outdated over time and may not be applicable at all times\. Readers / Learners / Users are advised to seek updated information and consult with a financial professional before making any investment / trading decisions\.*

*Exoneration of Aineura and Content Creators*

*All of our educational partners & collaborators, including Mr\. Amit R\. Charan \(the “*__*Author*__*”\)  \(collectively, called “*__*Content Creators*__*”\) and  Aineura Infomarkets Private Ltd\. \(the “*__*Company*__*”\) or any of its employees, representatives, officers, directors, affiliates, investors, supporters, partners, collaborators etc\. \(collectively “*__*Related*__* *__*Parties*__*”\), shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental or other consequential damages or indemnities arising directly or indirectly from any use of the Learning material & contents contained on any of the Platforms, which is provided “as is”, and without warranties\. All trademarks appearing on any of the Platforms  are the property of the Company and the copyright pertaining to the all the Learning material pertains to the Author and/or the Company, as the case may be\.*

*AI Disclaimer:*

*Thank you for choosing our AI platform: FnKnow Bot for your learning needs\. We would like to inform you that the learning materials provided on our platform are generated by an Artificial Intelligence \(AI\) system\.*

*This platform provides learning through an artificial intelligence \(AI\) system that generates responses based on patterns and data it has been trained on\. It is important to note that the information provided by our AI platform may be erroneous or incomplete due to factors beyond our control\. While we have made every effort to ensure the accuracy and reliability of this AI system, it is important to understand that it may produce content that could be erroneous\. This could be due to a variety of factors that are beyond our control, including but not limited to, the inherent limitations of AI technology, changes in the source data, or unforeseen software issues\.*

*By using this platform, you acknowledge and agree that our company, its affiliates, and employees shall not be held responsible for any loss or damage that may occur as a result of relying on the responses generated by the AI\. The AI\-generated content is offered for informational purposes only and should not be considered as professional / financial / trading or technical advice\.*

*We strongly recommend that users exercise their own skill and care with respect to their use of this platform and carefully evaluate the accuracy, currency, completeness, and relevance of the material on the platform for their intended purposes\. We strongly recommend cross\-verifying the responses generated by the AI through our eBook\. The eBook serves as a reference guide to validate and complement the information/ chat responses on FnKnow Bot\. It is also important to be aware that the Summaries provided on FnKnow Bot are also AI\-generated and are derived from the contents of our eBook\. Furthermore, the Summaries provided in our Summary section are also generated by our AI system from the contents of our eBook\. While these Summaries are designed to provide a quick overview of the various topics / contents, they may not capture all the relevant and finer details of the original eBook content\. Therefore, we encourage users to refer to the original eBook for a more comprehensive understanding\.*

*While we strive to provide accurate and reliable information, we cannot guarantee the correctness of the AI\-generated content\. Users are encouraged to exercise their own judgment and seek professional advice when necessary\.*

__Table of Concepts of Basic F&O Concepts \(contained in Volume\-I of our eBook\)__

The Table of Contents for the Basic F&O Concepts & Risk Management Rules are contained in Volume\-I of our eBook on Futures & Options\. Various topics which have been exhaustively covered under the Basic F&O in Volume\-I, Chapter\-wise, are provided below along with the relevant page numbers in that Volume:

__Chapters__

__Topic__

__Page No\.__

1\.

__Introduction to Futures & Options__

__1\-10__

*What are Futures?*

1

*What are Options ?*

2

*American & European Options*

3

*FNO – as hedging instruments*

4

*Why FNO are traded ?*

6

*Different FNO instruments & their Lot size*

7

*Key takeaways from this Chapter*

8

2\.

__Trading Futures & Options__

__11\-34__

*Futures trading & Futures Contract*

11

*What transpires in Futures trading ?*

12

*Physical delivery in Futures trading*

14

*Options trading & Basics of Options*

16

*Changes in Options’ premium*

17

*Options trading & Options Contract*

17

*What transpires in Options trading ?*

18

*Trading Call Options*

19

*Trading Put Options*

20

*Physical delivery in Options trading*

22

*Risk in Stock Options trading near Expiry*

23

*Approach to avoid Physical Delivery risk in Options*

24

*FNO trading – a zero sum game*

25

*Futures trading Vs Options trading*

26

*FNO trading opportunities in Indian market*

30

*Liquidity in FNO instruments*

30

31

3\.

__About Options – Important Features & Basic Concepts__

__35\-82__

*Options Chain*

35

*Different Expiry series with separate Options Chain*

37

*Born date & Expiry date of Options*

37

*Options with Weekly or Monthly Expiry series*

38

*Addition of fresh Weekly / Monthly Expiry Series*

39

*Different Expiry Series for different Underlying \(Stock Indices Options, Stock Options, Commodity Options & Currency Options etc\.\)*

40

*CE side & PE side of Options Chain and Strike Price*

41

*ITM\-ATM\-OTM on CE & PE sides in Options Chain*

43

*Summary of type of Options in the Options Chain*

46

*LTP of Options & its real\-time changes*

47

*Options follow their respective Futures’ price until their Expiry Day*

49

*Relationship / Inter\-play between the Premium of CEs & PEs*

50

*Factors influencing LTP of Options*

51

*Open Interest and Change in Open Interest in Options Strike*

51

*Volume in Options*

53

*Bid Price & Bid Quantity in Options*

55

*Ask Price & Ask Quantity in Options*

56

*Importance of Bid Price & Ask Price in Options*

57

*Liquidity in Options*

58

*Benefits of Liquidity in Options*

59

*Risks in Illiquid Options*

60

*Certain Options with Liquidity Issues*

62

*Trading in Illiquid Options*

63

*Implied Volatility in Options*

63

*India VIX and Implied Volatility in Options*

63

*Impact of IV on Options’ Premium*

65

*Summary points on IV*

66

*Major Options Greeks*

66

*Delta value in Options*

67

*Delta of CE Options*

67

*Delta of PE Options*

68

*Co\-relation between Delta values & LTP of CEs with PEs*

69

*Delta value of same Strike Option for different Expiry series*

70

*Gamma*

71

*Theta*

72

*Vega*

73

*Summary on: Greeks in an Options Chain and Greek Values of same Strike in different Expiry Series*

74

*Illustration of Greek Values in an Options Chain *

75

*Other Options Greeks*

78

*Other important factors influencing Options  & Certain Data Points relevant to Options*

78

*Max Call & PE OI Concentration, PCR and Maxpain*

79

*Historical Volatility*

81

*Options Data Tools*

81

*Summary on the Chapter*

81

4\.

__About Futures – Important Features & Basic Concepts__

__83\-96__

*Futures for a given Expiry*

83

*LTP of Futures*

84

*Futures on premium or discount than Spot*

84

*Futures with different Expiry series*

84

*Born Date & Expiry date of Futures*

84

*Expiry series in Futures of different Underlying*

84

*Expiry Series for Stock Indices & Stock Futures*

84

*Expiry series for Futures Contract of Commodities*

85

*Expiry series for Futures Contract of Currency*

85

*Open Interest and Change in Open Interest in Futures*

86

*Change in Futures’ OI on real\-time basis*

86

*Significance of Futures’ OI*

87

*Long Buildup in Futures*

87

*Short Buildup in Futures *

87

*Long Unwinding in Futures*

88

*Short Covering in Futures*

88

*Volume in Futures*

89

*Bid Price & Bid Quantity in Futures*

90

*Ask Price & Ask Quantity in Futures*

91

*Significance of Bid Price & Bid Quantity and Ask Price & Ask Quantity in Futures:*

92

*Liquidity in Futures*

93

*Risks in illiquid Futures instruments*

94

95

5\.

__Long & Short in Futures and Options__

__97\-118__

*Trading involves a buyer and seller*

97

*Buying a F&O instrument: Bid price matches Ask Price*

98

*Selling a F&O instrument: Ask Price matches Bid price*

99

*Long & Short in F&O Instrument*

99

*Long & Short in Futures*

101

*Long in Futures: Buying Futures *

101

*Short in Futures: Selling Futures*

102

*Conclusions on Long & Short in Futures*

103

*Long & Short in Options*

103

*Long & Short in CE Options*

104

*Illustration on Long in CE Options: Buying CE *

107

*Illustration on Short in CE Options: Selling CE*

108

*Long & Short in PE Options*

110

*Illustration on Long in PE Options: Buying PE*

114

*Illustration on Short in PE Options: Selling PE*

115

*Conclusions on Long & Short in Options*

116

*Summary Chart on Long & Short in F&O*

117

6\.

__Concepts & Calculations for determining profit & loss in Options trading__

__119\-171__

*Calculations from Expiry perspective*

120

*Calculations before Expiry of Options*

120

*Long & Short In Options: Premium Debit & Premium Credit*

121

*Long Options: Debit position*

121

*Short Options: Credit position*

123

*Moneyness in options & its Calculations*

125

*Moneyness in Options: Intrinsic Value and Extrinsic Value *

125

*Significance of Intrinsic Value and Time Value in Options*

127

*Calculation of Intrinsic Value and Time Value in Options*

128

*Summary on: Moneyness & its Calculation*

132

*Impact of Moneyness in Long Options trade*

133

*Impact of Moneyness in Short Options trade*

134

*Calculations of Profit & Loss Scenario in Options trade: Breakeven Strike from Expiry perspective*

136

*Calculations of Potential P&L on Long Options Trade: from Expiry perspective *

137

*Calculations of Potential P&L on Short Options Trade: from Expiry perspective*

141

*Calculations of Profit & Loss Scenario in Options trade: prior to Expiry Date*

146

*Conclusion on Options Trade: from Expiry perspective and prior to Expiry Date*

149

*Calculations involved in Hedged Trade from Expiry perspective*

149

*Calculations from Expiry perspective in:  Hedged Trade involving Long Options position*

152

*Calculations from Expiry perspective in:  Hedged Trade involving Short Options position*

155

*Conclusions on Calculations involved in Hedged Trade, from Expiry perspective*

159

*Concept of Risk & Reward in Long & Short Options trade*

159

*Long Options trade: Concept of Limited Risk & Unlimited Reward*

160

*Long in CE Options: Concept of Limited Risk & Unlimited Reward*

161

*Long in PE Options: Concept of Limited Risk & Unlimited Reward*

163

*Short Options trade: Concept of Unlimited Risk & Limited Reward*

164

*Short in CE Options: Concept of Unlimited Risk &  Limited Reward*

167

*Short in PE Options: Concept of Unlimited Risk &  Limited Reward*

169

*Conclusion on the Chapter*

171

7\.

__Summary: Core Practical Aspects of FNO__

\(Important summary points of Chapter 2 to 6\)

__172\-184__

8\.

__Options Behaviour__

__185\-287__

*Discussion on different Options’ behaviour*

186

*Basic Options behaviour*

188

*Impact on Options of Momentum in the Underlying*

192

*Impact of VIX & Volatility on Options*

202

*Intrinsic & Extrinsic Value in Options and Impact of Time Decay thereon*

210

*Impact of Delta values on Options, due to movement in the  Underlying*

226

*Impact of Expiry Timetrack and Expiry Day on Options *

237

*Impact on Options of: Futures trading in exorbitant Premium or Discount  than Spot*

254

*Impact on Options: When ITM in Discount  than its Intrinsic Value*

259

*Behaviour of Options from their Born Date*

262

*Stone\-age Options & its behaviour*

265

*Determination of Options’ Premium value on future date, due to movement in Underlying *

269

*Final Premium value of Options on their Expiry*

274

*Identification of current trend using Options*

276

*Summary of all important behavioural aspects of Options*

278

9\.

__Option Buying Vs Selling__

__288\-308__

*Options Buying: Long Options*

288

*Favourable & Non\-favourable factors for Long Options*

289

*Momentum coupled with rise in Volatility*

290

*Momentum Vs volatility: One stronger than the other*

291

*Most Impacted Radius Zone for Long Options*

292

*Long Options on Expiry Day*

293

*General Ideas of playing Long Options*

293

*Options Selling: Short Options*

296

*Favourable factors for Short Options*

297

*Impact of movement in the Underlying*

297

*Impact of Theta from Expiry perspective*

298

*Higher Breakeven in Short Options position*

299

*Impact of fall / fluctuations in Volatility*

300

*Unfavourable factors for Short Options*

301

302

*Breach of Breakeven Strike in Short positions*

303

*Impact of rise in Volatility *

303

*General Ideas of playing Short Options*

304

*Conclusion on Long Options & Short Options*

308

10\.

__Procedural Aspects of F&O Trading__

__309\-330__

*Different Order Types*

310

*Market Order*

310

*Limit Order*

312

*Basket Order*

315

*Initiating fresh trading positions*

316

*Squaring\-off/ exiting trading positions*

316

*Order placement for Stop Loss*

317

*Stop Loss Limit Order*

318

*Stop Loss Market Order*

319

*Trailing the Stop Loss*

320

*Order placement for Intraday and Positional Holding*

321

*Order Placement with Target & Stop Loss*

322

*Order placement After Market Hours*

323

*Order placement for Roll\-Over of F&O positions*

324

*Reducing Margin Utilization for F&O trades*

326

*Overcoming restrictions of buying Far OTMs*

328

330

11\.

__Golden Rules of Trading: Do’s & Don’ts __

__331\-353__

*Preparations before opting for Trading Career*

332

*The First Step: Proper Learning*

333

*Technical Analysis*

334

*Practicing & Skill Development*

335

*Discovering your trading style / preferences*

337

*Capital deployment & Position sizing*

338

*Planning the trade and monitoring the trade*

338

*Careful while initiating & exiting trading positions*

339

*Stop Loss Vs Adjustments*

340

*Naked Vs Hedged positions*

342

*Directional trades Vs Non\-directional trades*

343

*Over\-trading & playing Multiple Strategies*

343

*Restraint*

344

*Profit booking*

345

*Adaptability towards Market Dynamics*

345

*Optimization of Capital*

346

*Control Loss: Save Capital*

347

*Manage trading charges & overheads*

347

*Evaluation of Trading PNL*

348

*Survive to thrive*

349

*Value well\-being*

351

__Table of Concepts of Advanced F&O Concepts \(contained in Volume\-II of our eBook\)__

The Table of Contents for the Advanced F&O Concepts & Strategies are contained in Volume\-II of our eBook\. Various topics which have been exhaustively covered under the Advanced F&O, Chapter\-wise, are provided below along with the relevant page numbers in that Volume:

__Topic__

1\.

__F&O Trading: Construct of Hedge & Strategies __

__1\-24__

*Steps involved in F&O Trading*

2

*Trend identification / view on the underlying*

2

*Decision to initiate naked or hedged trades*

3

*Naked positions / Strategies in F&O*

3

*Construction of hedged positions / Strategies*

4

*Profit & Loss Scenario in trade legs of Hedged Strategies*

6

*Strike selection of Options for Hedged Strategies*

7

*Delta Values of trade legs in Hedged Strategies*

7

*Premium of Options in different Strikes & Expiry Series*

10

*Net Debit Hedged Positions / Strategy:*

14

*Net Credit Hedged Positions / Strategies:*

14

*Selection of suitable Strategy to play the trend*

15

*Examples of Hedged Strategies to play specific trend \(bullish, bearish, mild\-bullish, mild\-bearish, rangebound, breakout\)*

15

2\.

__Adjustment Techniques: To Mitigate Losses__

__25\-72__

*Reversal of original Trend requiring Adjustments*

26

*Objective of Adjustments*

27

*Types of Adjustments to trade*

28

*Adjustments through F&O of different Underlying*

28

*Adjustments through F&O of same Underlying*

29

*Adjustments through Countering*

30

*Counter Adjustments through Long or Short Options*

30

*Counter Adjustments through Delta positions*

31

*Higher Delta on positions in Counter Adjustments*

31

*Delta shifting in Counter Adjustments*

32

*Counter Adjustments to Net Premium Credit / Debit positions*

34

*Strike Selection for Counter Adjustments*

37

*Illustrations of Counter Adjustment techniques on trend reversal*

38

*Different Counter Adjustment Techniques on different F&O positions basis market dynamics*

41

*Adjustments through Pyramiding*

63

*Pyramiding in Mild\-Bearish Trend Reversal*

64

*Pyramiding in Mild\-Bullish Trend Reversal*

66

*Illustrations of Adjustments through Pyramiding technique upon Trend Reversals*

69

*Booking Loss Vs\. Adjustments*

70

*Summary on Adjustment Techniques*

71

3\.

__F&O Strategies: Conventional Strategies__

__73\-376__

*Different Conventional Strategies*

75

*Covered Call Strategy*

78

*Covered Put Strategy*

78

*Big Boy’s Covered Call Strategy*

99

*Poor Man’s Covered Call Strategy*

99

*Poor Man’s Covered Put Strategy*

99

*Collar Strategy*

100

*Covered Call Vs\. Married put: For hedging Stock positions *

101

*Bull Call Debit Spread Strategy*

107

*Bear Put Debit Spread Strategy*

107

*Bull Put Credit Spread Strategy*

134

*Bear Call Credit Spread Strategy*

134

*Call Ratio Spread Strategy*

158

*Put Ratio Spread Strategy*

158

*Call Calendar Spread Strategy*

181

*Put Calendar Spread Strategy*

181

*Short Strangle Strategy*

205

*Iron Condor Strategy*

205

*Short Straddle Strategy*

247

*Iron Fly / Iron Butterfly Strategy*

247

*Long Strangle Strategy*

288

*Reverse Iron Condor Strategy*

288

*Long Straddle Strategy*

327

*Reverse Iron Fly/Iron Butterfly Strategy*

327

*Long Strap Strategy*

352

*Overview on few more Conventional Strategies*

366

*Call Ratio Backspread Strategy*

366

*Put Ratio Backspread Strategy*

366

*Call Butterfly Strategy*

367

*Put Butterfly Strategy*

367

*Call BrokenWing Butterfly Spread Strategy*

368

*Put BrokenWing Butterfly Spread Strategy*

368

*Various Conventional Strategies Depicted on a Boiler\-Plate Options Chain*

369

*Conclusion on the Chapter *

376

4\.

__F&O Strategies: Customised Strategies__

__377\-605__

*Different Customised Strategies*

379

*Futures Hedge Strategy for bullish trend*

383

*Futures Hedge Strategy for bearish trend*

383

*Hedge\-17 Strategy for mid\-range bullish trend*

405

*Hedge\-17 Strategy for mid\-range bearish trend*

405

*A\-19 Strategy \(Call Calendar Long Spread\): for Rangebound market with mild\-bullish bias*

427

*A\-19 Strategy \(Put Calendar Long Spread\): for Rangebound market with mild\-bearish bias*

427

*1:4 CE Diagonal \(Long\) Ratio Spread: to play overnight Expiry decay with mild\-bullish bias*

452

*1:4 PE Diagonal \(Long\) Ratio Spread: to play overnight Expiry decay with mild\-bearish bias*

452

*Toofani Hedge: Call Diagonal Spread Strategy with mild\-bullish bias*

495

*Toofani Hedge: Put Diagonal Spread Strategy with mild\-bearish bias*

495

*Advanced Covered Call Strategy: for mild\-bullish trend*

546

*Advanced Covered Put Strategy: for mild\-bearish trend*

546

*Non\-Directional Credit Ratio Spread Strategy*

565

*Short Options Strategy*

581

*Regular Monthly Income from Options Strategy*

586

*Long Options play through Stone\-age Options*

597

605

5\.

__F&O Strategies: Expiry Day special Strategies__

__606\-__

*Technical parameters for trend identification for Expiry day*

608

*Different Intraday Strategies for Expiry Day*

610

*Intraday Bullish Momentum play through Naked CE OTM Buying*

613

*Intraday Bearish Momentum play through Naked PE OTM Buying*

613

*Intraday Bullish Trend play through Naked Synthetic Futures \(CE ITM\) Buying*

619

*Intraday Bearish Trend play through Naked Synthetic Futures \(PE ITM\) Buying*

619

*Intraday Bullish Momentum play through Futures Hedge Strategy*

627

*Intraday Bearish Momentum play through Futures Hedge Strategy*

627

*Trading Gap Hedge: when Futures trading in excessive discount than Spot*

636

*Trading Gap Hedge: when Futures trading in excessive premium than Spot*

636

*Non\-Directional, Half Diagonal Hedged Strategy*

646

654

__Intro to Futures & Options:__

Futures and Options \(*generally, collectively referred to as ‘FNO’ or ‘F&O’*\) are __derivative financial instruments__, which means that F&O are a kind of financial instruments which derive their value from an underlying asset, group of assets, or benchmark\. This underlying asset can be market indices, stocks, currencies, agricultural commodities and non\-agricultural  commodities \(*like, gold, silver, copper, crude oil etc\.*\)\.

__Overview on Futures & Options__

- Futures and Options are derivative financial instruments, which derive their value from an underlying asset, group of assets, or benchmark\.
- Futures are contracts entered into with an “obligation to buy” or “obligation to sell” an underlying asset or securities \(of agreed number of Lots\) for a pre\-agreed price at a particular future date \(*referred to as Expiry Date of that Futures contract*\)\. When a  person initiates a position in Futures instrument, it implies that he is entering into a Futures contract, where one is a Futures buyer and another Futures seller\.
- Options are contracts entered into with a “right to buy” or “right to sell” an underlying asset or securities \(of agreed number of Lots\) for a pre\-agreed price \(*referred to as strike price*\) at a particular date in future \(*referred to as Expiry Date of that Options contract*\)\. Here, “right to buy” is called a CE Option and a “right to sell” is called a PE Option\. 
- A person who enters into an Options contract to purchase the “right to buy” is called a CE buyer and the one who sells the “right to buy” under an Options contract is called the CE seller/writer\. Similarly, a person who enters into an Options contract to purchase “right to sell” is called a PE buyer and the one who sells the “right to sell” under an Options contract is called the PE seller/writer\. Thus, when a person initiates a position in Options instrument, it implies that he is entering into a Options contract, where one is an Option buyer and another an Option seller\.
- Under an Options contract, an Options buyer has a right \(*and not an obligation*\) to purchase \(as CE buyer\) or sell \(as PE buyer\) the underlying asset or securities on the Expiry Date of that Option, while the Options seller under the Options contract is under an obligation to sell \(as CE seller\) or purchase \(as PE seller\) the relevant  underlying asset or securities to the Options buyer, if the Options buyer chooses to exercise his “right to buy” or “right to sell”, as the case may be\.  
- In India, we follow European Options, wherein an Options buyer can exercise his “right to buy” or “right to sell” an underlying asset or securities, only on the Expiry Date of that Options\.
- Futures and Options are primarily employed for hedging purposes, which implies fixing the price of the underlying asset for the purpose of physical trade of any asset on a future date or to take counter\-positions through financial instruments to set\-off  losses that may arise in existing financial positions due to adverse market situations\.
- Trading in F&O implies \- taking a position in any F&O instrument for a time, to benefit from the favourable price movement of the underlying asset and to square\-off the F&O position before the relevant Expiry Date \(*thus avoiding situation of physical delivery of assets/ securities on Expiry Date*\)\.
- Trading in F&O, offers money\-making opportunities in many asset classes, with relatively low capital \(*as F&O instruments are leveraged instruments*\)\.
- Only assets and securities selected by the stock exchanges for the F&O segment, from time to time, can be contracted / traded through F&O instruments\.
- F&O instruments can only be contracted / traded in multiples of pre\-defined Lot size as fixed by the stock exchanges from time to time\.

__FNO Instruments:__

It may be noted that not all securities or assets are available under F&O segment of the stock exchanges\. For the F&O segment, certain scrips, instruments, assets, indices etc\. are selected by the stock exchange, from time to time\. 

Only such securities / assets are made available in the F&O segment by stock exchanges for trading through F&O instruments of those underlying securities and assets\.

__Why FNO are traded?__

We know that F&O are derivative financial instruments, primarily employed for hedging\. However, since F&O derive their value for the underlying asset – hence fluctuations in the value or pricing of the underlying assets results in changes and fluctuations in the pricing or value of the F&O instrument\. Thus, these F&O instruments  are also used for trading purposes to capture the profit margin arising due to fluctuation in pricing of the F&O instrument due to fluctuations in the price of the underlying asset\. 

<a id="_Hlk108992203"></a>This manner of taking a position in any F&O instrument for a time, to benefit from the favourable price movement of the underlying asset and to square\-off the F&O position before the relevant Expiry Date of the relevant F&O instrument implies trading in F&O\.

One might think that if F&O derives their value from  an underlying asset – why shouldn’t we then trade directly in the underlying assets instead of trading in F&O\. Well, answer to that is as follows: 

1. it is not possible for every big player to do trade in all kinds of underlying asset class like crude oil, agri\-commodities etc\. involving physical delivery of these assets – as these will have the logistics issues besides other factors\. However, such big players would not let go of an opportunity in any asset class to make money – hence trading in F&O instrument  pertaining to various sectors and assets gives them this opportunity; and
2. F&O instruments are designed as a __leverage instrument__ – which allows a trader to trade in the underlying asset class through F&O route in sizeable volume but by employing phenomenally less capital \(i\.e\. *the margin money – which is only a fraction of the actual contract value*\)\. 

__*<*start*>*__*For example – while somebody can trade in stocks of SBI in the cash segment instead of trading in Futures or Options of SBI\. However, trading in F&O segment or SBI Scrip will enable the trader to  buy or sell in the defined F&O Lot size of SBI Scrip \(as decided by the stock exchange\), which as of now comprises of 1500 shares in 1 Lot of SBI F&O with the margin requirement of about Rs\. 2\.6 Lakh per lot in Futures of SBI\. Whereas trading SBI shares in cash segment, for a volume size of 1500 shares would require Rs\. 7\.2 Lakhs \(@ stock price of Rs\. 480 per share\)\. Thus, initiating trade in F&O segment will enable the trader to trade large volume with relatively less capital than in cash segment\.*__*<*end*>*__   

Thus, as a __F&O trader, one can explore many asset classes \(*which are available under the F&O segment*\) and encash the opportunities; that too with relatively low capital__\. Big Fund Houses and institutions exploit this opportunity as they know and understand its potential of making money through identifying opportunities that arise from time to time\.

__FNO: Lot Size__

F&O contract in relation to a particular asset or securities can not be executed for any number of quantity for those assets/securities as  one desires\. Each F&O instrument can be contracted/ traded only in pre\-defined Lot sizes, as fixed by the stock exchanges from time to time\. 

Lot size means the multiples of minimum no\. of units in which F&O Contract can be executed / F&O positions can be initiated in respect of a given asset or securities\. 

Lot size of certain scrips/  indices/ commodities, as fixed by the stock exchange for F&O segment, are as follows:

- Nifty Index Futures & Options have a lot size of 50\.
- BankNifty Index Futures & Options have a lot size of 15\. BankNifty’s Lot size used to be on 25; and it has been changed with effect from July 2023 to be 15\. 
- SBI Futures & Options have a lot size of 1500 shares \(i\.e\. 1 Lot of SBI Futures or Options comprise of 1500 shares of SBI\)\. 
- Reliance Futures & Options have a lot size of 250 shares \(i\.e\. 1 Lot of Reliance Futures or Options comprise of 250 shares of Reliance\)\.
- Crude Futures and Options have a lot size of 100 barrel units\.

__What are Futures?__

Generally speaking, Futures are a kind of derivative financial instruments, which derive their value from an underlying asset or a benchmark \(like, stocks, commodities, indices etc\.\)\. 

Precisely, Futures is an “__obligation to buy__” or “__obligation to sell__”, an underlying asset of an agreed quantity for a pre\-agreed price, at a particular future date called __Expiry Date of that Futures__\. When a  person enters into a Futures position, it implies that he is entering into a contract that __obligates__ him to buy or sell the underlying asset at a predetermined future date and price\. A Futures contract is a forward contract, which is traded on an Exchange\.

The buyer of Futures must purchase or the seller of Futures must sell the underlying asset at the set price, irrespective of the prevailing market price on the Expiry Date\. However, from the perspective of Futures trading, it is pertinent to note that the stock exchanges from time to time may otherwise stipulate terms & conditions regarding treatment of Futures of certain underlying asset, securities or benchmark, if held until Expiry\.

__What are Options: CE & PE ?__

Generally speaking, Options are a kind of derivative financial instruments, which derive their value from an underlying asset or a benchmark \(like, stocks, commodities, indices etc\.\)\.

Precisely, Options is a “__right to buy” __or__ “right to sell”__ an underlying asset of an agreed quantity for a pre\-agreed price at a particular date in future called Expiry Date of that Option\. Here, “right to buy” is called a __Call Option__ \(*denoted with symbol “CE”*\) and a “right to sell” is called a __Put Option__ \(*denoted with symbol “PE”*\)\. The person who purchases the “right to buy” is called a __Call Option Buyer__ and the one who sells the “right to buy” is called the __Call Option Seller__\. Similarly, the person who purchases the “right to sell” is called a __Put Option Buyer__ and the one who sells the “right to sell” is called the __Put Option Seller__\. An Option Seller is also called an __Option Writer__\.

Thus, Options are a contract of purchase of “right to buy” or a “right to sell” an underlying asset or financial instrument \(*like, stocks, commodities etc\.*\) by the Options buyer on one hand, with the seller of the “right to buy” or a “right to sell”, respectively on the other hand, at a pre\-agreed price \(*referred to as strike price*\) for a particular pre\-agreed quantity before a particular __Expiry Date of that Option__\. Each contract will have a specific Expiry Date by which the holder of the options must exercise their option\. It is noteworthy that the purchaser of the Options has a right \(*and not an obligation*\), while the seller of the Options is under an obligation to honour the right exercised by the Options buyer on the Expiry Date\.

If the Options buyer \(as a CE buyer\) has purchased a “right to buy” an underlying asset or securities from a CE Options seller – then the CE Options buyer may or may not choose to exercise his “right to buy” on the Expiry Date to buy the underlying securities or asset on the Expiry Date; but if he chooses to exercise his “right to buy” then the CE Options seller will be under an obligation to provide physical delivery of the relevant underlying asset or securities to the CE Option buyer at the pre\-agreed price \(*referred to as the strike price*\) for the pre\-agreed quantity\.

Thus, unlike Futures, the holder/buyer of the Options is not required to buy or sell the underlying asset if they decide not to do so on the Expiry Date\. However, from the perspective of Options trading, it is pertinent to note that the stock exchanges from time to time may otherwise stipulate terms & conditions regarding treatment of in\-the\-money Options of certain underlying asset, securities or benchmark, if held until Expiry\.

__Type of Options:__

Globally, there are mainly two types of Options: American and European Options contracts\. 

American Options can be exercised at any time up to and including the Expiry Date of the Options\. However, European Options can only be exercised on the Expiry Date\. 

__In India, we follow European Options__ and the discussions about Options  in the Book is considering Options as European Options\. The alphabet ‘E’ in CE & PE indicates the European type Options\.

__Futures and Options for Hedging:__

Futures and Options are primarily __hedging instruments__, which are used mainly, by: 

1. big institutions/hedge funds for hedging their existing financial positions/investments from any adverse market fluctuations that may cause loss to their existing financial position; or
2. commodity traders to fix the price of commodities/assets they wish to buy or sell in future \(*like, rubber, crude oil, gold, USD, Nickel etc\.*\), from any untoward situation or market fluctuation that may cause adverse price movement of the asset/commodity they wish to buy or sell\. 

Let us go through the following examples for better understanding of the concept of hedging\. 

__*<*start*>*__*Example 1: Suppose there is a trader of physical copper, who wishes to buy copper by a  relevant date at a particular price, as he fears that the price of copper are going to soar high soon\. Thus, with an intention to fix the price  of copper now, in order to buy physical copper of a particular quantity at a particular future date \(referred to as Expiry Date\) – he might decide to enter into a Futures contract or an Options contract, by paying margin money through his broker or over\-the\-counter \(OTC\) \(this margin money is like an initial deposit money against the full price for the quantity of physical copper he wishes to buy on the Expiry Date at a particular fixed price\)\. Now, after he has entered into any such F&O contract, even while the price of copper in the commodities market may fluctuate depending on the demand\-supply economics, for the trader the copper would be made available at the same price at which he has entered into the trade through the F&O contract\. Thus, depending upon whether he has entered into a Futures contract or an Options contract – he may take physical delivery of copper on the relevant Expiry Date, by paying the balance amount basis the price of copper pre\-agreed by him in the F&O contract with the seller of the copper\. There will be some cost that the trader will have to bear towards hedging the upside risk through F&O contract\.*__* <*end*>*__

__*<*start*>*__*Example 2: Suppose there is a farmer who grows wheat\. After harvest he has physical wheat grains in his warehouse\. Now, he wishes to sell the wheat grains to a bread manufacturing company\. However, the farmer has reasons to apprehend that the price of wheat in the agri\-commodities market may drop down due to some situation\. So the farmer wants to fix the price at which he is fine selling the wheat grains to the bread\-making company\. Thus, with an intention to fix the price  of  wheat now, in order to sell physical  wheat grain of a particular quantity at a particular future date \(referred to as Expiry Date\) – he might decide to enter into a Futures contract or an Options contract with the bread\-making company\. Now, after he has entered into any such F&O contract, even while the price of wheat in the agri\-commodities market may fluctuate depending on the demand\-supply economics, for the farmer the price at which the company would purchase the physical wheat grains would remain the same price at which he has entered into the trade through the F&O contract with the company\. Thus, depending upon whether he has entered into a Futures contract or an Options contract – he may make physical delivery of wheat grains to the company on the relevant Expiry Date, and receive the proceeds of sale from the company basis the price of wheat pre\-agreed by him in the F&O contract with the company\. There will be some cost that the farmer will have to bear towards hedging the downside risk through F&O contract\.*__* <*end*>*__

__*<*start*>*__*Example 3: Suppose somebody has invested Rs\. 1 Lakh in a particular asset class and a situation arise which may cause loss to the aforesaid investment, then it may be prudent to create a position in suitable F&O instrument by incurring a cost of say, Rs\. 1000 to cover/hedge the risk of loss in the investment of Rs\. 1 Lakh\. Here idea is that if the apprehended situation arise then we would tend to make some gain in the F&O position,  which may help counter the loss on the investment\. However, we need to be mindful that if the apprehended situation does not arise or turnout as expected – then the investor may loose Rs\. 1000 which he expended to create the F&O position as hedge to cover the investments*\.__* <*end*>*__ 

Thus, hedging is risk mitigating measure which may be undertaken by executing F&O Contracts for fixing the price of the underlying asset for the purpose of trading the underlying asset at a favourable price on a future date; or to take a position in suitable F&O instruments to counter/set\-off the losses that may arise in certain existing investments/financial positions due to adverse market situations\. 

This hedging can be achieved  by taking positions in F&O instrument / executing F&O contract, as per requirement, for implementation only on the specified future date \(called, Expiry Date\) and the __requirement of actual physical buying or selling of underlying assets arises on the Expiry Date__\.

__Golden Rules of FNO Trading: Risk Management__

We are going to understand the basic but utmost crucial concepts in relation to trading and particularly F&O trading, and that is Risk Management \! 

Trading is a psychological warfare\. Even if you are armed with knowledge about F&O, there is one more last mile that need to be run\. Success in trading comes to those who discipline themselves with strict rules of trading\. Training oneself to be a disciplined trader is a process, which must be seriously undertaken and not just consciously learnt but every effort be made to quickly inculcate these measures in your trading style\.

Let must be familiar with certain essential do’s & don’ts and most significant aspect of trading discipline, which every trader must learn, respect and adhere\. These aspects collectively comprise the __Risk Management associated with F&O trading __which every aspiring, struggling and even expert traders much closely follow\. 

We have provided crucial aspects of Risk Management generally associated with F&O trading, so as to be a guiding light for the beginners who desire to start a trading career but do not know what steps to follow; and also for the practicing traders \(both amateur and seasoned, alike\) to be mindful of sound risk management practices to ensure low burn rate and enhancing their success probability\. 

It is our conscious endeavour to bring forth the difficulties, temptations, fear, greed, common mistakes, general tendencies which are practically faced by almost every trader, and to suggest suitable solutions /  approach so as to avoid, curb or mitigate such practical difficulties with beforehand understanding about these issues and their possible solutions\.  These practical Risk management practices plays a very important role in evolving a mature trader within every trader and goes a long way in defining success story of a disciplined trader\.

__Before Starting to Trade: First Focus on learning i\.e\. acquire knowledge __

After adequately planning to be able to devote time, mind and capital for trading, a trader must focus on only one thing, that is to learn all that is required to be a successful trader, in reasonably shortest span of time\. Learning is a broad term, which in the context of trading would involve: \(a\) acquiring knowledge; and \(b\) developing trading skills; both together will complete the __Learning Phase__\.

In __Stage 1__ of the Learning Phase, focus on acquiring knowledge about capital market, stocks, instruments and trading; but only those aspects which are important from the practical perspective of trading\. An academic approach \(with unnecessary theoretical discussions, diagrams, statistical and mathematical calculations\), in the context of acquiring requisite knowledge about trading, can not only be boring and complex but also unproductive\. So what is indeed needed is crisp, focussed, hardcore __practical knowledge concerning trading__\.

In order to gain relevant knowledge about trading, it is important that a trader does adequate research to __identify a good source of learning or tool __\(may be a book, webinar, videos, software or any AI tool etc\), which is both genuine and knowledgeable to be able to give a comprehensive coverage to your trading career needs\. In order to be a successful F&O trader, one need to  learn about technical analysis, general understanding about stock market, stocks & derivative instruments, basic fundamental analysis; and particularly about practical aspects of trading in stocks and F&O \(including Options behaviour\)\.

Some may feel that learning about stock market or trading can be accomplished on his own through hit & try method or by surfing through some random videos available on social media\. But trust me, all this will cause severe damage to the sprouting and growth of a healthy trading career\. Moreover, it will be suicidal for the trading career, if somebody starts trading with real money without first acquiring proper knowledge from a reliable source\. In such cases, the quantum of loss suffered by the trader would instill such fear in him that it will make him psychologically very weak, besides robbing his morale\. More often than not, many people who make this blunder in the starting phase of their trading career, fall under the severe grip of anxiety and depression, and are never able to muster the courage to restart all over again\.  Few amongst such people, who strive to restart, will have to make more than double the effort to undo or straighten up the distorted knowledge acquired from random sources and also to regain the much needed psychological edge, in order to make trading as their successful career\. It is therefore utmost important to avoid committing this blunder in your trading journey \!

Like in any other career, requisite learning and knowledge is the foundation stone on which trading career can be built\. Adequate and timely learning is the first most important step which is needed in shaping of a trading career\. Thus, identifying a good source of learning / tool will help a great deal to shorten the learning curve, and will therefore help a lot of precious time from getting wasted; besides avoiding acquiring distorted / half\-baked knowledge\. A good source of learning can help you acquire the requisite knowledge in 6 months to 1 year time\. Thus, finding such a learning source / tool is worth the time and cost \!

Depending on any tips provider for your trading needs or taking trades basis somebody else’s recommendations \(including on social media or TV channels\) is the fastest way of killing your trading career\. Nobody can guard or value your money as much as you can; so better take charge of your capital and deploy it on your own conviction, after learning and practicing enough\. It is worth going that extra mile on learning \!

__Naked versus hedged positions: In F&O Trading __

Let us also discuss if naked trade is good or hedged trades are good\. 

For a beginner, without doubt hedged trades must be the trading style\. Hedged trades offers good capital optimisation and cushion to absorb loss, which helps psychologically a great deal besides saving valuable capital\. While, profits on hedged trades, as compared to naked trades, may be less but the same can be maximised by increasing volume on the hedged trades\. It is much worth to keep taking small but consistent profits through hedged trades, than taking riskier bets on naked trades\. Hedged trades keeps the nerves under zen, which is a very important aspect of trading which helps maintain and build up the requisite psychological edge\.  

Having said above, at the time of exiting a hedged trade, one must always be careful to first exit the sell leg and then the buy leg \(not the other way round\), in order to avoid margin call requirements just in case when most part of your trading capital is under deployment in the hedged trade\.

However, after one has learnt enough and has sort of mastered a particular strategy/ pattern after practicing well, and has been consistently making reasonable gains with fewer drawdowns, one may consider undertaking naked trades with strict stop loss\.

__Overtrading and playing multiple strategies/positions__

Trading, more than often, especially for beginners, may be like a double edge sword, i\.e\. when you are making profit you get the impulse to trade even more; and when in loss then too to trade more to recover the loss\. This tendency to initiate multiple trades in a single day or even to frequently trade generally, could be toxic to trading success\. Keeping control over the number of trades you do, is another important aspect of risk management \(besides position sizing, stop loss as discussed above\)\.

A trader need to develop that psychological maturity in his trading, which helps him to remain focussed, disciplined and in control of impulses\. How often you must trade depends upon a lot of factors like experience, capital, whether you are an Options’ buyer or seller etc\. This must be discovered by the trader himself\. But generally, no more than 2 trades in a single day must be a rule of thumb\.

Another important aspect of risk management is to avoid playing simultaneously multiple strategies/ trades\. It is extremely important to be focussed and give your 100 percent on one or two trades running simultaneously which are needed as per the thoughtfully carved trading plan, than to try playing multiple strategies at a given time out of sheer impulse\. Besides, multiple trades / strategy too have an impact on trading cost in terms of brokerage charges etc\.  

Objective in trading is generating profit; while keeping the stress causing elements during trading at their low\. That is the art of trading\. Handling multiple strategies/ trading positions would unnecessarily divide your attention span, capital and constantly strain you mentally and drain you psychologically both during trading and even after trading hours\. Focus on doing few good trades than many not\-so\-good trades\.

__Surviving 2 to 3 years into trading: A tough fight__

Trading can be extremely profitable, but becoming consistently profitable trader needs a lot of hardwork and patience\. Until it gets easier, it will be very difficult\. 

As explained already, trading must begin with careful planning about taking this as a career, which will demand your full time attention, presence in live market, capital which would get lost in the process of learning and practicing to begin with\. If entering into this career is not planned well upfront, then the journey would become extremely difficult, protracted and painful\. Many a times, the family suffers on account of abrupt decision taken on impulse to jump into trading business\. 

Thus, it is extremely important to cut short the pain by proper planning and cut short the learning curve by finding a good learning source / tool for your learning as the first step towards peaceful progression in this career\. With proper planning and learning, the first phase becomes super cool\.

After the first phase of planning and learning is over, the next phase in which a trader starts taking the trades, gives the real taste of trading career\. During this phase, the trading may pose different unexpected troublesome situations which may give jittering pain\. This is the toughest part, i\.e\. to endure this pain and keep up the practical learning before trading starts generating the realisable gain\.  There will be unexpected events during this period\. There may be months of losses even when you were right\. Wherever you take positions deciding the trend, the trend will reverse; when you adjust then it will reverse again\. Then you may start making profit for a few weeks and months and then all of a sudden something will happen \(super reversal  in trend/ breakout/breakdown, VIX spike etc\.\) that all that was earned will go down in a single trade\. These are all the practical sides of situations that almost every trader need to face and go through\. But this phase gives clarity to a trader about what suits him, where is he going wrong, what can be improved, how optimisation can be done, how losses can be minimised, when to take stop loss, when to adjust a trade, which strategy is working most, what to implement when etc\. 

Market is dynamic and is the best teacher\. It teaches its various facets; but with every learning comes a cost which will have to borne\. A cost of defeat and loss\. You bleed emotionally, psychologically and monetarily\. It is extremely important that the trader is mentally tough, emotionally balanced and financially equipped to be able to survive this phase of rigorous exercise\. This phase may be a period of excruciating pain for most; but surviving this period of practical trading \(when you are barely profitable inspite of all the hardwork\) is the key to success in the trading business on long term basis\. People who would plan well, learn properly, practice with small volumes, learn constantly inspite of repeated defeats and consistent losses and survive the stress that every aspiring trader has to go through, will be the ones who will get to see the light at the end of the tunnel\. It may take 2 to 3 years for a person to be able to evolve as a successful trader, starting from the time you begin learning from a good & unbiased resource\. 

This period gives the glimpse of possible market eventualities that a trader may face, the loss situations that the trades may incur and the anxiety and stress that a trader may have to suffer; which in turn helps a trader to accordingly fine tune his trading style and prepares him with possible solutions for different situations\. Besides, such experience also moulds a person and help evolve a trader as more reasonable, humble, practical, calculative, analytical and efficient in risk management\. 

If you think you see the merits in this trading business, and can plan to provide and support self & family during this period of intense training, then you must be prepared to stick on and survive this period of skill development as long as it reasonably takes\. Those who are able to fine tune themselves, their trading style etc\. during this phase, will come out as those who can really make big into this career which offers unlimited opportunities of wealth creation and financial independence\.

__Do not loose Peace over Trading: Maintaining Zen & happy living is more important than Anything Else__

Trading is certainly, one of the possible ways of creating fast wealth and gaining financial independence; but it is not the only way\. Trading is no magic wand like many consider it to be; and anticipate that they can do trading without much of preparation and one day they will get the desired wealth\. The bitter fact is that trading needs a lot of learning, time, money, hardwork, patience, perseverance, discipline and sacrifice\. 

As already mentioned above, that the initial few years into trading may drain away much of the capital and time and may cause a lot of anxiety, frustration, uncertainty, nerve wracking losses and failures\. Many are unable to bear with the cost associated with the learning curve and get trapped into misery, despair, self\-pity and depression\. All of these may put not just the individual trader into series of problems; but may also devour family\. Mental, physical and financial well\-being of the individual trader and his family may get severely impacted; if this career is not taken seriously right from the time you entertain the idea of giving it a try\. 

FNO trading in particular is a zero sum and is extremely risky, may be stressful and may cause loss of hard\-earned money, unless done with proper knowledge & learning, after developing trading skill with regular practice and following trading discipline\.* *Trading journey would typically involve acquiring trading knowledge, skill development, regular practice, live market and post market analysis, sufficient capital, patience, perseverance, inculcating discipline, risk management, becoming flexible as per market dynamics, ability to absorb loss and failure, sacrifice at various levels; before you can expect to start making decent returns consistently through trading\. Hence, plan well even before taking plunge, including to provide for your family needs and contingencies well in advance\. Spare yourself the free time, capital and mind which are the basic requirements to be planned and provisioned for in reasonably ample quantum\.

Even during the journey into the trading career, one must aspire to maintain a good balanced life\. Take small bets with low volumes\. Test the waters for atleast a year\. Do not over do anything in your trading\. Learn ways to optimise profits and develop good risk management techniques\. Do not expect miracles to save you from losses\. Focus on learning\. Take this career seriously\. For every mistake there will be a cost that will have to be paid\. Sometimes, losses will also have to be incurred even when you are right; this will help you learn that market is dynamic and would teach you to be flexible and prepared to handle your trades\. There is no short cut in this profession\. Whatever time you may take to arrive at the point of take\-off, be prepared to go upto that extra mile\. Try to indulge into good habits, clean entertainment and friend circle\. Keep yourself motivated and away from nay\-sayers\.  Take care of your health and mental well being; and that of your family\. It is a serious business; riskier but rewarding – if done the proper way \!

Having said this, if a person realizes that \(a\) he does not have the knack for trading; or \(b\) he would not be able to spare free time, capital and mind for going through the learning curve of trading; or \(c\) he has an alternate source of income or an idea through which he can gain the desired financial freedom; or \(d\) he would not like to go through the challenges of a trading career which may expose him \(and his family\) to unnecessary anxiety, pressure, mental and financial stress, then it is better to not get into trading career\. Such people can still reap the benefits of the market by investing in largecap shares which are considered as safe investments or can invest through SIP into such largecap shares or shares of good companies or investing through mutual funds or ETF routes\.  Hence, every aspiring or struggling trader needs to evaluate his own circumstances, strengths and weaknesses and then decide if he should take a plunge/continue trading or not\. 

There is nothing wrong if somebody decides to not opt for trading or quit trading after proper introspection or realization of the cost and facts involved\. As said in the beginning here, trading is only one of the ways to achieve financial success, but not the only way to achieve that\. The  most important point is that while achieving financial success must be aspired for; but to achieve it at the cost of peace of mind or health or family’s well\-being is definitely not worth it\. 

Happiness is the biggest treasure; it must be guarded, nourished and cherished\. There are many ways to achieve, maintain and multiply happiness, but we got to be careful that we may lose it with one reckless act\. Therefore, the decision whether to pursue trading career or not, must be decided basis the temperament and cost involved in getting into and pursuing the trading career, both in terms of money & time\.

Take an informed decision \!

__Stop Loss versus Adjustment in Trading Positions__

Risk management is a very important part of trading\. One of the element of risk management is position sizing, about which we have already discussed above\. Another aspect of risk management is stop loss\. 

Stop loss must be taken, but only when our trade basis certain technical parameters has actually failed as we expected it to go\. Hence, it is important to understand to take stop losses at the right place, not before and not after\. It is important to take stop losses, when it is actually required to as it will help a great deal to protect the trading capital; and never delay taking stop losses beyond the pre\-determined level\. Remember always that stop loss taken at the right level without delay causes the smallest dent to your capital/profit; any further delay in taking stop losses beyond the requisite level will only deepen the dent into the capital\. 

Having said above, it is important to pre\-define the maximum loss you may reasonably absorb in a trade, should the trade go wrong\. While, one should ideally book loss in a trade upon failure of a trade as per technical indication, but this must be made subject to a maximum loss amount\. Such maximum loss can be defined as 1% to 2% of capital deployed on a trade or certain percentage of weekly or monthly profit \(which you make by deployment of specific strategy regularly\) or any such formula suitable to your situation\. Idea is that the maximum loss should be a defined amount, which must be such which will not dent your capital and should not be bigger chunk from your hard earned profit accumulated over last few days/ week / month, as the case may be\. So, either the trade must fail as per technical indication or the maximum loss amount, whichever arrives earlier, should be the stop loss area\. This additional leg of maximum amount of stop loss must be added as an extra precaution, making it part of your risk management\. This will help curtail the loss in the events of sudden trend reversals with extreme momentum \(*which may cause immediately high amount of loss in the trade, even though technical parameters of stop loss may not have got fulfilled*\)\. 

Further, in the context of stop loss, it is advisable to not keep a very tight stop loss order initiated on the system; instead look for a full accomplishment of the stop loss situation in order to book a stop loss\. This will help avoid stop loss getting hit due to freak trades or sudden non\-lasting spike movement etc\. It may take some time to discover and fine tune the level at which stop loss must be taken for a particular strategy; so study the patterns and levels over and over again for deciding optimum level for stop loss in respect of a given strategy\.

Another important aspect of risk management is stop loss versus adjustment\. There may be situations when it is prudent to take a small stop loss and exit the trade; and some times when there is ample room for making adjustments that one must decide to initiate suitable positions to adjust the running trade and not go easy on booking stop losses\. While deciding on whether or not to initiate adjustments, one must consider if it would be prudent to initiate adjustments from the perspective of the time and cost involved \(including the opportunity cost\)\. If the answer to aforesaid is no, then it may be advisable to instead take a stop loss and initiate a fresh trade\.

Thus, whenever it is possible and commercially rightful/ beneficial to initiate adjustments in a trade, then the same must be done\. However, what possible adjustments you may need to make on your running trading positions must be upfront planned for, at the time of initiating the original trading positions, so as to be mentally ready to immediately go for the relevant adjustments should the need to initiate adjustment suddenly arrives\. Having said this, from a practical perspective, one must bear in mind that it is easy to adjust an Options Short position; but very difficult to initiate adjustments for a naked Long position\.

__Profit Booking is must: Learn booking small profits__

Market is supreme and dynamic; it may change tides any time\. Greed causes to hold on to a trade in anticipation of more profits beyond reasonable time or levels; which more than often eventually turns into losses, as profits are not booked on time\.

Loss caused when market all of a sudden changed and caused your otherwise sound trade into a loss trade, is the right kind of loss that a trader must be willing to absorb or adjust\. But loss suffered when the trade yielded decent profit but was not booked at the right level and time, is the real bad category of loss\. Learn to avoid the latter; sooner the better\. One must learn to keep booking profits even though small \(especially during initial years of trading career\), as it will help keep the morale high and develop the psychological edge needed for evolving as a successful trader\.

__Execution & Exit of Trading Positions__

Execution of a trade must always be a decision backed with a meticulous trading plan and to be done in alert state of mind\. Try to catch sound sleep, before your trading days, especially if you are an intraday trader or a very active trader with large volumes\. It needs to be decided if trading positions should be initiated as a basket order or as a limit order, basis the liquidity available for relevant instruments\. Avoid initiating positions in illiquid Strikes or instruments\. 

Never initiate positions as soon as market opens for trading at 9\.15am\. Let the market and VIX settle down during initial 15mins period after opening\. This will help to avoid getting impacted by freak trades on market opening\. 

Double check your planned positions before execution, as most common mistakes are selection of wrong Strike or quantity or initiating ‘buy’ instead of ‘sell’ \(or vice versa\)\. You can always check out by initiating positions at preferred Strike price etc by executing just one lot; and if the execution successfully goes through then desired quantity can be initiated on those instruments\. 

Also, avoid initiating fresh positions after 3\.15pm, especially when trading positions involve both sell and buy leg and need to be executed through a limit order; because most likely the urgency to complete full trading positions before the market closure may not go through as desired due to the last\-minute rush or technical glitch\. Always, keep checking if the order has got successfully executed and the trading positions have been correctly executed/added\. Having said above, execution of trading positions must be fast; so acquaint and train yourself for swift and smooth execution\.

Similar alertness and speed must be followed for exiting from a position\. Always ensure to exit the sell leg first, before exiting from the buy leg of your trade \(*as this will help avoid further margin requirement*\)\. Also, do not wait until the last few minutes for the closure of the market to exit the trade\. Try to exit by 3\.15pm, if you need to square\-off your trading positions\.

__Comparing and Evaluating Profit & Loss Account \(PNL\) of others and self__

Trading is a psychological game\. Two people deploying same strategy over a period of time may also yield completely different results\. This is because each trader has different circumstances, capital adequacy, emotional quotient levels, risk appetite, risk management efficacies, besides difference in their level of knowledge and experience\.  

The interplay and influence of all of these factors will decide on the PNL each trader may eventually arrive at over a period of consistent trading\. Hence, one must not get dissuaded, discouraged or influenced in any manner with the PNL of other traders, whether successful or not\. Do not compare yourself or your PNL/results with anyone\. 

Be focussed, consistent and strive to learn and evolve\. Every trader will have to go through the journey of his own learning, developing skill and knowledge, inculcating discipline, persevering with patience, trading consistently with optimising risk management to the best level possible, before he can become consistently profitable trader\. 

Further profitability in trading must not be decided on the basis of a week’s or a month’s results\. There may be successive months in a row where trades did not yield decent profit or some reasonable loss, even when the trade plan / strategy was right due to unexpected/ unavoidable circumstances\.  PNL must therefore only be looked at a minimum of a 6 monthly to yearly period, especially by beginners\. This period may get shorter for seasoned traders\.

__Trading involves: Practicing and developing trading skills__

After gaining adequate knowledge about trading and trading related matters, from practical standpoint, an aspiring trader must practice what he has learnt\. This practice will involve chart reading, data analysis as part of his technical study, and deciding what should be the best strategy to play the current trend basis his analysis\. Putting the knowledge acquired into practice, is the __Stage 2__ of the Learning Phase\. 

During this stage of practicing trading, the trader must make notes and initiate dummy positions on some __virtual trading__ platform; and he must try to initiate positions at the right entry point, hold till the right exit point \(*profit booking level*\) or to take stop loss at the optimum levels\. A trader must make his notes/ journals about the virtual positions he took / planned and how they span out\. This leg of practice through virtual trading mode may be done for upto around 6 months or so \(during which time, every temptation and impulse to deploy the capital must be controlled\)\.

After, practicing through virtual trading for a reasonable time, and after which if the trader feels that his analysis has mostly started to go correct \(and if not then I know where my stop loss should be\) and he has developed some conviction on his analysis or trading strategy then he must start __actual trading__ with the just 1 or 2 Lot\. When actual trading is initiated, all the technical analysis and strategy/position deployment and other trading decisions are put to the real test\. When actual money is at stake \(even if for 1 or 2 Lot\), then the real emotional and psychological pressure is faced by the trader and his trading skill begins to take shape in the real sense\. Virtual trading only helps gain acquaintance, but actual trading with real money helps develop the real skill involved for trading\. 

It takes time to develop the trading skill, acquire  psychological edge and inculcate requisite trading discipline; which would cost in terms of both time and money\.  Hence, in this phase, actual trading must be done with low volumes, so as to have low drawdowns while you learn on the job\. Do not let drawdowns to exceed 5% of your capital, particularly, if there is no addition to your trading capital from any income source\. Key is to practice with actual trading in very small quantities\. Furthermore, a particular strategy must be tried consistently for a reasonable period of time before concluding on its suitability\.   Different market dynamics impact the success rate of a strategy differently; so study these situations carefully and avoid becoming a strategy hopper\.

Thus, the entire process of the Learning Phase, beginning with acquiring knowledge to practicing with actual trading in small quantities, may take atleast 2\-3 years\. Patience and perseverance would need to be its highest levels to keep you going\. Repeated drawdowns may try to break you down, but it is important to be able to cling on during this phase of learning despite of failures\. Market is great teacher; and so clinging on to the market study \(both live market and post market\) during your Learning Phase will equip you with tremendous working knowledge\. Losses are a part of the learning, appreciate them, study them and learn how to reduce the probability and quantum of next drawdown\. During this Learning Phase, indulge into things and people which will help to keep your morale high\. 

Once, a person has successfully survived during his Learning Phase the surprises and shocks of the market, he would be ready for a serious business in the market\. A proper career planning even before taking plunge into trading \(as explained in the first point above\), will help you able to cruise through the rough tide during the entire period of the Learning Phase\.  All this time spent or practicing trading, while studying different market cycles, market dynamics and life stages of a stock etc\., are all worth the effort and time, as all this will help shape up and build a disciplined and skilled trading mindset\. One of the litmus test that may be applied to determine if a trader is ready for deploying bigger capital, is that: if he has been reasonably profitable in a consecutive period of atleast six months or so with fewer drawdowns\. 

However, on the other hand, there may be instances where a person realizes during or after spending 3 years or more learning trading, that this career is not for him \(or has pressing demands for other things in life\), then there is no reason why he should stick on in his pursuit for a trading career\. While giving ample time to proper learning is important; but stretching it unnecessarily beyond a point may be damaging; besides there is an opportunity cost associated during your Learning Phase\. Therefore, if there are reasons for you to put a pause to trading or to drop it over something more compelling \(such as family needs etc\), then it must be given due attention that it deserves\. Happiness and peace, for self and family, must be maintained at any cost\.

__Preparation & planning before initiating trades; monitor your trades__

Trading is not what is done on the trading terminal, it is actually meticulous planning basis technical analysis and factoring relevant inputs, designed / calculated in the trading journal\. Trading terminal is only for executing trades, monitoring running trades and exiting from the trades\. Thus, planning the trading positions / Strategy is the most important part, which must decide upfront on the point of entry, stop loss level, profit booking level, adjustment level, margin required, holding time etc\., before executing the trade\. 

The trade plan must also take into account the trading holidays, theta impact on Options positions, instrument under BAN or not, liquidity in instruments/Strikes, how far is expiry day, whether to use basket order or limit order etc\. The trade planning must be done in an alert state of mind, not in a lazy mindset\. Reckless attitude towards trading would not only cost time and money, but would cause unnecessary pain instead of any gain\.

After a trade is executed basis the trade plan, it is equally important to monitor the trade; or atleast important elements like volatility, any news development \(particularly during days of important announcements, reportings etc\.\), change in volume scenario etc\. need to be kept a tab on\. While, monitoring your trades, you must be able to have quick access to your terminal should there arise a need to book profit, take stop loss, initiate adjustments etc\. In market, both positive and negative situations, may arrive at the moment of a drop of a hat\. So make yourself available and prepared during market hours, when your real money is at stake as a trading bet\.

__Broker and brokerage charges: A Cost in Trading__

Selection of a good broker for your trading needs is also very crucial from the perspective of cost of trading, capital safety and analytical tools\. 

Many a times, it is the brokerage cost that makes the PNL go negative, even if you are profitable in your trading\. Different broker charges different brokerage charges, and offers discounted rates from time to time\. Therefore, opting for a good trading plan offered by a broker must be explored because saving brokerage charges will help you a great deal to maintain the capital required for your trading needs by ensuring minimum trading cost slipage from your hard earned profit / capital\. 

Also, trading cost must be efficiently managed by avoiding overtrading/ multiple trading strategies etc\. One must also take note that trading in Futures has higher cost implications than trading in Options\.

Further, while it is important to opt for a broker offering best discounted brokerage charges in order to keep the trading cost at minimal, however, it is always advisable to not compromise on the quality, reliability and credibility of a broker\. The capital you make available to the trading account maintained by the broker also need to be adequately protected\. 

There have been instances in the past when the brokers have defrauded their customers; and lot of customers lost their capital/ securities they bought in the demat account maintained with those brokers or got entangled into protracted legal disputes to recover their capital/securities\. Hence, choose your broker wisely; a trust worthy broker is of utmost importance especially if you plan to trade with big capital\. 

Sometimes, certain brokers make certain restrictions from their side, on initiating positions on some scrips/ Strike options or impose particular quantity restrictions\. Such restrictions by the broker may adversely impact your trading plan, particularly when you need to take positions on such instruments/Strikes or size in order to suitably adjust/cover your running trades\. Some examples are restrictions on buying far OTMs, restrictions on buying near OTMs beyond a particular quantity on Expiry day etc\. You may therefore consider this aspect before you decide to use a broker for your trading requirements\. 

Besides, it is always advisable to maintain atleast two trading accounts, so that if one of the broker imposes certain restrictions all of a sudden or there is some glitch in the trading terminal of one of the broker then you have an option to initiate trades in other trading account maintained with other broker\.

__Directional trades versus non\-directional trades__

A non\-directional strategy \(preferably hedged\) is the best trading bet, especially for starters\. Well, but once you start getting the trend and direction technically right, you must add directional trend following strategies too to your trading armoury\. 

Non\-directional strategies will catch you less with surprises, but the profits may be kind of limited but it would certainly be a more peaceful way of trading\. Profits on non\-directional trades can be maximised by increasing volume\.

__Save opportunity cost & optimise capital use__

Try to make optimum use of capital\. This can be achieved through hedged trades in F&O \(instead of naked Options Short or Futures Short\) and by deploying good amount of capital on one or two good trades rather than deploying small portions of capital on multiple strategies or positions simultaneously\.

Also, holding a complex trade situation for long time may entangle your capital unnecessarily, giving rise to an opportunity cost\. It may be prudent to exit from a complex trade situation and deploy the released capital on to a fresh trade with more winning probability  rather than fighting out the complex trade situation\.__ __

__Importance of Technical Analysis, as part of trading knowledge__

I think it is utmost important to separately highlight here about the importance of learning technical analysis, that would be involved in trading, be it in F&O segment or cash segment\. No trading decision \(in cash or F&O segment\) can be initiated without proper technical analysis\. Learning technical analysis is part of the first step of “acquiring knowledge”\. 

The most fundamental part of technical analysis is chart reading\. Mostly, decisions regarding initiating a position, holding and exiting the positions are taken basis the chart reading\. Besides, chart reading, as part of technical analysis, a trader must also acquire knowledge about the effect of VIX, Open Interest data, Volume, liquidity, delivery and other data points which may also help a trader to plan his trade\. 

While, most of the data points are a shifting shadow and indicators are mostly lagging, thus it is __the price action basis chart reading which should be final decision making point for a trader__\. Thus, learning about technical analysis \(especially, chart reading\) is a must \!

__Do not act on impulse __

Stock market is an ocean of opportunities\. Ideally speaking, a trader must wait for the right opportunity and basis the opportunity at hand, must prepare a trading plan and then deploy his capital with proper risk management in terms of amount to be deployed, position sizing, hedge versus naked positions, entry point, stop loss area, possibility of adjustment and exit at appropriate levels\. 

For becoming successful trader, inculcating discipline and gaining the requisite psychological edge with repeated conscious efforts to spot mistakes and learning therefrom while trading, is the key\. Having said this, the truth of the matter is that many traders do not actually put in the hard work to acquire the practical trading knowledge; and many amongst those who gain knowledge are not able to inculcate discipline in their trading style; which then eventually becomes the main reason for them to not being able to evolve as a successful trader even after being trading for several years\.

Trading is a game of emotion\. Human emotions of greed and fear triggers the impulses which causes most of the traders to commit things during their trading, which results over time in a heap of losses\. These impulses usually causes the trader to initiate or exit trades, when they should ideally wait for clear technically signal over some reasonable time period\. Developing self\-control over your impulses is an important part of self\-discipline required for evolving as a successful trader\. You must know that you need to keep your impulse triggering emotions under tight leash; and at best not to put them into action \!

__Starting a Trading Career__

To be successful, a trader must first plan to be able to take out free time, free mind and free capital to devote for trading\. This process of planning to achieve a point where you feel confident to be able to devote all above mentioned three factors for trading, may take 3 months to a year or more, depending upon person to person\.

Market offers great many opportunities to make money, and so does trading; provided it is taken as a serious vocation\. Thus, it is advisable to plan to be able devote full time to this career, as it will involve immense learning on many fronts, including live market study and post market analysis\. 

1. A mind with many concerns may not be able to focus well; so it is imperative that an aspiring trader must plan his trading career after suitably providing for bothering concerns, *viz\. *loans, divided attention, budget constraints, income source/funds to sustain your family requirements, contingency fund so and so forth\. 
2. A trader must not consider trading with borrowed / leveraged capital or positions, as this situation may hamper the learning curve and the mental ability to focus and thereby impairing the psychological edge required for making a successful career out of trading\. 
3. Sufficient time to be able to do the requisite live market study and post market analysis would be very much required during the learning phase and even during trading hours\. 

These three must be planned and provisioned for adequately, before considering to take plunge into trading\. This career should not be mistaken to be a part time vocation or a hobby; and must be considered as a serious business venture which will require time, study, hardwork, perseverance, patience, dedication, discipline and capital\.

While, time required to equip one\-self, with requisite trading knowledge and skill development, may differ from person to person, however one must plan for __atleast 2 to 3 years of time__ to devote\. Likewise, the capital requirement for trading also differs from person to person, depending on risk appetite and financial status; however, larger the capital the better, but __on the minimum side provision for an exclusive trading capital of 6 to 8 lakhs__ must be ensured\.

__Position sizing & capital deployment for trading__

Once, trading business is started, do not scale up full trading volume at the first instance\. Larger volume will show larger levels of stop loss amounts, drawdowns net P&L etc \(*even if they are same in percentage terms to which you are used to facing while practicing with smaller quantities*\), which may send a sudden shock or fear message to the brain\. Let your nerves pick up on those negative numbers slowly, so that they do not cause psychological disturbance to your trading\. If you had been practicing with 2 Lots increase it to 4 and then to 6 and then to 10 Lots and so on after a gap of atleast 3\-6 months\. Take your time to digest the ups & downs on those trading volumes, before you scale up to next level of volume enhancement\.

Also, do watch out on the percentage of total capital deployed for trading, at any given point in time\. For option buying trades, do not exceed 5% of your capital and for option selling do not exceed 50% of your total capital, at any given point in time\. Thus, at all times, not more than 50% of your capital is on trading positions\. Balance 50% of your capital will help maintain MTM situations and to execute trading positions for adjustments to mitigate losses in a running trade\.

__In Trading, Identify What Trading Style Suits You __

Once a person reaches towards a point where he had been consistently in profit, with fewer drawdowns, over last six months period; then by this time most likely he must have learnt and identified what particular trading style \(*intraday/ overnight / positional/ stock trading/ Futures trading / Options trading/ Options seller or buyer, trading in FNO stocks or Indices etc*\) suits him the most and which strategy\(ies\) he has a sound grip on to play particular market situations\. 

Thus, during the Learning Phase, the focus must be __discover your preferred trading style, which can fetch you reasonable profit with fewer drawdowns__\. This may vary from person to person depending on the capital required and the psychological level etc; but it is a discovery which every trader would have to make for himself\. Once discovered, a trader must develop and optimise on his preferred trading style on those relevant Strategies rather than on keep experimenting; and so prepare to take plunge for the actual trading business in real sense\. 

During his Learning Phase, a trader must learn all that is relevant from practical perspective of trading which need to be learnt, but then eventually he must settle on with a few trading patterns/plans and strategies, which he is most competent and comfortable playing\. Thus, a trader must strive to be genius in all, and then master/ specialise in one or few areas \(*which he discovers during the course of his learning to be best suiting his temperament, capital, situation and reasonable ambitions* etc\)\.

__Market Adaptability: Be dynamic, quick to adapt__

Market is very dynamic and it keeps changing from time to time\. Always expect that the market may surprise you any time; and so be prepared for it\. There may be so many reasons which may turn the market completely, hence impacting your trade plan/ trading positions\. Precisely, for this reason it is important that you monitor your running trades and have at all times quick access to them\.

Moreover, when the market changes its course, you need to have the hawkish eyes to be able to figure out at the earliest that likely the tides may turn\. Sound understanding about reading charts and other technical analysis tools would help spot such market changes; so always keep a dashboard of relevant charts indicators, data points, news flash etc\. handy, while your trading positions are running\.

Further, when you figure out that the market is taking a turn, you must have or develop a counter plan, which may have to be instantly executed \(*whether to take a stop loss or initiate fresh positions or to go for adjustments or to book profit or do delta drifting or to shift your positions to different Strikes or change Strategy etc\.*\), either to mitigate the loss that may be incurred on the running trades and/or to exploit the new opportunity that market seems to be offering\. 

Your trading knowledge and experience, constant observation on market dynamics, know\-how about technical analysis, would help you ride over such rough plateau over which the market may through your running positions at times\. So the greater amount of time you spend in live market to study, analyse, making notes, reading charts, training your eyes, would help a great deal in preparing you to handle such unexpected turn of event in market\. 

__Focus on loss, save capital__

It is absolutely important in a trading plan to focus on saving loss than to chase for profits\. Profit is part of the trading business\. If you are able to plan the risk and control the risk in a trade and hence save loss, then you will end up being profitable in that trade\. So figure out risk spots and such events in your trade; and watch out for them\. 

Have a risk identification and risk mitigation plan as part of your trade plan\. The profit lies in the secret of your risk management around saving the potential loss in every trade that you take\. 

As part of risk management, various aspects need to be planned\. This includes: knowing all but specialise in one strategy, hedge trades, maintaining position sizing, optimum use of capital, trading frequency and quantum of trades, defined stop losses subject to maximum drawdown, pre\-planned possible adjustments, following technicals not impulses etc\.

__Intro to options Buying and Option Selling__

Major factors which influences the Options’ LTP are: movement in the price of the underlying, Delta values, momentum in the movement of the underlying, time decay/ Theta, time for Expiry, Intrinsic Value & Time Value in Options’ Premium, change in Volatility etc\. Basis these factors as it plays out currently and as it may be expected to play out in the near future, as per the technical analysis, a trader need to decide if he has to initiate a Long Options position or a Short Options position or what combination of both \(or in association with Futures\) to create a hedge trade\. Therefore, a sound understanding of the impact of these factors on different Options is extremely important\.

Now, let us understand the situations which are suitable for creation of a Long Options position or a Short Options position; and also, how would these positions get impacted under various influencing factors\.  In nutshell, when should a trader go Long or Short on Options and when he must consider not continuing in these positions\.

__Summary on option Buying Vs Option Selling__

Thus, it can be deduced that:

1. __For Long Options__, strong momentum is the key for profit\. Momentum and rising Volatility are favourable factors for the Long Options and Theta decay and falling Volatility are unfavourable to Long Options\. Thus, the key for initiating a positional Long Options position is to initiate Long on Options with larger time for Expiry; and the most important factors for intraday or positional Long Options positions is that there must be favourable momentum and Volatility must not be in a falling state\.

Also in a Long Options position, from Expiry perspective, it is a must that the Long Options position crosses its Breakeven Strike by its Expiry and expires as an ITM with its final LTP being higher than the buying Premium after the full Theta impact of Expiry\.

1. __For Short Options__, Theta decay is the key for profit\. Theta decay and falling Volatility are favourable factors for the Short Options positions and unfavourable momentum and rising Volatility are unfavourable factors for the Short Options\. Thus, the key for initiating positional Short Options position is to initiate Short on Options where Theta decay will erode the entire Premium on Expiry; and the most important factors for intraday or positional Short Options positions is that the Strike at which Short has been initiated must not be breached by the underlying and the Volatility must not be in a rising state\.

Also in a Short Options position, from Expiry perspective, it is a must that the Short Options position does not breach its Breakeven Strike by its Expiry and preferably expires as an ATM or OTM to gain from the full Theta impact of Expiry\.

__Long Options on Expiry Day:__

On Expiry day, rise in momentum or Volatility causes expansion in the Time Value of the near OTMs within the Most Impacted Radius Zone area of Expiry Day, thereby rising in the LTP/ Premium value\. If the momentum is on the upside direction then near CE OTMs can be bought to play the upside momentum till it lasts; and if the momentum is on the downside direction then near PE OTMs can be bought to play the downside momentum till it lasts\.

On Expiry day, as soon as the momentum or rise in Volatility ceases, the Premium of the OTMs  \(including near OTMs\) exhibit a sharp decline due to strong Theta effect on Expiry day\.

Further, on Expiry day, near ITMs after about 12 noon rapidly looses their Time Value and are left with mostly only Intrinsic Value\. These ITMs with \+98% Intrinsic Value \(with a Delta value close to 1\) starts behaving like Futures\. These Synthetic Futures can be used to initiate Long to play the trend on the Expiry day \(even if there is no momentum\)\. 

Thus, on Expiry day, if the trend is clear and confirmed \(and even if the momentum may not be a sure thing\), such scenario can be played by initiating Long in these Synthetic Futures, because even if there is absence of momentum there is no Time Value erosion issue in these Synthetic Options, and so long the trend is intact these Synthetic Futures will generate rise in LTP value almost like Futures\.

__Most Impacted Radius Zone: For Long Options__

The effect of momentum and change in Volatility is felt maximum in the Most Impacted Radius Zone around ATM\. The intensity of momentum / rise in Volatility defines the Most Impacted Radius Zone, from time to time\. 

In Nifty Options may be around 800 to 1200 points, around ATM, depending upon the intensity of rise in momentum / change in Volatility\. In case of BankNifty Options may be around 1000 to 2000 points, around ATM, depending upon the intensity of rise in momentum / change in Volatility\.  

In the event of rise in momentum or rise in Volatility, the Near OTMs and Not\-so\-Deep OTMs experience maximum rise in their LTP/ Premium in percentage terms; and Near ITMs and Not\-so\-Deep ITMs experience maximum rise in their LTP/ Premium in absolute terms\. Deepest ITMs and OTMs are least impacted with the impact of rise in momentum / Volatility\. Therefore, any rise in momentum or rise in Volatility should be played accordingly within the Most Impacted Radius Zone\.

On Expiry day, the Most Impacted Radius Zone on the OTM side is shrinked usually to maximum of 3 to 4 strikes from ATM, subject to the intensity of momentum / change in Volatility this area may further enlarge\.

__Option buying: Long Options Position__

We know that when the underlying is expected to move up, a Long position in CE Options may be initiated; and when the underlying is expected to move down, a Long position in PE Options may be initiated\. 

Generally, because the profitability in Long position in CE Option is directly proportional to the direction of the underlying \(i\.e\. when the underlying price rises, CE’s LTP rises and when the underlying falls the CE’s LTP falls\), therefore the Delta value of a CE Long position is represented with a \+ve sign\. 

However, since the profitability in Long position in PE Option is inversely proportional to the direction of the underlying \(i\.e\. when the underlying price rises, PE’s LTP falls and when the underlying falls the PE’s LTP rises\), therefore the Delta value of a PE Long position is represented with a \-ve sign\.

The basic requirement of Long Options position is that the underlying must be trending in favour of the relevant Long Options position, i\.e\. 

1. in respect of CE Long position the underlying must trend upwardly and must keep trending higher than the CE Strike at which Long has been initiated; and 
2. in case of PE Long position the underlying must trend downwardly and must keep trending lower than the PE Strike at which Long has been initiated\.

__Momentum coupled with rise in Volatility: Best mix for Long Options Trade Position__

The following situations are best to play Long Options:

- For Buying CE: Rise in the price of the underlying with momentum coupled with rise in the Volatility, can be played through initiating Long on CE Options; and
- For Buying PE: Fall in the price of the underlying with momentum coupled with rise in the Volatility, can be played through initiating Long on PE Options\.

__Momentum or Volatility: One Stronger than Other__

Having said above, one must also bear in mind that in certain cases when the momentum and the Volatility are trending in opposite direction \(i\.e\. *when momentum is rising but Volatility is crashing; or when the underlying is moving slowly but Volatility is rising*\), then if one is significantly stronger than the other, then that factor nullifies the negative impact on the LTP/ Premium of Options and consequently causes the Premium of the relevant Long Options position to rise \(*inspite of the other factor not being supportive or mildly negative*\)\. That is, if:

1. Rise in the price of the underlying is slow \(not with momentum\) / not significant, but there is a sudden exponential rise in the Volatility, then the Premium of the CE Options would rise even if the directional rise in the underlying is not so much, because the effect of strong rise in Volatility on CE Options would outweigh the negative impact of slow / less rise of the underlying on CE Options\. In such situations, because the directional move of the underlying is primarily favourable to the CEs, the CE Options’ Premium may rise exponentially due to significant rise in Volatility; whereas the PE Options’ Premium would fall less due to exponential rise in the Volatility which would curtail the fall in the PEs’ Premium \(caused due to directional upmove of the underlying\)\. 
2. Likewise, if fall in the price of the underlying is slow \(not with momentum\) / not significant, but there is a sudden exponential rise in the Volatility, then the Premium of the PE Options would rise even if the fall in the underlying is not so much because the effect of strong rise in Volatility on PE Options would outweigh the negative impact of slow / less fall of the underlying on PE Options\. In such situations, because the directional move of the underlying is primarily favourable to the PEs, the PE Options’ Premium may rise exponentially due to significant rise in Volatility; whereas the CE Options’ Premium would fall less due to exponential rise in the Volatility which would curtail the fall in the CEs’ Premium \(caused due to directional fall of the underlying\)\.
3. Rise in the price of the underlying is with a strong momentum, but there is no rise in Volatility / some fall in Volatility, then the Premium of the CE Options would rise even if the Volatility dropped though not so much, because the effect of strong momentum on CE Options would outweigh the negative impact of fall in Volatility on CE Options\. In such situations, because the directional move of the underlying is primarily favourable to the CEs, the CE Options’ Premium may rise exponentially due to strong momentum rise in underlying; whereas the PE Options’ Premium would fall significantly due to double jeopardy caused due to negative momentum \(rise in underlying price is negative to PE’s Premium\) coupled with fall in Volatility\. 
4. Likewise, if fall in the price of the underlying is with a strong momentum, but there is no rise in Volatility / some fall in Volatility, then the Premium of the PE Options would rise even if the Volatility dropped though not so much, because the effect of strong momentum on PE Options would outweigh the negative impact of fall in Volatility on PE Options\. In such situations, because the directional move of the underlying is primarily favourable to the PEs, the PE Options’ Premium may rise exponentially due to strong momentum fall in underlying; whereas the CE Options’ Premium would fall significantly due to double jeopardy caused due to negative momentum \(fall in underlying price is negative to CE’s Premium\) coupled with fall in Volatility\.

Thus, to play a Long Options position a trader must be certain of rise in momentum and/or Volatility\.

__Favourable and Unfavourable Factors for Long Options Trade Position:__

A trader must bear in mind that there are primarily only two factors which favours a Long Options position or makes it profitable\. 

__*Favourable Factors to Long Options*:__

These are two __Favourable Factors to Long Options__:

1. Movement in the price of the underlying with swift momentum
2. Rise in Volatility

In both the above situations, the Time Value in the LTP of the Long Options rises significantly in response to the favourable momentum and rise in Volatility\. Favourable momentum coupled with rising Volatility is the best scenario to play the directional trend through initiating Long Options position\. 

However, if the movement in the price of the underlying is in the favourable direction of the Long Options position but is slow \(i\.e\. not with swift momentum\), then most likely the Long Options position may not yield the desired outcome / extent of profit\. This is because the following factors act against a Long Options position \(__Unfavourable Factors to Long Options__\)\.

__*Unfavourable Factors to Long Options*:__

__ Following__ are the __Unfavourable Factors to Long Options position:__

1. Up & down / sluggish movement in the price of the underlying \(even if in the favourable direction to the Long Options position\) causes erosion of the Time Value in the Long Options’ LTP, resulting in reduction of the LTP/ Premium of Options in which Long is initiated
2. If the movement in the price of the underlying is slow \(even if the direction is in favour of the Long Options position\), then with the passage of time the Theta value increases and as the Expiry draws near the Time Value comprised in the Long Options’ LTP starts undergoing faster decay, resulting in reduction of the LTP/ Premium of Options in which Long is initiated 
3. If the Volatility starts to fall, the Time Value in the Long Options’ LTP would undergo erosion, resulting in reduction of the LTP/ Premium of Options in which Long is initiated
4. From an Expiry perspective, a Long Options position needs to cross its Breakeven Strike in order to be profitable\. 

__<start>Formula: Breakeven Strike of CE Long position is: \[CE Strike at which Long is initiated \+ Premium paid\], from Expiry perspective <end>__

__<start>Formula: Breakeven Strike of PE Long position is: \[PE Strike at which Long is initiated \- Premium paid\], from Expiry perspective <end>__

However, even if a Long Options position crosses its Breakeven Strike but expire as an ATM or OTM, then due to Theta effect on Expiry, ATMs and OTMs expire worthless with their LTP/ Premium becoming zero\. Therefore, from an Expiry perspective, in order to be profitable, a Long Options position not only need to cross its Breakeven Strike but must also expire as an ITM with a final LTP exceeding the buying price\.

From the above discussions, it is quite clearly evident that there are  fewer favourable factors in relation to a Long Options position\. It is therefore not enough to be right with regard to the direction of the underlying __for initiating a Long Options position, but it needs to be ensured that there is momentum in the movement of the price of the underlying and the Volatility is not in a falling / fluctuating state__\. 

A rangebound market \(i\.e\. movement of the underlying price in a range\) or a slow directional move or fall/ fluctuations in Volatility are not the right type of market situations to initiate a Long Options trade and is better to avoid playing directional move in any of the aforesaid situations through Long Options positions\.

__General Trade Ideas of playing Long Options:__

Mentioned below are a few situations, where basis the market view, certain Long Options positions can be initiated to play out the trend \(with the logic for initiating Long on Options\):

__<start>Table__:

| Trades | Bullish View | Bearish View | Reason |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| Longer period Positional trade \(25 days or more\)\. Suitable even for slow directional move | Buy CEs of Next Month or Far Month Expiry | Buy PEs of Next Month or Far Month Expiry | Impact of time decay would be minimal\. Gain in absolute terms would be more |

| 2\-22 days Positional trade\. Sure of directional move, but not of momentum | Buy Synthetic Futures CE of Current Month | Buy Synthetic Futures PE of Current Month | Options having \+98% Intrinsic Value\. Decay would be to the extent of quantified Time Value |

| Intraday or 1\-2 days Positional trade\. Sure of directional move, expecting favourable momentum | Buy Synthetic Futures CE of Current Month | Buy Synthetic Futures PE of Current Month | Options having \+98% Intrinsic Value\. To take advantage of close to 1 Delta \(same as Futures move\) without incurring huge margin/ MTM requirement applicable for Futures |

| Intraday or 1\-2 days Positional trade\. To play expected favourable momentum | Buy OTM CE with Delta of around 0\.4 to 0\.45 | Buy OTM PE with Delta of around 0\.4 to 0\.45 | To take advantage of Delta drifting from 0\.4 to 0\.5 or higher due to momentum, and to target highest percentage gain in Most Impacted Radius Zone |

| Intraday or 1\-2 days Positional trade\. To play expected favourable momentum | Buy ITM CE with Delta of around 0\.55 to 0\.65 | Buy OTM PE with Delta of around 0\.55 to 0\.65 | To take advantage of Delta drifting from 0\.55 to 0\.8 or higher due to momentum, and to target highest gain in absolute terms in the Most Impacted Radius Zone |

| Expiry day\. To play expected favourable momentum on Expiry | Buy OTM CEs within 3 Strikes from ATM | Buy OTM PEs within 3 Strikes from ATM | Options within Most Impacted Radius Zone of Expiry Day, to target maximum gain in percentage terms on relatively low capital, quickly till momentum lasts |

| Expiry day\. To play expected favourable momentum on Expiry | Buy Synthetic Futures CE of ongoing Expiry series \(i\.e\. ITM CEs within 3\-4 Strikes from ATM\) | Buy Synthetic Futures PE of ongoing Expiry series \(i\.e\. ITM PEs within 3\-4 Strikes from ATM\) | Near ITM Options having \+98% Intrinsic Value on Expiry Day, to take advantage of close to 1 Delta \(same as Futures move\) without incurring huge margin/ MTM requirement applicable for Futures\. Safer bet than playing though OTMs on Expiry, if momentum is not continuous but trend is confirmed |

| When strong and longer time momentum is expected to arrive anytime within 10\-15 days or so | Stone\-age CEs \(i\.e\. Far OTM CEs of Next Month Expiry series\) | Stone\-age PEs \(i\.e\. Far OTM PEs of Next Month Expiry series\) | Long positions for larger holding time through Stone\-age Options can be initiated, as erosion in Premium value in Stone\-age Options is very less, thus making it suitable for longer holding  positions \(besides lower buying cost\) |__ <end>__

__<start>Non\-Directional Trend through Long Options:__

__Table__:

| Market Situation | Trade | Reason |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| When it is likely that a momentum based strong trend will arrive, without certainty about the direction \(upside or downside\) | Long Straddle: Buy CE and Buy PE of same Strike \(ATM strike or near ATM Strike\) | Strong momentum in any one direction \(upside or downside\) will cause one Option to become deep ITM \(i\.e\. increase in Delta\) and the other Option to become deep OTM \(i\.e\. decrease in Delta\)\. Thus, Options favourable to the momentum movement will give exponential rise in the Premium of such Options, whereas the other Options Premium will be significantly reduced\. Thus, difference between the profit earned on one side Option against total Premium debit incurred on the Long Straddle will be the profit in this position |

| When it is likely that a momentum based strong trend will arrive, without certainty about the direction \(upside or downside\) | Long Strangle through Stone\-age Options: Stone\-age CEs \(i\.e\. Far OTM CEs of Next Month Expiry series\) and Stone\-age PEs \(i\.e\. Far OTM PEs of Next Month Expiry series\) | Long Strangle with Stone\-age Options will have relatively lesser buying cost as compared to a regular Long Straddle\. Further, with Stone\-age Options longer holding period can be targeted as these Options experience less erosion in their Time Value\. Thus, when strong & lasting momentum in any one direction \(upside or downside\) is expected, and such momentum arrives then either side Option \(CE or PE, as the case may be\) will come closer to ATM or may even become deep ITM \(i\.e\. increase in Delta\) and the other side Option would become even deeper OTM \(i\.e\. decrease in Delta\)\. Thus, Options favourable to the momentum movement will give exponential rise in the Premium of such Stone\-age Option, whereas the other Stone\-age Options’ Premium will be significantly reduced\. Thus, difference between the profit earned on one side Option against total Premium debit incurred on the Long Strangle will be the profit in this position | __<end>__

__Thus, Long Options positions need support of a strong momentum, no fall in Volatility and low Theta \(slow impact of time decay\); and from Expiry perspective the Options must expire as an ITM\.__

__General Trade Ideas of playing Short Options:__

Mentioned below are a few situations, where basis the market view and Theta impact, certain Short Options positions can be initiated to play out the trend \(with the logic for initiating Short on Options\):

| Trades | Bullish View | Reason |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| Positional trade \(20 days or more\) | Sell Far OTM PEs of Next Month or Far Month Expiry | Next Month or Far Month Expiry PE will have higher Premium\. Thus, if view is clear that by Expiry the underlying will not breach the OTM PE Strike, then higher Premium PEs can be targeted by playing Short\. As the underlying keeps going higher, LTP of the PE Short position will decrease thereby yielding profit\. Further, as the Expiry approaches closer Theta impact would also cause reduction in Premium value thereby yielding profit\. |__ <end>__

| Trades | Bearish View | Reason |

| Positional trade \(20 days or more\) | Sell Far OTM CEs of Next Month or Far Month Expiry | Next Month or Far Month Expiry CE will have higher Premium\. Thus, if view is clear that by Expiry the underlying will not breach the OTM CE Strike, then higher Premium CEs can be targeted by playing Short\. As the underlying keeps going lower, LTP of the CE Short position will decrease thereby yielding profit\. Further, as the Expiry approaches closer Theta impact would also cause reduction in Premium value thereby yielding profit\. | __<end>__

| Trades | Rangebound View | Reason |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| Positional trade \(10 days or more\) | Sell Far OTM CEs & OTM PEs \(Short Strangle\) of Current Month or Next Month or Far Month Expiry | Current Month OTM CE & PE can be shorted if available with reasonable Premium and in a decent safer range\. Next Month or Far Month Expiry CE and PE will have higher Premium\. Thus, if view is clear that by Expiry the underlying will not breach the OTM CE & PE Strikes, then higher Premium OTM CEs and OTM PEs can be targeted by playing Short\. Up & down movement of the underlying within a range will cause erosion of Time Value of OTM CE & OTM PE thereby reducing their LTP and yielding profit\. Further, as the Expiry approaches closer, Theta impact would also cause reduction in Premium value thereby yielding profit\. |

| Intraday trade to positional trade \(2 to 7 days or so\) | Sell ATM CE & ATM PE \(Short Straddle\) | Highest Time Value is available on ATM Strikes\. Therefore, if the view is clear that the underlying will hover with a tight range for intraday or for a few days then a Short position can be created on ATM CE & ATM PE Strikes of Current Month Expiry or of any weekly series depending on availability of decent Premium values to benefit from on a Short position thereon\. Up & down movement of the underlying within a range will cause erosion of Time Value of ATM CE & ATM PE thereby reducing their LTP and yielding profit\. Further, as the Expiry approaches closer, Theta impact would also cause reduction in Premium value thereby yielding profit\. | __<end>__

| Trades | Rangebound Volatility or falling Volatility | Reason |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| Intraday or Positional trade \(1 to 10 days or so\) | In case of Rangebound underlying: \(i\) Sell OTM CEs & OTM PEs \(Short Strangle\); or \(ii\) Sell ATM CE & ATM PE \(Short Straddle\) \\n In case of rising underlying: Sell OTM PE \\n In case of falling underlying: Sell OTM CE | Weekly series or Current Month CE and/or PE can be shorted if available with reasonable Premium\. Up & down fluctuations of Volatility or fall in Volatility will cause erosion of Time Value of Options, thereby reducing their LTP and yielding profit\. If the underlying is in a range, then up & down price fluctuations of the underlying will cause erosion of Time Value of Options, thereby reducing their LTP and yielding profit\. If the underlying is in a rising state, then PE Options LTP would get reduced thereby yielding profit on PE Short position\. However, if the underlying is in a falling state, then CE Options LTP would get reduced thereby yielding profit on CE Short position\. Also, as the Expiry approaches closer, Theta impact would also cause reduction in Premium value thereby yielding profit\. |

| Trades | Expiry Timetrack \(Theta decay\) | Reason |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-|

| Shorter Positional trade or STBT trades \(1 to 5 days\) | Sell OTM CEs & OTM PEs of Current Week on 1st day of current week Expiry or on one day prior to current week Expiry day\. In case Thursday is the Expiry day for the relevant Options \(like Nifty\), then this trade can be initiated on Friday \(i\.e\. first day of the current week Expiry series\) or on Wednesday \(i\.e\. a day before Expiry\)\. If Expiry day is Friday \(like in case of BankNifty\) then this trade can be initiated on Monday \(i\.e\. first day of the current week Expiry series\) or on Thursday \(i\.e\. a day before Expiry\)\. If Expiry day is Tuesday \(like in case of FinNifty\) then this trade can be initiated on Wednesday \(i\.e\. first day of the current week\) or on Monday \(i\.e\. a day before Expiry\)\. | If view is clear that by Expiry the underlying will not breach the OTM CE & PE Strikes, then the current week Expiry OTM CEs and OTM PEs can be targeted by playing Short\. Position can be initiated on Friday for Nifty \(or on Monday for BankNifty / Wednesday for FinNifty\) i\.e\. starting of new current week Expiry series, if view is that the underlying will remain within a tight range \(and not too volatile\) so as to benefit from weekend Theta decay\. However, if the view is that in the current week the underlying may be Volatile and unpredictable, then best would be that the position is created any time before the end of the trading session on the previous day to Expiry i\.e\. Wednesday for Nifty and Thursday for BankNifty and Monday for FinNifty etc\. \(the “Previous Day”\)\. Idea in this trade is to benefit from the overnight decay between the Previous Day and Expiry Day due to Expiry Timetrack Activation from Previous Day afternoon onwards\. Upon opening on Expiry Day, itself Theta impact causes much decay to the CE OTM and PE OTM Short positions thus causing drop in their Premium value and yielding profit\. The position may be exited upon opening on Expiry Day to reap overnight decay; or the position may be held until Expiry Day EoD if the view is that the underlying will remain and close within the range of CE & PE OTM Strikes shorted, in order to reap full benefit of Theta impact of Expiry on the OTM CE & PE Short positions to play Expiry day |

| Positional trade \(7 to 20 days\) | If view is bullish or rangebound – then sell deep ITM PE with 80% Intrinsic Value and 20% Time Value\. If view is bearish or rangebound – then sell deep ITM CE with 80% Intrinsic Value and 20% Time Value | As the Expiry approaches, the Time Value amongst the ITM Options experiences stronger time decay impact starting from deep ITMs left with some Time Value\. Therefore, if the view is that the directional move of the underlying would be favourable then as the CE or PE ITM Option as the case may be would get more deeper ITM due to favourable directional move of the underlying and loose its Time Value, thereby yielding profit\. And further as the Expiry approaches near, the deep ITM Options with some Time Value left in their LTP, start losing their Time Value to Theta thereby causing reduction in the Premium of that Option and yielding profit | __<end>__

__Options Selling: Short Options__

We know that when the underlying is expected to move up, a Short position in PE Options may be initiated; and when the underlying is expected to move down, a Short position in CE Options may be initiated\. 

Generally, because the profitability in Short position in CE Option is inversely proportional to the direction of the underlying \(i\.e\. *when the underlying price rises, CE Short position yields loss and when the underlying falls the CE Short position yields profit*\), therefore the Delta value of a CE Short position is represented with a \-ve sign\. Likewise, since the profitability in Short position in PE Option is directly proportional to the direction of the underlying \(i\.e\. *when the underlying price rises, Short PE position yields profit and when the underlying falls the Short PE position yields loss*\), therefore the Delta value of a PE Short position is represented with a \+ve sign\.

The basic requirement of Short Options position is that the underlying must not breach the Strike at which Short is initiated i\.e\. 

1. in respect of CE Short position the underlying must not breach/ go above the CE Strike at which Short has been initiated; and 
2. in case of PE Short position the underlying must not breach / go below the PE Strike at which Short has been initiated\.

__Unfavourable factors in Short Options Trade position:__

Following are the factors which act against a Short Options position \(__Unfavourable Factors to Short Options__\):

1. Underlying gets trending in opposite direction of the Short Options positions
2. Underlying breaches the Breakeven Strike from Expiry perspective
3. Rise in Volatility

Each of the aforesaid factors which are unfavourable to a Short Options position are discussed below\.

1. __Movement of the underlying:__

Now, if a CE Short is initiated, then the view is: 

1. bearish i\.e\. the underlying would fall and consequently LTP of the CE Options shorted would fall yielding profit; or 
2. the underlying may remain rangebound i\.e\. it neither rise or fall substantially and consequently with the passage of time the Theta decay will catch up causing fall in the LTP of the CE shorted, thereby yielding profit\. 

However, instead of the aforesaid situations, if the underlying starts rising higher i\.e\. gets in an uptrend movement, then the LTP of the CE Short positions would start rising, thereby generating loss in the CE Short position\. Further, if in such a case, the underlying rises so much so as to cross the CE Strike shorted thereby making it an ITM, then likely that the Theta decay impact on the Time Value on Expiry, may not yield profit if the final LTP is higher than the LTP at which CE Short position was initiated \(*profit in such situation may only arise if the final LTP on Expiry of the CE Option is less than the LTP at which CE Short position was initiated*\)\.

Likewise, if a PE Short is initiated, then the view is: 

1. bullish i\.e\. the underlying would rise and consequently LTP of the PE Options shorted would fall yielding profit; or 
2. the underlying may remain rangebound i\.e\. it neither rise or fall substantially and consequently with the passage of time the Theta decay will catch up causing fall in the LTP of the PE shorted, thereby yielding profit\. 

However, instead of the aforesaid situations, if the underlying starts falling higher i\.e\. *gets* into downtrend movement, then the LTP of the PE Short positions would start rising, thereby generating loss in the PE Short position\. Further, if in such a case, the underlying falls so much so as to cross the PE Strike shorted thereby making it an ITM, then likely that the Theta decay impact on the Time Value on Expiry, may not yield profit if the final LTP is higher than the LTP at which PE Short position was initiated \(*profit in such situation may only arise if the final LTP on Expiry of the PE Option is less than the LTP at which PE Short position was initiated*\)\.

Thus, in a Short Options position, an unfavourable trend/ direction may cause loss in such position\.

1. __Breach of Breakeven Strike:__

If a CE Options Short position or PE Options Short position do not breach its respective Breakeven Strike on Expiry then the Short positions shall yield profit\. If on Expiry such Short Options position expires as an ATM or OTM then the LTP of the CE Short and PE Short becomes zero \(*as their LTP comprises of only Time Value and Time Value from all Options becomes zero on Expiry*\) and thus would yield a profit to the extent of total Premium at which Options were sold\.

If on Expiry, the underlying breaches the CE or PE Option Strike at which Short is initiated but does not breach its respective Breakeven Strike, then the Short Options position \(which would be an ITM\) may still yield some profit depending on the final LTP being less than the LTP at which Short position was initiated\. However, as mentioned, if on Expiry the underlying breaches the Breakeven Strike of CE or PE Option Strike at which Short is initiated, as the case may be, then the Short Options position  \(which would be an ITM\) may likely yield loss as the final LTP would be higher than the LTP at which Short position was initiated \(even after total decay of Time  Value on Expiry in the CE or PE Options shorted\)\.

1. __Rise in volatility:__

Rise in Volatility causes expansion of Time Value comprised in the Premium of Options, leading to rise in the Premium of the Options\. Therefore, when the Volatility starts to rise, the Time Value comprised in the Premium of the Options gets expanded causing rise in the Premium of the Options\. Therefore, even if there is no directional move in the underlying, rise in Volatility would cause rise in LTP of Options\. If rise in Volatility is coupled with any directional move in the underlying, then the LTP of Options to which the directional move is favourable \(*CE Options when underlying increases; and PE Options when underlying falls*\) gets phenomenally increased, whereas the Options to which the directional move of the underlying is unfavourable may rise/ fall little in LTP due to the impact of stronger volatility rise than the unfavourable directional move\.

However, it is pertinent to note that the rise in Volatility impacts only the Time Value comprised in the LTP of Options\. Thus, on Expiry day, even if there is rise in LTP on account of rise in Volatility, eventually the Time Value would become zero due to Theta impact\. Therefore, from Expiry perspective, rise of LTP on account of rise in Volatility may exhibit only notional loss in Short Options positions, but the actual loss in Short Options position is determined basis where the underlying closes on Expiry \(i\.e\. whether or not on Expiry the Breakeven Strike is breached\)\.

__Favourable Factors for Short Options Trade Position:__

A trader must bear in mind that there are primarily three factors which favours a Short Options position or makes it profitable\. These factors are \(__Favourable Factors to Short Options__\):

1. Underlying must not breach the Strike at which Short has been initiated and from Expiry perspective the Breakeven Strike must not be breached by the underlying
2. Maximum time decay / Theta impact
3. Larger loss area / Breakeven Strike
4. Fall / fluctuations in Volatility

Each of the aforesaid favourable factors are discussed below\.

So far as the movement of the underlying is concerned, whether if it trends in favour of the Short position \(i\.e\. the underlying falls in case of CE Short; and the underlying rises in case of PE Short\) OR it remains hovering within a range, but does not breach the Strike at which Short has been initiated \(i\.e\. its Breakeven Strike\), the Short position would remain profitable\. The reason for the aforesaid is explained below:

1. If a Short position is initiated, and a favourable momentum/ trend arrives \(i\.e\. *the underlying keeps falling lower in case of CE Short; and the underlying keep rising in case of PE Short*\) then the LTP of the Short position would decline and thus would generate profit in the Short position \(__Favourable Trend__\)\.
2. However, if the underlying does not trend in any direction much but remain rangebound and does not breach the Strike at which Short has been initiated \(or its Breakeven Strike\) then the Short position would generate profit due to the following factors \(__Rangebound Movement of Underlying__\):

- As a result of up & down movement of the underlying, the Time Value comprised in the Premium of Short position undergoes expansion and contraction, consequently, the Time Value faces erosion leading to reduction in the Premium of the Short Option position thereby yielding profit;
- As the underlying keeps hovering up & down in a range, with the passage of time, Theta impact \(i\.e\. time decay\) goes stronger and faster as the Expiry draws near\. This Theta impact causes erosion in the Time Value comprised in the Premium of the Short position, consequently, the Time Value faces erosion leading to reduction in the Premium of the Short Option position thereby yielding profit\.

1. __Theta Impact from Expiry perspective:__

A Short position is best suited to be created in deep OTMs, because of the surety of the fact that if: irrespective of the occurrence of an opposite trend i\.e\. in direction unfavourable to the Short position, the Strike at which Short position has been initiated expires as an OTM or ATM on its Expiry day, the LTP of that Short position will become zero on Expiry yielding profit \(even though before Expiry it was showing loss due to opposite direction of the underlying which was unfavourable to the Short position\)\. This situation is a sure event on Expiry, because due to the Theta effect the Time Value comprised in the Premium of all Options become zero on expiry, consequently, the ATMs and all the OTMs expire worthless on Expiry \(i\.e\. with their LTP as zero\) and all ITMs are left with only Intrinsic Value on Expiry\.

Also, as an Options behaviour, the Theta impact of Expiry begins strongly at a fast pace from deep OTMs for the OTMs and from the deep ITM for the ITMs\. Therefore, while deep OTMs provides an opportunity to benefit from Theta effect of Expiry by initiating Short Options in deep OTMs, even the deep ITMs in certain situations can be played through Shorting deep ITMs with Premium comprising of about 20% of Time Value and 80% of Intrinsic Value\. As the Expiry Timetrack gets activated, these ITMs start loosing their Time Value quite rapidly\. On Expiry day, in the second half of the Expiry day, most of the ITMs starting from the deep ITMs start loosing their Time Value, consequently bringing the Premium of the ITMS equivalent to their Intrinsic Value \(*and therefore most of the ITMs become Synthetic Futures towards the close of the Expiry, with only Intrinsic Value left in their Premiums*\)\. Therefore, upon activation of Expiry Timetrack, if the underlying remains within a tight range until Expiry or if the underlying is trending then the relevant ITMs \(i\.e\. *if underlying is trending upwardly, then PE Shorts; and if the underlying is trending downwards then, CE Shorts*\) with 80% Intrinsic Value would rapidly lose their remaining Time Value from their Premiums and consequently yielding profit on the Shorts initiated on such deep ITMs closer to Expiry\.

1. __Higher Breakeven in Short positions:__

In Short Options position, a trader gets a notional credit equivalent to the Premium at which the Options have been sold by the trader to a buyer\. From an Expiry perspective, if the underlying price does not breach the Strike at which the Short has been initiated \(i\.e\. *in case of CE Short position: above the CE Strike at which Short has been initiated; and in case of PE Short position: below the PE Strike at which Short has been initiated*\), then the notional credit of the Premium received by the seller from the buyer of that Option becomes the actual credit of premium / profit of the Option seller\. The Premium notionally received by the seller from the buyer at the time of initiating a Short position, gives a notional credit to the seller which acts as cushion to increase the loss area of the seller in his Short position\. This ‘credit of Premium’ driven threshold Strike \(which broadens the actual loss area of a seller in his Short Options position\) defines the Breakeven Strike of the Short position\.  Thus, from an Expiry perspective, it is important that a Short Options position must not breach its Breakeven Strike\. 

__Formula: <start>Breakeven Strike of CE Short position is: \[CE Strike at which Short is initiated \+ Premium received\] <end>__

__Formula: <start>Breakeven Strike of PE Short position is: \[PE Strike at which Short is initiated \- Premium received\] <end>__

Therefore, this Breakeven Strike \(*which is based on the Premium notionally credited to the seller at the time of initiating the Short position*\) is the Strike level beyond which if the underlying price expires on Expiry day, will cause the actual loss in the Short position to the seller\. Therefore, for a CE Short position, the underlying must not cross above the Breakeven Strike on Expiry; and in case of a PE Short position, the underlying must not cross below the Breakeven Strike on Expiry\. 

If by Expiry, a Short Options position ends up breaching its Breakeven Strike, then that implies that it is an ITM on Expiry\. Most likely in such event, the Short position would yield loss, because the selling Premium would have gone even higher as the Strike at which Short was initiated becomes an ITM/ goes deep into ITM\. However, even in such cases, there will be some Time Value in this ITM Strike which on Expiry would become zero thereby reducing the final Premium of such an Option\. Therefore, the actual loss on such a Short Option position would be the difference between the final Premium \(which on Expiry will be equivalent to its Intrinsic Value\) and the selling Premium\.

1. __Fall and Fluctuations in Volatility:__

Generally, in 80% cases, rise in Volatility causes market /  underlying to fall; and crash in Volatility results in upward movement in the market / underlying price\.

In the context of impact of Volatility on Options, we know that generally, the rise in Volatility causes expansion of Time Value comprised in the Premium of Options, leading to rise in the Premium of the Options; and drop in Volatility causes contraction in the Time Value comprised in the Premium of the Options, leading to fall in the Premium of the Options\. 

Therefore, when the Volatility starts to fall, the Time Value comprised in the Premium of the Options gets eroded causing depletion in the Premium of the Options\. Also, when the Volatility fluctuates up & down in a range, the Time Value comprised in the Premium of the Options experience continuous  contraction and expansion leading to its erosion, in turn causing depletion in the Premium of the Options\. Since, OTMs have 100% Time Value in their Premium, the fall / fluctuations in Volatility causes maximum erosion of Time Value and depletion in the Premium of the OTMs in percentage terms\. 

Further, if fall / fluctuations in Volatility is accompanied with:

1. a tight range movement of the underlying price, then: generally both the CEs & PEs would face contraction and expansion in the Time Value comprised in their respective Premium, resulting in a faster erosion of their Time Value and consequently depletion in their Premium\. 
2. the underlying trending upwardly, then: the PE Shorts would exhibit very quick depletion in their Premium yielding quick profit, but the erosion in the Time Value of CE Short positions due to fall / fluctuations  in Volatility may get neutralised by the impact of negative direction of the underlying on the CE Shorts depending on the upward momentum of the underlying\.
3. the underlying trending downwardly, then: the CE Shorts would exhibit very quick depletion in their Premium yielding quick profit, but the erosion in the Time Value of PE Short positions due to fall / fluctuations in Volatility may get neutralised by the impact of negative direction of the underlying on the PE Shorts depending on the downward momentum of the underlying\.

- Trading in Futures implies to take a position in Futures to benefit from the favourable price movement of the underlying asset and to square\-off the Futures position before the relevant Expiry Date, thereby avoiding the obligation of taking or making physical delivery of underlying asset\.
- In Futures trading – the risk of fulfilling the obligation to buy or sell an underlying asset or securities can also be mitigated by they trading in Futures of only those assets/benchmark where there is no requirement of making or taking any physical delivery of any asset / securities on Expiry \(*like Futures of Nifty & Banknifty as these are cash settled on Expiry*\)\.
- Trading in Options implies to take a position in Options to benefit from the favourable price movement of the underlying asset and avoid a  situation requiring them to make or take physical delivery of underlying asset\.
- In Option trading, the trader \(as option buyer or seller\) avoids the situation of taking or making physical delivery of underlying asset or securities \(*which arises only when the position is held by the trader until Expiry and the Options is an ITM on Expiry*\):
- By squaring\-off their position before the relevant Expiry Date \(*in case of illiquid Options, atleast a week before Expiry*\); or 
- If they intend to hold their Options position close to Expiry or until Expiry or during Expiry \- then they trade in Options of only those assets/benchmark where there is no requirement of making or taking any physical delivery of any asset / securities on Expiry \(*like Options of Nifty & Banknifty as these are cash settled on Expiry*\); or 
- To trade through hedged positions, involving instruments with contra\-delivery positions i\.e\. one with ‘delivery\-giving’ requirement and the other instrument with ‘delivery\-taking’ requirement, both in same quantity on same underlying with same Expiry series\.
- Price of the Options before its Expiry, follows the price of the Futures of the underlying asset\. On Expiry the price of the Options follows the Spot price of the underlying asset \(as Futures price merges with the Spot on Expiry Day\)\.
- As soon as any position is created in Futures or Options by a trader \(as a buyer or seller\) online through his broker – it implies that there is a corresponding seller or buyer \(respectively\) with whom the trader has entered into the trade and automatically a Futures or Options Contract, as the case may be, has been executed between them as soon as the trade order placed by the trader is successfully online executed\.
- In Options: when the price of the underlying increases, the price of the CE Option increases but that of PE Option decreases; and when price of the underlying decreases, the price of the PE Option increases but that of CE Option decreases\.
- In Options trade: if view is bullish, CE Option may be bought or PE Option may be sold; but if view is bearish PE Option may be bought or CE Option may be sold\.
-  While F&O trading is zero sum game, but a knowledgeable F&O trader is capable to identify a high\-winning probability trade and can also turnaround his loosing position into a winning position\.
- A Futures trader requires to pay a higher Margin money and maintain a higher MTM cost on his Futures position\. Mostly liquidity is not an issue with Futures\. 
- An Options seller requires to pay a higher Margin money/ premium \(*but comparatively lesser than that required for Futures*\) and maintain a MTM cost on his Options sell position\. Option buyer have to pay a lesser premium and do not need to maintain MTM requirement on his position of Option buy\. Some Options have liquidity issues \(*like Far OTM Options, certain Stock Options, Next month or Far Month Expiry Options*\)\. 
- Trading in Futures is simpler than Options’ trading\. Options’ trader must understand the Options’ behaviour and various calculations involved in dealing with Options trading\. These things make Option relatively complex than Futures\.
- A F&O trader must not be solely dependent on Futures trading but must also equip himself with thorough knowledge of Options, as Options offer many money\-making opportunities and loss\-avoiding tools to a F&O trader\. A F&O trader having knowledge of Options’ can create many hedge designs \(i\.e\. hedged trading positions\) which can ensure mitigation of down\-risk in any F&O trade including covering the risk in Futures’ trades too\. Thus, it is said that Options has many options \!\!
- Futures and Options are available for trading in varied market segments and sectors, which continuously offer to a F&O trader long & short opportunities to generate profit through F&O trading\.

__*Futures Trading is simpler and Options Trading is complex:*__

Futures are simple instruments for trading purposes – which we buy when our view is bullish and sell when view is bearish\. In Futures position we need to pay higher Margin and need to maintain MTM on ongoing basis which makes Futures relatively a high\-cost trading instrument\. But trading Futures is relatively simpler as we only have to take a position as per our analysis and maintain the MTM and exit the trade before Expiry\. Futures trader can also consider rolling\-over their position to next month, if they feel that even though their existing Futures position is in loss but it will come in profit if they continue to hold the position for some more time\. But even for roll\-over, the existing Futures position of the current Expiry needs to be exited before Expiry and a fresh similar position is created in the next month Futures\.

In case of Options, the story is much different from Futures\. In Options trading, a trader need to have a knowledge and understanding about various factors like effect of momentum & volatility on Options, factor of time\-decay etc\. Trader must understand the Options’ behaviour and various calculations involved in dealing with Options trading\. These things make Option relatively complex than Futures\. But having said this, Options must not be ignored by an aspiring F&O trader, as __Options offer many money\-making opportunities and loss\-avoiding tools to an F&O trader__\. It is not advisable to be solely focussed on Futures trading, but it is utmost important to gain thorough knowledge about Options so as to be able to beat and survive the adverse market situations and to excel as a professional F&O trader\.

__*Futures are mostly liquid, all Options are not:*__

Liquidity, implies active participation of F&O traders or trading in a particular F&O instrument\. 

In Futures, usually there is no liquidity issue until the last hour of its Expiry\. However, not all Options are liquid, hence a F&O trader need to exercise caution while considering taking a position on any such illiquid Options\.

__*Futures is an Obligation and Options is a right:*__

Futures contract casts an obligation to buy or sell the underlying asset on Expiry; whereas a CE Option buyer has the right to exercise buying \(*not an obligation*\) the underlying asset on Expiry and a PE Option buyer has the right to exercise selling \(*not an obligation*\) the underlying asset on Expiry\.__* *__

Thus, a F&O trader has to exercise caution in trading with Futures of those assets where he will have to physically buy or sell the underlying asset if he continues to hold \(*intentionally or erroneously*\) the Futures until Expiry\. If he forgets to exit the trade i\.e\. square\-off his position before Expiry, whether in profit or loss, then he will be required to make or take physical delivery of the underlying asset or settle the position in cash as per the contract\. However, generally, if an Option buyer holds a CE or PE Option on Expiry \(*intentionally or erroneously*\), then he may choose not to exercise the right to buy or sell the underlying asset\. However, only if ITM Options are held on Expiry by an Option buyer, then it would require the holder of Options to exercise his right to buy or sell the underlying asset \(ATM & OTM Options would expire worthless on Expiry\)\. 

Therefore, it is advisable to __either trade in F&O segment of only those asset classes or benchmark, where there is no requirement of physical buying or selling of the underlying asset on Expiry \(*like – F&O of indices like Nifty and Banknifty etc\.*\) or square\-off your existing F&O position before Expiry__ in profit or loss, as the case may be\.

__*MTM Requirement higher in Futures than Options:*__

We know that the price of F&O instruments keeps fluctuating as per fluctuations in the price of the underlying asset\. The Futures instrument follow the Spot price of the underlying asset \(*for example: SBI Futures will follow the price of SBI in the cash segment*\) and the price of the Options before its Expiry follows the price of the Futures of the underlying asset and not the Spot price of the underlying asset or benchmark/indices \(*for example: Price of SBI Options Futures will follow the price of SBI Futures before Expiry of the relevant Options*\)\. Only on the day of Expiry the price of Options starts to follow the Spot price of the underlying asset or benchmark, as on Expiry the Futures price of the underlying asset merges/coincides with the Spot price of the underlying asset or benchmark\.

Thus, once a Futures trade is initiated after paying the required Margin money \(*as explained above*\), and the trend of the market reverses against the Futures position \(i\.e\. *If Futures were purchased, the price of the relevant underlying asset or benchmark starts falling down or vice\-versa*\) – then the Futures position will reflect loss\. This loss situation will require additional Margin money to be provided/kept with the broker \(i\.e\.* additional money required to be kept in the trading account maintained with your broker*\) to continue with that Futures position\. This additional Margin is said to be required to maintain the MTM \(mark\-to\-market\) situation in the existing position i\.e\. additional margin requirement to account for the loss caused in the existing Futures position due to adverse market price fluctuation of the underlying asset or benchmark/indices\. This MTM requirement may require Futures traders to keep/infuse additional funds in their trading account on an ongoing basis, as and when the additional Margin requirement ensues towards MTM deficit in the existing Futures position\. As the loss in the Futures position keep increasing, the MTM requirement would also keep increasing\.

In case of Options trade, similar MTM requirement on ongoing basis \(*as required in Futures*\) needs to be adhered by the trader for Options selling trades\. As we know that the Margin requirement of  Futures is higher than that  for Option selling, therefore, accordingly, the __MTM requirement in case of Option selling positions is little lower than that for Futures positions__\. However, in case of an Option buy position, there is no requirement of maintaining any MTM requirement\. This might be surprising to you, and you might be wondering why is that there is no requirement to maintain MTM requirement for Option buy positions unlike for Options sell positions and Futures position\.

__*Margin Requirement higher in Futures than Options:*__

Margin money is the amount required to be upfront paid to the broker when a trader initiates a position in F&O\. Margin money would depend on whether you take a position of buy or sell and whether your position is in Futures or Options\. The margin money is blocked by the broker from the trading account of the trader\. Margin money varies for different instruments and also for different scrips under the same segment\. Margin money would also depend upon the pre\-defined Lot size \(*fixed by the stock exchange*\) for each F&O instrument and the prevailing price of that instrument under the Futures or Options segment \(*which would obviously derive its value from the price of the relevant underlying asset or benchmark*\), as the case may be\. For example Margin money of Copper would be different from Crude and Margin money for Infosys would be different from that of TCS and so on\. 

Just to give you a vague idea about the Margin requirement for trading in commonly traded instruments under the F&O segment \- trading in Futures instrument generally requires a Margin a money of about Rs\. 2 to 4 Lakhs per Lot, for initiating a buy or sell position\. In the Options segment, generally, a buying position can be created with a Margin money of about Rs 2000 to Rs\. 75,000 for a single Lot; while a sell position in Options may require about Rs\. 1\.25 to 2\.5 Lakhs for a single Lot\. The Margin money paid/ payable for creating positions in Options segment is also referred to as “premium” amount\. Here, we can see that the __Margin requirement for trading in Futures is higher than that of Options__\.

Also, it is pertinent to note that __with the practical knowledge of trading in F&O, a trader can substantially reduce the margin requirement__ and can create upto 3\-4 positions within the margin amount of 1 Lot\. This way a knowledgeable F&O trader can harness the full potential of these leveraged derivative instruments by playing out large volumes, even with less capital, to substantially increase profit margin\.

__*Options give an edge to F&O trader:*__

As mentioned above, Options gives many\-fold advantage to a F&O trader\. With the help of Options, a __F&O trader can create many hedge designs__ __which can ensure mitigation of down\-risk in any F&O trade__\. In the context of F&O trading, hedging would imply to create a financial position in the opposite side of the main trade/investment \(i\.e\. an opposite\-direction trade\), so that if the main trade/investment gives loss then the opposite\-side trade \(*initiated as a hedge*\) may generate profit and thus help set\-off the loss arising in the main trade/investment\. Hedging, therefore, works like an insurance to secure loss to any existing investment or financial position or price movement in any asset, by paying relatively nominal hedging cost\. Options can also be used to hedge the risk in Futures position\. Knowledge of Options’ behaviour and calculations help a trader to manoeuvre even a loosing trade into profit by __making suitable adjustments to the loosing trade through making positions in Options__\.  Such is the beauty of Options \! 

Bottomline is that Options must not be ignored by a F&O trader, but every endeavour must be made to learn the practical knowledge about Options and its trading\.

__FNO trading opportunities in Indian market__

In India, Futures and Option instruments popularly used by F&O traders for pure trading purposes are: 

- In Indices – Futures and Options of Nifty, BankNifty and FinNifty
- FNO Stocks – Futures and Options are available for identified stocks only, as selected by stock exchanges from time to time
- Currency – Futures and Options of USD\-INR are very popular in the Currency segment
- Commodities – Trading in Futures and Options of Gold, Silver and Crude Oil are also quite popular amongst F&O traders\.

These varied segment lines, where F&O trading is available for a retailer, offers a plethora of opportunities to make money\. __These varied segments continuously offer to a F&O trader long & short opportunities on account of various governmental decisions, geo\-politics, economics of demand & supply, revolutionizing trends, innovations, watershed events etc\. amongst many other factors__\.

Thus, if one is ready with a sound practical understanding of F&O, for such traders, sky is the limit \!\!

__Liquidity in FNO instruments__

Liquidity in an instrument signifies active participation of traders or active trading in a particular F&O instrument\. A F&O instrument where liquidity is high means that there is greater participation of buyers & sellers trading on that instrument, which in turn implies that a F&O trader will not face any issue with regard to taking an entry in a position on such F&O instrument and also squaring\-off from his position also will not pose any problem \(*thereby enabling the trader to quickly ride on an opportunity and immediately eject if when situation so demands*\)\.

In Futures, usually there is no liquidity issue until the last hour of its Expiry\. However, not all Options are liquid – hence a F&O trader need to exercise caution while considering taking a position on any such illiquid Options\. Following are a few instances, where Options are usually not liquid:

- Options of Nifty and Banknifty indices are generally liquid, except their Next Month or Far Month Expiry Options\. This will become more clear, once we will study about Options with their different Expiry in next few Chapters\.
- Not all FNO stocks are liquid\. For example – A few FNO stocks like Reliance, Bajaj Finance, SBI, Axis Bank and a few more are stocks with decent liquidity in their Options, but most of the other FNO stocks do not have enough liquidity in their Options\.
- Far OTM Options of Crude and other commodity Options are also not reasonably liquid\. Do not fret with this jargon like “__OTM__” here if you are already not familiar, as these Option jargons will become clear once we will start dwelling upon these terms as we progress further towards next Chapters\.

Whether or not there is enough liquidity in a F&O instrument can be examined easily\.

__Physical delivery in Options:__

The stock exchanges from time to time may stipulate terms & conditions regarding treatment of Options of certain underlying asset, securities or benchmark, if held until Expiry\. 

In India: 

- ITM positions in __Stock Options__ are mandatorily required to be physically settled, that is: 
- ITM CE Buy or ITM PE Sell position on Expiry will require underlying shares to be bought by paying the entire contract value \(i\.e\. Options strike price x number of shares in the Lots x number of Lots  bought in Options\); and 
- ITM PE Buy or ITM CE Sell position on Expiry will require underlying shares to be provided of the total quantity contracted\.

However, if a trader holds a hedged position in the same underlying stock in equal quantity, such as Long Futures and Short CE \(which on Expiry, is an ITM\), then on Expiry, both the positions shall be netted\-off, as one position involves ‘giving physical delivery’ and the other position ‘taking physical delivery’\. In the above example, Long Futures involves ‘taking of physical delivery on Expiry’ and equal number of Short ITM CE involves ‘giving physical delivery of underlying stock’\. Thus, on Expiry __such hedged trading position in Stock F&O instruments will result in no physical delivery obligations as both positions would be netted off__\. Thus, hedged trades in Stock F&O instruments would also have this protection from physical delivery requirements\. 

- __Options of Indices__ \(*like, Nifty, Banknifty, FinNifty, MidCapNifty, Sensex and Bankex etc\.*\) do not require exercise of any right or fulfilling of any obligation to make or take physical delivery of any scrip/securities, and these Options are automatically cash settled on Expiry\.
- For __Commodities Options Contract__, there is a requirement that all ITM Options on Expiry, will devolve into a Futures Contract – thus necessitating the obligation to make/ take delivery of physical commodities on Expiry of such ITM Options\. However, if the exchange cannot match the contract with a counterparty, the ITM Option will be cash\-settled instead of devolving into a Futures contract as aforesaid\.

Generally, in case an ITM position \(or an ATM or near OTM position, which may become an ITM by Expiry\) is held by a trader close to Expiry in Options of asset/securities which requires mandatory exercise of Options or fulfilment of obligations, to buy or sell the underlying securities or assets \(*whether due to devolvement of ITM Options into Futures Contract or otherwise*\), then a similar situation concerning phenomenally high margin call etc\. would ensue as we discussed above in the context of Futures requiring compulsory buy or sell of underlying asset/securities\. Thus, in case of Options too, the apprehensions are the same, that if the trader by mistake or otherwise hold his aforesaid Options trading position until Expiry – then he may have to exercise his right or fulfil the obligation of making / taking physical delivery of the relevant underlying assets or securities equivalent to the total contract value of Options \(*unless, ofcourse, the trader holds equal quantity of hedged positions on the same underlying for same Expiry series\. As explained in the context of Stock Options above*\), thereby requiring him to either maintain sufficient cash margin with the broker for fulfilling his buying obligation or having sufficient quantity of securities / assets to fulfil his selling obligation\.  If the trader doesn’t meet the margin call of the broker, the broker has the right to square\-off the Options position held by the trader on as\-is\-where\-is basis and initiates its process of recovery for any shortfall against the trader with interest etc\. including to recover by selling the shares held by the trader with that broker\.

__*Approach to avoid Physical Delivery risk in Options:*__

In Options trading, the Options’ trader, in order to avoid the situation of taking/ making physical delivery of the underlying asset or securities on Expiry Date, may follow the below mentioned approach: 

1. For new Options’ trader or those who are not much familiar with the physical delivery rules on Expiry of any particular underlying asset or securities, as Options seller/ buyer, they may:

- trade only in Options of assets/benchmark which do not obligate  they to make or take delivery of the underlying asset/securities \(*like Options of Nifty & Banknifty*\);  
- initiate their Options position with a trade plan to square\-off their Options position atleast a week before the Expiry Date\. 

1. For Options’ trader who are familiar with the physical delivery rules on Expiry of any particular underlying asset or securities, they may:

- as Options seller \- let the Options expire if they are Far OTMs on Expiry; or
- they may initiate hedged trades with contra\-positions in F&O instruments with same quantity on same underlying and with same expiry series, so that they net\-off on Expiry and do not invoke any physical settlement requirements\.

It is therefore advisable to check the applicable rules of holding a position in Options which may be an ITM on Expiry; and is always prudent for a F&O trader to square\-off his F&O positions before relevant Expiry, particularly, if he is not familiar with the applicable rules concerning ITM Options or Futures etc\.

__*Risk in Stock Options trading near its Expiry: *__

Certain trader prefers to trade in Stock Options, sometimes without realising or knowing the potential risk involved in trading of Stock Options\. Following two risky situations are highlighted in the context of trading in Stock Options in India:

- As a Stock Options trader one must know that not all Stock Options are liquid, and trading in such Stock Options may lead to a situation where the trader may not be able to square\-off his position in such illiquid Stock Options \(either in profit or even in loss\) and consequently his loss may increase manifold or profitable Options position may land him to compulsory buy or sell the underlying stocks \(*incase, his Options position becomes an ITM*\)\. Thus, this aspect further enhances the risk of an Option trader if he hold his positions in such asset classes close to Expiry; and thus may have to face high margin calls etc from the broker as the Expiry approaches\. Accordingly, while trading in Options of such asset classes, the trader must endeavour to exit from his trade atleast a week before Expiry\. Also, due to liquidity issues of Stock Options, certain brokers will not allow taking fresh long positions in Stock Options in the last two days of Expiry \(i\.e\. Wednesday and Thursday\)\.
- Sometimes, an Options trader on the day of Expiry or before, do not square\-off his naked Options positions assuming that his Options position will expire as an ATM or very near OTM\. However, on Expiry the given Options position end up as an ITM \(*such ITM situation can arise either due to sudden price movement causing the ATM/near OTM to be pushed as an ITM or when an ATM/near OTM price is adjusted as per the average price calculation upon Expiry i\.e\. the final settlement price*\), which may require the trader to compulsory exercise his right or to fulfil the obligation to buy or sell the relevant underlying asset on which such physical delivery requirement is applicable\. In such situations, where near OTM/ ATM Options suddenly on the day of Expiry ends up as an ITM – the trader wasn’t required to pay the additional margins to the broker \(as the Option was an OTM\)\. However\. when suddenly such Options becomes an ITM, the trader who has taken a position by paying a small amount of Margin to the broker \(without additional Margin paid for the ITM option by Expiry\) will now have to make or take underlying securities equivalent to the contract value of phenomenally higher amount \(which may be outside the means of the trader to fulfil\), thus causing significant risk to the trader and the broker\. Also, if such situation arises for an Options trader of certain commodities where ITM Options of such assets have been stipulated by the stock exchanges to compulsorily devolve into a Futures Contract – then such trader will have to fulfil the requirement of the Futures contract concerning his ITM Options by arranging to make or take physical delivery of the underlying commodity\.

This situation may also arise in case an Options trader has position in Stock Options\. Taking or giving delivery of the entire contract value worth of stocks require either full cash or stocks in your account upon Expiry, is mandatory for all ITM Stock Options\. 

NSE wide its Circular no\. 008/2023  dated January 20, 2023 has discontinued the DNE \(*do\-not\-exercise*\) facility for Stock Options with effect from March 2023\.

__Options Trading:__

In Options trading, a trader purchases/sells a CE or PE Option with an intention to capture profit arising in the price of the relevant Option \(*ofcourse, due to favourable price movement of the underlying asset / Indices*\) and exit the trade before the Expiry of that Option or to hold the trade of certain Options \(*which will not require the trader to make/ take physical delivery of underlying assets or securities*\) until their Expiry\. 

This manner of holding position in Options for a time and squaring\-off the same before the relevant Expiry Day or hold them till Expiry, as the case may be, is Trading in Options\.

__Trading PE Options:__

When a trader is bearish on some underlying asset, he might like to purchase a PE Options \(i\.e\. *an option or a right to sell an underlying asset at a pre\-agreed price at Expiry Date, because he anticipates that the price of that underlying would decrease even lower by the Expiry Date*\) from a PE Options seller\. This also implies that if the PE option seller is willing to sell the PE Options at the pre\-agreed price to the PE Option buyer, then the PE Options seller has a bullish outlook on the underlying \(i\.e\. *the seller feels that the underlying asset will rise above the pre\-agreed price*\)\.Thus, with such understanding and analysis a PE Option contract is entered into between a PE Option Buyer and a PE Option seller, when the trade is executed\.

However, when the Option buyer, after purchasing a PE Option chooses not to exercise his “right to sell” the underlying asset, he might exit the contract/ trade before the Expiry Date, if the price of the underlying has decreased resulting in increase in the price of the PE Option he purchased \(*than  the price at which he purchased that PE Option*\) and thus making a profit through such trading in PE Option\. However, this situation also implies that the price of CE Options of the underlying would decrease\.

But if the price of the underlying asset or securities starts going up after the trader purchased the PE Option, the price of the PE Option would start to decline\.  Now, if the trader feels that there are chances that the price of the underlying might  rise further \(*thus causing further dip in the price of the PE Option he purchased*\), he might consider to exit the contract/ trade before Expiry by booking loss in the PE Option he purchased\. However, this situation also implies that the price of CE Options of the underlying would increase\.

Let us understand this with the following example:

__*<*start*>*__*Example*: Shares of SBI are trading at Rs\. 480 per share\. As per your analysis, you feel that within next 10\-20 days, SBI’s share would decrease to Rs\. 400 or more\. You decide to buy PE Option of SBI for a strike price of Rs\. 400 \(i\.e\. *your target price of SBI’s shares*\) prevailing at a price of Rs\. 25 \(*assuming this is the per Lot price of the SBI PE Option for 400 Strike you need to pay*\)\. So you purchase PE Option of SBI for 400 strike by paying the margin money of Rs\. 37,500 to your broker \(i\.e\. 1 Lot of SBI has 1500 shares x Rs\. 25\)\. Now, if the price of SBI shares decreases  to Rs\. 460, the price of your PE Option of 500 strike may jump from Rs\. 25 to Rs\. 45 \(*thus, a gain of Rs\. 20 per Lot*\)\. You may choose to book the profit generated by your PE Option by exiting/squaring\-off your position, before the Expiry Date of that PE Option\. Thus, making a substantial gain of Rs\. 30,000 \(*Rs\. 20 x 1500 shares in 1 Lot*\) i\.e\. 80% on your capital deployed for the trade\. 

In the aforesaid example, you as an Option buyer made a good profit, but it also implies that the Option seller who sold you that PE Option made a same amount of loss\. However, in the aforesaid example if the price of the SBI shares would have increased from Rs\. 480, then the price of the PE Option would have decreased to below Rs\. 25, in which case PE Option buyer would be in loss and the PE Option seller would be in profit\. Thus, Options trading is a zero\-sum game i\.e\. in an Options trade, if the PE buyer wins then in the same trade the PE seller would lose or vice\-versa\.__* <*end*>*__

__Thus, if your view is bearish, you may be a PE Option buyer; but if your view is bullish then you may be a PE Option seller__\.

__Trading CE Options:__

When a trader is bullish on some underlying asset, he might like to purchase a CE Options \(i\.e\. *an option or a right to buy an underlying asset at a pre\-agreed price at Expiry Date, because he anticipates that the price of that underlying would increase even higher by the Expiry Date*\) from a CE Options seller\. This also implies that if the CE Options seller is willing to sell the CE Options at the pre\-agreed price to the CE Option buyer, then the CE Option seller has a bearish outlook on the underlying \(i\.e\. the seller feels that the underlying asset will not rise above the pre\-agreed price\)\.Thus, with such understanding and analysis a CE Options contract is entered into between a CE Options buyer and a CE Options seller, when the trade is executed\.

However, when the Options buyer, after purchasing a CE Option chooses not to exercise his “right to buy” the underlying asset, he might exit the contract/ trade before the Expiry Date, if the price of the underlying has increased resulting in increase in the price of the CE Option he purchased \(*than  the price at which he purchased that CE Option*\) and thus making a profit through such trading in CE Option\. However, this situation also implies that the price of PE Options of the underlying would decrease\.

But if the price of the underlying starts going down after the trader purchased the CE Option, the price of the CE Option would also start to decline\. This situation however also implies that the price of PE Options of the underlying would increase\. 

Now, if the trader feels that there are chances that the price of the underlying might slip further \(*thus causing further dip in the price of the CE Option he purchased*\), he might consider to exit the contract/ trade before Expiry by booking loss in the CE Option he purchased\.  Let us understand this with an example\.

__*<*start*>*__*Example*: *Shares of SBI are trading at Rs\. 480 per share\. As per your analysis, you feel that within next 10\-20 days, SBI’s share would increase to Rs\. 500 or more\. You decide to buy CE Option of SBI for a strike price of Rs\. 500 \(i\.e\. your target price of SBI’s shares\) prevailing at a price of Rs\. 30 \(assuming this is the per Lot price of the SBI CE Option for 500 Strike you need to pay\)\. So you purchase CE Option of SBI for 500 strike by paying the margin money of Rs\. 45,000 to your broker \(i\.e\. 1 Lot of SBI has 1500 shares x Rs\. 30\)\. Now, if the price of SBI shares increases  to Rs\. 520 – the price of your CE Option of 500 strike may jump from Rs\. 30 to Rs\. 70 \(thus, a gain of Rs\. 40\)\. You would choose to book the profit generated by your CE Option by exiting/squaring\-off your position, before the Expiry Date of that CE Option\. Thus, making a substantial gain of Rs\. 60,000 \(Rs\. 40 x 1500 shares in 1 Lot\) i\.e\. 150% on your capital deployed for the trade\.* 

In the aforesaid example, you as an Option buyer made a good profit, but it also implies that the Option seller who sold you that CE Option made a same amount of loss\.  However, in the aforesaid example if the price of the SBI shares would have fallen below Rs\. 480, then the price of the CE Option would have decreased to below Rs\. 30, in which case CE Option buyer would be in loss and the CE Option seller would be in profit\. Thus, Options trading is a zero\-sum game i\.e\. in an Options trade, if the CE buyer wins  then in the same trade the CE seller would lose an equivalent amount or vice\-versa\.__*<*end*>*__

__Thus, if your view is bullish, you may be a CE Option buyer; but if your view is bearish you may be a CE Option seller__\.

__Options Premium:__

The price of the Option is referred to as the ‘Premium’ or ‘LTP’ \(i\.e\. the last traded price\) of Options\. 

When the price of the underlying increases the price of the CE Option increases; and when price of the underlying decreases the price of the PE Option increases\. 

This also implies that: __when the price of the underlying increases, the price of the CE Option increases but that of the PE Option decreases__; and __when price of the underlying decreases, the price of the PE Option increases but that of the CE Option decreases__\. This is the basic tenet of the buying and selling of Options\.

__*<*start*>*__Example: *Price of *<a id="_Hlk108732643"></a>*CE and PE Option of SBI will fluctuate as per the fluctuations in price of the shares of SBI on the stock exchange\. If price of shares of SBI increases – price of SBI’s CE Options would increase and correspondingly price of the PE Option of SBI would decrease*\.__*<*end*>*__ 

Likewise, price of CE and PE Option of Nifty or Banknifty or Crude Oil will fluctuate as per the movement of Nifty or Banknifty or Crude Oil, respectively, as the case may be\.

__Options and Options Chain:__

Since, Options is a derivative instrument, its price fluctuates as per the fluctuations in the price of the underlying asset\. It is pertinent to note that the __price of the Options \(both CE & PE\) before its Expiry follows the price of the Futures of the underlying asset__ \(*and not the spot price of the underlying asset or benchmark*\)\. The price of the Options before its Expiry follows the price of the Futures of the underlying asset \(*and not the spot price of the underlying asset or benchmark*\)\. Only on the day of Expiry, after about 12noon, the price of Options starts to follow the Spot price of the underlying asset or benchmark, as on Expiry the Futures price of the underlying asset merges/coincides with the Spot price of the underlying asset or benchmark\.  

Options for relevant asset, securities or Indices, are determined by the stock exchanges from time to time\. Further, each asset or indices may have Options with different Expiry series\. However, each Options pertaining to a particular Expiry series is maintained and made available by the stock\-exchanges, in a tabular format on real\-time basis\. This table of Options for different Expiry series for a given asset or indices, is called Options Chain\. 

The Options Chain comprises of very crucial data about Options of that Expiry series, *viz\. *various CE & PE Options, price of Options \(referred to as ‘Premium’ or LTP i\.e\. last traded price\) and certain other information and data about the Options of that Expiry series*\. *  

The Options Chain also lists out possible price levels \(in standard multiples\) to which the Future’s price of the underlying asset may travel, in either direction from the current prevailing Future’s price of the relevant underlying asset, securities or indices as the case may be\. These price levels are called the Strike Price levels\. 

In this list, there is always a pair of Options comprising of a CE Option and a PE Option; and each CE & PE Option has a specific price \(*also called as ‘Premium’ or ‘LTP’ \(last traded price\) of the Options*\) which is derived from the Future’s price of the underlying but is influenced by many other factors\. In the Options Chain, each Strike Price levels comprise of a pair of CE & PE Options with their real\-time specific LTP value\.

Buying and selling of the CE and PE Options, before exercise of the right/option to buy or sell before the Expiry Date, to make profit from the fluctuation in the price of Options \(*ofcourse due to fluctuations in price of the underlying asset or benchmark*\)  is __Options Trading__\. Thus, in Options trading, a trader tries to generate profit by taking a trading decision on the movement of the price or LTP of the Options of an underlying asset or Indices \(*ofcourse, due to favourable price movement of the underlying asset / Indices*\)\.

From the perspective of Options trading, it is pertinent to note that the stock exchanges from time to time may stipulate terms & conditions regarding treatment of *in\-the\-money* \(__ITM__\) Options of certain underlying asset, securities or benchmark, if held until Expiry\. All OTM Options expire worthless on Expiry and only in\-the\-money Options requires exercise of his right \(for the Options buyer\) or fulfilling his obligation \(for the Options seller\)\. 

For example \- In India, trading in Options of Indices \(*like, Nifty and Banknifty*\) do not require Options trader to, exercise his right or fulfil any obligation to make or take physical delivery of any scrip/securities in relation to ITM Options, and these Options are automatically cash settled on Expiry\. 

Thus, in Options trading, the trader avoids fulfilling the requirement of taking or making physical delivery of the underlying asset on Expiry Date, by either squaring\-off his position before the Expiry Date or trading in Options of those assets/benchmark which do not require exercising of right or fulfilling obligation towards making/taking physical delivery of any asset/securities on Expiry\.

__Options Contract:__

Options are traded on the exchange, online through the broker with whom you have a demat account\. 

As soon as an Options is purchased by a trader online through his broker, it implies that there is a corresponding seller who sold that Option to the buyer of that Option \(or vice\-versa\), thus automatically an __Options Contract__ is  executed between the Options buyer and the seller\.

__Futures Trading:__

We know now that Futures is a derivative instrument and its price fluctuates as per the fluctuations in the price of the underlying asset\. For example, price of Futures of SBI will fluctuate as per the fluctuations in price of the shares of SBI on the stock exchange\. Likewise, price of Futures of Nifty or Banknifty or Commodity or Currency will fluctuate as per the movement of underlying  \- Nifty or Banknifty or Commodity or Currency, respectively, as the case may be\.  The price of the underlying security in the cash market or that of an underlying Indices is called the Spot Price\.

Buying and selling of the Futures of an underlying asset or benchmark, and squaring\-off the Futures position before the Expiry Date, to make profit from the fluctuation in the price of Futures \(*ofcourse due to fluctuations in price of the underlying asset or benchmark*\) is __Futures Trading__\.

From the perspective of Futures trading, it is pertinent to note that the stock exchanges from time to time may stipulate terms & conditions regarding treatment of Futures of certain underlying asset, securities or benchmark, if held until Expiry\. For example \- In India, trading in Futures of Indices \(*like, Nifty and Banknifty*\) do not require any obligation to make or take physical delivery of any scrip/securities and these Futures are automatically cash settled on Expiry\.

Thus, in Futures trading, the trader avoids fulfilling the obligation of taking or making physical delivery of the underlying asset on Expiry Date, by either squaring\-off his position before the Expiry Date or trading in Futures of those assets/benchmark which do not obligate making/taking physical delivery of any asset/securities on Expiry\.

__Futures Contract:__

Futures are traded on the exchange, online through the broker with whom you have a demat account\. 

As soon as a Futures is purchased by a trader online through his broker, it implies that there is a corresponding seller who sold that Futures \(or vice\-versa\), thus automatically a __Futures Contract__ is executed between the Futures buyer and the seller\.

__What transpires in Futures trading ?__

When a trader is bullish on some underlying asset – he might like to purchase a Futures of that asset \(i\.e\. *with an understanding that the trader would be obligated to buy the underlying asset of definite quantity equivalent to the units comprised in the Lot he bought, at a pre\-agreed price at which he bought the Future on the Expiry Date irrespective of the price of the underlying asset on the Expiry – if he holds the Futures until Expiry\) *from a seller of the Futures because he anticipates that the price of that underlying would increase even higher by the Expiry Date\. This also implies that if the Futures seller is willing to sell the Futures at the pre\-agreed price to the Futures buyer – then the Futures seller has a bearish outlook on the underlying \(i\.e\. *the seller feels that the underlying asset will not rise above the pre\-agreed price*\)\. Thus, with such understanding and analysis a Futures contract is entered into between a Futures Buyer and a Futures seller – when the trade is executed\. 

Thus, in Futures trading \- a trader who purchased / sold the Futures but do not hold the Futures until Expiry \(*thus avoiding the requirement to fulfil the obligation to purchase/ sell the underlying asset on Expiry date at the pre\-agreed price*\) and exits the trade/ square\-off his position before the Expiry of that instrument\. Idea is to capture profit in the price of the relevant Futures before the Expiry of that Futures and exit the trade\. This manner of holding a Futures position for a time and squaring\-off the same before the relevant Expiry Day is Trading in Futures\. Thus, in Futures trading, a trader tries to generate profit by taking a trading decision on the movement of the Futures’ price of the underlying asset or Indices\.

__*<*start*>*__*Example: If a trader buys 1 Lot Futures of SBI \(comprising of 1500 shares\) at prevailing market price of Rs\. 480 per share in the Futures segment, of a particular Expiry Date, by paying a margin money of about Rs\. 2\.6 Lakhs with his broker \- then by default it *__*implies*__* that he is under an obligation to purchase 1500 shares of SBI  on the Expiry Date by paying the balance amount of Rs\. 4\.6 Lakhs \[Rs\. 7\.2 Lakhs \(i\.e\. total amount required to purchase 1500 shares of SBI @Rs 480 per share\) minus margin money of Rs\. 2\.6 Lakhs already paid to the broker\]\. However, if the trader square\-off \(i\.e\. sells\-off in this case\) the Futures he bought any time before the relevant Expiry Date – then that will be called trading in Futures of SBI\. Therefore, if this trader sells\-off the Futures of SBI before the Expiry Day @ Rs\. 500 per share of SBI prevailing in the Futures segment – then he makes a profit of 20 Rs\. per Lot \(i\.e\. 20 x 1500 shares in the Lot = Rs\. 30,000\)\. Thus, in this example, while the trader agreed to buy SBI’s 1500 shares  on Expiry Date but before the Expiry Date he squared\-off his Futures position at a profit of Rs\. 20 per Lot thus making a profit of Rs\. 30,000 per Lot \(i\.e\. 11\.5% profit on capital deployed on the trade\), and not waiting until the Expiry Day to buy 1500 shares of SBI at a huge amount of Rs\. 7\.2 Lakhs\.*__* *__

In the aforesaid trade, the buyer of SBI Futures made a good profit, but it also implies that the seller of SBI Futures who sold SBI Futures made a same amount of loss\.  Thus, Futures trading is a zero sum game i\.e\. in a Futures trade, if the buyer of the Futures win then in the same trade the  seller of the Futures would loose or vice\-versa\.__*<end >*__

Let us see another example where a trader wishes to capture profit on account of fall in the prices of crude oil due to some situation\.

__*<*start*>*__*Example: A trader observes a situation due to which he considers to be an opportunity to make profit on account of fall in the prices of crude oil, So he decides to sell Futures of crude oil of a particular Expiry Date at a prevailing price of Rs\. 7500 per Lot\. His anticipation is that the crude will come down to a level of Rs\. 7000\. 1 Lot of crude oil comprise of 100 units\. Thus, when he sells/short 1 Lot of Future for crude, he will have to pay a margin amount of about Rs\. 3 Lakhs as against full contract value of Rs\. 7\.5 Lakhs \[100 units x 7500 per Lot price at which he sold Futures\]\. This Futures sell transaction by default *__*implies*__* that the trader is under an obligation to sell 100 unit of crude oil on the Expiry Date by paying the balance amount of Rs\. 4\.5 Lakhs \[Rs\. 7\.5 Lakhs \(i\.e\. total amount required to purchase 1 Lot / 100 units of  crude @Rs 7500 per Lot\) minus margin money of Rs\.3 Lakhs already paid to the broker\]\. Now, if the price of the crude oil come down to Rs\. 7300 – the trader has an opportunity to capture a profit of Rs\. 200 per Lot\. Thus, if the trader square\-off \(i\.e\. buys the sold Futures in this case\) the Futures he sold any time before the relevant Expiry Date – then that will be called trading in Futures of Crude Oil\. Therefore, in this Futures trade, the trader exits from the trade/ square\-off his sold Futures position anytime before Expiry and captures a profit of Rs\. 200 per Lot \[which translates into Rs\. 20,000 \(i\.e\. Rs\. 200 profit x 100 units\) about 6\.5% profit on the capital deployed for the trade\], and thus avoids the obligation to sell the crude of 100 units on Expiry of the relevant Futures\.*

In the aforesaid trade, the seller of Crude Futures made a good profit, but it also implies that the buyer of the Crude Futures who bought Crude Futures made a same amount of loss\. Thus, Futures trading is a zero\-sum game i\.e\. in a Futures trade, if the seller of the Futures win then in the same trade the buyer of the Futures would lose or vice\-versa\.__* <*end*>*__

__Physical delivery in Futures trading:__

The stock exchanges from time to time may stipulate terms & conditions regarding treatment of Futures of certain underlying asset, securities or benchmark, if held until Expiry\. 

In India: 

- All Futures positions in F&O Stocks are mandatorily required to be physically settled i\.e\. 
- Futures Buy position on Expiry will require underlying shares to be bought by paying the entire contract value; and 
- Futures Sell position on Expiry will require underlying shares to be provided of equivalent number as contracted for\. 
- Commodity Futures contracts can be cash settled or physically settled\. However, certain brokers do not allow physical settlement of MCX Futures contracts, as they square\-off the position on as is where is basis just before Expiry of Contract and thus cash settled Commodity Futures Contracts\.
- Futures of Indices \(*like, Nifty and Banknifty*\) do not require any obligation to make or take physical delivery of any scrip/securities and these Futures are automatically cash settled on Expiry\. 

Thus, when a Futures trader holds a Futures position \(in an asset requiring compulsory making/taking physical delivery of underlying assets or securities\) close to Expiry Date – there may be chances that the trader for whatever reason may end up holding the position until Expiry\. Now, if the trader by mistake or otherwise hold his aforesaid Futures trading position until Expiry – then he will have to fulfil the obligation of making / taking physical delivery of the underlying assets or securities equivalent to the total contract value of Futures – thereby requiring him to either maintain sufficient cash margin with the broker for fulfilling his buying obligation or having sufficient quantity of securities / assets to fulfil his selling obligation\.  In case of Stock Futures \- taking or giving delivery of the entire contract value worth of stocks require either full cash or stocks in your account post expiry\. Thus, such a situation poses grave risk for the trader; and also for the broker in case the trader defaults on fulfilling his buying or selling obligation on Expiry\. Consequently, as the Expiry approaches, since the risk for the broker goes up with respect to the trader not having enough cash margin to take delivery or stock/asset to give delivery, the broker phenomenally increases the Margins required to hold a Future buy or sell position by the trader \(*minimum around 40% of the contract value on the last two days of Expiry*\)\. This margin call by the broker keeps increasing as the Expiry draws near and becomes a cause of concern for the trader\. If the trader doesn’t meet the margin call of the broker, the broker has the right to square\-off the Futures position held by the trader on as\-is basis and initiates its process of recovery for any shortfall against the trader with interest etc\. including to recover by selling the shares held by the trader with that broker\.

It is therefore advisable to check the applicable rules of holding a position in Futures until Expiry, as applicable for the relevant underlying asset or securities; and it is always prudent that a Futures trader square\-off his positions before relevant Expiry, particularly, if he is not familiar with the applicable rules concerning holding Futures position until Expiry for a particular underlying asset class\.

__F&O Trading: a zero\-sum game__

Yes, F&O trading is a zero\-sum game i\.e\. in a particular F&O trade, either the buyer would win or the seller would win\. If the buyer wins, definitely the seller loses the same amount which the buyer won; and if in a particular  trade the seller wins, then definitely the buyer loses the same amount which the seller won in that trade\. This was also highlighted in the examples discussed above under the Futures Trading and Options Trading\. Thus, in each F&O trade, each trader takes a buying or a selling position as per his own analysis – knowing well that if he loose in his trade as a buyer/seller then the other person is going to profit same amount equivalent to his loss\.

However, __a knowledgeable F&O trader is capable to identify an opportunity and take a high\-winning probability trade__; and if he is surprised by any reversal by the market then he knows exactly how to take the bull by the horns and to __turnaround his loosing position into a winning position__\. This is precisely what we are going to learn here\. Thus, through & through knowledge about various facets of F&O, including understanding Options’ behaviour, its calculations and creation of various hedge designs & counter\-adjustment strategies can give us that winning edge\. 

__Moneyness in Options__

__In the context of CE Options:__ moneyness signifies those CE Options which are below the Futures’ LTP of the underlying asset or Indices \(i\.e\. those CE Options which have been crossed above by the price of the underlying\), therefore such CE Options are called “__in\-the\-money__” as they have been already crossed over by the underlying price from the perspective of upward movement of the underlying\. All such CE Options having moneyness in them \(i\.e\. which are lower/below the price of the underlying\) are referred to as the ITM CE Options\. In the Options Chain, all CE Options which are at Strikes lower than the ATM Strike are ITM CEs\.

__In the context of PE Options:__ moneyness signifies those PE Options which are higher than the Futures’ LTP of the underlying asset or Indices \(i\.e\. those PE Options which have been crossed below by the price of the underlying\), therefore such PE Options are called “__in\-the\-money__” as they have been already crossed over by the underlying price from the perspective of downward movement of the underlying\. All such PE Options having moneyness in them \(i\.e\. which are higher / above the price of the underlying\) are referred to as the ITM PE Options\. In the Options Chain, all PE Options which are at Strikes higher than the ATM Strike are ITM PEs\.

The quantum of moneyness in various ITM CEs and PEs are different\. Moreover, the quantum of moneyness in ITMs is not the same as their LTP / Premium\. The exact quantum and extent of moneyness is referred to as the __Intrinsic Value__ of the Option\. The difference between the LTP of an ITM Option and its Intrinsic Value is referred to as the __Extrinsic Value__ or __Time Value __of that Option\. 

It is extremely important to understand the calculations with regard to determination of Intrinsic Value and the Extrinsic Value, as it is the most basic feature of the Options, which is must to know calculation by every Options trader\.

__Intrinsic Value and Extrinsic Value__

The most fundamental and absolutely must\-to\-know calculation in Options is calculation on Intrinsic Value and Extrinsic Value in Options\. Let us understand here what is the meaning of Intrinsic Value and Extrinsic Value in the context of Options\.

Intrinsic Value means exact value of moneyness in an Option\. Every Options, may have any of the following possibilities from the perspective of “measure of moneyness” it carries in its LTP:

- __Some moneyness__ in its LTP
- __No moneyness__ at all in its LTP
- __Full moneyness__ in its LTP\.

Now, in order to understand what has been said above with regard to “measure of moneyness” in the LTP of Options, let us try and understand this concept of moneyness in the LTP of Options  with an example\.

*LTP of every Options is like a packet of chips \(the edible snack\)\. In a packet of chips, as available in a shop for sale, we always find it to be bloated\. That means that the packet of chips – has chips in it, but also air in it\. Likewise, in the context of Options, the LTP of Options is like the packet of chips\.  When we say that an Options has some moneyness in it – then it means that its LTP has some moneyness i\.e\. Intrinsic Value \(like chips in the packet\) and the balance part of the LTP is like air in the packet of chips\. The air, in the context of such Options is called the Extrinsic Value or Time Value of Options\. Thus, when we have categorized the Options above, from the perspective of the “measure of moneyness” in the LTP of Options, it basically implies the following:*

*<*__start__*>*__Table__:

| Measure of Moneyness in Options | Meaning in terms of Intrinsic Value and Time Value |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Some moneyness in LTP of Options | Some Intrinsic Value and some Time  Value |

| No moneyness in LTP of Options | No Intrinsic Value and 100% Time Value |

| Full moneyness in LTP of Options | 100% Intrinsic Value and No Time Value |* <*__end__*>*

__Significance of Intrinsic Value and Time Value in Options__

Every Options’ LTP value may either have: \(i\) partly Intrinsic Value and balance Time Value; or \(ii\) entirely Time Value or entirely Intrinsic Value\.

We know that every Options suffers time decay with the passage of time in its LTP value\.  However, the time decay occurs or affects only the Time Value part of an Options’ LTP and not its Intrinsic Value\. Time decay is nothing but erosion from the value of the LTP of an Option\. But this erosion is caused only to the component of the Time Value in the LTP of an Option\. Thus, if we know how much is the Time Value in the LTP of an Options then we would know how much part of an Options’ LTP is subject to erosion with each passing day due to time decay\. On the contrary, the part of the LTP of an Option which is the Intrinsic Value will not get affected at all with time decay \(*provided all other factors remain constant*\)\. Let us understand this with an example\.

*<*__start__*>*__Example__*: Suppose, SBIN ITM CE Option of 320 Strike, has an LTP of Rs\. 76\. Now, suppose the Intrinsic Value of this CE Option is 56; then obviously the balance value in the LTP would be the Time Value, which is 20\. Now, assuming all factors remaining constant, except passing of time, the time decay will impact Rs\. 20 in the LTP of 76\. In other words, the erosion in LTP will happen each day only on the Rs 20 part \(the Time Value component of the LTP\) and not the Rs\. 50 part \(the Intrinsic Value component of the LTP\)\. <*__end__*>*

Thus, the bottom\-line significance of Intrinsic Value and Time Value is that the time decay affects only the Time Value part in the LTP of an Option\. The Intrinsic Value part in the LTP, has achieved the moneyness and is therefore not subject to erosion due to time decay\. Now, let us learn how to calculate the Intrinsic Value and the Time Value in the Options, after which we will see how they are of relevance for an Options Long position and a Short position\.

__Calculations of Intrinsic Value and Time Value in the LTP of CE & PE Options:__

<__start__>“The Intrinsic Value and Time Value component in the LTP of any CE & PE Options is calculated as per the formula given below:

__| Calculation | Formula | Note |__

__|\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-|__

__| Intrinsic Value for CE Options | Spot price of the underlying – Strike Price of the CE Option | Options follow Futures’ price up to the Expiry day; and on Expiry day the Futures' price coincides with the Spot price and consequently Options starts following the Spot price\. Thus, for more accurate values, one may calculate the Intrinsic Value of ITM Options from the Futures’ LTP instead of Spot price\. However, for the purpose of explaining here we are using the Spot price\. |__

__| Intrinsic Value for PE Options | Strike Price of the PE Option – Spot price of the underlying | Options follow Futures’ price up to the Expiry day; and on Expiry day the Futures' price coincides with the Spot price and consequently Options starts following the Spot price\. Thus, for more accurate values, one may calculate the Intrinsic Value of ITM Options from the Futures’ LTP instead of Spot price\. However, for the purpose of explaining here we are using the Spot price\. |__

__| Time Value for CE Options | LTP of the CE Option – Intrinsic Value of that CE Option | |__

__| Time Value for PE Options | LTP of the PE Option – Intrinsic Value of that PE Option | |__ 

In the aforesaid formula, the Intrinsic Value is confirmed only if after applying the formula the Intrinsic Value is a __positive__ value\. Thus, if the LTP of an Option has a positive Intrinsic Value, then the balance value in the LTP \(besides the positive Intrinsic Value\) comprise of the Time Value in the LTP of that Options\. However, if after applying the aforesaid formula for a particular Option, the Intrinsic Value in the LTP of that Option is zero or negative then it means that, there is no Intrinsic Value in the LTP of that Options \(but such Option has 100% Time Value in its LTP\)\.<__end__>

<__start__>__Example:__ In order to understand the calculations with an illustration, let us use the following snapshot of the Options Chain of BankNifty taken from the website of NSE: __<img7>   __Futures’ LTP of BankNifty August Monthly Expiry is 39110\. BankNifty Spot Price is 39103\. The ATM strike is 39100\. 

Now, let us start applying the formula for calculating Intrinsic Value and Time Value for the CE & PE Options side of the aforesaid BankNifty Options Chain, randomly for some ITMs, ATM and OTM Options\.

__Table:__

| Strike Price | Calculation of: Intrinsic Value for CE | Calculation of: Intrinsic Value for PE | Calculation of: Time Value for CE | Calculation of: Time Value for PE | Calculation of: Percentage of Intrinsic Value & Time Value in the LTP of CE | Calculation of: Percentage of Intrinsic Value & Time Value in the LTP of PE |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| 37700 | For Deep ITM CE 37700 Strike = 39103 \- 37700 =  \+1403 \(note, Intrinsic Value of this CE is a \+ve value\) | For Deep OTM PE 37700 Strike = 37700 \- 39103  = \- 1403 \(note, Intrinsic Value of this PE is a \-ve value\) | 1452 – 1403 = 49 | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore entire LTP value of 104\.1 of this PE is Time Value | 96% of Intrinsic Value and balance 4% of Time Value\. in its LTP | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore this Option has 0% of Intrinsic Value and 100% of Time Value in its LTP |

| 38900 | For Near ITM CE 38900 Strike = 39103 \- 38900 = \+203 \(note, Intrinsic Value of this CE is a \+ve value\) | For Near OTM PE Option 38900 Strike = 38900 \- 39103  = \- 203 \(note, Intrinsic Value of this PE is a \-ve value\) | 580 – 203 = 377 | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore entire LTP value of 386\.6 of this PE is Time Value | 35% of Intrinsic Value and balance 65% of Time Value, in its LTP | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore this Option has 0% of Intrinsic Value and 100% of Time Value in its LTP |

| 39100 | For ATM CE 39100 Strike would be zero\. Because even though Spot – ATM Strike of 39100 \(39103 – 39100\) would give a value of 3, however, while ATM Strike is pegged in the Options Chain to the nearest round\-off number to the Spot price but ATM Strike is practically same as the Spot price\. Hence, Intrinsic Value of an ATM CE Strike is always zero\. | For ATM PE 39100 Strike would be zero\. Because while ATM Strike of 39100 \- Spot \(39100 – 39103\) would give a value of \-3, however, infact the ATM Strike is practically same as the Spot price \(even though ATM Strike is pegged in the Options Chain to the nearest round\-off number to the Spot price\)\. Hence, Intrinsic Value of an ATM PE Strike is always zero\. | Since, Intrinsic Value of this ATM is zero, therefore entire LTP value of 464\.9 of this CE is Time Value | Since, Intrinsic Value of this ATM Option is zero, therefore entire LTP value of 472 of this PE is Time Value | Since, Intrinsic Value of ATM is always zero, therefore the ATM has 0% of Intrinsic Value and 100% of Time Value in its LTP | Since, Intrinsic Value of ATM is always  zero, therefore the ATM has 0% of Intrinsic Value and 100% of Time Value in its LTP |

| 39300 | For Near OTM CE 39300 Strike = 39103 \- 39300 = \- 197 \(note, Intrinsic Value of this CE is a \-ve value\) | For Near ITM PE 39300 Strike = 39300 \- 39103 =  \+197 \(note, Intrinsic Value of this PE is a \+ve value\) | Since, Intrinsic Value of this Near OTM is a \-ve value, therefore entire LTP value of 369\.6 of this CE is Time Value | 561\.45 – 197 = 364\.45 | Since, Intrinsic Value of this Near OTM is a \-ve value, therefore this Option has 0% of Intrinsic Value and 100% of Time Value, in its LTP | 35% of Intrinsic Value and balance 65% of Time Value, in its LTP |

| 39800 | For Deep OTM CE 39800 Strike = 39103 \- 39800 = \- 697 \(note, Intrinsic Value of this CE is a \-ve value\) | For Deep ITM PE 39300 Strike = 39800 \- 39103 =  \+697 \(note, Intrinsic Value of this PE is a \+ve value\) | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore entire LTP value of 170\.15 of this CE is Time Value | 889\.2 – 697 = 192\.2 | Since, Intrinsic Value of this Deep OTM is a \-ve value, therefore this Option has 0% of Intrinsic Value and 100% of Time Value, in its LTP | 78% of Intrinsic Value and balance 22% of Time Value, in its LTP | <__end__>

Thus, if we calculate the Intrinsic Value and Time Value for any Option, as per the formula / calculations discussed above, in any given Options Chain, we will arrive at the following universal truth applicable for all Options:

1. Only ITM CE & ITM PE Options have Intrinsic Value in their LTP
2. The percentage of Intrinsic Value in the LTP of a given Option increases, as we go deeper towards ITM from the ATM, on both CE & PE sides\. This also implies that the percentage of Time Value in the LTP of a given Option decreases, as we go deeper towards ITM from the ATM, on both CE & PE sides
3. We know that the LTP and  Delta value of Option increases, as we go deeper towards ITM from the ATM, on both CE & PE sides\. Here we learnt that the Intrinsic Value Option increases, as we go deeper towards ITM from the ATM, on both CE & PE sides\. Thus, it implies that an ITM Option with higher LTP would have higher percentage of Intrinsic Value and a higher Delta \(*i\.e\. higher change with the price change of the underlying*\) and a lower Theta amongst ITMs \(*i\.e\. lower time decay / erosion from the LTP of the ITM Option*\)
4. All ATM and OTM CE & PE Options have only Time Value in their respective LTP
5. ATM Strike has maximum Time Value i\.e\. Theta in an Options Chain \(*besides, maximum Vega and Gamma at the ATM Strike*\) for both CE & PE\. 
6. We know that LTP, Delta value and Time Value of Option decreases, as we go deeper towards OTM from the ATM, on both CE & PE sides\. This implies that an OTM Option with lower LTP has lower Delta \(*i\.e\. less change with the price change of the underlying*\) and lower quantity of Time Value i\.e\. lower Theta amongst OTMs \(*i\.e\. lower quantum of time decay / erosion from the LTP of the Option\. However, it is noteworthy here that while a deep OTM has low Theta but since the LTP of a deeper OTM is also very low thus even the low Theta in percentage term results in significant erosion in deep OTM Options’ LTP due to time decay*\)

__Conclusion:__

__An Option, in its LTP may or may not have moneyness\. An Option having higher Intrinsic Value has higher moneyness in its LTP and consequently a lower time decay/Time Value \(*lower Theta*\)\. An Option with higher moneyness in its LTP is therefore more deeper in\-the\-money \(ITM\) in the Options Chain and has higher LTP \(thus, costlier\) and exhibits higher change in its LTP with the price change in the underlying \(*higher Delta*\)\. An Option with lower moneyness or no\-moneyness are more susceptible to erosion from the LTP with the passage of time \(time decay\)\. As the Expiry of the Options draw near, the time factor causes speedy erosion on the Time Value component in the LTP of Options, such that on Expiry day the Time Value of all Options \(from ITM to OTM\) becomes zero and only ITM Options have their LTP left equal to their respective Intrinsic Value\.__

Thus, moneyness in Options, from the perspective of its moneyness \(i\.e\. essentially how much is the Intrinsic Value and time Value\) determines the outlook of a trader in relation to a Long trade on Options and a Short trade in Options\.

__Impact of moneyness in Long Options trade:__

We know that a Long trade in Options is a Debit trade for the buyer in relation to the Premium cost incurred by the buyer for buying Options of a particular Strike Price \(i\.e\. paid by the buyer of the Options of a particular Strike Price to the seller of the same Options at that Strike Price\)\. Thus, Options buyer pays the Premium to the seller\. 

Now, if a trader desires to initiate a Long trade in Options i\.e\. to buy an Option, then from the perspective of moneyness, the trader need to be mindful of the following aspects from Expiry perspective:

- If the Option bought, on the Expiry day is an ATM  or an OTM, then its LTP would become zero on Expiry, even if the LTP of this Option before Expiry rose higher than the buying price of the Option\. Thus, any Option bought if Expires an ATM or OTM then the trader would be in a total loss of the Premium paid by him to buy that Option\. 
- However, if the Option bought on Expiry is an ITM then its LTP would reduce to the extent of Time Value it carries and the final LTP of the Option bought would be equal to the Intrinsic Value\. Thus, if this final LTP of the Option bought is higher than its buying price on Expiry then the trader is in profit to the extent of difference in the buying price and the final LTP on Expiry; otherwise in loss to the extent the final LTP is less from the buying price\.

Thus, in Options’ Long trade, from the perspective of moneyness in the Option, the Option bought must be an ITM on Expiry \(i\.e\. the Option bought must have Intrinsic Value in its LTP\)\. In other words, in a Long Options trade it is absolutely detrimental for the trader if the Option bought expires as an ATM or OTM as such Options have no Intrinsic Value but only Time Value on Expiry\. However, even if the Options bought expires as an ITM, the trader will only have profit if the final LTP exceed the Premium paid by the trader while buying the Option\.* *

__*<*start*>Example*__*: If an OTM INFY 1700 CE is bought at LTP of Rs\. 18, and on Expiry the aforesaid Strike is an ITM with final LTP of Rs 100\. Then, from Expiry perspective, the profit of the CE Option buyer would be 100\-18= Rs 82 per Lot \(i\.e\. LTP exceeding the Premium paid\)*\.__* <*end*>*__ 

Therefore, from the perspective of Expiry, it can be said that:

- In Long Options trade, Option buyer need to ensure higher moneyness / Intrinsic Value in the LTP of the Option bought and a lesser Time Value in its LTP\.
- Thus, an __Option buyer actually trades Intrinsic Value in an Option__ \(i\.e\. the Intrinsic Value of the Option bought must increase in the Long Options trade\)\.

__Impact of moneyness in Short Options trade:__

We know that a Short trade in Options is a Credit trade for the seller in relation to the Premium cost credited to the seller of the Options of the same Strike Price level \(i\.e\. collected by the seller of the Options of a particular Strike Price from the buyer of the same Options at that Strike Price\)\. Thus, Options seller, collects the Premium from the buyer\. Now, if a trader desires to initiate a Short trade in Options i\.e\. to sell/Short an Option, then from the perspective of moneyness, the trader need to be mindful of the following aspects from Expiry perspective:

- If the Options sold, on the Expiry day is an ATM or OTM, then its LTP would become zero on Expiry \(*as the Time Value of all Options becomes zero on Expiry and the ATM and OTMs have only Time Value in their LTP*\), even if the LTP of this Option before Expiry was higher than the sell price of the Option\. Thus, any Option sold if Expires an ATM or OTM then the trader would be in a total  profit of the Premium collected by him from the Options buyer by selling that Option to the buyer of that Option\.
- However, if the Option sold on Expiry is an ITM then its LTP would reduce to the extent of Time Value it carries and the final LTP of the Option sold would be equal to the Intrinsic Value\. Thus, if this final LTP of the Option sold is lesser than its selling price on Expiry then the trader is in profit to the extent of difference in the selling price and the final LTP on Expiry; otherwise in loss to the extent the final LTP exceeds the selling price\.

Thus, in Options’ Short trade, from the perspective of moneyness in the Option, best is if the Option sold expires as an ATM or OTM \(*as the LTP of the Options sold would become zero on Expiry due to the fact that ATM and OTMs have 100% Time Value and Time Value of all Options become zero on Expiry*\)\. However, if the Options sold expires as an ITM, then the loss scenario would occur if the final LTP of the Option exceeds the total Premium collected by the seller\.* *

__<start>*Example*__*: If an OTM INFY 1700 CE is sold at LTP of Rs\. 18, and on Expiry the aforesaid Strike is an ITM with final LTP of Rs 100\. Then, from Expiry perspective, the loss of the CE Option seller would be 100\-18= Rs 82 per Lot \(i\.e\. LTP value exceeding the Premium collected\)*\.__ <end>__ 

- In Short Options trade, Option seller need to ensure higher Time Value in the LTP of the Option sold and a lesser Intrinsic Value in its LTP\.
- Thus, an __Option seller actually trades Time Value in an Option__ \(i\.e\. the Time Value of an Option sold must increase in the Short Options trade and the Intrinsic Value of that must decrease\)\.

__Profit & Loss Calculations in relation to Options__

We need to understand an important aspect concerning profit & loss calculations in relation to Options, and that is: 

- We can make calculations, in trades involving Options, in order to determine its potential profit & loss scenario, from the perspective of Expiry Day;
- We need to understand also understand when a Options position would generate profit or loss, during its lifespan \(i\.e\. before its Expiry Day\)\.

Thus, profit and loss scenario can be calculated in the Long & Short Options trade, both from the Expiry perspective and also immediately after initiating the trade \(i\.e\. before Expiry perspective\)\.

__Calculations from Expiry perspective:__

We know that every Options pertains to a particular Expiry series \(*may be weekly, monthly or quarterly*\)\. Thus, every position in Options \(whether Long or Short\) need to be calculated, basically, keeping in mind the relevant Expiry Day of that Options \(that is for the life span of that Options\)\. 

When calculations on any Options positions’ are conducted, from the perspective of its Expiry, then the trader gets to know in advance, the possible maximum risk & reward situation and the level beyond which profit will get generated else loss in the those positions on the Expiry Day of that Options\. This piece of information is extremely crucial for a F&O trader as it enables the trader to assess the risk in the position and the possible outcome if the position goes or does not go in his favour by  the Expiry Day \(the final time until which a trade can be held or adjusted\)\.

__Calculations in Options Trade from Expiry Perspective:__

Every Option has a life span until its Expiry; and there are situations owing to which a trader may like to hold on to his Short or Long trade until Expiry \(*ofcourse, in those Options which would not attract physical delivery requirements, viz\. Options of Nifty & BankNifty*\)\. In order to understand the potential risk and reward in a positional Options trade – it becomes imperative to do calculations keeping in mind how the trade would play out until the Expiry day\. 

Furthermore, particularly, in relation to Short trade in Options it may make a lot of sense to hold on to a particular Short position until Expiry to take benefit of the time decay \(Theta\) which becomes significantly higher closer to Expiry and also because in Short trades a trader usually like to target that their Options expire as an OTM so that they may benefit by appropriating the entire Premium \(*which was initially only notionally credited to the seller at the time of initiating the Short trade*\) on Expiry\. 

Therefore, for positional trades perspective it is very important to do certain calculations and analysis from the Expiry perspective for Options\. Also, in a hedged trade it is important to know how much Credit is available in the trade as against the Debit in that trade \(*this is because the net profit situation in a hedged trade is calculated basis how much premium is getting credited to the trader in the Option selling leg of the trade as against how premium is being paid by the trader for his Option buying leg i\.e\. buying premium – selling premium*\) from Expiry perspective\. Therefore, these calculations can only be made keeping in mind a particular time period, which is the Expiry of the Options being traded\.

__Calculations of Potential P&L on Short Options Trade: from Expiry perspective:__

In the context of Short Options trade, the seller of an Option gains full Premium paid by the buyer of that Option if the Options expire as an ATM or OTM \(*which implies that the Expiry has occurred below the Strike price which has been Shorted by the CE seller; and in case of PE Short trade the Expiry has occurred above the PE Strike Price shorted by the seller*\)\. Further, the seller of an Option would make partial profit on his Short trade on the Expiry day of that Option, if the Option expires as an ITM and the final LTP of the Option on Expiry is less than the Premium collected by him from the buyer of that Option\. This partial profit would be to the extent of difference between the selling price of the Option and the final LTP of the Option\. These are the full and partial profit scenarios for a Short Options’ trade\. 

Having said above, there is another profit scenario for a Short Options’ trade, from Expiry perspective, and that is: if the Expiry happens within the relevant Breakeven Strike Price for the Short trade\. This Breakeven Strike Price can be calculated at the time of initiating a Short trade in Options\. 

Let us understand the Breakeven Strike Price for the Short Options’ trade\.

__*Understanding Breakeven Level for Short Options Trade: *__

An Options’ Short trade is a Credit trade and that is so because in an Options’ Short trade \(whether, CE or PE sell\) the seller collects the Premium \(which the buyer pays to the seller\)\. Thus, in order to make profit, from Expiry perspective, the seller should not lose the Premium notionally collected by him at the time of initiating the Short trade\. This Profit scenario can occur if the Expiry happens below the CE Strike Price shorted by the seller and in case of PE Short trade above the PE Strike Price shorted by the seller \(thus, implying that on Expiry the Strike Price shorted by the seller is an ATM or OTM\), thereby the seller would actually be able to receive credit of the entire Premium into his trading account as his profit on the Short trade\. However, if the Expiry happens above the CE Strike Price shorted by the seller or below the PE Strike Price shorted by the seller, then it implies that this Strike Price is likely to be an ITM on Expiry\. If an Options Short trade on Expiry ends up as an ITM but within the Breakeven Strike of the Options sold, then the seller would be able to book partial profit on his Short trade to the extent of difference between the final LTP on Expiry and the selling price\. These are the __Profit Scenarios __for the Short trade in Options from Expiry perspective\.

However, if the Expiry happens beyond this Breakeven Strike for Short CE or PE Options trade, as the case may be, then the seller would suffer loss on the Short trade on Expiry to the extent of difference in the selling price and the final LTP of the Options shorted by the seller \(__Loss scenario__\)\.

Thus, so long the Expiry happens within this Breakeven Strike Price, the seller would be able to book some profit \(if not full\) on Expiry on his Short trade\. This threshold Breakeven Strike Price level of Options, within which the seller would make profit in his Short trade of CE or PE, from Expiry perspective, is referred to as the Breakeven Price for the Options seller\.

Thus, it can be concluded that:

- In Short Options trade \(Option selling\), in order to be profitable, the premium collected for selling the Options \(by the seller from the buyer of that Options\) would need to be retained\.
- In the Options Short trade \(whether CE or PE\), if by Expiry the price of the underlying does not breach the Breakeven Strike Price level of the Options sold, then the Short trade  would generate profit to the extent final LTP of the Option sold is less than the selling price of that Option \(__Profit__ __scenario__\)\. But if by Expiry the price of the underlying breaches the Breakeven Strike of the Option sold, then the Options Short trade would generate loss \(__Loss scenario__\) 

__<start>Example: __*To further understand the calculation of Breakeven Strikes for Short Options  position, provided here is the Options Chain of Nifty for Aug 25, 2022 Expiry \(as on August 24, 2022\) showing a few Strike Price levels and the LTP of certain ITM, ATM and OTM Options for both CE and PE side\. Also, adjacent to the Options Chain we have provided the Breakeven Strike levels \(*__*BE Strike*__*\) from Expiry perspective for each of the CE and PE Options, if a Short position is initiated in those Options at almost the prevailing LTP \(i\.e\. selling premium or selling price\) as appearing in the Options Chain, for the Short trade in that Option to be profitable on Expiry*: __<img9> <end>__

If you notice the Breakeven Strike of Short position on a given Strike in this table, is the Breakeven Strike for the buyer of that Option on the Long position in that Option\. Do check the Breakeven Strike calculation given on the same Options Chain in the context of Long Options trade, above in this Chapter\. You will find that the Breakeven Strike for a buyer of a particular CE Option is the same for the seller of that CE Option and the Breakeven Strike for a buyer of a particular PE Option is the same for the seller of that PE Option\. Accordingly, it can be observed that the __area of profit for an Options buyer is the loss area for the seller of that Option; and area of loss for an Options buyer is the area of profit for the seller of that Option__\. This is because the profit of buyer is the loss to the seller and the profit of the seller is the loss of the buyer of that Option\. Thus, Options trading is a zero sum game \!

Therefore, for the aforesaid reasons, the seller of an Option before initiating his Short trade may need to evaluate and calculate the probability of his Option being able to fulfil the Breakeven Strike threshold on its Expiry, for his Short trade to be profitable on Expiry, should he consider holding his Short trade until Expiry or if it necessitates the trader to evaluate his position from Expiry perspective for other reasons\. However, it must be remembered that holding a position until Expiry may attract physical delivery requirements in specified instruments\. But the calculations are done, assuming if the position is held until Expiry; not that the position is intended to be held until Expiry\.  Moreover, a trader might even consider trading Options which do not attract any physical requirements on Expiry \(such as Options of Nifty and BankNifty\), thus the analysis and calculations from the perspective of holding the position until Expiry may be required\.

Breakeven for Short trade on PE Options: In case of PE Options, LTP rises above with the fall in the price of the underlying and falls with the rise in the price of the underlying\. Therefore, in order to retain the premium collected for the PE sell trade \(*trading bet in PE sell is that the price of the underlying would rise*\), the price of the underlying should remain above the Strike at which the PE Option sell has been initiated or atleast not  fall as much so as to exhaust the premium received from the buyer of that Option\. Objective of a PE Option seller is to retain either full premium collected or not lose much premium which may start getting exhausted if the direction of the underlying starts going against the trading bet of the PE Option seller \(i\.e\. *if the underlying starts falling causing rise in the LTP of the PE Option sold by the seller*\)\. Therefore, the Breakeven Strike in case of PE Option sell trade would be lower Strike level from the Strike level at which the Short position has been initiated in PE Option\. In other words, the Breakeven Strike of the PE seller will be the same Strike as that of the PE Option buyer of that Option at same premium\.  

Having said this, the Breakeven Strike for a Short PE Option will be calculated, as mentioned below:

__Formula: <start>Breakeven Strike \(for Short trade in PE\)__ = PE Strike on which Short is initiated \- selling price of PE Option  

- *Above this Breakeven Strike is Profit Area*
- *Below this Breakeven Strike is Loss Area*__<end >__

If you notice the Breakeven Strike of Short position on a given Strike is the Breakeven Strike for the buyer of that Option on the Long position in that Option\.

To understand the Breakeven Strike Price for a Short trade on PE, let us take an example: 

__<start>Example: __*where a trader is bullish on Infosys shares and decides to initiate a Short trade on PE at a Strike Price of 1650 and sells it at an Ask Price of Rs\. 50\. Now in this INFY 1650 PE  Short trade, the Breakeven Price for the seller would be 1650 \- 50 = 1600\. This would mean that so long the Expiry happens anywhere above the Breakeven Strike of 1600 \(*__*Profit Area*__*\), the seller is going to book some profit on his Short trade on INFY 1650 PE Option\. Now, if the Expiry happens above 1650 then INFY 1650 PE would be an ATM or OTM and hence the seller would get the entire Premium to his profit\. However, if the Expiry happens somewhere below 1650 but above 1600, then it would imply that INFY 1650 PE is an ITM on Expiry, and the seller would be able to appropriate part of the Premium as his profit i\.e\. to the extent of the difference between the final LTP on Expiry of 1650 PE Option and the selling price of that Option\. But if the Expiry happens anywhere below 1600 Breakeven Strike Price \(*__*Loss Area*__*\), then it would imply that the INFY 1650 PE is an ITM and also that the seller will now have to book a loss on his PE Options Short trade to the extent of difference between the selling price and the final LTP of INFY 1650 PE Option on Expiry\. *__<end>__

Breakeven for Short trade on CE Options: In case of CE Options, LTP rises above with the rise in the price of the underlying and falls with the fall in the price of the underlying\. Therefore, in order to retain the premium collected for the CE sell trade \(*trading bet in CE sell is that the price of the underlying would fall*\), the price of the underlying should remain below the Strike at which the CE Option sell has been initiated or atleast not rise as much so as to exhaust the premium received from the buyer of that Option\. Objective of a CE Option seller is to retain either full premium collected or not lose much premium which may start getting exhausted if the direction of the underlying starts going against the trading bet of the CE Option seller \(i\.e\. *if the underlying starts rising causing rise in the LTP of the CE Option sold by the seller*\)\.  Therefore, the Breakeven Strike in case of CE Option sell trade would be higher Strike level from the Strike level at which the Short position has been initiated in CE Option\. In other words, the Breakeven Strike of the CE seller will be the same Strike as that of the CE Option buyer of that Option at same premium\.

Having said this, the Breakeven Strike for a Short CE Option will be calculated, as mentioned below:

__Formula: <start>Breakeven Strike \(for Short trade in CE\)__ = CE Strike on which Short is initiated \+ selling price of CE Option

- *Below this Breakeven Strike is Profit Area*
- *Above this Breakeven Strike is Loss Area *__<end>__

Let us understand the calculation of Breakeven Strikes and its meaning for the CE Option Short trade\.

__<start>*Example: *__*If a trader has a bearish outlook on Infosys shares and so he decides to initiate INFY 1620 CE  Short trade, then the Breakeven Price for the seller would be 1620 \+ 18 = 1638\. This would mean that so long the Expiry happens anywhere below the Breakeven Strike of 1638 \(*__*Profit Area*__*\), the seller is going to book some profit on his Short trade on INFY 1620 CE Option\. Now, if the Expiry happens below 1620 then INFY 1620 CE would be an ATM or OTM and hence the seller would get the entire Premium to his profit\. However, if the Expiry happens somewhere above 1620 but below 1638, then it would imply that INFY 1620 CE is an ITM on Expiry, and the seller would be able to appropriate part of the Premium as his profit i\.e\. to the extent of the difference between the final LTP on Expiry of 1620 CE Option and the selling price of that Option\. But if the Expiry happens anywhere above 1638 Breakeven Strike Price \(*__*Loss Area*__*\), then it would imply that the INFY 1620 CE is an ITM and also that the seller will now have to book a loss on his CE Options Short trade to the extent of difference between the selling price and the final LTP of INFY 1620 CE Option on Expiry\.*__ <end>__

Hedged trades with PE Long & CE Long:

In this trade the view is bearish and PE Long is the primary position and the hedged leg comprises of CE Long\. Now, in this hedged trade, both PE Long and CE Long leg are debit trade for which premium has been paid\. The premium paid for the primary position and the hedged leg will have to be first recovered by the primary position in order to generate profit from Expiry perspective Thus, from Expiry perspective, this hedged trade will only become profitable when PE Long position will rise beyond the amount of premium paid by the trader for the PE Long leg and CE Long leg\.

__i\.\.e\. <start>Formula: the Breakeven Strike in this trade \(for the primary position\) = PE’ buying premium \+ CE’s buying premium__

Thus, when the PE Strike at which Long is initiated falls beyond the total aggregate amount of premium paid for the PE leg as well as for the CE leg, then this hedged trade would become profitable from Expiry perspective\.__ <end>__

__<start>*Example*__*:  If a trader has a bearish view on Reliance and the trader wishes to create a bearish position on Reliance PE Option\. Reliance Futures is  trading at Rs 2600 \(ATM strike\)\. Now, suppose the trader buys Reliance 2560 OTM PE at Rs\. 15 premium and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not fall as per plan, but instead rise up\), so he buys a 2640 OTM CE for Rs\. 25 premium\. This CE Long is the hedged leg in this trade\. Now, the trader would become profitable in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would fall below 2560 \(i\.e\. PE’s premium paid of Rs\. 15 \+ CE’s premium paid of Rs\. 25\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over below 2560 then this hedged trade would be in loss\.*__ <end>__

Hedged trades with Futures Short & CE Long:

In this trade the view is bearish and Futures Short is the primary position and the hedged leg comprises of CE Long\. Now, in this hedged trade, the CE Long leg is a debit trade for which premium has been paid\. The premium paid for the hedged leg will have to be first recovered by the primary position in order to generate profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will only become profitable when Futures’ Short position will fall below the amount of premium paid by the trader for the CE Long leg\.

__i\.\.e\. <start> Formula: the Breakeven Strike in this trade \(for the primary position\) = Futures’ selling price \- CE’s buying premium__

Thus, when the LTP at which Short is initiated in Futures falls beyond the amount of premium paid for the CE leg, then this hedged trade would become profitable from Expiry perspective\.__ <end>__

__<start>Example__*:  If a trader has a bearish view on Reliance and the trader wishes to create a bearish position on the Futures of Reliance, which is trading at Rs 2600 per lot\. Now, suppose the trader sells Reliance Futures’ at LTP of 2600 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not fall as per plan, but instead rise up\), so he buys a 2640 OTM CE for Rs\. 25 premium\. This CE Long is the hedged leg in this trade\. Now, the trader would become profitable in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would fall below 2575 \(i\.e\. Futures selling price of 2600 \- CE’s premium paid of Rs\. 25\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over below 2575 then this hedged trade would be in loss\.*__ <end>__* *

__Profit & Loss Calculations in Hedged Trades, from Expiry Perspective__

Hedging from the perspective of trading, simply means to have a contra position to the main / primary position \(i\.e\. position in the opposite side of the main position\)\. Suppose, if our view is bullish and we initiate a bullish position \(__primary position__\) through any F&O instrument, then we would hedge this aforesaid bullish position by creating a contra\-position i\.e\. on the bearish side using F&O instruments \(__hedging leg__\)\. Some may wonder that if we have our primary position with the bullish view and we hedge this bullish position with a bearish position then how would ever the trade be profitable, as bullish and bearish positions will contradict each other and the net situation would be of no profit on either position\. However, this is not true \!

In every hedged trade, the objective is to derive profit from the primary position, and the hedging leg is initiated to minimise losses if our primary position do not go as per our analysis/ as we expected\. Thus, hedged trades are suitably designed basis certain calculations so as to broadly ensure that:

- If the trade goes as per plan \(*the primary position starts generating profit, but the hedging leg starts to generate loss*\) \- the profit generated in the primary position is higher than the loss getting generated on the hedging leg – thus making the trade profitable on net basis\.
- If the trade does not go as per plan \(*the primary leg starts generating loss, but the hedging leg starts to generate profit*\) \- the profit generated in the hedging leg while would be less than the loss getting generated on the primary position, but the hedging leg would help to curtail the quantum of loss that gets generated on the primary leg\.

Thus, it is important for every F&O trader to know and to do these simple calculations in its F&O trade, to be able to suitably design a hedged trade\. These calculations are primarily based on concepts, like: calculation of Intrinsic Value and Extrinsic Value, concept of Debit & Credit in Options, Breakeven Strikes for determining profit & loss areas in Options’ Long & Short positions, etc\. 

Now, let us understand how to do these calculations and use these calculations in a hedged trade involving varied F&O instruments:

<__start__>Broadly, every hedged trade has a primary position and a hedged leg\. Accordingly, we have outlined below, broadly, certain hedged trades for both bullish and bearish view, by employing combination of F&O instruments with primary leg basis on view on the underlying and by having a hedged leg as a contra position to the primary leg to take care of reversal situations of our view on the underlying:

| Sl\. No\. | Bullish View | Bearish View |

|\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| 1 | Long Futures \(primary position\); and Long PE Option \(hedged leg\) | Short Futures \(primary position\); and Long CE Option \(hedged leg\) |

| 2 | Long Futures \(primary position\); and Short CE Option \(hedged leg\) | Short Futures \(primary position\); and Short PE Option \(hedged leg\) |

| 3 | Long CE Option \(primary position\); and Long PE Option \(hedged leg\) | Long PE Option \(primary position\); and Long CE Option \(hedged leg\) |

| 4 | Long CE Option \(primary position\); and Short CE Option \(hedged leg\) | Long PE Option \(primary position\); and Short PE Option \(hedged leg\) | 

Please note that the aforesaid hedged trades are provided just for the sake of understanding the calculations required to be done in creating a hedged trade and does not provide here the ITM\-ATM\-OTM Strikes which need to be employed to create a suitable hedge for a given market situation\. <__end__>

For the sake of our discussions, we have broadly segregated the abovementioned hedged trades, as follows:

1. Hedged  trades involving Long Options position; and 
2. Hedged trades involving Short Options position\.

The calculations by which a trader can ascertain the profit & loss levels in hedged trades \(as given in the table above\) from Expiry perspective, is based on the following basic concepts:

1. For every Long Option leg: we need to know the premium paid / debited
2. For every Short Option leg: we need to know the premium collected / credited
3. Every hedged trade is based on the basic tenet of \[__buying – selling__\]__ __i\.e\. the difference between the premium paid for the buying leg and the premium collected for the selling leg
4. For every Long & Short Option leg: we need to know the Breakeven Strike\.

Hedged Trades with CE Long & CE Short:

In this trade the view is bullish and CE Long is the primary position and the hedged leg comprises of CE Short\. In this hedged trade, the CE Long position is the debit position for which the premium has been paid and the CE Short leg is a credit position for which premium has been collected\. In this trade, the buying price of CE Long is higher than the selling price in the CE Short leg\. Now, so long the net premium \(i\.e\. *difference between the premium paid in the primary position and premium collected in the hedged leg*\) is recovered in the primary position then this hedged trade will be in profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will be profitable if the Futures’ LTP rises above the difference in the buying price – selling price\.

__i\.\.e\. <start>Formula: the Breakeven Strike in this trade \(for the primary position\) = CE Long’ buying price – CE Short’ selling premium__

Thus, when the CE Strike of the primary position crosses above the amount of premium differential between the CE buying & selling leg, the trade gets profitable from Expiry perspective\.__ <end>__

__<start>Example__*:  If a trader has a bullish view on Reliance and the trader wishes to create a bullish position in the CE Option of Reliance\. The Futures’ of Reliance is trading at Rs 2600 per lot \(i\.e\. 2600 Strike is ATM\)\. Now, suppose the trader buys Reliance CE OTM 2640 at a premium of Rs\. 35 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not rise as per plan, but instead slips down\), so he sells a 2660 OTM CE for Rs\. 20 premium\. This CE Short is the hedged leg in this trade\. Now, the trader would get profitable if the Expiry occurs above 2615 Strike \(i\.e\. 2600 Strike \+ \(buying premium of Rs\. 35 – selling premium of Rs\.20\)\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over above 2615 then this hedged trade would be in loss\.*__ <end>__

Hedged Trades with CE Long & PE Long:

In this trade the view is bullish and CE Long is the primary position and the hedged leg comprises of PE Long\. Now, in this hedged trade, both CE Long and PE Long leg are debit trade for which premium has been paid\. The premium paid for the primary position and the hedged leg will have to be first recovered by the primary position in order to generate profit from Expiry perspective Thus, from Expiry perspective, this hedged trade will only become profitable when CE Long position will rise beyond the amount of premium paid by the trader for the CE Long leg and PE Long leg\.

__i\.\.e\. <start>Formula: the Breakeven Strike in this trade \(for the primary position\) = CE’ buying premium \+ PE’s buying premium__

Thus, when the CE Strike  at which Long is initiated rises beyond the total aggregate amount of premium paid for the CE leg as well as for the PE leg, then this hedged trade would become profitable from Expiry perspective\.__ <end>__

__<start>Example__:*  If a trader has a bullish view on Reliance and the trader wishes to create a bullish position on Reliance CE Option\. Reliance Futures is  trading at Rs 2600 \(ATM strike\)\. Now, suppose the trader buys Reliance 2640 OTM CE at Rs\. 20 premium and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not rise as per plan, but instead slips down\), so he buys a 2560 OTM PE for Rs\. 10 premium\. This PE Long is the hedged leg in this trade\. Now, the trader would become profitable in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would rise beyond 2630 \(i\.e\. CE’s premium paid of Rs\. 20 \+ PE’s premium paid of Rs\. 10\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over beyond 2630 then this hedged trade would be in loss\.*__ <end>__

Hedged Trades with PE Long & PE Short:

In this trade the view is bearish and PE Long is the primary position and the hedged leg comprises of PE Short\. In this hedged trade, the PE Long position is the debit position for which the premium has been paid and the PE Short leg is a credit position for which premium has been collected\. In this trade, the buying price of PE Long is higher than the selling price in the PE Short leg\. Now, so long the net premium \(i\.e\. *difference between the premium paid in the primary position and premium collected in the hedged leg*\) is recovered in the primary position then this hedged trade will be in profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will be profitable if the Futures’ LTP falls below the difference in the buying price – selling price\.

__i\.\.e\. <start> Formula: the Breakeven Strike in this trade \(for the primary position\) = PE Long’ buying price – PE Short’ selling premium__

Thus, when the PE Strike of the primary position crosses below the amount of premium differential between the PE buying & selling leg, the trade gets profitable from Expiry perspective\.__ <end>__

__<start>*Example*__*:  If a trader has a bearish view on Reliance and the trader wishes to create a bearish position in the PE Option of Reliance\. The Futures’ of Reliance is trading at Rs 2600 per lot \(i\.e\. 2600 Strike is ATM\)\. Now, suppose the trader buys Reliance PE OTM 2580 at a premium of Rs\. 25 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not fall as per plan, but instead rises upwards\), so he sells a 2560 OTM PE for Rs\. 10 premium\. This PE Short is the hedged leg in this trade\. Now, the trader would get profitable if the Expiry occurs below 2585 Strike \(i\.e\. 2600 Strike \- \(buying premium of Rs\. 25 – selling premium of Rs\.10\)\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over below 2585 then this hedged trade would be in loss\.*__ <end>__

Hedged Trade with Futures Long & PE Long:

In this trade the view is bullish and Futures Long is the primary position and the hedged leg comprises of PE Long\. Now, in this hedged trade, the PE Long leg is a debit trade for which premium has been paid\. The premium paid for the hedged leg will have to be first recovered by the primary position in order to generate profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will only become profitable when Futures’ Long position will rise beyond the amount of premium paid by the trader for the PE Long leg\.

__i\.\.e\. <start> Formula: the Breakeven Strike in this trade \(for the primary position\) = Futures’ buying price \+ PE’s buying premium__

Thus, when the LTP at which Long is initiated in Futures rises beyond the amount of premium paid for the PE leg, then this hedged trade would become profitable from Expiry perspective\.__ <end>__

__<start>*Example*__*:  If a trader has a bullish view on Reliance and the trader wishes to create a bullish position on the Futures of Reliance, which is trading at Rs 2600 per lot\. Now, suppose the trader buys Reliance at Futures’ LTP of 2600 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not rise as per plan, but instead slips down\), so he buys a 2640 ITM PE for Rs\. 45 premium\. This PE Long is the hedged leg in this trade\. Now, the trader would become profitable in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would rise beyond 2645 \(i\.e\. Futures buying  price of 2600 \+ PE’s premium paid of Rs\. 45\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over beyond 2645 then this hedged trade would be in loss\.*__ <end>__* *

Hedged Trades with Futures Long & CE Short:

In this trade the view is bullish and Futures Long is the primary position and the hedged leg comprises of CE Short\. In this hedged trade, the CE Short leg is a credit position for which premium has been collected\. Now, so long the premium collected for the hedged leg is not lost, the primary position will be in profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will remain profitable until the Futures’ Long position do not fall below the amount of premium collected by the trader for the CE Short leg\.

__i\.\.e\. <start>Formula: the Breakeven Strike in this trade \(for the primary position\) = Futures’ buying price \- CE’s selling premium__

Thus, when the LTP at which Long is initiated in Futures starts falling below the amount of premium collected for the CE leg, then this hedged trade would go into loss, else it will remain profitable from Expiry perspective\.__ <end>__

__<start>*Example*__*:  If a trader has a bullish view on Reliance and the trader wishes *to* create a *bullish* position on the Futures of Reliance, which is trading at Rs 2600 per lot\. Now, suppose the trader buys Reliance at Futures’ LTP of 2600 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not rise as per plan, but instead slips down\), so he sells a 2640 OTM CE for Rs\. 20 premium\. This CE Short is the hedged leg in this trade\. Now, the trader would suffer loss in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would fall below 2580 \(i\.e\. Futures buying  price of 2600 \- CE’s premium collected of Rs\. 20\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over below 2580 then this hedged trade would be in profit\. *__<end>__

Hedged Trades with Futures Short & PE Short:

In this trade the view is bearish and Futures Short is the primary position and the hedged leg comprises of PE Short\. In this hedged trade, the PE Short leg is a credit position for which premium has been collected\. Now, so long the premium collected for the hedged leg is not lost, the primary position will be in profit from Expiry perspective\. Thus, from Expiry perspective, this hedged trade will remain profitable until the Futures’ Short position do not rise above the amount of premium collected by the trader for the PE Short leg\.

__i\.\.e\. <start>Formula: the Breakeven Strike in this trade \(for the primary position\) = Futures’ selling price \+ PE’s selling premium__

Thus, when the LTP at which Short is initiated in Futures starts rising above the amount of premium collected for the PE leg, then this hedged trade would go into loss, else it will remain profitable from Expiry perspective\.__ <end>__

__<start>*Example*__*:  If a trader has a bearish view on Reliance and the trader wishes to create a bearish position on the Futures of Reliance, which is trading at Rs 2600 per lot\. Now, suppose the trader sell Reliance Futures’ at LTP of 2600 and thus creates his primary position\. But the trader also wishes to hedge his primary position \(just in case if Reliance do not fall as per plan, but instead rises upward\), so he sells a 2580 OTM PE for Rs\. 25 premium\. This PE Short is the hedged leg in this trade\. Now, the trader would suffer loss in this hedged trade, from Expiry perspective, only when Reliance Futures’ LTP would rise above 2625 \(i\.e\. Futures selling price of 2600 \+ PE’s premium collected of Rs\. 25\)\. Thus, if the Reliance Futures by its Expiry does not cross\-over above 2625 then this hedged trade would be in profit\.*__ <end>__

__Calculations of Potential P&L on Long Options Trade: from Expiry perspective__

We know that the buyer of an Option suffers total Premium loss if the Options expire as an ATM or OTM\. Further, the buyer of an Option would make profit on his Long trade on the Expiry day of that Option, if the Option expires as an ITM and the final LTP of the Option on Expiry is over and above the Premium cost paid by him to the seller for buying that Option \(__Profit scenario__\)\. 

The aforesaid Profit scenario for a Long Options’ trade, from Expiry perspective can be calculated by determining the Breakeven Strike Price for the Option bought in a Long trade\.

Let us understand Breakeven Strike Price for Long Options Trade: You may recall that an Options’ Long trade is a Debit trade and that is so because in an Options’ Long trade \(whether, CE or PE buy\) the buyer has to incur the cost of the Premium \(which the buyer pays to the seller\)\. Thus, in order to make profit, from Expiry perspective, the buyer will have to first recover the Premium cost paid by him by waiting for the price of the underlying to cross\-over the Strike Price level after covering up the Premium cost incurred by the buyer\. This threshold Strike Price level of Options, beyond which the buyer would make profit in his Long trade of CE or PE, from Expiry perspective, is referred to as the Breakeven Price for the Options buyer\.

Thus, it can be concluded that: 

- In Long Options trade \(Option buying\), in order to be profitable, the premium paid for buying the Options would first need to be recovered\.
- If the Options Long trade \(whether CE or PE\) is unable to expire beyond the Breakeven Strike Price level by Expiry, then Long trade  would generate loss \(__Loss scenario__\)\. But if the Options bought expires as an ITM beyond its Breakeven Strike then it may generate profit if the final LTP of that Option on Expiry is greater than the buying price of that Option \(__Profit scenario__\)\.

In this Loss scenario: If the Options bought expires as an ATM or OTM, then the entire Premium paid would be a loss\. But if the Option expires as ITM \(even if the Breakeven threshold has not been crossed\-over by the price of the underlying\), then the loss would be to the extent of difference between the final LTP and Premium paid\.

__<start>Example__: *To further understand the calculation of Breakeven Strikes for Long Options  position, provided here the Options Chain of Nifty for Aug 25, 2022 Expiry \(as on August 24, 2022\) showing a few Strike Price levels and the LTP of certain ITM, ATM and OTM Options for both CE and PE side\. Also, related to this Options Chain we have provided the Breakeven Strike levels \(*__*BE Strike*__*\) from Expiry perspective for each of the CE and PE Options, if a Long position is initiated in those Options at almost the prevailing LTP \(i\.e\. buying premium or buying price\) as appearing in the Options Chain, for the Long trade in that Option to be profitable on Expiry*: __<img8> <end>__

Thus, the buyer of an Option before initiating his Long trade may need to evaluate and calculate the probability of his Option being able to fulfil the Breakeven Strike threshold on its Expiry, for his Long trade to be profitable on Expiry, should he consider holding his Long trade until Expiry or if it necessitates the trader to evaluate his position from Expiry perspective for other reasons\. However, having said this, it must be remembered that , holding a position until Expiry may attract physical delivery requirements on specified instruments\. But the calculations are done, assuming if the position is held until Expiry; not that the position is intended to be held until Expiry\.  Moreover, a trader might even consider trading Options which do not attract any physical requirements on Expiry \(such as Options of Nifty and BankNifty\), thus the analysis and calculations from the perspective of holding the position until Expiry may be required\.

__*Understanding Breakeven Level for PE Long Options Trade:*__

Breakeven for Long trade on PE Options: In case of PE Options, LTP rises above with the fall in the price of the underlying\. Therefore, in order to recover the premium paid for the PE buy trade \(*trading bet in PE buy is that the price of the underlying would fall*\), the price of the underlying will have to first fall so much lower and beyond so as to surpass the  Debit incurred by the buyer for the premium paid by him for the trading bet of fall in the underlying \(*consequently causing the ATM strike to move towards the lower Strike levels*\)\.  Therefore, the Breakeven Strike in case of PE Option buy trade would be lower Strike level from the Strike level at which the Long position has been initiated in PE Option\.  

<a id="_Hlk153833672"></a>Having said this, the Breakeven Strike for a PE Option will be calculated, as mentioned below:

__Formula: <start>Breakeven Strike \(for Long trade in PE\)__ = PE Strike on which Long is initiated \- buying price of PE Option  

- *Above this Breakeven Strike is Loss Area*__<end>__

To understand the Breakeven Strike Price for a Long trade on PE, let us take an example: 

__<start>Example: __*where a trader is bearish on Infosys shares and decides to initiate a Long trade on PE at a Strike Price of 1650 and buys it at a Bid price of Rs\. 50\. Then for being profitable on his Long trade on INFY PE 1650, from Expiry perspective, the INFY Futures’ must expire below the  Breakeven Strike of 1600 i\.e\. 1650 – 50 \(*__*Profit Area*__*\)\. This implies that INFY 1650 PE would be an ITM on Expiry and also its final LTP is likely to be above the buying price of Rs\. 50 / Premium paid*\. *However, if Expiry happens above this Breakeven Strike Price of 1600 \(*__*Loss Area*__*\) and the INFY 1650 PE is an ITM, then the buyer will have to suffer a loss to the extent of difference between the buying price and the final LTP of INFY 1650 PE on Expiry \(on Expiry the Time value in the LTP of the PE Option would become zero, thus reducing the final LTP\)\. But if Expiry happens above 1650, then it would mean that INFY 1650 PE is an ATM or an OTM on Expiry, hence its LTP would become zero on Expiry and accordingly causing a total Premium loss to the PE buyer\.* __<end>__

__*Understanding Breakeven Level for CE Long Options Trade:*__

Breakeven for Long trade on CE Options: In case of CE Options, LTP rises above with the rise in the price of the underlying\. Therefore, in order to recover the premium paid for the CE buy trade \(*trading bet in CE buy is that the price of the underlying would rise*\), the price of the underlying will have to first rise so much higher and beyond so as to surpass the  Debit incurred by the buyer for the premium paid by him for the trading bet of rise in the underlying \(*consequently causing the ATM strike to move towards the higher Strike levels*\)\.  Therefore, the Breakeven Strike in case of CE Option buy trade would be higher Strike level from the Strike level at which the Long position has been initiated in CE Option\.

Having said this, the Breakeven Strike for a CE Option will be calculated, as mentioned below:

__Formula: <start>Breakeven Strike \(for Long trade in CE\)__ = CE Strike on which Long is initiated \+ buying price of CE Option

- *Below this Breakeven Strike is Loss Area *__<end>__

__<start>Example:__* In* *INFY 1620 CE Long trade, which is bought at Rs\. 18, the Breakeven Price for the buyer would be 1620 \+ 18 = 1638\. Thus, to be profitable in the aforesaid CE Option Long trade from Expiry perspective, the Expiry must happen above 1638 Breakeven Strike Price \(*__*Profit Area*__*\)\. This implies that INFY 1620 CE would be an ITM on Expiry and also its final LTP is likely to be above the buying price of Rs\. 18 / Premium paid*\.* However, if Expiry happens below this Breakeven Strike Price of 1638 \(*__*Loss Area*__*\) and the INFY 1620 CE is an ITM, then the buyer will have to suffer a loss to the extent of difference between the buying price and the final LTP of INFY 1620 CE on Expiry \(on Expiry the Time value in the LTP of the CE Option would become zero, thus reducing the final LTP\)\. But if Expiry happens below 1620, then it would mean that INFY 1620 CE is an ATM or an OTM on Expiry, hence its LTP would become zero on Expiry and accordingly causing a total Premium loss to the CE buyer\.*__ <end>__

__Calculations before Expiry day:__

After a position is initiated in Options, the Options before its relevant Expiry may undergo a lot of changes in its LTP due to various factors\. Thus, in these situations – while the calculations performed on these Options positions from the perspective of its Expiry would hold good, a trader may consider to continue to ride or exit basis the changes to the Options \(and various factors influencing the Options position\) during its journey before its Expiry\.

Thus, a F&O trader must understand the calculations required to be done on Options from the perspective of its Expiry Day in order to initiate & hold a position in Options; and must also understand relevant calculations that may need to be carried out during the journey of Options before its Expiry, in order to aptly deal with the position as the Options undergoes changes due to various factors influencing them \(which cannot be foreseen or fully planned for at the time initiating the position\)\.

__Potential Profit & Loss Scenario on Options: Prior to Expiry Date:__

As mentioned above, there may be situations which may necessitate a trader to hold Options’ Long or Short trade until Expiry\.  However, holding the trades until Expiry is neither mandatory nor necessary\. A trader after initiating a Long or Short trade in Options, may any time \(even in few minutes\) before the Expiry of the relevant Options may exit the trade by squaring\-off his Long / Short trade, as the case may be\. 

__Conclusion on Options trade: Upto Expiry Date & Prior to Expiry__

A trader with a very brief period of holding in mind can initiate a trade, without having to understand and evaluate the trade from Expiry perspective and exit the position\. However, this approach is fine if a trade is initiated when Expiry is quite far; however if the Expiry is close it is better that the trader considers and evaluate the trade by doing requisite calculations from the Expiry perspective to understand the potential risk and reward and profit and loss areas in his trade if for some reason he has to hold the position until Expiry\.

__*Potential Profit & Loss Scenario on Short Options trade: Prior to Expiry Date*__

The Short trade initiated by the seller of an Option, starts showing profit as soon as the LTP of the Option sold  falls below the selling price of the seller\. In a Short trade, the LTP of a CE Option would fall with the fall in the price of the underlying; and in case of a PE Option the LTP would fall when the price of the underlying rises\. However, as already mentioned in previous Chapters, besides price change in the underlying there are various other factors which determine the LTP of an Option and its change \(like Volatility, Time decay etc\.\)\. 

Thus, when a seller do not wish to hold his Short trade until Expiry, he need not get involved into the calculation of the Breakeven Strike, Profit Area and Risk Areas and also need not be concerned whether or not his Options would end up as an ATM / OTM on Expiry\. Such a seller can book the profit by squaring\-off his Short position by placing a buy order on the Options held by the seller by quoting a Bid Price \(*obviously, which will be lower than the selling price of the Options*\)\. Let us look at the following examples of a Short trade in CE and PE, respectively, from the perspective of holding the position briefly and exiting before the Expiry\.

__*<*start*>Example:*__* If a trader having a bearish view on Infosys shares, initiates a Short trade by selling INFY 1620 CE at Rs\. 18 Ask Price, then as soon as the INFY 1620 CE’s LTP falls below Rs\. 18 \(due to fall in the price of Infosys shares or due to any other factor like fall in volatility or due to time decay\), the seller can place a buy order at a Bid Price of say Rs\. 10, and once the buy order gets executed at Rs\. 10, the seller of this CE Option would have booked a profit of Rs\. 8 per lot on that CE Option*\. *However, after initiating the Short trade, the LTP of INFY 1620 CE rises from Rs\. 18 to Rs\. 25 and the trader feels that it may rise even further, then the trader may exit his Short position by squaring\-off by placing a buy order at a higher LTP of say Rs\. 25 \(Bid Price\) and book a loss of Rs\. 7 per lot once the buy order gets executed\.*__* <end>*__* *

__*<*start*>Example: *__*Likewise, where a trader is having a bullish view on Infosys shares, initiates a Short trade by selling INFY 1650 PE at Rs\. 50 Ask Price, then as soon as the INFY 1650 PE’s LTP falls below Rs\. 50 \(due to rise in the price of Infosys shares or due to any other factor like fall in volatility or due to time decay\), the seller can place a buy order at a Bid Price of say Rs\. 30, and once the buy order gets executed at Rs\. 30, the seller of this PE Option would have booked a profit of Rs\. 20 per lot on that PE Option*\. *However, after initiating the Short trade, the LTP of INFY 1650 PE rises from Rs\. 50 to Rs\. 65 and the trader feels that it may rise even further, then the trader may exit his Short position by squaring\-off by placing a buy order at a higher LTP of say Rs\. 65 \(Bid Price\) and book a loss of Rs\. 15 per lot once the buy order gets executed\.*__* <*end*>*__

__*Potential Profit & Loss Scenario on Long Options trade: Prior to Expiry Date*__

The Long trade initiated by the buyer of an Option, starts showing profit as soon as the LTP of the Option bought rises above the buying price of the buyer\. In a Long trade, the LTP of a CE Option would rise with the rise in the price of the underlying; and in case of a PE Option the LTP would rise when the price of the underlying falls\. However, as already mentioned in previous Chapters, besides price change in the underlying there are various other factors which determine the LTP of an Option and its change \(like Volatility, Time decay etc\.\)\. 

Thus, when a buyer do not wish to hold his Long trade until Expiry, he need not get involved into the calculation of the Breakeven Strike, Profit Area and Risk Areas and also need not be concerned whether or not his Options would end up as an ITM on Expiry\. Such a buyer can book the profit by squaring\-off his Long position by placing a sell order on the Options held by the buyer by quoting an Ask Price \(*obviously, which will be higher than the buying price of the Options*\)\. Let us look at the following examples of a Long trade in CE and PE, respectively, from the perspective of holding the position briefly and exiting before the Expiry\.

__*<*start*>Example: *__*If a trader having a bullish view on Infosys shares, initiates a Long trade by buying INFY 1620 CE at Rs\. 18 Bid Price, then as soon as the INFY 1620 CE’s LTP rises above Rs\. 18 \(due to rise in the price of Infosys shares or due to any other factor like rise in volatility\), the buyer can place a sell order at an Ask Price of say Rs\. 25, and once the sell order gets executed at Rs\. 25, the buyer of this CE Option would have booked a profit of Rs\. 7 per lot on that CE Option*\. *However, after initiating the Long trade, the LTP of INFY 1620 CE drops from Rs\. 18 to Rs\. 15 and the trader feels that it may drop even further, then the trader may exit his Long position by squaring\-off by placing a sell order at a lower LTP of say Rs\. 15 \(Ask Price\) and book a loss of Rs\. 3 per lot once the sell order gets executed\. *__*<*end*>*__

__*<*start*> Example: *__*Likewise, where a trader is bearish on Infosys shares and decides to initiate a Long trade on PE at a Strike Price of 1650 and buys it at a Bid price of Rs\. 50\. Now this Long trade on PE Options would become profitable as soon as LTP of INFY PE 1650 rises above 50 \(due to fall in the prices of the Infosys shares or due to any other factor like rise in volatility\)\. Say, if the LTP of the said PE Option becomes 80, then the trader may choose to book a profit of Rs\. 30 per lot on the said PE Option by squaring\-off his Long trade on PE Option by placing a sell order at an Ask Price of Rs\. 80\. And once the sell order gets executed at Rs\. 80, the buyer of this PE Option would have booked a profit of Rs\. 30 per lot on that PE Option*\. *However, after initiating the Long trade, the LTP of INFY 1650 PE drops from Rs\. 50 to Rs\. 40 and the trader feels that it may drop even further, then the trader may exit his Long position by squaring\-off by placing a sell order at a lower LTP of say Rs\. 40 \(Ask Price\) and book a loss of Rs\. 10 per lot once the sell order gets executed\.*__* <*end*>*__

__Premium Debit & Premium Credit__

All Long trades in Options \(i\.e\. buying Options, whether CE or PE\) is a premium debit trade; while all Short trades in Options \(i\.e\. selling Options, whether CE or PE\) is a premium credit trade\.

__Short in Options: Is a Credit trade for Options seller:__

We know that a Short position is created in any Options \(CE or PE, whichever\) by selling that Options\. An Options is sold by placing a ‘sell’ order at a particular Ask Price by the seller\. When the ‘sell’ order gets executed at a particular Ask Price, that Ask Price is the selling price of that Options\.*  *The seller of the Options has the expectation that the LTP of the Options he sold  would fall below his selling price, thereby generating profit on his Short trade in that Options\.

Like in every sell transaction, generally, the seller sells the goods and receives the money/ sale price\. Likewise, when a Short trade in Options is initiated, the seller of the Options notionally gets to receive the Premium being paid by the buyer of that Options\. 

Thus: __Seller of an Option receives the Premium paid by the buyer of that Option__

That is the Options premium paid by the buyer is actually the selling price received by the seller from the buyer of that Option\. Thus, the Premium cost which the buyer pays is the amount which gets notionally credited to the seller of that same Options for the number of Lots sold by the seller\. Accordingly, the price at which the seller of an Option sells the Options to a buyer \(and receives its selling price, from the buyer of that Option\) is calculated as:

__<start>Formula: Total Selling  Price received = Premium at which an Option is sold X no\. of Qty sold <end>__

__<start> __*For example: If INFY 1620 CE Option of Aug 2022 Expiry is trading at LTP of Rs\. 18; and if a trader \(having a bearish view on Infosys\) places a sell  order for 2 Lots \(1 Lot of INFY = 300 qty of Infosys shares\) of INFY 1620 CE at an Ask Price equal to the current LTP of Rs\. 18 and is able to successfully sell it for an Ask Price of Rs\. 18 \(the selling price of this CE Option\), then the Premium which the trader will receive for selling the aforesaid 2 Lots of INFY CE Option will be the same Premium amount which the buyer of those 2 Lots will have to pay, that is: Total Premium received on selling = 18 x 600 = Rs\. 10,800*

This Premium cost in Options selling is supposed to have been notionally credited to the seller at the time of initiating a Short trade\. However, one should take note that for the seller to Short 2 Lots of INFY 1620 CE Option he will have to pay a margin money of approx\. Rs\. 1\.8 Lakhs, which will be blocked from the trading account of the trader by the broker as the margin required to Short 2 Lots of INFY CE Option at a selling price of Rs\. 18 per Lot\. __<end>__

Thus, in a Short trade, the Premium cost collected by the seller \(calculated as the Premium cost required to be paid by the buyer of Options\) is not the same amount which is blocked by the broker from the trading account of the trader for his Short trade as the margin money\. Further, the seller of Options will have to be careful about maintaining MTM \(*mark\-to\-market*\) cost on his Short trade if the trend starts going opposite the view of the seller\.  Thus, from the perspective of margin & MTM requirement for a Long trade & Short trade in Options, following can be concluded:

- Margin money for a Short trade at a particular Strike Price is much higher than the margin money blocked by the broker for a Long trade in Options of the same Strike Price\.
- In Options Short trade, the trader needs to be mindful of the MTM requirement on his Short trade if the trade starts going against the expectation of the trader\. There is no requirement of MTM in case of Long Options trade\.

The aforesaid background brings us to the understanding that the Premium cost incurred by the buyer of an Option is notionally paid to the seller of that Option\. Therefore, from the perspective of the Option seller: since, the Premium is notionally collected by the Option seller for his Short trade, the seller’s Short trade is always a Credit trade\.  

To conclude: __Selling price for Shorting Options is the Premium Credit collected from the buyer of that Option \(*which is the same as the total buying cost paid by the buyer of that Option*\)__

__Long in Options: Is a Debit trade for Options buyer__

A Long position is created in any Options \(CE or PE, whichever\) by buying that Options\. An Options is bought by placing a ‘buy’ order at a particular Bid Price by the buyer\. When the ‘buy’ order gets executed at a particular Bid Price, that Bid Price is the buying price of that Options\.*  *The buyer of the Options has the expectation that the LTP of the Options he bought would rise above his buying price, thereby generating profit on his Long trade in that Options\.

Here, we should take note that when a Long trade in Options is initiated, the buyer need to pay the premium or the Options’ price on per lot basis, which is calculated by multiplying the buying price of the Options bought with the no\. of lots purchased\. 

Thus, the formula for computing Premium cost of buying Options is:

__<start>Formula: Total Premium paid = buying price of Options x no\. of Qty purchased <end>__

__<start> __*For example: If INFY 1620 CE Option of Aug 2022 Expiry is trading at LTP of Rs\. 20; and if a trader \(having a bullish view on Infosys\) places a buy order for 2 Lots \(1 Lot of INFY = 300 qty of Infosys shares\) of INFY 1620 CE at a Bid Price slightly less than current LTP of Rs\. 20 and is able to successfully buy it for a Bid Price of Rs\. 18 \(the buying price of this CE Option\), then the Premium which the trader will have to pay to buy the aforesaid 2 Lots of INFY CE Option will be calculated as:*

__Calculation: __*Premium cost = 18 X 600 = Rs\. 10,800 *

This Premium cost will be blocked from the trading account of the trader by the broker as the margin required to buy 2 Lots of INFY CE Option at a buying price of Rs\. 18 per Lot\. Here, one should take note that in a Long trade, the Premium cost of buying an Option is the same amount which is blocked by the broker from the trading account of the trader for his Long trade as the margin money\.

Further, we know that every instrument is bought from the seller of that instrument\. Thus, in case of buying an Option, the Option buyer buys it from the seller of that same Option at an agreed price \(which is the Bid Price of the buyer and the Ask Price of the seller being same\)\. Therefore, in the above example of buying 2 Lots of INFY 1620 CE Option, we know that the trader was able to buy the aforesaid CE Option, obviously, from the seller of the CE Option at the same Strike Price level of 1620 and the seller was willing to sell the CE Option at a price of Rs\. 18 per Lot \(which was the Ask price of the seller\)\. __<end>__

The aforesaid background brings us to the understanding that the Premium cost paid by the buyer of the Option is being notionally paid to the seller of the Option by the buyer of that Option\. Therefore, the Premium cost incurred by the buyer to initiate his Long trade in Options is always a Debit trade for the Option buyer\. Having said this, from the perspective of Option seller, the Premium being paid by the Option buyer is being collected by the Option seller, hence a Credit trade for the Options seller\. 

To conclude: __Buyer of an Option, pays the Premium to the seller of that Option__

__Long Options: Limited Risk & Unlimited Reward:__

In an Option buying position \(i\.e\. Options’ Long trade\), the buyer pays the premium to the seller and in order to be profitable the buyer must first recover the premium paid in his trade\. 

Now, in Options’ Long trade if the LTP of the underlying Futures’ crosses beyond the relevant Breakeven Strike Price level \(i\.e\. beyond the premium incurred by the buyer\) then there is unlimited reward situation in the Options Long trade if the LTP of Option keeps rising\. As the relevant Option keep moving beyond the relevant Breakeven Strike Price level, then it means that the Option is moving deeper into the money \(i\.e\. it is becoming deeper ITM\), which in turn implies that the moneyness or the Intrinsic Value in the LTP of that Option is rising \(or the Time Value in the LTP of the Option is decreasing\)\. Thus, as the Option moves further beyond the relevant Breakeven Strike Price level, the time decay in that Option decreases and on Expiry the LTP of that Option would become equal to the Intrinsic Value it attained \(and the Time Value in its LTP would become zero on Expiry\)\. Further, as the Option keeps moving beyond the relevant Breakeven Strike Price level i\.e\. deeper into moneyness, there is no limit to which it may keep rising subject ofcourse to the favourable price movement of the underlying \(i\.e\. *the price of the underlying keeps rising in case of CE Option buying and the price of the underlying keeps falling in case of PE Option buying*\)\. Thus, in an Options’ Long trade, the reward is unlimited to the extent it keeps going in the money due to favourable price movement of the underlying\.

However, if the Options remain within the Breakeven Strike Price level on Expiry, then that would mean that no moneyness / Intrinsic Value got added to the LTP of that Option, and whatever Intrinsic Value it has on Expiry will be the final LTP of that Option \(as the entire Time Value in its LTP would become zero on Expiry\)\. Assuming, the worst\-case scenario: that the Option on Expiry has no Intrinsic Value but only Time Value in its LTP \(*which implies that on Expiry such Option would be an ATM or OTM*\), then the entire premium paid by the buyer for that Option would become zero on Expiry\. This is the maximum / defined loss that an Option buyer may suffer on his Options’ Long trade \(i\.e\. to the extent of entire premium paid by him\)\. Thus, in an Options’ Long trade, the loss / risk is quantified or limited to the extent of Time Value in the final LTP of Option on Expiry\.

For the aforesaid reasons, Options’ Long trade \(i\.e\. Option buying\) is said to be having Unlimited Reward & Limited Risk\. 

__*<*start*>*Example__: Let us analyse the Breakeven Strikes for the Long trades in CE & PE Options of Nifty for Aug 25, 2022 Expiry as given in here: __*<*img8*>*__ Here in this Table, the Breakeven Strike levels \(__BE Strike__\) from Expiry perspective, is mentioned, for each of the CE and PE Options, if a Long position is initiated in those Options at almost the prevailing LTP \(i\.e\. buying premium or buying price\) as appearing in the Options Chain, for the Long trade in that Option to be profitable on Expiry\.__* <*end*>*__ 

__*Long in PE Options: Limited Risk & Unlimited Reward*__  

We know that PE LTP rises when the price of the underlying falls\. Thus, if Long position is initiated in the PE Options given in the Table above, then from Expiry perspective, as the price of the underlying keeps falling down the LTP of the PE Option keeps rising \(*this is why the Delta for PEs are given in negative in the Options Chain*\) and as the price of the underlying continues to fall the PE Options one by one would start becoming deeper ITMs / ITMs as the price of the underlying crosses below the BE Strike of the PE Options\. Therefore, with the continuous fall in the price of the underlying, the profit in the PE Options below their respective BE Strike keeps rising, thus an Unlimited Reward for Long trade in PE Options as the price of the underlying keeps moving below the BE Strike for a given PE Option\.

However, assuming that by Expiry, the price of the underlying does not cross\-over below the relevant BE Strike of  certain PE Options, then on Expiry the Time Value in the LTP of each of these PE Options would become zero, and consequently: 

- PE Options which end up as an ATM or OTM on Expiry, their LTP would become zero on Expiry\. Thus, entire premium paid for these PE Options is a loss to the PE Option buyer and a profit of PE Options seller for a given Strike; and 
- PE Options which are ITM on Expiry, their final LTP may become less than its buying premium because the Time Value of these PE Options would become zero and the final LTP would be reduced only to the value of moneyness/Intrinsic Value in the LTP of these Options\. Therefore, in the context of Long Options trade, even if an Option expires as an ITM, then: the profit will accrue only if the final Premium value of such ITM \(*which on Expiry will be equal to only its Intrinsic Value*\) is greater than the buying price of the relevant Option; and the profit will be the difference between the final Premium value of such ITM as against its buying price\. Since, on Expiry, the Time Value of all Options including ITMs is lost and the ITM expires at their Intrinsic Value, therefore in case of Long Options trade: even if the relevant Option expires as ITM, in order for such Long Options trade to be profitable the relevant Option must have an Intrinsic Value which is higher than the buying price of that Option\. Thus, if the relevant Option expires at an Intrinsic Value lesser than the buying price, then the difference between the buying premium and the final LTP of the ITM PE Option on Expiry would be the loss of the PE Option buyer and profit of the PE Option seller\.

Thus, we can observe that even in the worst\-case scenario the loss of the PE Option buyer is limited to the maximum extent of the full premium paid by the buyer for buying a particular PE Option \(i\.e\. the buying price at which a Long trade is initiated in PE Option\)\. Thus, the maximum loss or risk in PE Option buying is limited, hence Limited Risk\.

Hope now it is clear how for all PE Option Long trades, there is an Unlimited Reward & Limited Risk\.

__*Long in CE Options: Limited Risk & Unlimited Reward*__  

We know that CE LTP rises when the price of the underlying rises and PE LTP rises when the price of the underlying falls\. Thus, if Long position is initiated in the CE Options, then from Expiry perspective, as the price of the underlying keeps rising the LTP of the CE Option keeps rising and as the price of the underlying continues to rise the CE Options one by one would start becoming deeper ITMs / ITMs as the price of the underlying crosses above the BE Strike of the CE Options\. Therefore, with the continuous rise in the price of the underlying, the profit in the CE Options above their respective BE Strike keeps rising, thus an Unlimited Reward for Long trade in CE Options as the price of the underlying keeps moving above the BE Strike for a given CE Option\.

However, assuming that by Expiry, the price of the underlying does not cross\-over above the  BE Strike of certain CE Options, then on Expiry the Time Value in the LTP of each of these CE Options would become zero, and consequently: 

- CE Options which end up as an ATM or OTM on Expiry, their LTP would become zero on Expiry\. Thus, entire premium paid for these CE Options is a loss to the CE Option buyer and a profit of CE Options seller for a given Strike; and 
- CE Options which are ITM on Expiry, their final LTP may become less than its buying premium because the Time Value of these CE Options would become zero and the final LTP would be reduced only to the value of moneyness/Intrinsic Value in the LTP of these Options\. Therefore, in the context of Long Options trade, even if an Option expires as an ITM, then: the profit will accrue only if the final Premium value of such ITM \(*which on Expiry will be equal to only its Intrinsic Value*\) is greater than the buying price of the relevant Option; and the profit will be the difference between the final Premium value of such ITM as against its buying price\. Since, on Expiry, the Time Value of all Options including ITMs is lost and the ITM expires at their Intrinsic Value, therefore in case of Long Options trade: even if the relevant Option expires as ITM, in order for such Long Options trade to be profitable the relevant Option must have an Intrinsic Value which is higher than the buying price of that Option\. Thus, if the relevant Option expires at an Intrinsic Value lesser than the buying price, then the difference between the buying premium and the final LTP of the ITM CE Option on Expiry would be the loss of the CE Option buyer and profit of the CE Option seller\.

Thus, we can observe that even in the worst\-case scenario the loss of the CE Option buyer is limited to the maximum extent of the full premium paid by the buyer for buying a particular CE Option \(i\.e\. the buying price at which a Long trade is initiated in CE Option\)\. Thus, the maximum loss or risk in CE Option buying is limited, hence Limited Risk\.

Hope now it is clear how for all CE Option Long trades, there is an Unlimited Reward & Limited Risk\.

__Short Options: Unlimited Risk & Limited Reward:__

In an Options’ selling  position \(i\.e\. Options’ Short trade\), the seller receives \(*notionally*\) the premium paid by the buyer; and in order to be profitable the seller must retain the premium received in his trade\. To the extent the seller is able to retain the premium notionally credited to him, will determine actual credit of the premium to the seller from Expiry perspective thus the profit of the seller\. 

If the price of the underlying starts moving away/ farther from relevant Breakeven Strike Price level, then the LTP of that Option may start falling\. In case of CE Option Short trade, the price of the underlying moving away from BE of a CE Option would mean that the price of the underlying is falling down and is therefore moving farther away from the BE Strike of a CE Option Short position\. Since the underlying falls the LTP of CE Options would fall too\. In case of PE Option Short trade, the price of the underlying moving away from BE of a PE Option would mean that the price of the underlying is  rising up and is therefore moving farther away from the BE Strike of a PE Option Short position\. Since the underlying is rising the LTP of PE Options would fall\.

The LTP of an Option may start falling due to favourable price movement of the underlying \(i\.e\. *rise in the price of the underlying for the PE seller and fall in the price of the underlying for the CE seller*\) or even due to time decay with the passage of time \(*causing erosion in LTP value due to decay of the Time Value in the LTP of that Option*\)\. In such situations, the premium notionally received by the seller \(the selling price of the seller\) starts decreasing and can maximum decrease until it becomes zero\. If the Option Shorted by the seller on Expiry is an ATM or OTM, then its LTP would anyways become zero \(*due to time decay irrespective of its LTP just before Expiry*\) and consequently the premium paid by the buyer to the seller of that Option becomes zero and the seller gets to retain the credit of the premium collected by him by selling that Option to the buyer\. Thus, an Options seller has a limited reward as a seller can reap profit only to the maximum extent of the premium \(the selling price\) he received by selling an Option to the buyer of that Option\. 

However, if the Option sold by the seller happens to be an ITM on Expiry, then the profit of the seller would be the differential between the selling price of the Option and the final LTP of that Option on Expiry \(*provided the final LTP is lesser than the selling price of that Option at which it was sold by the seller*\), in which case the seller would be able to retain only part of the premium collected by the seller and not the entire premium received by him \(*notionally*\) when he sold that Option to the buyer at that premium\.    

Further, if the price of the underlying starts moving towards the relevant Breakeven Strike Price level of the Options sold, then it would mean that the LTP of the Option sold by the seller would be rising \(i\.e\. the Option is moving towards ITM\)\. In case of CE Option Short trade, the BE Strike would be breached if the price of the underlying rises and crosses above the BE of the CE Option sold\. Since the underlying rises the LTP of CE Options would rise\. In case of PE Options, the BE Strike would be breached if the price of the underlying falls and crosses below the BE of the CE Option sold\. Since the underlying falls the LTP of PE Options would rise\. In such case, as the LTP of the Option sold starts to rise with its movement towards the Breakeven Strike, the premium collected \(*notionally*\) by the seller starts to reduce; and once the Breakeven Strike is breached by the price of the underlying  the entire premium so collected by the seller gets exhausted and loss situation starts occurring in the Options’ Short trade of the seller\. Now, if the underlying keeps moving beyond the Breakeven Strike Price of the relevant Option \(shorted by the seller\) the LTP keeps rising and thereby the loss in the Options Short trade of the seller\. 

From the seller’s perspective the loss situation is unlimited as there is no end to which the underlying can keep moving beyond the relevant Breakeven Strike Price of the Option Shorted by the seller\. Thus, the seller of Options has to reckon the unlimited risk situation in their Options’ Short trade\. 

For the aforesaid reasons, Options’ Short trade \(i\.e\. Option selling\) is said to be having Limited Reward & Unlimited Risk\.

__<start>Example__: Let us analyse the Breakeven Strikes for the Short trades in CE & PE Options of Nifty for Aug 25, 2022 Expiry as given here: __<img9> \. __Here, in this Table, the Breakeven Strike levels \(__BE Strike__\) from Expiry perspective, is mentioned,  for each of the CE and PE Options, if a Short position is initiated in those Options at almost the prevailing LTP \(i\.e\. selling premium or selling price\) as appearing in the Options Chain, for the Short trade in that Option to be profitable on Expiry\.__ <end>__ 

As already discussed, Options trading is a zero\-sum game, i\.e\. in every Strike there would be a buyer and a seller; and either of the one would win and the other would lose\. In other words, situations which enables the buyer of an Option to profit, causes the seller of that Option to lose; and situation which may result in loss to the buyer of an Option, generates profits to the seller of that Option\. Thus, area of profit for an Options buyer is the loss area for the seller of that Option and area of loss for an Options buyer is the area of profit for the seller of that Option\. Therefore, if Option buyer bets on a Long trade with an Unlimited Reward & Limited Risk, the seller of that same Option bets on his Short trade with Limited Reward & Unlimited Risk\.

__*Short in PE Options: Unlimited Risk & Limited Reward *__

We know that PE LTP rises when the price of the underlying falls and the PE LTP falls when the price of the underlying rises\. Thus, if a trader has a bullish view on the underlying he may initiate a Short position on PE Option by selling PE Option\. We know that a PE buyer expects the LTP of his PE Option to rise with the fall in the price of the underlying; but a PE Option seller expects the LTP of his PE Option to fall with the rise in the underlying\. In other words, a PE Option seller \(also called PE Option writer\) tends to make profit with reduction in the LTP of the PE he sold\.

When a Short position is initiated in the PE Options, then from Expiry perspective, as the price of the underlying keeps rising the LTP of the PE Option keeps falling and as the price of the underlying continues to rise the PE Options one by one would start becoming deeper OTMs / OTMs as the price of the underlying keeps moving away and farther from the respective BE Strike of the PE Options\. Therefore, with the continuous rise in the price of the underlying, the profit in the PE Options Short trade starts getting generated as the LTP of the sold PE Option reduces from its selling price\. However, maximum amount to which LTP of a PE Option can fall is until it becomes zero, thus a Limited Reward for Short  trade in PE Options; as the price of the underlying keeps rising the price of the underlying drifts farther away from the respective BE Strike of the PE Options, but with the rise in the underlying the LTP of PE Option can fall maximum until it becomes zero\. Here take note that on Expiry the Time Value in the LTP of each of these PE Options would become zero\. Consequently: 

- If the Expiry happens above the PE Strike Price shorted by the seller, the PE Options end up as an ATM or OTM on Expiry\. The LTP of PE Options which are ATM and OTM on Expiry would become zero\. Thus, entire premium collected by the seller by selling PE Option to the buyer of that Option would be the profit of the PE Option seller and a loss of the PE Option buyer for a given Strike\. This also confirms that the maximum loss of the Options buyer is the maximum profit of the Options seller; and

- if the Expiry happens below the PE Strike Price shorted by the seller – then it implies that this Strike Price is an ITM on Expiry\. If an Options Short trade on Expiry ends up as an ITM but within the Breakeven Strike of the PE Options sold, then the seller would be able to book partial profit on his Short trade to the extent of difference between the final LTP on Expiry and the selling price\. PE Options which are ITM on Expiry, their final LTP would become less than its selling premium because the Time Value of these PE Options would become zero and the final LTP would be reduced only to the value of moneyness/Intrinsic Value in the LTP of these Options\. Thus, the difference between the selling premium and the final LTP of the ITM PE Option on Expiry would be the partial profit of the PE Option seller and partial loss of the PE Option buyer\. The PE Option seller will be in no profit no loss situation if Expiry happens at the BE Strike of the PE Option sold \(*but Expiry anywhere below the BE Strike causes a loss situation for the PE Option seller*\)\.

Thus, we can observe that howsoever steep the price of the underlying rise, the profit of the PE Option seller is limited to the maximum extent of the full premium collected by the Options seller \(i\.e\. the selling price at which a Short trade is initiated in PE Option\) from the buyer of a particular PE Option\. Thus, the maximum profit or reward in PE Option selling is limited, hence Limited Reward\.

However, now assume if after initiating the Short trades in PE Options, the price of the underlying starts falling and consequently the LTP of the PE Option rises, which is not a good thing for the PE Option seller \(*as he Shorted PE Options, expecting that the price of the underlying would rise*\)\. Now, as the price of the underlying keep falling further, the price of underlying may breach the BE Strike of the PE Options one by one\. 

Now, as the price of the underlying keeps falling the LTP of the PE Option keeps rising and as the price of the underlying continues to fall the PE Options one by one would start becoming deeper ITMs / ITMs as the BE Strike of the PE Options is breached and the underlying price surpasses beyond their respective BE Strike\. Therefore, with the continuous fall in the price of the underlying, the loss in the PE Options beyond their respective BE Strike keeps rising\. Thus, if the Expiry happens below this Breakeven Strike for Short PE Options trade, then the seller would suffer loss on the PE Short trade on Expiry to the extent of difference in the selling price of the PE Option and the final risen LTP of the PE Options shorted by the seller, hence a situation of Unlimited Risk for Short trade in PE Options as the price of the underlying keeps moving below the BE Strike for a given PE Option\.

Hope now it is clear how for all PE Option Short trades, there is a Limited Reward & Unlimited Risk\.

__*Short in CE Options: Unlimited Risk Limited Reward*__

We know that CE LTP rises when the price of the underlying rises and the CE LTP falls when the price of the underlying falls\. Thus, if a trader has a bearish view on the underlying he may initiate a Short position on CE Option by selling CE Option\. We know that a CE buyer expects the LTP of his CE Option to rise with the rise in the price of the underlying; but a CE Option seller expects the LTP of his CE Option to fall with the fall in the underlying\. In other words, a CE Option seller \(also called CE Option writer\) tends to make profit with reduction in the LTP of the CE he sold\.

When a Short position is initiated in the CE Options, then from Expiry perspective, as the price of the underlying keeps falling the LTP of the CE Option also keeps falling and as the price of the underlying continues to fall the CE Options one by one would start becoming deeper OTMs / OTMs as each of the price of the underlying starts moving away and farther from the respective BE Strike of the CE Options\. Therefore, with the continuous fall in the price of the underlying, the profit in the CE Options starts getting generated as the LTP of the sold CE Option reduces from its selling price\. However, maximum amount to which the LTP of a CE Option can fall is until it becomes zero, thus a Limited Reward for Short  trade in CE Options; because as the price of the underlying keeps falling the price of the underlying drifts farther away from the respective BE Strike of the CE Option but the LTP of the CE Option with the fall in the underlying can fall maximum until it becomes zero\. Here take note that on Expiry the Time Value in the LTP of each of these CE Options would become zero\. Consequently: 

- If the Expiry happens below the CE Strike Price shorted by the seller, the CE Options end up as an ATM or OTM on Expiry\. The LTP of CE Options which are ATM and OTM on Expiry would become zero\. Thus, entire premium collected by the seller by selling CE Option to the buyer of that Option would be the profit of the CE Option seller and a loss of the CE Option buyer for a given Strike\. This also confirms that the maximum loss of the Options buyer is the maximum profit of the Options seller; and

- if the Expiry happens above the CE Strike Price shorted by the seller, then it implies that this Strike Price is an ITM on Expiry\. If an Options Short trade on Expiry ends up as an ITM but within the Breakeven Strike of the CE Options sold, then the seller would be able to book partial profit on his Short trade to the extent of difference between the final LTP on Expiry and the selling price\. CE Options which are ITM on Expiry, their final LTP would become less than its selling premium because the Time Value of these CE Options would become zero and the final LTP would be reduced only to the value of moneyness/Intrinsic Value in the LTP of these Options\. Thus, the difference between the selling premium and the final LTP of the ITM CE Option on Expiry would be the partial profit of the CE Option seller and partial loss of the CE Option buyer\. The CE Option seller will be in no profit no loss situation if Expiry happens at the BE Strike of the CE Option sold \(*but Expiry anywhere beyond causes a loss situation for the CE Option seller*\)\.

Thus, we can observe that howsoever steep the price of the underlying falls, the profit of the CE Option seller is limited to the maximum extent of the full premium collected by the Options seller \(i\.e\. the selling price at which a Short trade is initiated in CE Option\) from the buyer of a particular CE Option\. Thus, the maximum profit or reward in CE Option selling is limited, hence Limited Reward\.

However, now assume if after initiating the Short trades in CE Options, the price of the underlying starts rising and consequently the LTP of the CE Option rises, which is not a good thing for the CE Option seller \(*as he Shorted CE Options, expecting that the price of the underlying would fall*\)\. Now, as the price of the underlying keep rising further, the BE Strike of the CE Options may get breached\. 

Now, as the price of the underlying keeps rising even further, the LTP of the CE Option keeps rising and as the price of the underlying continues to rise the CE Options one by one would start becoming deeper ITMs / ITMs as the BE Strike of the CE Options is breached and the underlying price surpasses above their respective BE Strike\. Therefore, with the continuous rise in the price of the underlying, the loss in the CE Options above their respective BE Strike keeps rising\. Thus, if the Expiry happens above  this Breakeven Strike for Short CE Options trade, then the seller would suffer loss on the CE Short trade on Expiry to the extent of difference in the selling price of the CE Option and the final risen LTP of the CE Options shorted by the seller, hence a situation of Unlimited Risk for  Short trade in CE Options as the price of the underlying keeps moving above the BE Strike for a given CE Option\.

Hope now it is clear how for all CE Option Short  trades, there is a Limited Reward & Unlimited Risk\.

__Intro to Options Behaviour:__

Option traders trade the Options basis their LTP \(also called, premium\)\. Option buyers expect LTP of the Option to rise in order to be profitable; and the Options seller expects the LTP of the Option to fall to be profitable\. We know that Options being a derivative instrument derives its value or change in value/LTP with the change in the price of the underlying asset or Indices, as the case may be\. But unlike Futures, Options LTP gets impacted by various factors, besides change in the price of the underlying\. This makes Options a dynamic derivative instrument\. 

The various market conditions or Options’ related factors, would determine or impact the way in which a particular Option would behave or react to a particular market situation\. Also, a particular market situation may impact a given Option so much and yet so little some another Option\. Thus, it becomes imperative for a F&O trader to know and well understand the behavioural aspects of Options\. Because, only then a F&O trader would know as to which type of Options to employ to play a particular market condition\(s\), or would only then be able to initiate a suitable position in Options, or would be able to understand and estimate how and when his position in Options would be profitable, or what is required to be done in order to make a losing F&O trade a no\-loss or less\-loss trade if the trade has started moving in the direction of loss due to sudden change in the market conditions\. This dynamic nature of Options makes it very unique hedging instrument\. As it empowers and enables a trader to manoeuvre his trade towards the desired objective\.

__Discussions on different Options’ behaviour:__

Let us explore and discuss certain important behavioural aspects of Options, in relation to the following situations:

1. __Basic Options’ Behaviour__
2. __Impact of momentum in the underlying on Options’ premium__
3. __Impact of VIX and Volatility on Options’ Premium __
4. __Intrinsic Value & Time Value in Options’ Premium and Impact of Time Decay \(Theta\) on Options’ Premium__
5. __Delta Values of Options \(*i\.e\. magnitude of change in Options’ pricing of different Options in response to movement in the underlying*\)__
6. __Options’ behaviour upon activation of Expiry Timetrack and on Expiry day, in response to momentum, Volatility & decay \(i\.e\. Theta\) perspective__
7. __Effect on Options pricing due to Discount pricing in Futures and Premium pricing in Futures__
8. __Impact of ITM Options Premium value in Discount than its Intrinsic Value__
9. __Behaviour of Far Month Options immediately after their Born Date __
10. __Behaviour of Stone\-age Options__
11. __Determination of Options price on a future date and on their Expiry__
12. __Trend identification through Options__

The aforesaid are a few important and regular situations which a trader has to face while trading in F&O, and particularly when Options are employed in the trade either in association with a Futures position or cash position or only in Options position\. Therefore, it is important to understand how these factors influences Options and eventually their LTP, so that a trader is able to understand their implications and can accordingly initiate, ride and mange his trading positions\.

__Summary on Options Behaviour__

The LTP of Options is not only determined by their Delta values or merely change in Delta values of Options due to movement in the price of the underlying\. The LTP of Options, besides Delta play \(which occurs on account of movement in the price of the underlying\) are also influenced by various other factors\. The impact on the resultant LTP of Options due to Delta movement gets subdued or overpowered or accelerated due the interplay of various other factors which has the ability to impact the behaviour of Options\.   The impact on the LTP/ premium value of Options, due to interplay of major factors having influence on Options behaviour, is  discussed below:

1. __*Delta values: *__In any Options Chain: \(i\) Delta value of certain ITM CEs matches with the Delta values of certain ITM PEs, between 0\.5 to 1; and \(ii\) Delta value of certain OTM CEs matches with the Delta values of certain OTM PEs, between 0 to 0\.5\. Delta values of ATM CE & PE have a Delta value of 0\.5; and \(iii\) OTM CEs & PEs having same/ close Delta values, would have same/ close LTP values \(or,* OTM CEs & PEs having same/ close LTP values, would have same/ close Delta values*\) and ITM CEs & PEs having same/ close Delta values, would have same/ close LTP values \(or,* ITM CEs & PEs having same/ close LTP values, would have same/ close Delta values*\)\. Any Long or Short Options position on any given Strike, has the Delta value equivalent to the aggregate number of Delta value basis the number of Lots comprised in that position \(eg: *2 Lot ATM Strike will have a Delta value of 1*\)\.
2. __*Momentum in the price of the underlying: *__Momentum in the price of the underlying in upward direction causes the Time Value of CE Options to expand thereby causing rise in the LTP of CEs; and the Time Value in the PE Options to contract, thereby causing reduction in the LTP of PEs\. Likewise, momentum in the price of the underlying in downward direction causes the Time Value of PE Options to expand thereby causing rise in the LTP of PEs; and the Time Value in the CE Options to contract, thereby causing reduction in the LTP of CEs\. Ofcourse, movement in the price of the underlying in any given direction with momentum also activates the Delta play for both CEs & PEs\. Movement in the upward direction of the underlying, will cause shifting of CEs towards higher Delta ITM Strikes and push the PEs towards lower Delta OTM Strikes\. Likewise, movement in the downward direction of the underlying, will cause shifting of PEs towards higher Delta ITM Strikes and push the CEs towards lower Delta OTM Strikes\.
3. __*Rise in Volatility: *__Rise in Volatility causes the Time Value in the Options’ LTPs to expand thereby causing the Options to rise in their LTP value, irrespective of any directional move in the price of the underlying\. However, if rise in Volatility is coupled with a directional move in the price of the underlying, then the favourable side Options gain higher LTPs but Options for which directional move of the underlying is unfavourable may not suffer much deterioration in their LTP\. Thus, if there is rise in volatility along with upward movement of the underlying, then this combination of rise in volatility and upward movement of the underlying will cause the LTP of CEs to significantly rise, but the LTP of PEs may not suffer too much fall because rise in volatility would also swell the Time Value of PE Options too, which may negate the opposite direction movement of the underlying for PEs to some extent depending on the magnitude of rise in volatility\. Likewise,  if there is rise in volatility along with downward movement of the underlying, then this combination of rise in volatility and downward movement of the underlying will cause the LTP of PEs to significantly rise, but the LTP of CEs may not suffer too much fall because rise in volatility would also swell the Time Value of CE Options too, which may negate the opposite direction movement of the underlying for CEs to some extent depending on the magnitude of rise in volatility\. Further, in such situation, Delta shift caused due to movement of the underlying would also play its role in rise/fall in the LTP of Options\.
4. __*Fall in Volatility: *__Fall in Volatility causes the Time Value in the Options’ LTPs to  contract thereby causing the LTP of Options to fall, irrespective of any directional move in the price of the underlying\. However, if fall in Volatility is coupled with a directional move in the price of the underlying, then the favourable side Options loose their LTPs more but Options for which directional move of the underlying is unfavourable may much deterioration in their LTP\. Thus, if there is fall in volatility along with upward movement of the underlying, then this combination of fall in volatility and upward movement of the underlying will cause the LTP of PEs to significantly fall, but the LTP of CEs may not rise much because fall in volatility would cause contraction of the Time Value of CE Options too, which may negate the favourable upward direction movement of the underlying for CEs to some extent depending on the magnitude of fall in volatility\. Thus, PE seller would tend to gain comfortably in this situation than CE buyers\. Likewise, if there is fall in volatility along with downward movement of the underlying, then this combination of fall in volatility and downward movement of the underlying will cause the LTP of CEs to significantly fall, but the LTP of PEs may not rise much because fall in volatility would cause contraction of the Time Value of PE Options too, which may negate the favourable downward direction movement of the underlying for PEs to some extent depending on the magnitude of fall in volatility\. Thus, CE seller would tend to gain comfortably in this situation than PE buyers\. Further, in such situation, Delta shift caused due to movement of the underlying would also play its role in rise/fall in the LTP of Options\.
5. __*Most Impacted Radius Zone of maximum Impact of Momentum / Volatility: *__Rise in momentum in the price change of the underlying or rise / fall in Volatility also impacts the Most Impacted Radius Zone of Options The Options which fall within this Zone are only impacted with the change in  momentum  or Volatility\. Stronger momentum or significant rise in Volatility widens this Zone and reduced Volatility narrows down this Zone\. This Zone gets narrower down, usually with the onset of Expiry Day Timetrack \(i\.e\. one day prior to Expiry\) as far CE & PE OTMs significantly loose their Time Value due to aggressive Theta play near Expiry\. However, strong momentum or rise in Volatility during the period after Expiry Day Timetrack almost until an hour before Expiry may also cause expansion of this Zone more than its usual area\. Stronger the momentum / rise in Volatility will define the area of expansion of this Zone both on or before Expiry day\.
6. __*Impact of momentum/ Volatility in percentage & absolute terms:*__ In reaction to the momentum or change in Volatility, Options in the Most Impacted Radius Zone having lower LTP values gets impacted most in percentage terms and those with higher LTP values gets impacted most in absolute terms\.
7. __*Rangebound movement of the underlying: *__No directional advancement in the price of the underlying but only  rangebound movements, may cause expansion and contraction in the Time Value of Options\. In such situations of price fluctuations in a particular range, expansion and contraction in the Time Value of Options would ultimately lead to erosion in the Time Value and thereby resulting in reduction of LTP of Options\. Neither CE nor PE would get the benefit of rise in LTP, but would suffer LTP loss due to constant fluctuations within a tight range, both due to erosion of Time Value and also due to increase in Theta / time decay with passage of time as the underlying keeps fluctuating within the range and not able to breakout on either side\. There is no Delta benefit, but only Theta decay and erosion of LTP due to price fluctuations, which occurs in such sideways market\. If in such situation, volatility fall occurs then that will even fasten the reduction of LTP, providing best opportunity for Option sellers\. However, if in such sideways market, Volatility is on rise, then before Expiry the Time Value in the LTP of Options may not experience much erosion as the Volatility may swell up the Time Value depending on the extent of rise in Volatility\. However, close to Expiry, Theta decay would start overpowering the rise caused on account of Volatility; and eventually on Expiry all the Time Value irrespective of howsoever it was swelled up due to Volatility, would become zero in all Options\.
8. __*Fluctuations in Volatility: *__Significant fluctuations in Volatility in Options \(or rangebound movement of VIX\), irrespective of the price movement of the underlying \(ofcourse not in momentum though\), may cause expansion and contraction in the Time Value of Options\. In such situations of significant fluctuations in Volatility, expansion and contraction in the Time Value of Options would ultimately lead to erosion in the Time Value and thereby resulting in reduction of LTP of Options\. Neither CE nor PE would get the benefit of rise in LTP or may get very insignificant benefitted due to directional move \(*if movement in the price of the underlying is not moving in momentum, but very sluggishly*\), but would suffer LTP loss due to constant fluctuations of Volatility, both due to erosion of Time Value and also due to increase in Theta / time decay with passage of time\. Even though there may be some Delta benefit due to sluggish/ slow movement in the price of the underlying, but any LTP gained in terms of Time Value \(and not Intrinsic Value\) would get eventually eroded due to erosion of Time Value due to fluctuations in Volatility and ultimately catching up of Theta decay with passage of time\.
9. __*Theta / time decay: *__One thing which is certain in Options behaviour is that the time decay is a factor which keep eroding the Time Value of Options with the passage of time and the pace and quantum of Theta increases phenomenally as the Expiry of relevant Options draws near due to activation of firstly Timetrack in Expiry Series and then Expiry Day Timetrack\. Consequently, as a result of Theta play, the Time Value comprised in the LTP of all Options would become zero on their relevant Expiry\. Irrespective of any other factor the aforesaid fact remains certain\. The Time Value in Options until Expiry, may increase or decrease depending on the element of moneyness carried in the Options, rise/ fall in momentum or volatility etc\.; but Theta decay would keep performing its role until Expiry and by Expiry the Time Value would erode, such that the ATMs and the OTMs expire worthless \(i\.e\. their LTP becoming zero\) on Expiry and the LTP of all ITMs reduced to the extent of their Intrinsic Value\. Thus, by Expiry, howsoever any Options may have got impacted due to rise in Volatility or momentum in the price of the underlying, if such Option is an ATM or OTM on Expiry then it’s LTP/premium would become zero on  Expiry\. That’s a certain thing about Options\.
10. __*Theta Value: *__In any given Options Chain, the Theta value is maximum at ATM CE & PE\. We can observe that the Theta value of same Strike Options are nearly same/ close\-by\. Further, Theta value decreases from ATM towards deeper ITMs and OTMs for both CEs & PEs\. Moreover, there are close\-by / same Theta values between ITMs & OTMs on CE sides, as well as in the PE side\. Also, there are close\-by / same Theta values between OTMs on CE sides and OTMs on the PE side; and likewise there are close\-by / same Theta values between ITMs on CE sides and ITMs on the PE side\. An Options trade can be planned by exploring the Theta values of Options\.
11. __*Theta play near Expiry day: *__Upon activation of Expiry Day Timetrack, deep ITM and deep OTMs exhibit maximum depletion in their Time Value, and the time decay causes strong erosion from deep OTMs towards ATM and from deep ITM towards ATM\. Further, on Expiry day, due to strong impact of Theta / time decay: \(i\) Far OTMs very quickly loose their Time Value and rapidly becomes zero \(i\.e\. expire\) either on the opening of Expiry day or during the first half of the Expiry; and \(ii\) deep ITMs by noon on Expiry day tend to rapidly loose their Time Value and are left with only Intrinsic Value \(i\.e\. they become Synthetic Futures\)\.
12. __*Momentum overriding Theta effect: *__While, Options are subject to Theta decay each day as Expiry approaches near, however, the day\(s\) when there is a strong momentum in the price of the underlying, Options to which the direction of momentum is favourable do not get impacted by Theta decay while the momentum is on and their LTP rises on account of favourable momentum inspite of the Theta decay\. Even on Expiry or near Expiry too, if there is a sudden gush of directional momentum, then the Options to which the direction is favourable rise in their LTP values inspite of the operating strong Theta decay\. Thus, if the momentum arrives/ continues near Expiry, then the Options to which the direction of momentum is favourable may not loose as much Time Value even due to Expiry Timetrack as they otherwise do on regular days under Expiry Timetrack\. However, having said above, inspite of the momentum on Expiry, eventually the LTP of ATMs and the OTMs would become zero on Expiry and the LTP of ITMs would be reduced to their respective Intrinsic Value \(due to erosion of Time Value\) on Expiry\.
13. __*Rise in Volatility overriding Theta effect: *__While, Options are subject to Theta decay each day as Expiry approaches near, however, the day\(s\) when there is a strong rise in Volatility, then the Options may not get impacted by Theta decay while the Volatility is high or in rising state and consequently Options’ LTP rises on account of rise in Volatility inspite of the Theta decay\. Even on Expiry or near Expiry too, if there is a sudden rise of Volatility, then the Options would rise  in their LTP values \(or do not undergo decline of LTP values\) inspite of the operating strong Theta decay\. Thus, if the Volatility rises / continues to rise near Expiry, then the Options may not loose as much Time Value even due to Expiry Timetrack as they otherwise do on regular days under Expiry Timetrack\. However, having said above, inspite of the rise in Volatility on Expiry, eventually the LTP of ATMs and the OTMs would become zero on Expiry and the LTP of ITMs would be reduced to their respective Intrinsic Value \(due to erosion of Time Value\) on Expiry\.
14. __*Overriding effect of momentum, Volatility and Theta:*__ Depending on whether the momentum in the price of the underlying is stronger or the rise/fall in Volatility is stronger, the LTP/ premiums would get accordingly impacted so long the momentum/ volatility effect is lasting\. During such times the rise in momentum and/or the rise/fall in Volatility is active, the impact of momentum and/or Volatility on Options even override the Theta impact on Options, especially on the Most Impacted Radius Zone, as may be applicable before or on Expiry\. However, irrespective of the effect of Volatility or momentum before Expiry, eventually Theta overpowers and prevails by close of Expiry, whereby the Time Value in all Options becomes zero causing LTP of ATM & OTMs to become zero and the LTP of ITMs reduced to their Intrinsic Value\. 
15. __*Impact of Delta, Theta, Volatility and momentum in closer Expiry series versus farther Expiry series: *__Same strike Options, between closer Expiry series versus farther Expiry series, demonstrate the following Options behaviour:
16. Same Strike of closer Expiry series have lower LTP values and the farther Expiry series Option has higher LTP value, due to more Time Value component in the LTP of farther Expiry series both in percentage terms \(to their respective LTPs\) and in absolute terms\.
17. Delta value of same Strike ITM Options decrease from closest Expiry series towards farther Expiry series; and Delta value of same Strike OTM Options increase from closest Expiry series towards farther Expiry series\.
18. Impact of momentum in the underlying price or change in Volatility is more in percentage terms in the closer Expiry series than the farther Expiry series \(within the respective most Impacted Radius Zone\)\. However, the impact of momentum in the underlying price or change in Volatility is more in absolute terms in the farther Expiry series than the closer Expiry series \(within the respective most Impacted Radius Zone\)\.
19. Theta value of same Strike Options decrease from closest Expiry series towards farther Expiry series, as the farther Expiry series has more time for expiry hence slower Theta/ time decay in farther Expiry than those with closer expiry\.
20. Current Weekly Expiry series has Expiry Timetrack activated \(i\.e\. high Theta play\) than subsequent Weekly series of Expiry\. Likewise, Current Monthly Expiry series has Expiry Timetrack activated \(i\.e\. high Theta play\) than subsequent Monthly series of Expiry
21. __*Futures making gap with Spot, impacts Options pricing*__: If the relevant Futures starts trading at a exorbitant premium that the Spot value of the underlying or if the Futures starts to trade in discount from the Spot value, then the likely adjustment of Futures pricing towards its Spot value \(to maintain normal gap / differences with Spot value\) will also impact the Premium value of Options, in the following manner:
22. Adjustment of Futures \(when trading in exorbitant Premium to Spot\) toward Spot value, causes Futures premium to reduce to match the normal gap limit with Spot\. This movement of Futures causes rise in Premium value of relevant PEs\. Thus, indicative of short\-term bearish move in the underlying\.
23. Adjustment of Futures \(when trading in discount to Spot\) toward Spot value, causes Futures price to rise higher to match the normal gap limit with Spot\. This movement of Futures causes rise in Premium value of relevant CEs\. Thus, indicative of short\-term bullish move in the underlying\.
24. __*Deep ITM in Discount to its Intrinsic Value*__: If the relevant Futures is trading at its normal premium value to Spot value, and during such times it is observed that deep ITM liquid CEs or PEs of Current Week Expiry series or Current Month Expiry series are trading at a Premium value which is less than its Intrinsic Value \(i\.e\. ITM CE or PE is in discount\), then this situation is completely against the settled mechanism of Options pricing \(as per which, an ITM Options pricing should be higher than its Intrinsic Value\)\. In such situations the following trading opportunities may arise:
25. if such deep ITM CEs appear in discount to its Intrinsic Value, both from Spot and Futures, then it is likely that CEs would adjust their Premium value to get higher than their Intrinsic Value\. This adjustment towards its pricing, would cause rise in the Premium value of CEs, and thus give rise to a trading opportunity for Long CE positions\. This trading opportunity if appears on Expiry day of Options, then it can generate exponentially high profits for a trader, if exploited carefully\.
26. Similarly, if such deep ITM PEs appear in discount to its Intrinsic Value, both from Spot and Futures, then it is likely that PEs would adjust their Premium value to get higher than their Intrinsic Value\. This adjustment towards its pricing, would cause rise in the Premium value of PEs, and thus give rise to a trading opportunity for Long PE positions\. This trading opportunity if appears on Expiry day of Options, then it can generate exponentially high profits for a trader, if exploited carefully\.
27. __*Extreme erosion in Premium value in shortest span of time:* __Far OTM liquid Options of freshly born Far Month Expiry series, exhibit extreme erosion \(upto 50% to 70% or so\) in their Premium value, within 7\-10 days from its born date\. This phenomenon is exhibited in those Options which are opposite to the current trend i\.e\. if trend is bullish then such extreme erosion would be exhibited by Far OTM liquid PE Options of freshly born Far Month Expiry series; and if trend is bearish then such extreme erosion would be exhibited by Far OTM liquid CE Options of freshly born Far Month Expiry series\. This phenomenon makes these Far OTMs an ideal candidate for taking Shorting positions to benefit from premium erosion in a very short span of holding period \(7\-10 days\)\. 
28. __*Stone\-age Options experience least decay*__: Far OTM liquid Options of Next Month Expiry series, with premium value of certain range \(*viz\. 40\-60 for Nifty Options and 60\-100 for BankNifty Options*\) are seen to exhibit very slow decay; thus making them most suitable for playing Long Options trade with relatively longer positional holding, to target expected momentum in the underlying\.
29. __*Determination of  Options’ Premium value on a future date  during its lifetime*__: The Premium value of any given Option Strike, in response to movement in the underlying upto a target level, during the lifespan of an Option can be determined as follows: 
30. In case of an expected upward movement in the underlying, the Premium value of any CE Option Strike would increase and match approx\. the same Premium value as that of a lower CE Option \(i\.e\. towards CE ITM side\) which is lower by that many points by which underlying is expected to move upwardly from the current level\. In case of such upward movement in the underlying, the Premium value of any PE Option Strike would decrease and match approx\. the same Premium value as that of a lower PE Option \(i\.e\. towards PE OTM side\) which is lower by that many points by which underlying is expected to move upwardly from the current level\.
31. In case of an expected downward movement in the underlying, the Premium value of any PE Option Strike would increase and match approx\. the same Premium value as that of a higher PE Option \(i\.e\. towards PE ITM side\) which is higher by that many points by which underlying is expected to move downwardly from the current level\. In case of such downward movement in the underlying, the Premium value of any CE Option Strike would decrease and match approx\. the same Premium value as that of a higher CE Option \(i\.e\. towards CE OTM side\) which is higher by that many points by which underlying is expected to move downwardly from the current level\.  
32. __*Determination of  Options’ Premium value on its Expiry*__: The Premium value of any given Option Strike, upon its Expiry is fixed and can be determined as follows:
33. final Premium value of all CE OTMs and PE OTMs, on their Expiry, would be zero\.
34. final Premium value of both CE ATM and PE ATM, on their Expiry, would be zero\.
35. final Premium value of all CE ITMs and PE ITMs, on their Expiry, would be equal to its Intrinsic Value only \(which is the difference between the ATM Strike and the given ITM Strike\)\.
36. __*Determination of  current broad trend in the underlying using Options*__: Options can also be used to identify the broader current trend for any given underlying, in the following manner: 
37. If the deep liquid ITM CE Option of Next Month / Current Month Expiry series is below its born AVWAP on Daily TF, then the broader trend is bearish and if such CE Option is trending above its born AVWAP on Daily TF, then the current trend is bullish\. 
38. Similarly, if the deep liquid ITM PE Option of Next Month / Current Month Expiry series is below its born AVWAP on Daily TF, then the broader trend is bullish and if such PE Option is trending above its born AVWAP on Daily TF, then the current trend is bearish\.

Thus, understanding different behavioural aspects of different Options in response to volatility, momentum, time decay, Expiry etc\. are absolutely essential for an Options trader\. Knowledge about these Options’ behavioural aspects offers a wide range of trading opportunities to traders and the adaptability to harness change in market dynamics by employing suitable Strategies based on different behavioural aspects of Options\.

__Implications / consequences on Options’ behaviour from the perspective of their Intrinsic Value__

The Intrinsic Value in Options have the following implications / consequences on Options’ behaviour:

1. __All ITM Options are immune to the time decay to the extent of Intrinsic Value they carry in their LTPs__\. This advantage is not available to the ATM and OTM Strikes, from Expiry perspective\. Thus, on Expiry, since Time Value comprised in all the Options would become zero, therefore, only ITM Options would be left with a final value of LTP equivalent to the Intrinsic Value found on Expiry in their respective LTP\. 
2. __Since deeper ITMs have more Intrinsic Value, therefore, they are exposed to less erosion in their LTP values due to time decay__, and also their final LTP values on Expiry are higher than that of ITM strikes with lesser Intrinsic Value\.  
3. In the journey of an Option before Expiry, if __an Option moves deeper in\-the\-money then its LTP rises on account of rise in Intrinsic Value and reduction of Time Value in its LTP__\. The deeper the Option would move in\-the money, the more Intrinsic Value gets added up and the Time Value keeps decreasing\.
4. __Deeper in\-the\-money we may find Options, having almost negligible Time Value and the entire LTP value is comprised almost of Intrinsic Value__ \(i\.e\. 98% or more of Intrinsic Value\)\. Such deep ITM Options, which have negligible Time Value and almost full extent of Intrinsic Value in its LTP are found in the Options Chain near the Delta Value of 1\. Such Options with almost 100% Intrinsic Value \(i\.e\. having close to 1 Delta\) behave like Futures i\.e\. as Futures LTP is almost directly proportional to the price change in the underlying \(i\.e\. *if the underlying moves 5 Rs up then Futures also rise 5 rs\. up; and if the underlying drops 2 Rs then the Futures LTP also drops by 2 Rs\.*\), likewise, these Options also behave in the same fashion to the change in the price of the underlying\. Such Options are referred to as __Synthetic Futures__\. By employing Synthetic Futures instead of Futures, a trader can avoid the large margin requirement and MTM maintenance as applicable on Futures; and exploit the Unlimited Reward situation with maximum Delta advantage with relatively lesser margin cost through Synthetic Futures\.
5. Deeper ITMs may have liquidity issues, therefore, for creating any position in such ITMs liquidity must be checked\.
6. As the Expiry draws near, all the Options including ITM options tend to loose their Time value quickly\. Thus__, on the day of Expiry \(Thursday\), we would find Synthetic Futures as near ITM Options \(and not too deep in\-the\-money\)__\. Also, __on the Expiry day, near OTM Options get impacted the most \(in percentage terms\) with momentum in the price of the underlying__\. On Expiry day, even a small favourable momentum causes the LTP of these near OTM Options to rise phenomenally in percentage terms; and near ITMs to rise phenomenally in absolute terms\.    

__Trade Plan in view of Options behaviour from the perspective of Time Value__

Because of the behaviour exhibited by Options from the perspective of Time Value, a trader may plan the trade in the following manner:

1. __Can play rise in Volatility and rise in momentum in the price of the underlying, by buying Options within the Most Impacted Radius Zone__\. Can initiate Longs in Options in favourable direction of the underlying, using either deep OTM Options to exploit maximum profit in percentage terms or by creating position in deep ITMs for exploiting maximum profit in absolute terms\.
2. __Can play fall in Volatility by selling deep OTM Options on the periphery of the Most Impacted Radius Zone__\. Can initiate Shorts in Options in favourable direction of the underlying, using deeper OTM Options to exploit maximum profit by harnessing maximum decay in the Time Value by taking positions suitably on the periphery of the Most Impacted Radius Zone\.
3. __Can play for 100% assured time decay of OTM Options on Expiry, by selling Far OTM Options outside the Most Impacted Radius Zone__\. Can consider initiating Short positions in Options in favourable direction of the underlying or can Short Far OTMs on both CE & PE sides in case of a rangebound market, to exploit maximum profit by harnessing 100% assured time decay in the Time Value of the OTMs on Expiry\. Further, such Short positions must be created suitably outside the Most Impacted Radius Zone, as it will help the Short position to be relatively immune to the rise in Volatility or rise in momentum in the unfavourable direction to the Short positions \(which can expose Shorts to Unlimited Risk situation\)\.
4. __Can play for erosion in Time Value due to fluctuations in the price of the underlying within a tight range__\.__ __In such situations, a trader may initiate Short Straddle on ATM or near ATM Strike \(selling both CE & PE at the same Strike level\) to take advantage of reduction in LTP of both CE & PE due to erosion of Time Value in the LTP of both CE & PE caused due to fluctuations in the price of the underlying in a tight range\. This is because Time Value at the ATM Strike is highest, therefore, erosion is maximum at the ATM Strike due to fluctuations in the price of the underlying in a tight range\.
5. __Options Long positions can also be initiated in farther Expiry series, in order to dodge quicker erosion in LTP__ due to time decay\. *For example, for a positional Option buy trade for 30 days period in mind, one can consider buying Far Month Expiry series having 90 Days to expiry\. This will give trader the benefit of lower Theta on his Long Options trade\.*
6. To __exploit the benefit of high Theta in near Expiry Options__, a trader can create Short Options’ position in OTM Options of near Expiry series offering reasonable credit of premium, to benefit from quicker decay in closer expiry series\.
7. A __deep ITM with around 80% Intrinsic Value and around 20% Time Value also exhibit a typical behaviour i\.e\. when such deep ITM becomes even deeper or with the approach of Expiry closer, it tends to loose its Time Value and is gradually left with mostly Intrinsic Value only by Expiry__\. This property can be harnessed in a mid\-rangebound market situation\. Thus, a trader can also exploit such opportunities by Shorting such deep ITM to exploit benefit from the decay of 20% Time Value contained in such deep ITMs as they are expected to move even deeper in\-the\-money or to remain more or less within a range resulting in erosion of Time Value with the approach of Expiry\.
8. The __effect of time decay, starting from one day prior to Expiry \(i\.e\. Wednesday afternoon onwards, for Nifty and Thursday afternoon onwards for BankNifty Options\) until the Expiry day \(i\.e\. Thursday, for Nifty and Friday for BankNifty Options\)__ can also be played out differently\. During this period the time decay is super fast than on other regular days\. On the day of Expiry, since Far OTM Options are the first to become zero; thus this can also be a preferred bet for Options seller\.

__Significance of Intrinsic Value and Time Value in different Options \(ITM, ATM & OTM\)__:

1. Both CE & PE ATM Strikes and all CE & PE OTMs have 100% Time Value and no Intrinsic Value in their LTPs\. The Intrinsic Value is found only in the LTPs of ITM Strikes of both CE & PE sides\.
2. Intrinsic Value in ITMs, increases as we go deeper in\-the\-money Strikes, for both CEs & PEs; and the component of Time Value decreases as we go deeper in\-the\-money Strikes for both CE & PE\. 

<__start__>__Example__: Have a look at the part extract of the Options Chain of Nifty for September Monthly Expiry, exhibiting LTP values and Intrinsic Value and Time Value of CE & PE Options \(*as on Sep 02, 2022 EOD data*\): __<img12>\. __

We can observe the following information and patterns in the aforesaid Options Chain:

1. ATM strike is at 17550 \(*September Futures being at 17558*\)
2. The LTP/ premium on CE side progressively increases from deep OTM \(Rs 84\) towards deep ITM \(Rs\. 811\)\. The LTP/ premium on PE side progressively increases from deep OTM \(Rs 118\) towards deep ITM \(Rs\. 723\)\. Thus, it can be said that __LTP/ premium of Options progressively increases from deep OTM towards deep ITM__\.
3. __There is no Intrinsic value in the OTMs of both CE & PE__\. All OTM Options in any given Options Chain have only Time Value in its LTP\. Thus, it can be said that __all OTM Options, in any given Options Chain, in percentage terms have 100% Time Value__\.
4. The __Time Value increases in absolute terms, from deep OTM towards ATM Strike, for both CE & PE__\. 
5. Time Value is maximum at the ATM CE Strike \(329\), amongst all the CEs in the Options Chain\. Time Value is maximum at the ATM PE Strike \(331\), amongst all the PEs in the Options Chain\. Thus, it can be said that the __ATM Strikes carry the maximum Time Value in absolute terms in any given Options Chain__\.
6. Intrinsic Value increases with the rise in LTP from ATM towards deep ITM, for both CE & PE\. 
7. Intrinsic Value for ITM CEs shows progressive increase from 58 to 708 as we go deep in\-the\-money\. While, Time Value for ITM CEs shows a progressive decline from 307 to 103 as we go deep in\-the\-money\.
8. Intrinsic Value for ITM PEs shows progressive increase from 41 to 641 as we go deep in\-the\-money\. While, Time Value for ITM PEs shows progressive decrease from 318 to 81 as we go deep in\-the\-money\.
9. Thus, it can be said that the __Intrinsic Value progressively increases  in both absolute terms and percentage terms, as we move deeper in\-the\-money from the ATM__, for both CEs & PEs\. Also, the  __Time Value progressively decreases in both absolute terms and percentage terms, as we move deeper in\-the\-money from the ATM__, for both CEs & PEs\. <__end__>  

__The Time Value in Options and decay of Time Value have the following implications / consequences__:

1. Every day there is some decay of the Time Value in all Options, which occurs for sure from the Time Value each day until Expiry\. This time decay is different in different Options in any given Options Chain\. The time decay of different Options is measured by a Greek called Theta\. The Theta values of Options are provided in the Options Chain as provided and by the brokers on their trading terminal\. The __Theta value for an Option signifies that amount of money which will be lost by the passing of 1 day, if there is no other change in any other factor which may influence the LTP of Options__\. 

*<*__start__*>*__*Example*__*: If an ATM CE \(with a LTP of 358\) has a Theta value of 168, then if there occurs no change in the price of the underlying or in volatility etc\. then due to the impact of time decay on the Time Value, 1 Lot pf this ATM would experience a decay of 168 points from its LTP with the passage of 1 day \(i\.e\. on coming closer to its Expiry by 1 day\)\.  For a position comprising of 10 Lots on this ATM CE, would yield a decay of 168 x 10 = 1680 points loss / decay on passage of 1 day with all other factors remaining constant\. <*__end__*>*

1. In any given Options Chain, Theta value is maximum at ATM CE & PE\. Further, the Theta value decreases from ATM towards deeper ITMs and OTMs for both CEs & PEs\. Also, Theta value for both CE and PE Option at the same Strike level of a given Expiry are always same\. Moreover, there are close\-by / same Theta values between ITMs & OTMs on CE sides, as well as in the PE side\. Also, there are close\-by / same Theta values between OTMs on CE sides and OTMs on the PE side; and likewise there are close\-by / same Theta values between ITMs on CE sides and ITMs on the PE side\.
2. The fact that Theta value is maximum at ATM/ near ATM Options and Theta value decreases from ATM towards deep ITM & OTMs \(for both CE & PE sides\), the following patterns are usually found in any given Options Chain:
3. __there is a progressive percentage increase in decay/ loss from ATM towards deep OTMs, for both CE & PE sides, __because as we move towards deep OTM from ATM, the Time Value progressively decreases in absolute number \(and so does the LTP\) and the Theta value \(*even though decreases in absolute number from ATM towards deep OTM*\) progressively increases in proportion to the Time Value\. Further, as the Expiry draws near, the Theta value rises in quantum and pace particularly in deep OTMs; consequently, the Theta value tends to rise significantly as a proportion to the Time Value/ LTP causing much depletion of Time Value in deep OTMs with the approach of Expiry\. Thus, deep OTMs experience faster depletion of Time Value with the approach of Expiry, due to aforesaid Theta effect, than near OTMs\.
4. __there is a progressive decrease in absolute terms, in decay/ loss from ATM towards deep ITMs, for both CE & PE sides, __because as we move towards deep ITM from ATM the Time Value progressively decreases in absolute number and therefore the Theta value \(*which also decreases in absolute number from ATM towards deep ITM*\) on net\-off basis to Time Value progressively decreases in absolute terms\. Further, as the Expiry draws near, the Theta value rises in quantum and pace; consequently, the Theta value in deep ITMs tend to deplete much of the Time Value with the approach of Expiry\.__ __Thus, deep ITMs experience faster depletion of Time Value with the approach of Expiry, due to aforesaid Theta effect, than near ITMs\.
5. Therefore, as the Expiry draws near, the Time Value erosion due to time decay, in terms of maximum depletion, takes place from deep OTMs towards ATM and also from deep ITMs towards ATM\.  
6. Since __time decay impacts the Time Value in the LTP of Options__, therefore, Theta \(*value denoting time decay/ erosion*\) is maximum at the ATM Strikes & near ATM Strikes of ITMs & OTMs in any given Options Chain\. This is because, in the near OTMs and ATM Strikes, the Time Value in absolute number terms is quite higher than deep OTMs\. Likewise, in the near ITMs the Time Value in absolute number & percentage terms is quite higher than deep ITMs\. Therefore, Theta value decrease as we move from ATM Strike, deeper towards ITM and OTM strikes, for both CE & PE Options of an Options Chain\.
7. With the passage of time towards Expiry, the Time Value of all the Options \(ITMs to OTMs, for both CEs & PEs\) automatically undergoes erosion, consequently resulting in reduction in the LTP value of the Option\. __The decay in the Time Value becomes even quicker as the Expiry draws near__\. Theta value rapidly increases as the Expiry draws near\. 

*<*__start__*>*__Example__: As an illustration, have a look at the Theta values as per the extract of the Options Chain for BankNifty Options for its weekly Expiry series of Sep 22, 2022 at the EoD as on Sep 21, 2022 \(i\.e\. on Wednesday, a day before Expiry, as applicable before July 2023\), as given here: __<img13>__

The Theta value is maximum at ATM CE & PE \(i\.e\. 168\)\. We can observe that the Theta value is decreasing from ATM towards deeper ITMs and OTMs for both CEs & PEs\. Moreover, there are close\-by / same Theta values between ITMs & OTMs on CE sides, as well as in the PE side\. Also, there are close\-by / same Theta values between OTMs on CE sides and OTMs on the PE side; and likewise there are close\-by / same Theta values between ITMs on CE sides and ITMs on the PE side\. *<*__end__*>*

1. __On Expiry, the Time Value of all Options become zero, consequently, the LTP of ATM and OTM Options \(for both CEs & PEs\) reduces to zero on Expiry; and the LTP of ITM Options reduces to the Intrinsic Value__ comprised in the LTPs of the CE & PE ITMs\.
2. __Time decay is more in closer Expiry series than the farther Expiry series\.__ Therefore, Theta Value of a same Strike Options, would be more in case of closer Expiry  Option and would be lesser in case of a farther Expiry \(*this is because, farther Expiry Option has *more* time to its Expiry than the one with closer Expiry*\)\. *For example, current week Nifty Option will experience more decay than the same Option Strike with next week Expiry series\. Likewise, next week Expiry series will experience more decay than the monthly Expiry series as so on\. *
3. Also, in farther Expiry series Option, even though their LTP comprise of relatively more Time Value as compared to a closer Expiry same Strike Option, the erosion due to time decay would be slower \(*hence lower Theta*\) as farther Expiry Option has more time to Expiry\.
4. If price of an underlying fluctuates in a tight range, then such __up & down movement in the price of the underlying causes up & down movement in the LTP of Options which results in erosion of the Time Value comprised in the Options__\. Since, Time Value at the ATM Strike is highest, therefore, erosion is maximum at the ATM Strike due to fluctuations in the price of the underlying in a tight range\.
5. Thus, __time decay is a friend of Options seller and an enemy of Option buyer__\. For an Options buyer, even if his Long position just before expiry is higher than the buying price on Expiry, but expires as an ATM or OTM, then its LTP will become zero on Expiry\. On the other hand, if Options sellers’ Short position is giving a loss because the LTP is higher than the selling price, but if the Short position Strike expires as an ATM or OTM, the seller will gain the entire premium collected by him\. Consequently, from Expiry perspective, an Options buyer need to ensure that the Expiry happens beyond his Breakeven Strike and an Options seller need to be mindful that the price of the underlying must not breach his relevant Breakeven Strike by Expiry\.
6. __Volatility and momentum in the price of the underlying impacts the Time Value comprised in the Options__\. Consequently, the CEs & PEs falling in the Most Impacted Radius Zone, with more of Time Value in their LTP as compared to more of Intrinsic Value, get more severely impacted in percentage terms\. Thus, ATM & OTM Strikes, falling in the Most Impacted Radius Zone get relatively more severely impacted in percentage terms with the effect of Volatility and momentum in the price of the underlying than the ITM Options \(which get more impacted in absolute terms, because they carry higher LTP values, than the ATM & OTM Strikes\)\.
7. On Expiry day, ATM and OTM Options would become zero, and consequently, the Time Value starts to rapidly fall from the deep OTM Options towards ATM Options as well as from deep ITM towards ATM\. Thus, __on Expiry, the Far OTM Options very quickly loose their Time Value and rapidly becomes zero__ \(i\.e\. expire\) either on the opening of Expiry day or during the first half of the Expiry\. Due to this reason, __on the Expiry day, Far OTM Options do not get impacted or are negligibly impacted with momentum in the price of the underlying or change in Volatility\.__

__Premium / LTP Value of same Strike Options from closest Expiry series towards farthest Expiry series__

1. The Premium / LTP value of same Strikes \(for each of CE & PE Options\) progressively increases as we move from closest Expiry series towards farthest Expiry series \(*for example, as we move from current weekly expiry to next week expiry to monthly expiry and then to next month expiry to far month expiry series, the LTP of any given CE or PE Strike keep on progressively increasing as found in the relevant Options Chain*\)\. This progressive rise in the LTP value, in the relatively farther Expiry series, is largely due to increased Time Value component in the same Strike of higher Expiry series\. Let us examine this aspect for a given Strike for both CE & PE sides\. 

<__start__>__Example__: As illustration, we have reproduced below the LTP Values and Intrinsic Value and Time Value for 17000 & 18000 Strikes in relation to both CE & PE Options, as per the data available in the Options Chain of different Expiry series of Nifty \(*as available on Sep 02, 2022 EOD data*\) starting from current week Expiry series of Nifty for Sep 8, 2022 until Far Month Expiry series of Nifty Nov 24, 2022 \(as available on the trading terminal of a broker\): __<img33>\. __We can observe the following information and patterns from the real data in this Table here, containing the LTP, Intrinsic Value & Time Value for an ITM & OTM Strike of CE & PE Options and the relevant ATM Strike, as appearing in the Options Chain of different Expiry series of Nifty, besides the Futures’ LTP of the relevant Expiry series \(*as of Sep 02, 2022 EOD*\):

1. Most current Expiry is weekly Expiry of Sep 8th, 2022\. Thereafter, there is next week Expiry of Sep 15th and thereafter Sep 22nd weekly Expiry\. Since, Sep 29th is the last Thursday of the month, therefore, this Expiry series will be reckoned as Current Month Expiry series \(and not part of weekly series\)\. For this reason, Sep 29 Expiry will exhibit properties of Current Month Expiry and not that of weekly series Expiry\. Then, we have Next Month Expiry series of Oct 27, and thereafter Far Month Expiry series of Nov 24, 2022\. Thus, in the weekly series, there are 3 weekly series and in monthly expiry series there are 3 months Expiry series\. Further, against each of these Expiry series, we have also mentioned the applicable Futures Expiry series, which should be used to do calculations on Options pertaining to that relevant month’s Expiry series\.
2. It is seen that the ATM Strike is at a higher Strike level for each of the Monthly expiry series \(i\.e\. for current Sep Month expiry, the ATM Strike is at 17550; for Next month Oct Expiry, it is at 17600; and for Far Month Nov Expiry, ATM Strike is at even higher Strike level of 17700\. This shift in ATM for higher Expiry monthly series, is because of difference in the Futures LTP for each of these monthly series of Futures expiry \(Sep Fut is at 17558; Oct Fut is at 17611 and that of Nov Fut is at 17679\)\. Thus, __calculation of Options for a given Expiry series should be done as per the prevailing Futures value for that relevant Expiry series__\. 
3. On CE side, the LTP of 17000 ITM and 18000 OTM, progressively increases as we move towards farther Expiry series\. On PE side too, the LTP of 17000 OTM and 18000 ITM, progressively increases as we move towards farther Expiry series\. Thus, it can be said that the __LTP of the same Strikes progressively increases as we move towards farther Expiry series__\.
4. For 17000 ITM CE: \(a\) the LTP of weekly expiry series rises from 554 \(*Sep 8 series*\) to 720 \(*Sep 22nd series*\); and \(b\) the LTP of monthly expiry series rises from 704 \(*Sep 29 series*\) to 1016 \(*Nov 24 series*\)\. Note here that: Sep 29th expiry series has LTP of 704, which is lower than the 720 LTP of Sep 22nd weekly expiry series – this is because Sep 29th series will not be reckoned as part of weekly series but part of the monthly expiry series\. Hence, Sep 29thexpiry series, will exhibit properties as part of / in conjunction with the monthly series and not as part of the weekly series \(which for Sep month ends with Sep 22nd  weekly series\)\. Thus, it can be more aptly concluded that: __there is progressive rise in LTP of same Strike in the weekly expiry series as we move towards farther weekly series of expiry__; and also __there is progressive rise in LTP of same Strike in the monthly expiry series as we move towards farther monthly series of expiry__\. 
5. It can be observed that for both 17000 ITM CE and 18000 ITM PE: the absolute number of Intrinsic Value rises with the rise in LTP of the same Strike ITM Option, as we move towards farther Expiry series\. However, it is pertinent to note here that: even while the Intrinsic Value of a farther expiry same Strike ITM Option seems to be relatively higher in absolute terms, but its Intrinsic Value progressively decreases in percentage terms to the respective LTP value, as we move towards the farther expiry series\. For 17000 ITM CE: Intrinsic Value drops from 95% \(*as part of its relevant LTP*\) in the most current weekly expiry, to 66% \(*as part of its relevant LTP*\) for the far month Expiry series\. Likewise, for 18000 ITM PE: Intrinsic Value drops from 95% \(*as part of its relevant LTP*\) in the most current weekly expiry, to 42% \(*as part of its relevant LTP*\) for the far month Expiry series\. Thus, it can be concluded that the __moneyness / Intrinsic Value in the LTP of the same Strike ITM Option, progressively decreases in percentage terms \(i\.e\. as ratio to the LTP value\) as we move towards farther Expiry series__\.
6. Further, it can be observed that for both 17000 ITM CE and 18000 ITM PE: the Time Value rises with the rise in LTP of the same Strike, in absolute terms, as we move towards farther Expiry series\. However, it is pertinent to note here that: while the Time Value for the same Strike ITM Option of a farther expiry seems to be relatively higher in absolute terms, the Time Value even more progressively increases in percentage terms to the respective LTP value, as we move towards the farther expiry series for the same Strike ITM Option\. For 17000 ITM CE: Time Value rises from 25 points \(i\.e\.* from 5% as part of its relevant LTP*\) in the most current weekly expiry, to 336 \(i\.e\.* 33 % as part of its relevant LTP*\) for the far month Expiry series\. Likewise, for 18000 ITM PE: Time Value rises from 20 points \(i\.e\.* from 5% as part of its relevant LTP*\) in the most current weekly expiry, to 433 \(i\.e\.* 58 % as part of its relevant LTP*\) for the far month Expiry series\. Thus, it can be concluded that the __Time Value / Extrinsic Value in the LTP of the same Strike ITM Option, progressively increases, both in absolute terms as well as in percentage terms \(i\.e\. as ratio to the LTP value\), as we move towards farther Expiry series__\. <__end__>
7. <__start__>Also, in the Table given here: __<img33>__

If we have a closer look on the change in LTP, Intrinsic Value and the Time Value for the same Strike 17000 ITM CE and 18000 ITM PE Options from near to farther series of expiry, we note the following remarkable observations:

1. LTP of 17000 ITM CE rose from 554 to 1016, if we compare LTP for the most near Sep 8th current week expiry to November far month expiry series\. This rise in LTP is of 462 points \(over Sep 8th series LTP value\) which is almost 83% rise in the LTP of 17000 ITM CE between the two expiry series\. 
2. The Intrinsic Value of 17000 ITM CE rose progressively in absolute number terms from 529 to 679 between the two aforesaid expiry series\. This rise in Intrinsic Value is of 150 points \(over Sep 8th series Intrinsic Value\) which is almost 28%\. Also, the Intrinsic Value of 17000 CE, has progressively declined in percentage terms to their respective LTP value as well \(from 95% to 66%\)\.
3. The Time Value of 17000 ITM CE rose from 25 to 336 between the two aforesaid expiry series\. This rise in Time Value is of 311 points \(over Sep 8th series Time Value\) which is almost whooping 1244%\.
4. Likewise, LTP of 18000 ITM PE rose from 490 to 754, if we compare LTP for the most near Sep 8th current week expiry to November far month expiry series\. This rise in LTP is of 264 points \(over Sep 8th series LTP value\) which is almost 53% rise in the LTP of 18000 ITM PE between the two expiry series\. Whereas, the Intrinsic Value of 18000 ITM PE have progressively declined in absolute number from 470 to 320 between the two aforesaid expiry series\. This decline in Intrinsic Value is of 150 points \(over Sep 8th series Intrinsic Value\) which is almost 32% from the LTP value of the most current expiry series\. Also, the Intrinsic Value of 18000 PE, has progressively declined in percentage terms to their respective LTP value as well \(from 95% to 42%\)\. Finally, the Time Value of 18000 ITM PE rose from 20 to 433 between the two aforesaid expiry series\. This rise in Time Value is of 413 points \(over Sep 8th series Time Value\) which is almost whooping 2065%\.
5. Therefore, looking at the aforesaid changes to the LTP values, Intrinsic Value and Time Value of same Strike ITM Options, it can be said here that the __rise in LTP of the same Strike ITM Options, from near to far Expiry series, is largely due to exponential increase in Time Value \(both in absolute and percentage terms\) and exponential reduction of Intrinsic Value in percentage terms to their LTP__\. <__end__>
6. <__start__>Also, in the Table given here: __<img33>__

If we have a closer look on the change in LTP and the Time Value for the same Strike 18000 OTM CE and 17000 OTM PE Options from near to farther series of expiry, we note the following remarkable observations:

1. LTP of 18000 OTM CE rose from 20 to 440, if we compare LTP for the most near Sep 8th current week expiry to November far month expiry series\. This rise in LTP is of 220 points \(over Sep 8th series LTP value\) which is a whooping rise of 1100% in the LTP of 18000 OTM CE between the two expiry series\. Further, since OTM Options comprise of only Time Value, rise in LTP is directly proportional to the rise in Time Value in both absolute terms and percentage terms, from near to farther expiry series\.
2. The LTP of 17000 OTM PE rose from 24 to 365, if we compare LTP for the most near Sep 8th current week expiry to November far month expiry series\. This rise in LTP is of 341 points \(over Sep 8th series LTP value\) which is a whooping rise of 1420% in the LTP of 17000 OTM PE between the two expiry series\. Further, since OTM Options comprise of only Time Value, rise in LTP is directly proportional to the rise in Time Value in both absolute terms and percentage terms, from near to farther expiry series\.
3. Thus, __same Strike OTM Options shows exponential rise in their LTP as we move towards the farthest expiry series, which is primarily due to exponential increase in the Time Value \(both in absolute terms and percentage terms\) component in their LTP__\. <__end__>

__Trade Plan in view of the Options’ Behaviour from the perspective of their Intrinsic Value__

Because of the behaviour exhibited by Options from the perspective of Intrinsic Value, a trader may plan the trade in the following manner:

1. __Can play rise in Volatility and rise in momentum in the price of the underlying, by buying deep ITM Options within the Most Impacted Radius Zone__, for exploiting maximum profit in absolute terms\.
2. ITM Options have relatively more Intrinsic Value and less Time Value \(*unlike ATM & OTM options, which have only Time Value*\) and therefore __for a positional Options buying, ITM Options must be a preferred bet__ \(as the time decay impact would be lesser, as compared to an ATM or OTM Option\)\. Thus, directional trend can be comfortably played with an ITM Option\. Because, while the directional trend may be favourable but it may lack momentum or may not have the support of high/rising volatility, therefore, the sluggish uptrend over a period of time would make a Long position in Options subject to time decay\. This time decay can be managed by playing in Option through ITM Options as these Options has lesser Time Value in their LTP thus less erosion with passage of time and the Intrinsic Value which the LTP carries is immune to time decay\. Thus, on Expiry, an ITM Option would not become zero, but would still be left with final LTP equivalent to the amount of Intrinsic value contained in it\. Hence, an Option buyer would not loose entire premium paid by him to buy an ITM Option, if such Options remain an ITM on Expiry\.
3. In order to __exploit the benefit of Futures price change to a favourable trend, at relatively less margin and without the risk of MTM requirement, one can initiate Long position in Synthetic Futures__\. These are deep ITM Options with 99% or more Intrinsic Value and negligible Time Value \(therefore, these Options are minimally / negligibly impacted with time decay\)\. Such deep ITM Options have a delta of 1 and they react exactly like Futures in terms of price change to the underlying\. Thus, for an uptrend deep ITM CE \(with 99% Intrinsic Value\) can be bought; and to play the downtrend deep ITM PE \(with 99% Intrinsic Value\) can be bought\.
4. The effect of time decay on the Expiry day is very fast\. Thus, even the near OTM and ITM Options develop a special property on Expiry day, which can be used by Options buyer to play out a trending Expiry\.  	

__Impact of Volatility on Different Strike Prices and Options__

1. PE Options are relatively more Volatile than CE Options and thus carry slightly higher LTP than the CE Options of the same Delta value\.  
2. Impact of rise & fall of Volatility in the underlying does not cause the same amount of rise or fall in the LTP of relevant Options of a given Options Chain\. Moreover, Volatility may not necessarily affect all the Options in the Options Chain\. __Volatility__ __affects CE & PE Options falling within the Most Impacted Radius Zone in the Options Chain__\. This Most Impacted Radius  Zone is the same area which we have already discussed above in this Chapter in the context of momentum in the price of the underlying\. As discussed, the Most Impacted Radius  Zone is an area around the ATM Strikes and  extends from ATM Strike covering near ITMs & OTMs of CE & PE and a few Strikes upto deep  ITM & OTMs of CE & PE\.  The Most Impacted Radius  Zone in any given Options Chain may vary for different assets or Indices\. The area of this Most Impacted Radius Zone in any Options Chain widens if the Volatility increases very high\. Also, area of this Most Impacted Radius Zone in any Options Chain shrinks if Volatility drops low \(say, when VIX drops below 16 or so\)\. Therefore, __area of the Most Impacted Radius Zone is not a fixed area and it may widen or shrink depending upon high rise or low fall in the Volatility in the underlying__\.
3. Generally, we can say, that in Nifty Options, this Most Impacted Radius Zone is roughly about 500\-800 point above and below ATM Strike, when VIX is between 18 to 25\. In BankNifty Options, this Most Impacted Radius Zone is roughly about 1200\-1500 point above and below ATM Strike, when VIX is between 18 to 25\.  
4. __Deepest ITMs and OTMs of CE & PE Options are usually outside the Most Impacted Radius  Zone and are consequently not much / least affected by the usual Volatility in the price of the underlying__\. Therefore, it will not make sense to play rise in Volatility by buying too deep ITM or OTM Options as they will not be much affected with the rise in Volatility\. On the other hand, Option sellers should therefore make use of this outside Zone area to make Short Options position, so that even if their position is caught in the rise of Volatility scenario, the damage in their Short position is minimal\.

__Impact of Implied Volatility and Vega on Options’ Behaviour__

1. If VIX is fluctuating in a range, then it would cause the IVs of Options to fluctuate and consequently the LTP of Options would rise and fall with rise and fall in their respective IV values\. This fluctuation in the IV of Options would cause fluctuations in the Time Value comprised in the LTP values of the Options, which fluctuations would ultimately lead to erosion in the Time Value carried in the LTP\. Thus, with passage of time, if VIX or Options IV keeps fluctuating in a range then the LTP of Options would erode due to erosion in the Time Value caused by such fluctuation in volatility\. Thus, such situation also offers an opportunity for the trader to play out such fluctuations in volatility by creating suitable Short Option position\.

__*<*start*>Example:*__* If VIX is fluctuating in a range, then we know that the LTP of Options would reduce with time\. So if the market is also within a range then a trader can consider initiating a Short Strangle or Iron Condor positions \(i\.e\. selling OTM CE & PE\)\. But if market is gradually moving up while VIX is fluctuating in a range, a trader may consider Shorting PE or create a PE Credit Spread strategy \(i\.e\. selling higher OTM PE Strike and buying a lower OTM PE Strike\)\. And if market is moving down while VIX is fluctuating in a range, a trader may consider Shorting CE or create a CE Credit Spread strategy \(i\.e\. selling lower OTM CE Strike and buying a higher OTM CE Strike\)\.*  __*<*end*>*__

1. Options with high Vega is more susceptible to changes in volatility i\.e\. LTP of Options with high Vega gets more impacted with rise and fall of Volatility\. In any given Options Chain, ATM Strike of both CE & PE have maximum Vega, thus any change in rise or fall in Volatility causes maximum rise/ fall in their IV and consequently their LTP\. Vega value reduces as we move towards deeper OTM and ITM, for both CE & PE in an Options Chain\. Vega is higher for a particular Strike, in farther Expiry series than in a near Expiry series\. Vega value of ‘X’ of any Option would mean that: with1% rise in Volatility, that Option would exhibit rise of Rs\. ‘X’ in its LTP value provided all other factors remain constant; and with1% fall in Volatility, that Option would exhibit fall of Rs\. ‘X’ in its LTP value provided all other factors remain constant\. 

__Behavioural aspect of Options in relation to Volatility / VIX, on its LTP or Premium value__:

1. India VIX is the index which indicates volatility in the market\. Volatility in the market/ underlying increases when there is fear or uncertainty in the market\.
2. It is not necessary that when VIX rises market would fall and when VIX begins to cool\-off then market would rise\. But generally, the aforesaid situation is true in almost 80% cases\. But there can be instances where VIX is rising and market/ price of the underlying is also rising and when VIX is cooling\-off market/ price of the underlying is falling\.
3. When Volatility rises, IV of Options rises; and when Volatility subsides the IV of Options cool\-off\. __With rise in Volatility / IV, the LTP or Premium of Options tends to rise; and with fall in Volatility or IV the LTP of Options reduces__\.
4. Volatility impacts the Time Value comprised in the LTP of Options\. __Rise in Volatility causes the Time Value to expand which leads to rise in LTP  value or premium of the Options__\. On the other hand, __fall in Volatility causes the Time Value to shrink which leads to fall in LTP  value or premium of the Options__\.

__Trading Volatility through Options__

__ __

1. If a trader wishes to play rise in Volatility through Options in large volume, then he may consider initiating buy positions in Deep OTM Strikes, as it will be cost effective \(*i\.e\. relatively less margin would be required to initiate Long positions in deep OTM Options in comparison to deep ITMs*\)\. However, if a trader wants to trade in lesser quantity or if margin requirement is not an issue, then he may consider initiating Long position in Deep ITM Strikes to get maximum point in absolute terms per lot as profit\.  However, for initiating a Long position in such deep ITMs, liquidity must be ensured before initiating the position\. Instead of too deep ITM Option, slight deep ITM can ensure playing rise in Volatility without liquidity challenges\. 
2. Further, a trader can also consider initiating Long positions to play rise in Volatility, in relatively farther Expiry for the same Strike which he may be considering to initiate Long in the current Expiry, in order to gain relatively more in absolute terms\. However, for initiating a Long position in farther Expiry, liquidity must be ensured before initiating the position\. Instead of too deep ITM or OTM Option in farther Expiry, one can consider playing out with any liquid Option near ATM Strike which can ensure playing  rise in Volatility without liquidity challenges in farther Expiry\.
3. While, an Option buyer must try to position himself suitably in the Most Impacted Zone Radius to play the rise in Volatility \(*in order to exploit the Unlimited Reward situation in his Long Options position*\); but on the other hand an __Option seller must try to position himself outside this Most Impacted Radius Zone \(*i\.e\. atleast 2000 points away from ATM in case of BankNifty and 1000 points away from ATM in case of Nifty*\) to not face the brunt of sharp Volatility rise __\(*as it may expose his Short Options position to Unlimited Risk situation, due to significantly high rise in the LTP of Short position due to sharp rise in Volatility*\)\. Also, an Options’ seller need to be mindful that if his Short position is in farther Expiry and is caught in high rise in Volatility situation then his Short position may get even severely affected \(as the loss in absolute terms would be even greater\)\. Therefore, while an Options seller may like to Short a farther Expiry Option for taking credit of more premium, he must ensure to take create his Short position outside the Most Impacted Radius Zone of the Options Chain pertaining to that farther Expiry series \(*and not that of the most current Expiry series*\)\. A trader must __look for the Most Impacted Radius Zone of the Options Chain of that Expiry series in which he desires to create a Long or Short position, and then take a position at a suitable Strike__\.

__<start>Example: <img11> __As an illustration to see the impact of rise in Volatility in intraday coupled with sharp momentum fall, you may have a look at the extract of the Options Chain of BankNifty with last week expiry of Sep 2022 i\.e\. the Current Monthly Expiry series of Sep 29, 2022 at EoD on Sep 23, 2022, after BankNifty in intraday fell with a sharp momentum by \-2\.67% \(i\.e\. 1088 point from previous day’s close of 40630 to close on Sep 23, 2022 at 39546\) and VIX rose in intraday to \+9\.45% \(to close at 20\.5 on Sep 23, 2022 from previous day’s close of 18\.8\)\. __<end>__

1. __Volatility crash / falling of VIX may nullify the effect of momentum in the price of the underlying if the Volatility crash is severe__\. However, between the two, __if momentum is stronger than Volatility crash, then the effect of Volatility crash on the LTP of Options may get neutralized due to the effect of strong momentum on the LTP of Options__ and consequently the strong momentum may inspite of Volatility crash can cause LTP of Options to rise significantly\. However, if __rising Volatility gets coupled with rise in favourable momentum for any given Options, then the LTP of that relevant Options can go very high__ \(*for example, RBI is likely to announce favourable news for the banks and VIX spikes up beyond 30 and the BankNifty starts trending upward with momentum*\)\. Thus, the rising Volatility and the strong momentum of the rise in BankNifty can be played by creating Long positions in CE in the Most impacted Radius Zone\. Such a situation will get the LTP of CE Options blowing high because high Volatility along with steep momentum resulting in rise of BankNifty both causes the LTP of CE Options to soar high\.
2. While, Options are subject to Theta decay each day as Expiry approaches near, however, the day\(s\) when there is uprising of Volatility, Options may not get impacted by Theta decay so long the Volatility is high or in rising state, and their LTP rises on account of rise in Volatility inspite of the Theta decay\.
3. __Thus, a trader can play out Volatility in the market/ underlying through suitable positions in Options__\.
4. On Expiry day, ATM and OTM Options would become zero, and consequently, the Time Value starts to rapidly fall from the deep OTMs towards ATM as well as from deep ITM towards ATM\.  Thus, __on Expiry, Far OTMs very quickly loose their Time Value and rapidly becomes zero__ \(i\.e\. expire\) either on the opening of Expiry day or during the first half of the Expiry\. Due to this reason, __on the Expiry day, Far OTM Options do not get impacted or are negligibly impacted with change in Volatility\.__ However, even on or near Expiry, when there is a sudden rise in Volatility, the Options may not loose sufficient premium, as they usually do in regular market scenario due to strong Theta effect near Expiry\.
5. The effect of VIX on an Expiry day may need to be played out differently\. On Expiry day, the Most Impacted Radius Zone is different than on other regular days\.

__Long Trade in Options or Short Trade in Options: in view of Volatility__

1. __Rise in Volatility favourably impacts the Long Options trade and negatively impacts the Short Options position__\. On the contrary, __fall in Volatility favourably impacts the Short Options trade and negatively impacts the Long Options position__\. Thus, on this aforesaid reason, it is said that __rise in Volatility__ __is friend of Options buyer and enemy of Options seller__\.
2. Accordingly, __rise in Volatility is played with initiating Long Options position in the direction of the trend__ \(as LTP of Options would rise with rise in Volatility\); and __fall in Volatility is played with initiating Short  Options position in the direction of the trend__ \(as LTP of Options would fall with fall in Volatility\)\. 

__*<*start*>Example*__*: If market is falling and VIX is rising, then PE buy can be initiated\. When volatility is falling down and market is rising PE sell can be initiated\.* __*<*end*>*__

__*<*start*>*__As mentioned, there can be instances where VIX is rising and market/ price of the underlying is also rising and when VIX is cooling\-off market/ price of the underlying is falling\. *In such instances, a trader can observe this phenomenon and  initiate a CE buy position when market is rising with the rising VIX; and when the market is falling with the falling VIX then the trader can initiate CE sell position*\.__* <*end*>*__

__Impact of movement of Volatility and movement in Price of Underlying, on Options LTP / Premium Value:__

1. __All other factors remaining constant, rise in Volatility results in rise in LTP / Premium of both CE & PE Options; and fall in Volatility results in drop in the LTP of both CE & PE Options__\. However, depending on different market conditions, this aforesaid phenomenon may also display changes\. Few situations highlighting the effect on LTP / Premium of Options, from the perspective of change in Volatility are given below:
2. if there is no change in the price of the underlying, but: \(i\) if the Volatility increases, then the LTP of both CE & PE would rise; and \(ii\) if the Volatility starts falling down, then the LTP of both CE & PE would start falling down\. 
3. if price of the underlying is rising and the Volatility is also significantly rising, then the LTP of CE & PE may rise but CE’s LTP would rise more as compared to that of PE \(*this is because CE’s are also getting favourably impacted with the direction of change in the price of the underlying, besides rise in Volatility*\)\.
4. if price of the underlying is falling and the Volatility is significantly rising, then the LTP of CE & PE may rise but PE’s LTP would rise more as compared to that of CE \(*this is because PE’s are also getting favourably impacted with the direction of change in the price of the underlying, besides rise in Volatility*\)\.
5. if price of the underlying is rising but the Volatility is significantly falling, then the LTP of PE would certainly fall \(*as PE is getting double hit of rising price and volatility crash*\)\. However, in such situation even LTP of CE may not rise or may even fall, because the positive effect of rise in price of the underlying on the LTP of CE may get overridden by the effect of Volatility crash on the LTP of CE\.
6. if price of the underlying is falling and the Volatility is also significantly falling, then the LTP of CE would certainly fall \(*as CE is getting double hit of falling price and volatility crash*\)\. However, in such situation even LTP of PE may not rise or may even fall, because the positive effect of fall in price of the underlying on the LTP of PE may get overridden by the effect of Volatility crash on the LTP of PE\.   

__Impact of Volatility on Same Strike Options of different Expiry series__

1. Further, the __impact of Volatility reduces as we move from the most current Expiry series towards farther Expiry series__\. Therefore, between same Strike Option belonging to a current Expiry and the available far Expiry series, the impact of Volatility would be felt more on the Option belonging to the most current Expiry than the father one\.
2. It is important to note here that the rise & fall in Volatility \(i\.e\. *rise in  LTP Options with rise in Volatility and fall in LTP of Options due to fall in Volatility of the underlying*\), subject to steepness in the rise/fall of Volatility, can be expected to usually impact the relevant Options in the following manner \(assuming VIX is below 25\):
3. __Extreme deepest OTM may not be impacted at all__ \(*eg: beyond 1800 to 2000 points from ATM in BankNifty Options*\)
4. __Deep OTMs are most impacted in percentage terms__ \(*eg: in the range of about 500 to 1000 points from the ATM in BankNifty Options\. Broader range could be 400 to 1200 points where maximum traction in percentage terms can be observed*\)
5. Rise in LTP of Options in absolute number terms progressively increases with rise in Volatility \(and the fall in LTP of Options in absolute number terms progressively decreases with fall in Volatility\), from Deepest OTM Strike to Deepest ITM Strike\. Thus,__ Deep ITM Strikes rise / fall, as the case may, maximum in absolute number terms __\(*eg: 1000 to 1200 points Deep ITM from ATM in BankNifty Options*\)\.
6. Volatility impacts __lower LTP Options more in percentage terms than those with higher LTPs; and Options with higher LTPs are impacted more in absolute terms than those with lower LTP__, we can deduce that:
7. In the Most Impacted Radius Zone in any given Options Chain:
8. Options with lower premium/LTP \(*deep OTMs*\) would register maximum rise & fall in percentage terms due to rise and fall in Volatility; and Options with higher premium / LTPs \(*deep ITMs*\) would register relatively lesser rise & fall in percentage terms due to rise and fall in Volatility; and
9. Options with lower premium/LTP \(*deep OTMs*\) would register relatively lesser rise & fall in absolute terms in their LTP value due to rise and fall in Volatility; and Options with higher premium / LTPs \(*deep ITMs*\) would register maximum rise & fall in absolute terms due to rise and fall in Volatility\.
10. The same Strike Options between closer Expiry and farther Expiry: 
11. Options of closer Expiry would register maximum rise & fall in percentage terms in their LTP values \(*as they would have relatively lower premium/LTP*\) due to rise and fall in Volatility; and Options of farther Expiry would register minimum rise & fall in percentage terms in their LTP values \(*as they would have relatively higher premium / LTPs*\) due to rise and fall in Volatility; and 
12. Options of farther Expiry would register maximum rise & fall in absolute terms in their LTP values \(*as they would have relatively higher premium/LTP*\) due to rise and fall in Volatility; and Options of closer Expiry would register minimum rise & fall in absolute terms in their LTP values \(*as they would have relatively lower premium / LTPs*\) due to rise and fall in Volatility\.

__Futures LTP in Premium or Discount than Spot: Its relevance to Options__

The Options pertaining to particular calendar month, during their lifetime, follow the corresponding calendar month Futures\. Thus, the Weekly Options & Monthly Options pertaining to a particular calendar month, follows the Futures of that relevant Monthly Expiry series\. 

__<start>Example: __*June 15 Weekly Expiry series and June 22 Next\-to\-Next Week Expiry series and June 27 Monthly Expiry Options, would follow the Nifty Futures June Monthly Expiry series\. Similarly, July 5 Weekly Expiry series Options and July 26 Monthly Expiry Options would follow Nifty Futures of July Expiry series, and so on*\. __<end>__

It is only on their Expiry Day, that the relevant  Options after half the trading session on Expiry Day, ceases to follow their corresponding calendar month’s Futures price and adjusts its pricing to match the prevalent Spot value on the Expiry Day\. Accordingly, the Options expire on their Expiry Day as per the Spot value \(such that its ATM Strikes matches the Spot value at the end of the trading session on Expiry Day\)\. 

Having said this phenomenon, it is pertinent to note that during the lifetime of relevant Options, if the corresponding calendar month’s Futures exhibits extremely high LTP \(*i\.e\. relevant Futures starts trading at exorbitant  premium value than the Spot, i\.e\. more than the regular difference*\) or if the corresponding calendar month’s Futures starts trading in discount to the Spot value, then this __price difference between Futures and Spot is also manifested by the Options in their pricing__\. 

Further, since, we know that the Futures follow the Spot and eventually on their Expiry relevant Futures matches with the Spot value, therefore, we can estimate that if the Futures is trading too high from its Spot value \(*i\.e\. trading with premium pricing to Spot*\) or if it is trading lower than the Spot value \(*i\.e\. trading in discount pricing to Spot*\), then the relevant Futures by or before its Expiry, would adjust itself to match the Spot value\.  This adjustment by Futures to match the Spot value by/before its Expiry, is also manifested by the Options of that corresponding calendar month to which the Futures pertain\.

Thus, __it is important to understand this corelation of Options’ pricing to the Futures \(when it is trading with Premium value than Spot or when it is trading in discount than Spot\), to estimate the likely short\-term trend change in the underlying which would in turn be exhibited exhibited by the relevant Options__ following their corresponding calendar month’s Futures as and when the Futures adjusts itself to match with the Spot value\. This phenomenon offers a great foresighted opportunity to traders to exploit profits by playing such gaps between futures pricing and Spot values, through Options Strategies\. This aspect of Options behaviour is briefly discussed hereunder\.

1. The Options, before their relevant Expiry, follow the relevant Futures \(*i\.e\. Options of Weekly Expiries follow Current Month Futures; Next Month Options follow Next Month Futures and Far Month Options follow Far Month Futures*\)\. 
2. On the Expiry day of the relevant Options, after 12 noon on the Expiry day, since the corresponding Futures merges with  the Spot value, therefore, the Options start following the Spot \(instead of Futures\) on Expiry day\. Therefore, any calculations in relation to Options must be performed, before its Expiry, with regard to the relevant Futures LTP; and on Expiry day with regard to the Spot value\.
3. When Futures’ LTP trade higher than its Spot then it is said that Futures are trading on a __Premium__; and when Futures’ LTP trade lower than its Spot then it is said that Futures are trading on __Discount__\.
4. The fact that usually the Futures have LTP higher than the Spot, signifies that there is some element of Time Value in Futures LTP, which on Expiry day  or earlier should get eroded in order to match with the Spot value\.

__Conclusion__:

This phenomenon of deviation in the Futures pricing from the Spot value \(than the usual gap between Futures and Spot\), can also be used as part of our trading Strategies employing Options, as the aforesaid deviation percolates into Options behaviour which can be exploited for profit with proper understanding and risk management\.

__*Futures trading at abnormally high Premium*__:

1. When relevant Current Month Futures LTP or Next Month Futures LTP is much higher than its Spot \(*eg: \+100 points in Nifty Futures and \+200 points in BankNifty Futures*\), then it may imply that the Futures by Expiry will lose its Time Value to match the Spot and hence would lose its LTP by Expiry, thereby Futures may drop in their LTP value \(or Futures turning bearish\)\. 
2. Accordingly, since Options follow the Futures, therefore, likely that the bearish move in Futures would result in relevant CEs to move towards their OTM side and consequently experience erosion in its LTP/ premium\. Therefore, __Futures’ trading on extra Premium than Spot, may offer an opportunity to play the likely short\-term downside move in the underlying __\(which may arise on account of shrinking of Futures to match Spot\) by Shorting Futures or Shorting CE or buying PE\. Further, this phenomenon may offer to play downside movement even if other indicators/ price action suggests opposite/bullish trend for intraday/ next day\.
3. If such an opportunity occurs on the Expiry Day of weekly / monthly Options, wherein the Current Month Futures is trading at excessive premium than the Spot, then it is obvious that the expiring Options which have been following Futures LTP until around 12 noon on the Expiry day; and the Options would soon thereafter start following the Spot value which is much lower than the Current Month Futures\. 

Thus, as soon as the expiring Options tend to follow the Spot, CE Options would lose their excessive Time Value \(*due to adjustments of Options pricing arising due to the shift from following Futures to Spot*\) and the relevant PE Options would get benefitted as they become even more deep ITM\. 

Therefore, such situations offer an opportunity to get benefitted by initiating Long PE positions in PEs on / around Expiry day of Options\. This situation if occurs in a falling market it has been observed that in a falling market \(*where the underlying has fallen consecutively for a 2\-3 days*\), then this opportunity can offer very good returns from Long ITM PE trading positions\.

__Impact on Options: When Futures trading at Discount than Spot__

1. Contrary to the usual phenomenon of Futures LTP trading higher than Spot value, when relevant Futures LTP gets lower than its Spot, then it may imply that the Futures anytime soon may try to match the Spot or exceed the Spot to trade at Premium than Spot as is usually the case, thereby the Futures’ LTP can be expected to rise \(or in other words: Futures turning bullish\)\. Accordingly, since Options follow the Futures, therefore expected bullish move in the underlying would cause CEs to move towards its ITM side and consequently exhibit increase in its LTP/ premium\. Therefore,__ Futures’ trading on Discount than Spot by more than 20 points or so, may offer an opportunity to play the likely upside move in the underlying__ \(which may arise on account of rise of Futures’ LTP beyond the Spot\) by Buying Futures or Shorting PE or buying CE\. This phenomenon lasts usually so long the Futures LTP remains in Discount to Spot, usually in intraday/ next day\. Further, this phenomenon may offer to play upside movement even if other indicators/ price action suggests opposite/bearish trend for intraday/ next day\. 

<a id="_Hlk154190190"></a><__start__>__Example__: As an illustration on September 28, 2022 \(Wednesday\), one day before current monthly Expiry series for September, the current Monthly September Futures exhibited discount than their underlying Spot price\. Have a look at the following real data as on Sep 28, 2022 EoD: __<img18>__

 	On next day i\.e\. Sep 29, 2022 the Expiry day for Sep Current Monthly Expiry series, the following situations arose:

1. Nifty Sep Futures made around 1% gap up than previous day close of 16838\. Thereafter, in intraday on Thursday, Nifty Futures fell from the intraday opening high and closed on Thursday below the previous day close\.
2. BankNifty Sep Futures \(BankNifty’s F&O Expiry used to be on Thursday, prior to July 2023\) made around \+1% gap up than previous day close of 37689\. Thereafter, in intraday on Thursday, BankNifty Futures fell from the intraday opening high and closed on Thursday below the previous day close\. <__end__>

Thus, it demonstrates that the Futures trading at discount than the Spot, did show its effect on opening\. Thus, this phenomenon can be played for any intraday movement or BTST for the next day if the Futures close at discount than the Spot in intraday close\. 

1. However, there are certain situations in which this phenomenon may not work as expected\. These situations are:
2. If this phenomenon of Futures trading in Discount to Spot occurs for second time in few days’ time \(*i\.e\. within a short interval of time after its first occurrence*\), then the Futures’ will not be very bullish on such second/third occurrences after a short span of time, and price action will prevail over the effect of this phenomenon\. 
3. If this phenomenon of Futures’ trading in Discount to its Spot value occurs during extreme panic situation in the market *viz\. *Corona fall \(*i\.e\. *when* market is making upper circuit/lower circuit or up & down 6% is normal in market during such panic situations*\)\.

__Impact of Theta \(or Time Decay\) on Options versus Impact of Momentum in the price of the Underlying on Options__

1. While, Options are subject to Theta decay each day as Expiry approaches near, however, the day\(s\) when there is a strong momentum in the price of the underlying, Options to which the direction of momentum is favourable do not get impacted by Theta decay and their LTP rises on account of favourable momentum inspite of the Theta decay\.
2. On Expiry day, ATM and OTM Options would become zero, and consequently, the Time Value starts to rapidly fall from the deep OTMs towards ATM as well as from deep ITMs towards ATM\. However, if there arises strong momentum on Expiry day or before, then the loss in LTP of Options due to Theta decay may be nullified by the strong favourable momentum for the relevant Options\. Thus, __on Expiry, the Far OTM Options very quickly loose their Time Value and rapidly becomes zero__ \(i\.e\. expire\) either on the opening of Expiry day or during the first half of the Expiry\. Due to this reason, __on the Expiry day, Far OTM Options do not get impacted or are negligibly impacted with momentum in the price of the underlying\.__
3. Thus, the effect of momentum on an Expiry day need to be played out differently\. On Expiry day, the Most Impacted Radius Zone is different than on other regular days\.

__Impact of Momentum in the Price of the Underlying, on same Strike Options of different Expiry series__

1. The impact of momentum \(in the price of the Underlying\) reduces as we move from the most current Expiry series towards farther Expiry series\. 
2. Therefore, between same Strike Option belonging to a current Expiry and the available far Expiry series, the impact of momentum would be felt more on the Option belonging to the most current Expiry than the father one\.
3. The same Strike Options between closer Expiry and farther Expiry:
4. Options of closer Expiry would register maximum rise in percentage terms in their LTP values \(*as they would have relatively lower premium/LTP*\); and Options of farther Expiry would register minimum rise in percentage terms in their LTP values \(*as they would have relatively higher premium / LTPs*\); and 
5. Options of farther Expiry would register maximum rise in absolute terms in their LTP values \(*as they would have relatively higher premium/LTP*\); and Options of closer Expiry would register minimum rise in absolute terms in their LTP values \(*as they would have relatively lower premium / LTPs*\)\.

__Impact of Momentum in the Price of the Underlying on specific Strike Prices \(the Most Impacted Radius or the Most Impacted Radius Zone or the Most Impacted Strike Price Due to Momentum\)__

1. Momentum in the price of the underlying does not cause the same amount of rise or fall in the LTP of the relevant Options of a given Options Chain\. Moreover, momentum will not necessarily affect all the Options in the Options Chain\. __Momentum affects CE & PE Options falling within the Most Impacted Radius Zone in the Options Chain__\. 
2. This Most Impacted Radius  Zone is an area around the ATM Strikes and  extends from ATM Strike covering near ITMs & OTMs of CE & PE and a few Strikes of deep  ITM & OTMs of CE & PE\.  The Most Impacted Radius  Zone in any given Options Chain may vary for different assets or Indices\. 
3. The area of this Most Impacted Radius Zone in any Options Chain widens if the momentum is very sharp\. Also, area of this Most Impacted Radius Zone in any Options Chain widens when there is rise in Volatility in the underlying or when VIX keeps rising above 25 or so; and this Zone shrinks as VIX drops below 16 or so\. Therefore, __area of the Most Impacted Radius Zone is not fixed area and it may widen or shrink depending upon sharpness in momentum and/or volatility in the price of the underlying__\.
4. Generally, we can say, that in Nifty Options, this Most Impacted Radius Zone is roughly about 500\-800 point above and below ATM Strike, when VIX is between 18 to 25\. In BankNifty Options, this Most Impacted Radius Zone is roughly about 1200\-1500 point above and below ATM Strike, when VIX is between 18 to 25\.  
5. __Deepest ITMs and OTMs of CE & PE Options are usually outside the Most Impacted Radius  Zone and are consequently not much / least affected by the momentum in the price of the underlying__\. Therefore, it will not make sense to play momentum by buying too deep ITM or OTM Options as they will not be much affected with momentum\. Option sellers should therefore make use of this outside Zone area to make Short Options position, so that even if their position is caught in the opposite direction of the momentum, the damage in their Short position is minimal\.
6. In the Most Impacted Radius Zone in any given Options Chain:
7. Options with lower premium/LTP \(*deep OTMs*\) would register maximum rise & fall in percentage terms in their LTP values; and Options with higher premium / LTPs \(*deep ITMs*\) would register minimum rise in percentage terms in their LTP values; and 
8. Options with lower premium/LTP \(*deep OTMs*\) would register minimum rise in absolute terms in their LTP values; and Options with higher premium / LTPs \(*deep ITMs*\) would register maximum rise in absolute terms in their LTP values\. <__start__>For example, if we see in the Table given here: __<img32>__, While Deep OTM CE Strike of 39300 \(900 point deep OTM from the ATM of 38400\) rose by \+893%, but in effect the gain in absolute number is only 325 points\. Further, while, on the other hand a Deep ITM CE of 37000 Strike \(1400 point deep ITM from the ATM of 38400\) rose by only 93%, but in absolute number terms it actually rose by 1276 points, thus registering a maximum per lot profit in a CE Long position trade to play the momentum in BankNifty on Aug 30, 2022*\.<*__end__*>*

__Impact of Momentum \(i\.e\. fast & strong movement of the Underlying’s price, upwardly or downwardly\) on Options and its Premium Value \(or LTP\)__

1. __One of the factors, which influences the rate of change in the LTP of Options is the momentum or swiftness in the price change of the underlying asset or Indices__\. If the momentum arises in the upward direction such that the price of the underlying starts rising up very swifty, then the LTP of CE rises significantly and the LTP of corresponding PE drops significantly\. Likewise, if the momentum arrives in the downward direction of the price of the underlying, such that the price of the underlying starts falling down very swifty, then the LTP of PE rises significantly and the LTP of corresponding CE drops significantly\. __Steep rise in the LTP of the relevant Options is directly proportional to the steepness in the momentum of the price change of the underlying__\.

Thus, when there is huge gap up the LTP of CE Options rises phenomenally; and when there is huge gap down the LTP of PE Options shoots up\.

1. Momentum in the price rise of the underlying causes CE Options to shift towards ITM / deeper ITM and correspondingly causes PE Options to be pushed towards OTM/ deeper OTM\. Consequently, CE Options' LTP and Delta value rises and PE Options’ LTP and Delta value reduces\. Likewise, momentum in the price fall of the underlying causes PE Options to shift towards ITM / deeper ITM and correspondingly causes CE Options to be pushed towards OTM/ deeper OTM\. Consequently, PE Options' LTP and Delta value rises and CE Options’ LTP and Delta value reduces\.

__Impact of Momentum in the Price of the Underlying, on Options with lower Premium Value \(or LTP\) and those with higher Premium Value \(or LTP\), in a given Options Chain and between Different Expiry Series__

Since, as a result of favourable momentum in the price of the Underlying, __lower LTP Options rise more in percentage terms than those with higher LTPs; and Options with higher LTPs rise more in absolute terms than those with lower LTP__, we can deduce that:

1. In the Most Impacted Radius Zone in any given Options Chain:
2. Options with lower premium/LTP \(*deep OTMs*\) would register maximum rise & fall in percentage terms in their LTP values; and Options with higher premium / LTPs \(*deep ITMs*\) would register minimum rise in percentage terms in their LTP values; and 
3. Options with lower premium/LTP \(*deep OTMs*\) would register minimum rise in absolute terms in their LTP values; and Options with higher premium / LTPs \(*deep ITMs*\) would register maximum rise in absolute terms in their LTP values\. <__start__>For example, if we see in the Table given here: __<img32>__, While Deep OTM CE Strike of 39300 \(900 point deep OTM from the ATM of 38400\) rose by \+893%, but in effect the gain in absolute number is only 325 points\. Further, while, on the other hand a Deep ITM CE of 37000 Strike \(1400 point deep ITM from the ATM of 38400\) rose by only 93%, but in absolute number terms it actually rose by 1276 points, thus registering a maximum per lot profit in a CE Long position trade to play the momentum in BankNifty on Aug 30, 2022*\.<*__end__*>*
4. The same Strike Options between closer Expiry and farther Expiry:
5. Options of closer Expiry would register maximum rise in percentage terms in their LTP values \(*as they would have relatively lower premium/LTP*\); and Options of farther Expiry would register minimum rise in percentage terms in their LTP values \(*as they would have relatively higher premium / LTPs*\); and 
6. Options of farther Expiry would register maximum rise in absolute terms in their LTP values \(*as they would have relatively higher premium/LTP*\); and Options of closer Expiry would register minimum rise in absolute terms in their LTP values \(*as they would have relatively lower premium / LTPs*\)\.

__Impact of Cessation / stop of Momentum in the Price of the Underlying, on Options__

1. Further, upon __cessation or pause of the momentum in the price of the underlying, the LTP of relevant Options show a sharp decline__\. 
2. Therefore, sometimes it may be advisable not to immediately book loss if we have position in the opposite direction of the momentum and wait until there is a pause in the momentum, as the LTP of the Options would show some decline due to such pause or cessation of momentum\. At the same time, if the Options position is in the direction of the momentum, then one should eye at booking profit before the momentum is broken/halted, so as to reap maximum profit due to sharp rise in LTP of the Options caused due to continued momentum\.

__Impact of Volatility / VIX on the Momentum in the Price of the Underlying__

__Volatility crash / falling of VIX may nullify the effect of a weak momentum if the volatility crash is severe__\. However, between the two, __if momentum is stronger than volatility crash, then the effect of volatility crash on the LTP of Options may get neutralized due to the effect of strong momentum on the LTP of Options__ and consequently the strong momentum may inspite of volatility crash can cause LTP of Options to rise significantly\. 

__Example__: <__start__>It can be observed in the real example given in the Table here: __<img32>__: That even though VIX cracked more than 5% on August 30, 2022, however, because of a strong one\-sided momentum in BankNifty, certain CE Options rose as high as \+850% in a single day\. Infact most of the CE Options rose more than \+100% in their LTP\. <__end__> 

However, if __rising momentum gets coupled with rise in volatility, then the LTP of relevant Options can go very high__ \(*for example, Nifty starts tumbling down due to some freaking bad news and VIX spikes up beyond 30*\)\. 

Thus, the rising momentum of the fall in Nifty can be played by creating Long positions in PE in the Most impacted Radius Zone\. Such a situation will get the LTP of PE Options blowing high because steep momentum in fall of Nifty gets acceleration of the VIX spike i\.e\. rise in volatility\.

__Playing Momentum in the Price of the Underlying, through Options__

1. __Momentum in the price of the underlying, should therefore be played by being Long in Options__ \(ofcourse, in the direction of expected momentum\) __to take advantage of the Unlimited Reward and Limited Risk profile of Options buying__\. If expectation is that the price of the underlying would rise with momentum, trading bet should be CE buy; and if the expectation is the price of the underlying would fall with momentum, trading bet should be PE buy\. Having said this it may be noted that if there is a Short Options trade in the opposite direction of Short \(*for example, PE sell when market is falling; or a CE sell when market is rising*\), then the __momentum in the opposite direction of the Short position can expose the trader to Unlimited Risk__\.  
2. __Momentum in the favourable / expected direction of the trend is more profitable in Long Options trade than Short Options position__ \(i\.e\. *for uptrend: CE buy Versus PE sell; and for downtrend: PE buy Versus CE sell*\), due to unlimited reward profile on Long Options and limited rewarded profile of Short Options\. Accordingly, __momentum in the unfavourable direction of the trend may incur more loss in Short Options trade than Long Options position__, due to unlimited risk profile on Short Options and limited risk profile of Long Options\. Thus, on this aforesaid reason, it is said that __momentum is friend of Options buyer and enemy of Options seller__\.

__Example of Impact of Momentum in the Price of the Underlying, on Various Strike Prices in an Options Chain__

Let us understand the implication of momentum in the Price of the Underlying, on Various Strike Prices in an Options Chain, with the following real example on BankNifty\.

<__start__>__Example:__ Given here is a Table reproducing BankNifty Strikes for Sep 1, 2022 Expiry series, as of August 30, 2022 EOD data\. __<img32>__ 

In the aforesaid Table, the following may be noted:

- BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\. 
- Bank Nifty applicable Current Month \(September\) Futures closed at 38440 on August 29, 2022\.
- ATM Strike as on August 29 was 38400\. Please note that all CE Strikes, lower than 38400 were ITM on Aug 29, 2022 and all higher Strikes were OTM\.
- On August 30, 2022, BankNifty opened gap up by about 0\.6% higher over previous day’s close and moved up in momentum until close of the day\. BNF Sep Futures closed at 39710 \(\+3\.3%\) after a total rise of about 1265 points\. A very significant rise\. Current ATM Strike became 39700* *
- VIX closed at 19\.78 on Aug 29, 2022 and fell \-5\.65% to close on August 30, 2022 at 18\.7
- Here, decimal points have been ignored from the LTP / percentage change in LTP
- Let us now look at the rise in LTP of CE Options and fall in LTP of PE Options, as a result of this momentum causing significant rally of BankNifty on August 30, 2022\.

Upon analysing the change in LTPs in various Options as a result of momentum run up in BankNifty, the following conclusions can be drawn:

1. ATM Strike moved up from 38400 to  39700 i\.e\. about 1300 points in a single day
2. Maximum percentage rise \(in the range of 600% to 900%\) in CE LTP is seen in 38800 Near OTM CEs to 39600 Deep OTM CEs i\.e\. in the range of about  __400 to 1200 points OTMs from ATM__ Strike of 38400 \(as of Aug 29, 2022\)\. Within this range of 400 to 1200 points, highest percentage rise \(i\.e\. \+800%\) in LTP can be observed from Slight OTM CEs of 39100 to Deep OTM CE at 39500 Strikes i\.e\. in the range of about __700 to 1100 point OTMs from the ATM__ Strike of 38400 \(as of Aug 29, 2022\)\.
3. Second zone where percentage rise in CE LTP in the range of 300% to 600% is observed in: 
4. 39700 to 39900 Deeper OTM CEs i\.e\. in the range of about __1300 to 1500 points OTMS from ATM__ Strike of 38400 \(as of Aug 29, 2022\); and 
5. 38300 Near ITM CE to 38700 Near OTM CEs i\.e\. in the range of __100 point ITM from ATM Strike of 38400 to 300 point Near ITMs around ATM__ of 38400 \(as of Aug 29, 2022\)
6. Next zone where percentage rise in CE LTP in the range of 100% to 300% is observed in: 
7. 40200 to 40400 Deepest OTM CEs i\.e\. in the range of about __1800 to 2000 points OTMS from ATM__ Strike of 38400 \(as of Aug 29, 2022\); and 
8. 38200 Near ITM CE to 37200 Deep ITM CEs i\.e\. in the range of __300 to 1200 point ITM from ATM __Strike of 38400 \(as of Aug 29, 2022\)
9. Next zone where percentage rise in CE LTP in the range of 1% to 100% is observed in: 
10. 40000 to 40100 Even Deepest OTM CEs i\.e\. in the range of about __1600 to 1700 points OTMS from ATM__ Strike of 38400 \(as of Aug 29, 2022\); and 
11. 37100 Deep ITM CE to 36700 Even Deepest ITM CEs i\.e\. in the range of __1300 to 1700 point ITM from ATM __Strike of 38400 \(as of Aug 29, 2022\)
12. Extreme Deepest OTM CEs 40500 to 40700 CE registered a negative change in their LTP\. Thus, there was __no positive impact of momentum in the Extreme Deepest OTM CEs greater than 2000 points from__ __ATM __Strike of 38400 \(as of Aug 29, 2022\)\. Moreover, this negative change in LTP must be due to theta / time decay and erosion of Time Value in their LTP due to expansion and contraction in their LTP during Aug 30, 2022\. 
13. Maximum percentage fall \(\+90%\) in the LTP of PEs are seen from 37300 OTM PEs to 39300 ITM PEs i\.e\. in the radius of __about 900 points Slight Deeper ITM PEs to 1100 points Slight Deeper OTM PEs around ATM __Strike of 38400 \(as of Aug 29, 2022\)\. We must bear in mind that the maximum loss a PE Option Long trade can bear is loss of complete premium i\.e\. LTP becoming zero in case of 100% fall in LTP\. Thus, a buy position in PE Option could not give more than 100% loss\. 
14. Second zone where percentage fall ranges between \+70% upto 90% is in the LTP of PEs at: 
15. Deeper OTM 37300 PE to Even Deeper OTM PEs upto 36700 PE i\.e\. in the range of __about 1100 to 1700 points OTM PEs from ATM __Strike of 38400 \(as of Aug 29, 2022\)
16. Deeper ITM 39400 PE to Even Deeper ITM PEs upto 40000 PE i\.e\. in the range of __about 1000 to 1600 points OTM PEs from ATM __Strike of 38400 \(as of Aug 29, 2022\)
17. Second zone where percentage fall ranges between \+50% upto 70% is in the LTP of PEs at: 
18. Extreme Deepest OTM PEs from 36700 PE and even deeper i\.e\. in the range of __about 1800 points and more OTM PEs from ATM __Strike of 38400 \(as of Aug 29, 2022\)
19. Extreme Deepest ITM 40100 PE to Even Deepest ITM PEs i\.e\. in the range of __about 1700 points and more ITM PEs from ATM __Strike of 38400 \(as of Aug 29, 2022\)
20. While in percentage terms, maximum rise in LTP of CE Options and fall in LTP of PE Options seems to be concentrated around Deep OTMs to Deep ITMs, however, if we analyze the __LTP change in absolute terms__ \(i\.e\. in number terms\), we observe as follows:
21. On CE side, the __rise in LTP in absolute number terms progressively increases from Deepest OTM CE Strike to Deepest ITM Strike__\. In the Table above we see that CE LTP rises from about 2000 points 40400 Deepest OTM CE Strike \(\+0\.85 point rise\) from the ATM Strike of 38400 towards 1400 point 37000 Deepest ITM CE Strike \(with 1276 points rise\) from the ATM Strike of 38400\. Thus, Deeper CE ITMs register maximum rise in the LTP of CE in absolute number terms\.
22. Further, on CE side, if we analyze: CE Option which rose maximum in percentage terms was 39300 deep OTM CE which rose by 839%\. But in absolute number terms the 39300 CE Option generated a profit of only 325 points \(i\.e\. per lot basis profit would be 325 X 25 = Rs\. 8,125\)\. Whereas, in absolute number terms, 37000 deep ITM CE gave a whooping 1276 point profit \(even though in percentage terms the profit was only 96%\) which on per lot basis comes to 1276 X 25 = Rs\. 31,900\. Thus, __there is remarkably high difference in profit generated by deep ITM CE of 37000 as against 39300 deep OTM CE which rose maximum in percentage terms \(almost 4 times\)__\. 
23. On PE side, the __fall in LTP in absolute number terms progressively increases from Deepest OTM PE towards Deepest ITM PE\.__ In the Table above, we see that PE LTP falls from about 1700 points Deepest 36700 OTM PE Strike \(\-13 point rise\) from the ATM Strike of 38400 towards 2300 point 40700 Deepest ITM PE Strike \(with \-1263 points rise\) from the ATM Strike of 38400\. Thus, Deeper PE ITMs register maximum fall in the LTP of PE in absolute number terms\.
24. Further, on PE side, we know that the maximum loss in PE buy position can not go beyond 100% of its LTP\. For this reason, even if the PE Options suffer maximum loss in percentage terms beyond 90% or so; but in absolute term the PE Options which had the highest LTP would register maximum loss in absolute terms and we know such Options are deep ITM Options\.  
25. Therefore, we can see that __lower LTP Options rise more in percentage terms than those with higher LTPs\. However, Options with higher LTPs rise more in absolute terms than those with lower LTP__\. Thus, deep OTMs rise more in percentage terms than the deep ITMs; and deep ITMs rise more in absolute terms than the deep OTM Options\. This tenet holds true for any given Options Chain; as well as for the same strike Option between closer Expiry and higher Expiry series\. Options in closer Expiry series have relatively less LTP value than the same Strike Option in a farther Expiry series\. Thus, same Strike Option of a closer Expiry series rise more in percentage terms than the same Strike Option of a farther Expiry series; and same Strike Option of farther Expiry series rise more in absolute terms than the same Strike Option of the closer Expiry series\.
26. It can also be observed that even though VIX cracked by more than 5% on August 30, 2022, however, because of a strong one\-sided momentum in BankNifty, certain CE Options rose as high as \+850% in a single day\. Thus, __strong momentum has the ability to override the general effect of volatility crash on Options__\. <__end__>

It is important to note here that the favourable momentum \(i\.e\. *rise in price of the underlying on CE Option and fall in price of the underlying for PE Option*\), subject to steepness in the momentum, can be expected to usually impact the relevant Options in the following manner \(*assuming VIX to be around 18*\):

1. __Extreme deepest OTM may not be impacted at all__ \(*eg: beyond 1800 to 2000 points from ATM in BankNifty Options*\)
2. __Deep OTMs are most impacted in percentage terms__ \(*eg: in the range of about 500 to 1000 points from the ATM in BankNifty Options\. Broader range could be 400 to 1200 points where maximum traction in percentage terms can be observed*\)
3. Rise in LTP in absolute number terms progressively increases from Deepest OTM Strike to Deepest ITM Strike\. Thus,__ Deep ITM Strikes rise maximum in absolute number terms __\(*eg: 1000 to 1200 points Deep ITM from ATM in BankNifty Options*\)\.

__Playing Momentum trades in Options__

1. If a trader wishes to play momentum through Options in large volume, then he may consider initiating buy positions in Deep OTM Strikes, as it will be cost effective \(*i\.e\. relatively less margin would be required to initiate Long positions in deep OTM Options in comparison to deep ITMs*\)\. However, if a trader wants to trade in lesser quantity or if margin requirement is not an issue, then he may consider initiating Long position in Deep ITM Strikes to get maximum point in absolute terms per lot as profit\.  However, for initiating a Long position in such deep ITMs, liquidity must be ensured before initiating the position\. Instead of too deep ITM Option, slight deep ITM can ensure playing momentum without liquidity challenges\. 
2. Further, a trader can also consider initiating Long positions to play momentum, in relatively farther Expiry for the same Strike which he may be considering to initiate Long in the current Expiry, in order to gain relatively more in absolute terms\. However, for initiating a Long position in farther Expiry, liquidity must be ensured before initiating the position\. Instead of too deep ITM or OTM Option in farther Expiry, one can consider playing with any liquid Option near ATM Strike which can ensure playing momentum without liquidity challenges in farther Expiry\.
3. While, an Option buyer must try to position himself suitably in the Most Impacted Zone Radius to play the momentum \(*in order to exploit the Unlimited Reward situation in his Long Options position*\); but on the other hand an __Option seller must try to position himself outside this Most Impacted Radius Zone \(*i\.e\. atleast 2000 points away from ATM in case of BankNifty and 1000 points away from ATM in case of Nifty*\) to not face the brunt of sharp momentum__ if his Short position is caught on the wrong side of the trend \(*as it may expose his Short Options position to Unlimited Risk situation*\)\. Also, an Options’ seller need to be mindful that if his Short position is in farther Expiry and is caught on the wrong side of the trend and the Short position gets negatively impacted on account of sharp momentum then his Short position may get even severely affected \(as the loss in absolute terms would be even greater\)\. Therefore, while an Options seller may like to Short a farther Expiry Option for taking credit of more premium, he must ensure to take create his Short position outside the Most Impacted Radius Zone of the Options Chain pertaining to that farther Expiry series \(*and not that of the most current Expiry series*\)\. As already mentioned above, that the ATM Strikes are found at higher Strike levels as we move from closer Expiry series to farther Expiry series\. Bottomline is to __look for the Most Impacted Radius Zone of the Options Chain of that Expiry series in which you desire to create a Long or Short position, and then take a position at a suitable Strike__\.  
4. __Volatility crash / falling of VIX may nullify the effect of a weak momentum if the volatility crash is severe__\. However, between the two, __if momentum is stronger than volatility crash, then the effect of volatility crash on the LTP of Options may get neutralized due to the effect of strong momentum on the LTP of Options__ and consequently the strong momentum may inspite of volatility crash can cause LTP of Options to rise significantly\. 

<__start__>It can be observed in the real example given in the Table here: __<img32>__: That even though VIX cracked more than 5% on August 30, 2022, however, because of a strong one\-sided momentum in BankNifty, certain CE Options rose as high as \+850% in a single day\. Infact most of the CE Options rose more than \+100% in their LTP\. <__end__> 

However, if __rising momentum gets coupled with rise in volatility, then the LTP of relevant Options can go very high__ \(*for example, Nifty starts tumbling down due to some freaking bad news and VIX spikes up beyond 30*\)\. Thus, the rising momentum of the fall in Nifty can be played by creating Long positions in PE in the Most impacted Radius Zone\. Such a situation will get the LTP of PE Options blowing high because steep momentum in fall of Nifty gets acceleration of the VIX spike i\.e\. rise in volatility\.

__When ITM’s premium value is less than its Intrinsic Value \(i\.e\. when ITM is in Discount\)__:

As per the settled mechanism of Options pricing: an ITM Options pricing should be higher than its Intrinsic Value\. 

Therefore, if this pricing mechanism gets disturbed, such that the ITM starts trading at discount to its respective Intrinsic Value, then such disturbance for the pricing model would soon be adjusted to bring the pricing of such ITMs higher than their Intrinsic Value\. 

This adjustment generates a trading opportunity, which is of high probability; and in case such phenomenon occurs on or close to Expiry Day, then it offer opportunity to exploit this deviation from the pricing model of Options for generating huge profits\.

This phenomenon of ITM Options deviating from their settled pricing model and exhibiting discount in their Premium value \(i\.e\. lower than its respective Intrinsic value than Futures and Spot\), can also be used as part of our trading Strategies\.

__*ITM PE\(s\) in Discount \(i\.e\. When ITM PE’s premium value /LTP is less than its Intrinsic Value\):*__

1. If Futures’ of a relevant Expiry series are trading at usual Premium \(*i\.e reasonably higher than Spot*\), but the deep ITM PE\(s\) pertaining to the same Expiry series as that of the said Futures is trading at a Discount both from Spot and Futures of same Expiry series \(*i\.e\. the LTP or premium value of deep ITM PE is less than its Intrinsic Value by atleast 20\-30 points*\), then it can be reasonably expected that there would occur adjustments to the pricing of such ITM PEs, so as to make the LTP/ premium value of such deep ITM PE higher than its respective Intrinsic Value as must be the case for all ITM Options before their Expiry\. 
2. Thus, __this expected adjustment of pricing for such deep ITM PEs would result in rising of the LTP of PE Options, thereby causing the PE Options to rise in their LTP or generating a short\-term downtrend in the underlying__, either in intraday itself or within next 1 to 2 days, until the deep ITM PEs get their LTPs duly adjusted higher to their Intrinsic Value\. This adjustment in the PEs results in short\-term bearish move in the underlying\. The fall in the underlying in such situation is usually quite swift\.
3. The fact that the ITM PEs gets into discount to its Intrinsic Value may be attributable to bearish trading positions being initiated by the Big Money\. Thus, such situation may be indicative of a short\-terms bearish move in the underlying\.
4. Such phenomenon may be observed in Current Week Expiry series, wherein the deep ITM PE is trading at discount, from both Current Month’s Future and Spot\. This phenomenon may also be observed on / around Expiry day of Current Week Options and thus may offer an opportunity to initiate Long PE positions in such ITMs for intraday / BTST trades\.
5. Also, such phenomenon may be observed in Next Month or Far Month Expiry series, wherein the deep ITM PE \(of Next Month or Far Month Expiry series, as the case may be\) is trading at discount, from relevant Month’s Future LTP and Spot\. This situation may offer an opportunity for positional bearish trading positions in such PE ITMs\.

__<start>Example__: If ITM PE of Next Month Expiry series is having a LTP lower than its Intrinsic Value, both from the Spot and from the Futures of the Next Month Expiry series; then a bearish trading position may be initiated in such Next Month ITM PEs\. Likewise, if  ITM PE of Far Month Expiry series is having a LTP lower than its Intrinsic Value, both from the Spot and from the Futures of the Far Month Expiry series; then a bearish trading position may be initiated in such Far Month ITM PEs\.__ <end>__

__ITM CE\(s\) in Discount \(i\.e\. ITM CE’s Premium Value is less than its Intrinsic Value\):__

1. If Futures’ of a relevant Expiry series are trading at usual Premium \(*i\.e reasonably higher than Spot*\), but the deep ITM CE\(s\) pertaining to the same Expiry series as that of the said Futures is trading at a Discount both from Spot and Futures of same Expiry series \(*i\.e\. the LTP of deep ITM CE is less than its Intrinsic Value by atleast 20\-30 points*\), then it can be reasonably expected that there would occur adjustments to the pricing of such ITM CEs, so as to make the LTP of such deep ITM CE higher than its respective Intrinsic Value as must be the case for all ITM Options before their Expiry\. 
2. Thus, __this expected adjustment of pricing for such deep ITM CEs would result in rising of the LTP of CE Options, thereby causing the CE Options to rise in their LTP or generating an uptrend in the underlying__, either in intraday itself or within next 1 to 2 days, until the deep ITM CEs get their LTPs duly adjusted higher to their Intrinsic Value\. This adjustment in the CEs results in sort\-term bullish move in the underlying\. The rise in the underlying in such situation is usually quite swift\.
3. The fact that the ITM CEs gets into discount to its Intrinsic Value may be attributable to bullish trading positions being initiated by the Big Money\. Thus, such situation may be indicative of a short\-terms bullish move in the underlying\.
4. Such phenomenon may be observed in Current Week Expiry series, wherein the deep ITM CE is trading at discount, from both Current Month’s Future and Spot\. This phenomenon may also be observed on / around Expiry day of Current Week Options and thus may offer an opportunity to initiate Long CE positions in such ITMs for intraday / BTST trades\.
5. Also, such phenomenon may be observed in Next Month or Far Month Expiry series, wherein the deep ITM CE \(of Next Month or Far Month Expiry series, as the case may be\) is trading at discount, from relevant Month’s Future LTP and Spot\. This situation may offer an opportunity for positional bullish trading positions in such CE ITMs\.

__<start>Example__: If ITM CE of Next Month Expiry series is having a LTP lower than its Intrinsic Value, both from the Spot and from the Futures of the Next Month Expiry series; then a bullish trading position may be initiated in such Next Month ITM CEs\. Likewise, if  ITM CE of Far Month Expiry series is having a LTP lower than its Intrinsic Value, both from the Spot and from the Futures of the Far Month Expiry series; then a bullish trading position may be initiated in such Far Month ITM CEs\.__ <end>__

__Impact on Options Behaviour from their Born Date__

Most underlying assets/Indices which are available for trading in FNO segment, are usually made available by the Exchange in 3 Monthly Expiry series, i\.e\.: Current Month Expiry, Next Month Expiry and Far Month Expiry\. These Monthly Expiry series may be in addition to Weekly or Quarterly expiry series, which are also made available by Exchanges in respect of certain class of FNO instruments\. Like, FNO Stocks are made available in 3 Monthly Expiry series but not in Weekly Expiry series; but Nifty and BankNifty FNO Options are available in Weekly as well as Monthly Expiry series\.

Consequently, at any given time, in relation to such underlying, there are always 3 aforesaid Monthly Expiry series which are available\. Thus, as soon as a Current Month Expiry series expires, the existing Next Month Expiry series becomes the Current Month Expiry series and the existing Far Month Expiry series becomes the Next Month Expiry series; and a fresh subsequent calendar month specific Expiry series is born as a Far Month Expiry series\.

Therefore, it can be said that as soon as the Current Month Expiry series expires, a fresh Far Month Expiry series is born\. Thus, __the date subsequent to the Expiry Date of the Current Month Expiry series, is actually the Born Date of a fresh Far Month Expiry series__\.  Thus, in the sequence of Monthly Expiry series, fresh Monthly series Options are born after the expiry of the Current Monthly Expiry series of Options\. 

Lets discuss about a peculiar behavioural aspect demonstrated by the Options of the fresh born ‘Far Monthly Expiry series’, within few days from its respective Born date\.

__Far Month Expiry Options behaviour from their Born Date:__

When a fresh Far Month Options are born, after expiry of the Current Month Expiry series, they exhibit a unique behaviour, which is: that the __Far OTM Options of such fresh Far Month Expiry series have exorbitantly high premium value on starting of Far Month Expiry series, and these Far OTMs lose their premium value very rapidly with 7\-10 days__\. This aspect is further explained below\.

1. As soon as the fresh Far Month’s Expiry series becomes available for trading \(*immediately within few days, after expiry of Current Month Options*\), the Far OTMs of such Expiry series are found to have exorbitantly high Premium values\. These high Premium values in the Far OTMs can be observed in the Options Chain of this fresh Next Month Expiry series\. This phenomenon of Far OTMs carrying high premium value is due to the fact that as soon as a new Far Month Expiry series is born, the Far OTMs have excessive Time Value in their LTP \(in case of BankNifty, about 900 to 1500 per Lot\)\. If the VIX is high, like above 18 or so, then even higher premium value would be found on such Far OTMs\. 
2. However, within 7\-10 days after such fresh Far Months’ Options becomes available for trading, the Far OTMs of such Expiry series, loose their Premium value by more than 40\-50% \(*due to erosion of excessive Time value from their premium value*\)\.  If the trend is bullish, then Far OTM PEs would loose their Premium value significantly; and if the trend is bearish, then Far OTM CEs would lose their Premium value significantly\. Also, if the underlying remain rangebound during this time period, then too such Far OTMs would lose their excessive Time Value and result in excessive loss in their premium value\. For example: if a BankNifty Far OTM has about a premium value of about 900 to 1500 per Lot, then we may expect erosion to the tune of about 300 to 400 per Lot within 7\-10 days, if the trend remains intact or the underlying remains rangebound\. Thus, a huge premium profit can be generated through premium credits of this magnitude and speed of erosion in their Time Value\. 

__This Options behaviour, as exhibited by newly born Far Month’s Expiry series, immediately within 7\-10 days after it becomes available for trading \(*i\.e\. after being born*\), offers a huge profit potential through Shorting Far OTM Options to play the current trend__\. If the trend remains intact or even if the underlying remains rangebound, then Shorting Far OTMs to play the current trend, can generate huge profit within a very short span of holding period\. This is because  Shorting such Far OTMs carrying exorbitantly high premium value would give huge premium credits, which can quickly get converted into profits due to very fast erosion in their Time Value\. Thus, Shorting such Far OTMs offers a very reliable way of trading Short Options on positional basis \(*holding time 7\-10 days*\)\.

Having said above, only liquid Far OTMs of such Far Month Expiry  series, must be selected as a Shorting candidate to __exploit the peculiar characteristic of extreme erosion \(from its exorbitantly high Premium value\), exhibited by Far OTMs of new born Far Month Expiry series__\.

__Calculations of Delta value in trade positions__

1. Any Long or Short Options position on any given Strike, has the Delta value equivalent to the aggregate number of Delta value basis the number of Lots comprised in that position \(eg: *2 Lot ATM Strike will have a Delta value of 1, i\.e\. 0\.5 Delta x 2 Lots*\)\. 

Thus, __the impact of change in the LTP of Options in response to the change in the underlying, driven by Delta values, can be played by increasing the number of Lots \(i\.e\. Volume\) at a given Strike price__\. For example, if a Long position is initiated at ATM PE Strike with 2 Lots, then the aggregate / resultant Delta value of this Long Options position at ATM PE will be 1 \(i\.e\. equivalent to Delta value of a Synthetic Futures or Futures\)\. 

Therefore, a trend can be played out by increasing the Volume in order to benefit maximum from the aggregate Delta value \(i\.e\. *reaping maximum rise to the LTP of Options, in response to the change in the underlying*\)\. However, the aggregate Delta value basis the Lots \(i\.e\. the Volume\) may also backfire if the expected trend reverses in the opposite direction\.

1. Any Hedged trade comprising of Long Options & Short Options at different Strikes or involving Futures & Options position, would have a net Delta value equivalent to the aggregate Delta values of the primary leg \(on total number of Lots basis\) *minus* the aggregate number of Delta value of the hedged leg \(on total number of Lots basis\)\. Thus, a hedged trade can be suitably designed on the basis of likely __impact of change in the profit or loss in the hedged trade in response to the change in the underlying, driven by the respective aggregate Delta values of primary leg & hedged leg__\.

__Delta value of a Synthetic Future__

__Delta value of a Synthetic Future \(i\.e\. *an Option having entirely Intrinsic Value in its LTP and negligible Time Value*\) is 1__\. Thus, such Options are found in the deepest ITMs\. These Options react exactly as Futures, from the perspective of change in the price of the underlying\. Delta value of 1 means that if the price of the underlying changes by Rs\. 1, then the Futures price also changes by Rs\. 1 and so do the deep ITM Synthetic Futures\.

__Delta value of Options in any given Options Chain__

The Delta value of Options in any given Options Chain has the following meaning:

1. Delta value of any Option in any given Options Chain denote the likely change in LTP of that Option as a result of change in the price of the underlying, if all other factors remain constant\. This means that: with every 1 Rs change in the price of the underlying the LTP of the given Option would change by the amount represented as its Delta value in the Options Chain\. 
2. The __Delta value in any given Options Chain increases from deepest OTM towards deepest ITM, for both CE & PE sides__\. 
3. __CE side is denoted with a \+veDelta value, which signifies that LTP of CE Options rises with rise in the price of the underlying and falls with the drop in the price of the underlying__ \(i\.e\. *directly proportional relationship of CE LTP with the direction of the price of the underlying*\)\.
4. __PE side is denoted with a \-veDelta value, which signifies that LTP of PE Options rises with fall in the price of the underlying and falls with the rise in the price of the underlying__ \(i\.e\. *inversely proportional relationship of PE LTP with the direction of the price of the underlying*\)\.
5. On the CE side, Delta increases from 0 to 1 in decimals \(or from 0 to 100\) from deepest OTM towards deepest ITM\. The ATM CE has a Delta of 0\.5 in decimals \(*meaning that if the price of the underlying rises by 1 Rs\., then the LTP of CE ATM Strike would increase by 50paise and accordingly if price of the underlying decreases by 1 Rs\. then LTP of CE ATM would decrease by 50 paise*\)\. __Delta value on CE side increases from 0 at the deepest OTM to 0\.5 at ATM Strike__\. Further, on CE side, __the Delta value increases from 0\.5 at the ATM Strike to 1 towards the deepest CE ITM Strike__\.
6. On the PE side, Delta increases from 0 to 1 in decimals \(or from 0 to 100\) from deepest OTM towards deepest ITM\. The ATM PE has a Delta of 0\.5 in decimals \(*meaning that if the price of the underlying rises by 1 Rs\., then the LTP of PE ATM Strike would decrease by 50paise and accordingly if price of the underlying decreases by 1 Rs\. then LTP of PE ATM would increase by 50 paise\. Thus, the Delta values of PE are denoted with negative sign*\)\. __Delta value on PE side increases from 0 at the deepest OTM to 0\.5 at ATM Strike__\. Further, __on PE side, the Delta value increases from 0\.5 at the ATM Strike to 1 towards the deepest PE ITM Strike__\.
7. __Delta value of same Strike ITM Option decreases as we move from near Expiry series to farther Expiry series__; while the__ Delta value of same Strike OTM Option increases as we move from near Expiry series to farther Expiry series__\.
8. In any Options Chain: \(i\) Delta value of certain ITM CEs matches with the Delta values of certain ITM PEs, between 0\.5 to 1; and \(ii\) Delta value of certain OTM CEs matches with the Delta values of certain OTM PEs, between 0 to 0\.5\. Delta values of ATM CE & PE have a Delta value of 0\.5\.

__Delta Shifting in Options Trading__

1. A trader can play momentum in the price of the underlying, through Long positions in OTM Strikes at a Delta of around 0\.25 \(in order to keep minimum risk in the event of unexpected reversal\) and exit the Long position at the Delta of 0\.5 \(i\.e\. when OTM becomes ATM\) or at higher Delta\. And if the momentum is still continuing, the trader can again initiate a fresh position again with a OTM Strike at a Delta of around 0\.3 or 0\.4 and again ride the position until the position reaches a Delta of 0\.5 or higher\. This process is called __Delta shifting \(for Long Options position\)__\. Through such Delta shifting, the trader can initiate positions at lower Delta thereby minimising the risk in case of reversal and then booking the profit at a Delta level beyond which the risk would be significant\. This way the trader can keep booking profits and also ensuring that he is able to ride the momentum by maintaining the risk level in control\.
2. Similarly, a trader can also do Delta shifting for the purpose of Shorting Options\. For Shorting Options, Delta shifting is done from lower to relatively higher Delta position\. Mostly, the Far OTM Short Options position when becomes even farther, then that positions is booked and a fresh Short position is initiated at another Far OTM Strike \(which is relatively a Near OTM than the original Short position\), which would be on relatively higher Delta\. 

<__start__>__Example__: In case of bearish momentum in the price of the underlying, Short Options on Far OTM CE Strikes at a Delta of around 0\.25 is initiated \(*in order to keep minimum risk in the event of unexpected reversal*\) and this position is exited when due to bearish momentum, the said Far OTM CE loses its Premium as it reaches to a lower Delta value of 0\.15 or even lower\. And if the bearish momentum is still continuing, the trader can again initiate a fresh CE Short position at an OTM Strike at a Delta of around 0\.3 or 0\.25 and again ride the position until the position reaches a Delta of 0\.15 or lower\. This process is called __Delta shifting \(for Short Options position\)__\. 

The Delta shifting can also be similarly done to play bullish move through Shorting Far OTM PEs\. <__end__>

Through such Delta shifting, the trader can initiate Short Options positions at relatively higher Delta Far OTMs \(*obviously, so as to minimise the risk in case of reversal*\) and then booking the profit once the Far OTM Strike becomes even farther OTM moving at lower Delta level beyond\. This way the trader can keep booking profits and also ensuring that he is able to ride the momentum by maintaining the risk level in control\.

__Co\-relation between the Delta values of  CE and PE, in a given Options Chain__

1. On both CE & PE side, the Delta value ranges from 0 to 1 from their respective deepest OTM towards deepest ITM\. The ATM Strike CE & PE have a Delta of 0\.5\. On the CE OTM & PE OTM sides, the Delta value ranges from 0 to 0\.5 \(i\.e\. from deepest OTM towards ATM\)\. Also, on the CE ITM & PE ITM sides, the Delta value ranges from 0\.5 to 1 \(i\.e\. from ATM towards deepest ITM\)\. Further, on both CE & PE side, the LTP value increases from deepest OTM towards deepest OTM\. Given the aforesaid background, it can be noticed that in any given Options Chain: 
2. the Delta values of Options on the CE OTM side matches with specific Options on PE OTM side; and the Delta values of Options on the CE ITM side matches with specific Options on PE ITM side;
3. The LTP of a CE Option with a given Delta value, is closer to the LTP of a PE Option with same Delta value \(and *vice\-versa*\)\.

This, brings us to the conclusion  that: if we match the LTPs of a CE Option and a PE Option in any Options Chain, then likely their Delta values would be nearly same\. Likewise, if we match the Delta values of a CE Option and a PE Option in any Options Chain, then likely their LTP would be nearly same \(__Delta Matching__\)\. Thus, a __CE & PE with close Delta may have approximately close LTP values and vice\-versa__\. 

1. Also, at any given Strike level, the sum of Delta value between the CE & PE is equal to 1\. 

*<*__start__*>*__*Example:*__* if Nifty 16500 ITM CE has a Delta of 0\.75, then 16500 OTM PE will have a Delta of 0\.25\. Likewise, if Nifty 19000 OTM CE has a Delta of 0\.1, then 19000 ITM PE will have a Delta of 0\.9\. <*__end__* >*

These Delta values at a particular Strike signifies that always one Option of a given Strike has a higher Delta and another has a lower Delta\. __Option with higher Delta on a given Strike level would rise/fall more in its LTP value than the other Option at that Strike, in response to increase/decrease in the price of the underlying,__ as the case may be\.

__Impact on Delta value of Options, in response to change in the price of the underlying__

1. As the LTP of Options rises due to favourable direction of the price of the underlying \(i\.e\. *rise in the price of the underlying for CE for CE Option and fall in the price of the underlying for PE Option*\), the relevant Option moves towards more deeper in\-the\-money\. __Because of favourable directional move and shifting of relevant Option towards deeper in\-the\-money, the Options Delta value also shifts to a higher Delta value__\. Therefore, as the Option moves more deeper\-in the\-money due to favourable directional move in the price of the underlying the Delta value of such Options increases\. Thus, when an Option moves more in\-the\-money side, the rise in its Delta value signifies that: any positive or negative change in the price of the underlying would lead to a higher rise or fall in the LTP of Options\. *For example a CE ATM Option \(having Delta of 0\.5\) when becomes an ITM \(with a Delta value of 0\.7\) due to rise in the price of the underlying, then its implication is that now for any 1 Rs\. change \(up or down\) in the price of the underlying, the LTP of this CE Option would change by 0\.70 paisa up or down, as the case may be \(as against 0\.50 paisa change in the LTP value when that Option was an ATM\)\.* 
2. On the contrary, as the LTP of Options falls due to unfavourable direction of the price of the underlying \(i\.e\. *fall in the price of the underlying for CE for CE Option; and rise in the price of the underlying for PE Option*\), the relevant Option moves towards OTM side\. __Because of unfavourable directional move and shifting of relevant Option towards OTM/ deeper OTM, the Options Delta value also shifts to a lower Delta value__\. Therefore, as the Option moves more deeper out\-of\-the\-money due to unfavourable directional move in the price of the underlying the Delta value of such Options decreases\.
3. In other words, __as an Option shifts towards higher Delta \(*due to favourable directional move in the price of the underlying*\) the reward and risk also increases__\. *For example, LTP of an OTM PE Option with Delta of 0\.4 would rise by 0\.4 paisa if price of the underlying drops  by 1 Rs\.; and if the price of the underlying rise by 1 Rs\. then LTP of this PE Option would drop by 0\.4 paisa*\. *Now, if the price of the underlying swiftly drops such that this PE Option becomes an ITM with a Delta of 0\.75, then from here on if there is further fall of Rs\. 1 in the price of the underlying then the LTP of this PE Option would rise by 0\.75 paisa and if the price of the underlying rises by Rs\. 1 then the LTP of this ITM PE Option would fall by 0\.75 paisa\.  Therefore, when this PE Option was at OTM with a Delta of 0\.4 the risk and reward was lesser; but when the same PE Option became an ITM with 0\.7 Delta value then its risk and reward it can generate increased\.* Likewise, * *__as an Option shifts towards lower Delta \(*due to unfavourable directional move in the price of the underlying*\) the reward and risk also decreases__\.
4. Therefore, when a Long position is taken on an Option Strike with a particular Delta value, and the trend reverses such that the Option slips to a Strike with lower Delta value \(and obviously also to a lower LTP\), then it may not necessarily make sense to average the position by buying the same Strike at a lower Delta \(in the event the original view on the direction of the underlying remains intact\)\. Instead, initiating Long on another Strike Option with relatively higher Delta value may make more sense if the trend as originally expected is likely to resume\. 

This is because, the original Option, after it fell \(which has now shifted from a higher Delta to a lower Delta\) would incur loss, and if this same Option is averaged at the same Strike after its fall to a lower Delta, then upon reversal of trend again in the originally expected direction, this averaged Option Long position will rise less due to its lower Delta value, instead of a new Option Long initiated of a higher Delta which will help gain more profit after the trend reverses towards originally expected direction and absorb the loss incurred in the original Long Option position due to its fall\. Thus, __averaging same Strike Option on a Long position is not advisable__\.

__Significance of Understanding Delta values of Options positions for a F&O Trader__

The Delta value of an Option helps a trader to understand the effect that may occur on the LTP of that Option i\.e\. the increase or decrease in the LTP of Option as a reaction to the change in the price of the underlying, and to accordingly plan his trade\. A trader may consider following actions from the perspective of Delta in his trades:

1. A trader can play out very strong momentum, by taking a Long Options position in the favourable direction of the trend, within the Most Impacted radius Zone, through an OTM Option with a  Delta value of 0\.25 or 0\.3 and enjoy the ride all the way upto deep ITM\. This can be an ideal bet for positions with large volume  because the position is initiated at the Delta of 0\.25 or 0\.3, therefore if the momentum quickly fizzles out, right after initiating the position, for some reason then the risk on account of reversal would be to the extent of 0\.25 paisa to 0\.3 paisa for every reversal of 1 Rs\. \(as against, if such position would have been initiated with an ITM of a Delta of 0\.75\)\. Thus, __Delta value can help a trader take a calculated risk in view of his analysis__\.
2. A trader can play momentum in the price of the underlying, through Long positions in OTM Strikes at a Delta of around 0\.25 \(in order to keep minimum risk in the event of unexpected reversal\) and exit the Long position at the Delta of 0\.5 \(i\.e\. when OTM becomes ATM\) or at higher Delta\. And if the momentum is still continuing, the trader can again initiate a fresh position again with a OTM Strike at a Delta of around 0\.3 or 0\.4 and again ride the position until the position reaches a Delta of 0\.5 or higher\. This process is called __Delta shifting \(for Long Options position\)__\. Through such Delta shifting, the trader can initiate positions at lower Delta thereby minimising the risk in case of reversal and then booking the profit at a Delta level beyond which the risk would be significant\. This way the trader can keep booking profits and also ensuring that he is able to ride the momentum by maintaining the risk level in control\.
3. Similarly, a trader can also do Delta shifting for the purpose of Shorting Options\. For Shorting Options, Delta shifting is done from lower to relatively higher Delta position\. Mostly, the Far OTM Short Options position when becomes even farther, then that positions is booked and a fresh Short position is initiated at another Far OTM Strike \(which is relatively a Near OTM than the original Short position\), which would be on relatively higher Delta\. For example: in case of bearish momentum in the price of the underlying, Short Options on Far OTM CE Strikes at a Delta of around 0\.25 is initiated \(*in order to keep minimum risk in the event of unexpected reversal*\) and this position is exited when due to bearish momentum, the said Far OTM CE loses its Premium as it reaches to a lower Delta value of 0\.15 or even lower\. And if the bearish momentum is still continuing, the trader can again initiate a fresh CE Short position at an OTM Strike at a Delta of around 0\.3 or 0\.25 and again ride the position until the position reaches a Delta of 0\.15 or lower\. This process is called __Delta shifting \(for Short Options position\)__\. The Delta shifting can also be similarly done to play bullish move through Shorting Far OTM PEs\. Through such Delta shifting, the trader can initiate Short Options positions at relatively higher Delta Far OTMs \(*obviously, so as to minimise the risk in case of reversal*\) and then booking the profit once the Far OTM Strike becomes even farther OTM moving at lower Delta level beyond\. This way the trader can keep booking profits and also ensuring that he is able to ride the momentum by maintaining the risk level in control\.
4. A trader can __use Delta value to average his Long Option positions __upon opportunities at mean reversion or otherwise on temporary trend reversal\. A trader can initiate a Long Option position of a particular Delta value, and when he gets an opportunity to average his holding due to temporary reversal of original trend, the trader can upon such temporary trend reversal buy another Option \(to play the direction of the underlying as originally expected\) now available at lower LTP \(due to temporary reversal of trend\) but of a Strike carrying higher Delta value than the original Option on which Long was initiated\. Thus, when the original trend as expected resumes, then original Option position would start coming towards the profit, but the second Option of higher Delta value would start generating more profit \(due to its higher Delta value\) than the original Option bought\.
5. If a trader wishes to ride a Long position to exploit the benefits of Futures in terms of change in LTP in response to the price of the underlying, then a trader can play out through __Synthetic Futures i\.e\. deep ITM Options which have a Delta of 1__\. These Options behave exactly like Futures, but require relatively very less margin and do not have any MTM hassle unlike in Futures\. Moreover, the maximum loss in case of Synthetic Futures is limited to the maximum extent of premium paid for initiating Long in Synthetic Futures\. Also, if the trader needs to hold a Long position for a longer time and is expecting a sudden gush of momentum in some time during a period of 10\-20 days, then also playing such a situation through Synthetic Futures makes sense because there is barely any time Value in such Options and thus the time decay is minimal in such Options\.
6. __Delta values can help plan a hedged trade__\. In every hedged trade, the primary position is hedged by initiating a contra\-position as a hedged leg\. If the primary position is bullish then we have a bearish leg to hedge the bullish primary leg; or if the primary position is bearish then we have a bullish leg to hedge the bearish primary leg\. Therefore, we can strike a __suitable balance between the risk/reward profile of the primary leg and the hedged leg by initiating positions in Options with suitable Delta values__ for the desired hedged trade\. *For example, in Bull Call Debit Spread hedged trade, we can initiate a primary leg with a bullish view on a Strike with a Delta of 0\.3; and we can hedge this primary bullish leg with a bearish leg through a Strike having a Delta of 0\.2\. Thus, in this hedged trade, if the trade goes as per plan then the primary leg would always have more higher Delta than the bearish leg thereby generating a net profit\. But if the trend reverses, then the bullish leg will fall as per 0\.3 Delta but the bearish leg would generate profit as per 0\.2 Delta\. Therefore, on reversal of trend, while the primary leg would also always have a higher Delta than the hedged leg thereby giving more loss than the profit generated by the hedged leg, but the hedged leg do not have too wide a Delta difference with the primary leg, therefore the hedged leg can be expected to reduce the loss caused in the primary leg by a reasonable extent with the profits it will generate due to bearish reversal\.*
7. Also, a hedged trade can be suitably designed on the basis of Net Delta value between the primary leg & the hedged leg as __the Net Delta value will help understand the likely impact of change in the profit or loss in the hedged trade in response to the change in the underlying, driven by the respective aggregate Delta values of primary leg & hedged leg__\. For example, *if a Bull CE Spread position is initiated with a primary leg comprising of Long Options at higher OTM CE Strike with 2 Lots at Delta value of 0\.4, and a hedged leg comprising of a Short Options at OTM lower CE Strike with 2 Lots at Delta value of 0\.3, then the net / resultant Delta value of this Bull CE Spread hedged trade will be 0\.2 \(i\.e\. 0\.4x2 minus 0\.3x2\)*\. *Thus, with change in the price of the underlying by Rs\. 1, this hedged trade would rise or fall by 20 paisa\. *Such calculation of Delta values help to plan a suitable hedged trade\.
8. A trader may __plan a hedged trade by matching the Delta values of OTM CE & PE__ \(*like Short Strangle, i\.e\. shorting an OTM CE & OTM PE*\)\. This will ensure that increase/decrease in LTP on one leg gets almost closely compensated by the rise/fall in LTP of the other leg, so long the price of the underlying remains within a particular range\. If the price of the underlying moves out of a particular range, then the harmony between the two legs may get distorted \(*because then one leg will have a resultant higher Delta value and the other leg lower delta value*\)\.
9. Since, __one of the Option at a particular Strike has a higher Delta than the other Option at that same Strike of the same Expiry in an Options Chain__: this information can help the trader to initiate a hedged Long position through Long Straddle \(i\.e\. buying both CE & PE of the same Strike\) in following ways:
10. If the trader expects that likely the momentum will be on the upside than on downside, then he can plan to play such momentum by initiating buy at a Strike with more Delta in the CE leg and lower Delta on the PE leg\. This will be available in an ITM CE & OTM PE of same Strike\. If the momentum occurs on upside, CE leg will generate more profit due to higher Delta and PE leg will generate lesser loss due to lower Delta\. However, if the momentum arrives on the downside, then CE side will generate more loss due to higher Delta but the PE side with lower Delta would generate some profit which will help cover some amount of loss on the CE leg\.
11. If the trader expects that likely the momentum will be on the downside than on upside, then he can plan to play such momentum by initiating buy at a Strike with more Delta in the PE leg and lower Delta on the CE leg\. This will be available in an ITM PE & OTM CE of same Strike\. If the momentum occurs on downside, PE leg will generate more profit due to higher Delta and CE leg will generate lesser loss due to lower Delta\. However, if the momentum arrives on the upside, then PE side will generate more loss due to higher Delta but the CE side with lower Delta would generate some profit which will help cover some amount of loss on the PE leg\.
12. If the trader expects that likely super momentum will arrive on the breaking of some news but do not know if the news would bring rise in the price of the underlying or fall, then he can plan to play such situation of momentum by initiating buy at a Strike with almost equal Delta in the CE leg and the PE leg\. This will be available in ATM CE & ATM PE or near ATM same Strike CE & PE\. If the super momentum occurs on upside, CE leg will generate more profit because due to super momentum on upside there will be major shift of CE Strike in\-the\-money thereby rising its Delta value even higher than 0\.5 \(when it was an ATM CE\)\. Further, due to super momentum on the upside, there will be major shift of PE Strike towards out\-of\-the\-money thereby reducing its Delta value even lower than 0\.5 \(when it was an ATM PE\)\. Infact, more the Delta value of CE would rise on account of super momentum on the upside, the more reduction will occur to the Delta value of the PE leg\. This situation will generate more profit on CE leg than the loss on the PE leg, thereby a net profitable trade\. However, if there occurs super momentum on the downside, then the reverse will happen i\.e\. Delta value of PE would rise more on account of super momentum on the downside, and the Delta value of the CE leg would reduce\. This situation will generate more profit on PE leg than the loss on the CE leg, thereby a net profitable trade\.
13. Further, a trader can also plan the hedged trade by initiating Long on different Strike of CE & PE with difference in their Delta values \(instead of Long Straddle\)\. If inclination is on the upside move, then higher Delta CE Strike can be used as primary leg and lower Delta PE Strike as a hedged leg\. However, if downside is expected then higher Delta PE Strike can be used as primary leg and lower Delta CE Strike as a hedged leg\.

__Delta values from closest Expiry to farther Expiry series of same Strike Option__

1. The pattern of Delta values, LTP of Options \(i\.e\. their premium value\), rise in LTP/premium value in percentage and absolute terms with favourable direction in the price of the underlying, from closest Expiry to farther Expiry series is given below: 
2. Delta values of same Strike ITM Option decreases from closer Expiry series to farther Expiry series\. Whereas, Delta values of same Strike OTM Option increases from closer Expiry series to farther Expiry series\. 
3. LTP values of same Strike Options is higher in farther Expiry series than closer Expiry series\. 
4. Favourable movement of the price of the underlying \(i\.e\.* upward movement for CEs and downward movement for PEs*\), causes the LTP of same Strike Options to rises more in percentage terms in closer Expiry series than in farther Expiry series; and
5. Favourable movement of the price of the underlying \(i\.e\.* upward movement for CEs and downward movement for PEs*\), causes the LTP of same Strike Options rises more in absolute number terms as we go from closer Expiry series towards farther Expiry series, i\.e\. more rise in farther Expiry than closer Expiry in absolute terms\. 

__<start>Example__: The aforesaid scenarios can be observed in the following illustration, in case of BankNifty Options from closest Expiry series towards farthest Expiry series as of September 12, 2022 \(BankNifty Expiry prior to July 2023, was on Thursday\) with EOD values as given in the table below \(*please evaluate values in Weekly Series Expiry as one pack; and evaluate values in Monthly Expiry Series as a separate pack*\)\. BankNifty Sep Futures rose on Sep 12, 2022 by 0\.41% to close at 40670 \(and VIX finally closed after day’s fall, at \+1\.24% at 17\.94\): <__img34__> __<end>__

1. However, having said the above, the resultant LTP/premium of Options is not determined solely on account of the shift in their Delta values caused due to movement in the price of the underlying, but the full extent of the resultant LTP/ premium values on real time basis is the final outcome of the interplay of all the factors causing influence on the Options’ LTP/premium\. Thus, even if an Option moves to a Delta of 0\.5 to 0\.7, there may or may not be a rise in the LTP/premium of that Option due to other factors like momentum, time decay and volatility etc\., which have a dominating effect \(on the resultant premium of Options\) than that caused due to Delta shifting\.

__Stone\-age Options:__

Let us discuss about peculiar characteristic exhibited by certain type of Options, which make them most suitable type for Options for playing Long Options Strategy for a relatively longer holding time\. These Options are given a name, called: ‘__Stone\-age Options__’\.

As the name indicates, __Stone\-age Option is an Option which like a stone i\.e\. it exhibits the property of very slow decay in its Premium value, even with a relatively longer holding time__\. These Stone\-age Options are Far OTMs of Next Month Expiry series\. 

__Benefits of Long position in Stone\-age Options:__

Stone\-age Options exhibit the following peculiar features, which makes it a best candidate to play expected trend through naked Long Options:

1. __*Minimal erosion in Premium value*__*: *Stone\-age Options are relatively least affected with erosion in its Premium value, even if there is a huge gap\-up / gap\-down or huge 1000 point around movement in the underlying or if the underlying keep hovering in a range for about good 20 days or so\. This makes it attractive from buying perspective, because, a trader will not lose much on its Long position on such Options, if the expected trend arrives late or does not arrive or infact even if the trend arrives in an opposite direction \(which is not favourable to the Options on which Long trading position is created\)\. Maximum erosion in its Premium value may occur to an extent of about 50% from its buying price, from such events over a period of more than 10\-15 days holding time\. Thus, these Stone\-age Options can be held for a relatively longer holding period\.
2. __*Cost of initiating Long position is low*__*: * As mentioned above, targeted Stone\-age Option has about Rs\. 30\-40 Premium value \(per Lot basis\) in case of Nifty and about Rs\. 60\-80 \(per Lot basis\) in case of BankNifty Options\. Therefore, the cost of purchasing of these Options for Nifty is about Rs\. 1500\-2000 per Lot and for BankNifty Rs\. 1000\-1200 per Lot\. This low buying purchase cost enables a trader to initiate Long trade on these Stone\-age Options with decent volume size\.
3. __*Limited Risk & Unlimited reward potential*__: As mentioned above, the buying cost of these stone\-age Options is quite low, therefore, even in worst case scenario the max loss is limited to the extent of Premium paid to buy these Stone\-age Options\. Further, these Stone\-age Options are Far OTMs, which if becomes Near OTM / ATM or ITM due to favourable momentum in the trend, then these Options can generate exponentially high profit in percentage terms \(and if the volume traded is substantial, then even in absolute terms the profit can be extremely high\)\.  Thus, if the expected view on the underlying comes true, and the Stone\-age Option bought gets a favourable strong momentum, then such Far OTMs can generate unlimited profit\.

Thus, the peculiar characteristics discussed above, make such Stone\-age Option as one of the preferred Option types for initiating Long positions with relatively a longer holding time\. This behavioural aspect of Stone\-age Options can be suitably exploited by traders in their trading Strategies\.

__Stone\-age Options in Nifty and BankNifty; and its Selection:__

In respect of Nifty, Far OTM Options with a Premium value between 30 to 40, in Next Month Expiry series will qualify as Stone\-age Options for Nifty\. Similarly, in respect of BankNifty, Far OTM Options with a Premium value between 60 to 80, in Next Month Expiry series will qualify as Stone\-age Options for BankNifty\. 

These Far OTM Options are used by big hedge funds/ Option players to take hedging positions against their primary trading positions and generally experience low Theta until they are almost a week apart from becoming a Current Month Expiry series \(from their Next Month Expiry series status\)\.

__<start>*Example*__*: In the month of say, March:*

1. *between March 1st until about March 23rd: *Stone\-age* Option would be found in April Month Expiry series\. Therefore, in this case, a Far OTM CE or PE Options with a Premium value of around Rs\. 30\-40 in Nifty April Month Expiry series would qualify as a *Stone\-age* Option\. Likewise, Far OTM CE or PE Options with a Premium value of around Rs\. 60\-80 in BankNifty April Month Expiry series would qualify as a *Stone\-age* Option; and*
2. *after March 23rd: For the purpose of selection of *Stone\-age* Option, Next\-to\-Next Month expiry series will be treated as Next Month Expiry \(as the Current Month Expiry series is soon about to get lapse; and the Next Month Expiry series in a week’s time would become Current Month Expiry series\)\. Thus, when only about a week or so is left in the current month Expiry, we will look for *Stone\-age* Options in Next\-to\-Next Month Expiry series*\. *Accordingly, in the said example, *Stone\-age* Option should be looked for in May Month Expiry series instead of April expiry series\. Therefore, in this case, a Far OTM CE or PE Options with a Premium value of around Rs\. 30\-40 per Lot in Nifty May Month Expiry series would qualify as a *Stone\-age* Option\. Likewise, Far OTM CE or PE Options with a Premium value of around Rs\. 60\-80 per Lot in BankNifty May Month Expiry series would qualify as a *Stone\-age* Option\.<*__end__*>*

Further, in relation to the selection of relevant Stone\-age Options, the following aspects must be borne in mind:

1. It is here clarified that we are considering Monthly Expiry series Options \(and not weekly Expiry series\) for selection of Stone\-age Options\. Further, we are using the above methodology and parameters for identification of Stone\-age Options in Nifty and BankNifty Options only\.
2. The relevant Stone\-age Options would be a Far OTM, but it should not be more than about 2000\-2200 points away Strike from ATM in case of BankNifty; and not more than 1200\-1500 point away from ATM in case of Nifty\. 
3. Sometimes these Stone\-age Options may not be liquid and can be unavailable for trading initially, especially when we are in the last week of current month and are targeting a Stone\-age Option in Next\-to\-Next Month Expiry series\. In such case, we need to wait for the Stone\-age Option to be made available by the broker for trading, which becomes available as it starts to gain some traction from the big funds & liquidity tends to rise in such Options, which usually starts happening within 7\-10 days of Next\-to\-Next Month Expiry series becoming Next Month Expiry series\. 

__Premium Value / LTP of Options__

1. Premium value of Options \(CE or PE\) are being referred to as their LTP as well \(the broker’ terminals also show Premium value of Options as their LTP\)\.
2. Options are derivative instrument and they basically derive their value or Premium Value / LTP, from the price and the movement in the price of the underlying\.
3. Premium / LTP of CE Options rises with the rise in the price of the underlying and the LTP of CE Options fall with the fall in the price of the underlying\. 

However, Premium / LTP of PE Options rises with the fall in the price of the underlying and the LTP of PE Options fall with the rise in the price of the underlying \(*since movement in LTP of PE happens in the opposite direction to the movement in the price of the underlying, therefore Delta values of PE Options are denoted with a minus sign*\)\.

1. __LTP of Options follow Futures’ price of the underlying asset or Indices until Expiry__\. On Expiry day, the Futures price merges with the Spot price of the underlying asset / Indices, therefore, on Expiry day Options LTP starts following the Spot price of the underlying asset or Indices, as the case may be\. For __any calculations or mapping Options with Futures: it need to be ensured that the Options and Futures pertain to the same monthly Expiry series__\. For example, for the purpose of calculation of Intrinsic value of any Option pertaining to October Expiry series, the Futures for the month of October Expiry series need to be used \(*and not current monthly Expiry series of say September Futures*\)\. 
2. The Options pertaining to Current Monthly Expiry series will follow the Current Monthly Futures until Expiry; and on the day of Expiry the Current Monthly Futures will start following the Spot and consequently Current Monthly series Options too will start following the Spot for Expiry\. However, the Current Weekly Expiry series of Options will follow and react as per the Current Month Futures until Expiry; and on the day of Expiry the Current Weekly Expiry series Options will follow the Spot and Expire as per the Spot price \(and not Current Month Futures price\)\. 

<__start__>__Example__: As an illustration, the table below exhibits the BankNifty Spot price and BankNifty Current Month Futures price \(Oct 2022\) at EoD on Oct 20, 2022 \(was Thursday, before July 2023\) after Expiry of the Current Weekly BankNifty Options Expiry series of October 20, 2022\. Also, the table below exhibits the Options Chain of Current Weekly BankNifty Options of Expiry series of October 20, 2022 clearly demonstrating that the aforesaid Current Week BankNifty Options expired on EoD as per the BankNifty Spot value \(and not Current Month BankNifty Futures\)\.   __<img10>__  <__end__>

__Impact of Different Greeks and Intrinsic Value & Time Value \(or Extrinsic Value\) on Premium value \(or LTP\) of Options__

1. Fundamentally, each Options in an Options Chain have a definite Delta value, which determines how much a particular Option would rise or fall in its LTP / premium value as a result of change in the price of the underlying, provided all other factors remain constant\.
2. While, movement in the price of the underlying affects the Options, however, how much each Option on the CE and PE side would get positively or negatively impacted depends on a lot of factors\. Therefore, besides a pure Delta play, there are various dynamic factors which ultimately govern, impact and determine the resultant LTP / premium value of all Options on a real time basis\. Therefore, while looking at the Delta value in the Options Chain for any Option, one may make a basic assessment of possible LTP/premium value of an Option as a result of change in the price of the underlying, however, the final / resultant LTP/ premium value of Options would be on the basis of the impact being caused by various factors on the Options\. Each Option, depending on the Intrinsic Value and Time Value contained in its LTP may react differently \(or to different extent\) to the influence being caused by these factors\. The influence of these factors on the Options, make the Options a dynamic instrument\. __Due to interplay of these factors, change in the LTP of various Options in a given Options Chain \(as well in the LTP of Options of the same Strike but of different Expiry Series\) would be different\.__
3. The type and extent of reaction a particular kind of Options would exhibit under the influence of various governing factors \(*viz\. Delta value, time decay, volatility and momentum in the price of the underlying etc\.*\), determines the behaviour of these Options and ultimately  its resultant LTP/ premium value\. In a nutshell, on a standalone basis, generally these factors have the following influence on the Options’ LTP/ premium value:
4. Shifting of Options to higher Delta Strike \(due to favourable movement in the price of the underlying\) causes rise in LTP of that Option; and shifting of Options to lower Delta Strike \(due to unfavourable movement in the price of the underlying\) causes fall in the LTP of that Option;
5. Rise in the Momentum in the price of the underlying in the favourable direction of Options, causes rise in the LTP/ premium value of Options; and rise in the Momentum in the price of the underlying in the unfavourable direction of Options, causes fall in the LTP/ premium value of Options;
6. Rise in Volatility causes rise in the LTP/ premium value of Options; and fall in Volatility causes decline in the LTP/ premium value of Options; and
7. As the Expiry draws near, the LTP/ premium of Options decline due to erosion of Time Value from the LTP of Options due to increase in Theta\.
8. On Expiry, the Time Value of all relevant Options become zero, and consequently LTP/ premium of ATMs and OTMs become zero and expire worthless\.    

__LTP / Premium Value of Options, in the Options Chain__

1. In any given Options Chain, Option from the perspective of their LTP value are found in ascending order from the deepest OTM towards deepest ITMs, i\.e\. __deepest OTMs have lesser LTP and the LTP of Options keeps progressively increasing as we move in the Options Chain from deep OTMs towards deeper ITMs__\. 
2. Also, __LTP of same Strike Options increases as we move from closest current Expiry series towards farthest Expiry series__\. 

<__start__>__*Example*__*: 16000 CE of Nifty current week Expiry if is Rs\. 300, then the same 16000 CE Strike in far month Expiry series would be much higher than Rs\. 300*\. <__end__>

This signifies that the farther Expiry series for same Strike Option has more Time Value component in its LTP \(*which gradually erodes due to gradual rise in Theta, as it starts approaching to become current month Expiry series*\)\. 

Further, the ATM Strike is also not the same in all the Options Chain pertaining to most current to farthest Expiry series\. Infact, __ATM Strikes are found at higher Strike levels in the Options Chain of different Expiry series, as we move from closest to farthest Expiry series__\. <__start__>__E*xample:*__* ATM Strike of BankNifty for September 1st current weekly Expiry series is at 39500, but ATM Strike for September 29 monthly Expiry is 39700, and for October 27 Next Month Expiry series is 39900\. and ATM for November 24 Far Month Expiry series is at 40000*\. <__end__>

This, is basically because the Futures’ prevailing LTP for the corresponding Expiry series is presently around those levels where ATM is found in those Expiry series Options Chain\. 

Therefore, for __any calculations pertaining to any Options, it need to be ensured that the calculations are performed basis the data mentioned in the Options Chain pertaining to that particular Options for that relevant Expiry series taking into account the Futures LTP for that relevant Expiry__\.

__Caution to be exercised near Expiry of Options__:

A trader must remember to not initiate or carry any positions in Options or Futures close to Expiry day \(atleast 10\-15 days prior to Expiry\), where physical delivery requirement may need to be complied\. As the Expiry approaches, in certain Options liquidity may start fading out, making it extremely difficult to exit / square\-off the trade\. 

Thus, a trader must understand that the __position in Options \(where physical delivery requirement applies\) near Expiry could land him in a very difficult situation__\. Stock Options are subject to physical delivery requirements, which makes them even more riskier to trade near their Expiry\.

__*Expiry Day Effects on Options:*__

On the Expiry day, the Options behaviour in response to time decay, Delta values, momentum and volatility is quite different\. These Expiry day characteristics are mentioned below \(__Expiry Day Effects__\):

1. Upon opening of the Expiry day, subject to momentum and rise in Volatility, as a consequence to Overnight Expiry Decay, all Far OTMs and even near OTMs, both CEs & PEs, would open with their Time Value eroded very significantly thereby leading to reduction in their LTP \(almost close to becoming zero\)\. The near OTMs too would have their Time Value eroded and their LTP reduced quite a bit\. However, usually on Expiry day opening, the near OTM Options \(i\.e\. those which are within 3 to 5 Strikes from ATM\) are left with some Time Value and has some LTP
2. The Most Impacted Radius Zone on the OTM side \(where the impact of momentum in the price of the underlying and change in volatility is felt maximum\), gets reduced on Expiry day to only few near OTM Strikes i\.e\. upto 3 to 5 strikes from ATM \(__Most Impacted Radius Zone of Expiry Day__\)\.
3. As the Expiry day advances, the Time Value left in all the Options tends to erode and thereby causing reduction in the LTP of the Options\. __As a fact, all the Options will keep loosing their Time Value until entire Time Value becomes zero __by the end of the closing session of the Expiry day\.
4. If there arises momentum in the price of the underlying in any particular direction, then the LTP of relevant ITM Options \(favourable to the direction of underlying’s price movement\) rises too\. However, so far as the OTMs are concerned, only those which are falling within the Most Impacted Radius Zone of Expiry Day, would only exhibit rise in their LTP as the momentum would cause expansion of the Time Value and thus resulting in rise of the Options’ LTP \(i\.e\. *for upward momentum, in CE OTMs; and in case of downward momentum in PE OTMs*\)\. Far OTMs would not be impacted with the arrival of favourable momentum on Expiry day\. __The near OTMs \(*especially those which are not more than 2 to 3 strikes beyond ATM*\), exhibit a phenomenal rise in their LTPs due to arrival of a strong momentum on Expiry__, such that their LTPs may rise by 2x to 10x if the strong momentum lasts a few minutes on Expiry day\. Such significant rise mostly occurs on arrival of strong favourable momentum prior to 12\.30pm or so on the Expiry day\.  This behaviour is exhibited by near OTMs because the strong momentum causes rapid expansion in the Time Value of these Options\. Such behaviour of near OTMs, as a reaction to strong momentum on Expiry offers an opportunity to Option buyers to initiate Long positions in such near OTMs to exploit a huge gain by playing out the strong momentum on Expiry day \(__Expiry Day OTM Buying__\)\.
5. Also, ATM or those OTMs which become in\-the\-money on Expiry day, due to favourable directional move in the price of the underlying, also gains phenomenally in their LTP\. In this situation, the movement in the price of the underlying causing shifting of ATM/ OTM into ITM Options may or may not be due to a strong momentum\. Therefore, on Expiry day, even when the movement in the price of the underlying does not occur with momentum \(but only a gradual directional move occurs on Expiry day\), the rise in LTP of the Option would occur due to Delta shifting as an ATM/ OTM to a higher Delta value as ITM\. Moreover, the ATM & OTMs would be relatively of a lesser LTP due to Overnight Expiry Decay, thus Delta shifting in these Options due to even gradual directional move, causes significant rise in the LTP of these Options\. __Bottomline is that these Options must expire as ITM__\. This situation also offers Options buyer a good profit opportunity on Expiry day by playing out directional move through ATM or very near OTM \(__Expiry Day Directional Buying__\)\.
6. Also, __near OTMs \(which gets positively impacted with arrival of strong momentum on Expiry day\), upon cessation of the momentum starts immediately loosing much of the rise in their LTP values__ due to contraction in the Time Value as a result of cessation of momentum and strong impact of time decay of Expiry\. Therefore, if any trader plays outs momentum through Expiry Day OTM Buying then he must be careful to book the profits quickly before the momentum dies down, else contraction in the Time Value due to cessation of momentum and Theta on Expiry day being super active, would very quickly erode the gains appearing on these OTMs\.

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1. Usually, __during the Expiry day, the time decay is relatively slower until around 12\.30pm\. After 12\.30pm onwards, the time decay is quite strong and fast__, so much so that any directional move in the price of the underlying which lacks strong momentum or if the directional move is in an up & down fashion, such directional moves will not impact the LTPs of the relevant OTMs much \(*as expansion and contraction of the Time Value  causes ultimately its erosion and consequently reduction in the LTP of OTMs*\)\. __After about 2\.30pm on Expiry day, the time decay is super\-fast __and any momentum that arrives, will at best impact 1 or 2 strike OTMs, but if the momentum ceases or even pauses for few seconds the drop in the LTP value of these OTMs would be extremely rapid, due to super Theta being in play\. 
2. As the Expiry day advances, all the ITM Options too loses their Time Value\. Post noon on Expiry day, the ITM CE & PE Options are left with negligible Time Value and most of their LTP is comprised of Intrinsic Value\. Moreover, due to significant erosion of the Time Value from their LTPs, the ITMs are at their real reduced LTPs exhibiting their moneyness/ Intrinsic Value\. Therefore, even very near ITMs start exhibiting properties of Synthetic Futures with a Delta value close to 1\. These ITMs are relatively of lower LTP than deeper ITM Synthetic Futures, hence cost effective to initiate a Long Options trade\. Therefore, on Expiry day, Options buyers can also employ these Synthetic Futures available as near ITMs \(*in case of Nifty, within 2 to 3 Strike beyond ATM; and in case of BankNifty, within 2 to 5 Strikes beyond ATM*\) to exploit the benefit of Futures reaction to the favourable directional movement in the price of the underlying \(__Synthetic Futures Buying on Expiry__\)\. Besides, the advantage of being cost effective and an alternate to Futures, employing these near ITM Synthetic Futures also enables an Options buyer to initiate Long position to play a directional move without requiring a strong momentum to make profit \(*which is a pre\-requisite to play Long through near OTMs on Expiry day*\)\. Moreover, since these Synthetic Futures have negligible Time Value and the LTP comprises of only Intrinsic Value therefore, the risk of Option becoming zero is not there and the loss would be to the extent of difference of the final LTP of Option on Expiry and the buying price of the Option, if the trend reverses in the opposite direction\. 
3. The __only thing which is “sure to happen” regarding Options is that on the Expiry day, the Time value in all the Options would become zero and consequently all the OTMs would become zero due to Theta / time decay__\. This fact offers a great opportunity for Option sellers to initiate positions at such OTM Strikes which as per their technical analysis would not be breached by Expiry day and would consequently expire as OTMs\. This opportunity can be identified in both Far OTM CEs and PEs and Theta decay can be played on with suitable positions through Far OTM Options Short selling\. This Options selling can be initiated on positional trading basis \(*in current Weekly Expiry on Friday or in current Month Expiry at the start of the current Month Expiry series*\) or on Wednesday to target Overnight Expiry Decay and also for intraday trading on Expiry Day\. This opportunity is available to traders for every current Weekly and current Monthly Expiry\. __Idea in this type of trades is to benefit from the sure\-shot Theta decay in Far OTM Options__\. If the VIX is above around 16\+, then due to decent Volatility the Far OTMs even on Expiry day or prior to Expiry day would have decent LTP/ premium value at a suitably safe distance from ATM\. However, if the Volatility is low below 15 or so, then it may difficult to find reasonable premium in the Far OTM Strikes \(and creating Short positions in near OTMs may not be a safe bet, because if there arises sudden strong movement in the price of the underlying then the OTMs may become ITMs and their premiums may soar high\) and may not make sense to create a Short Options position for such low premium credits\. Further, if after initiating a Short positions in Far OTMs to benefit from Theta decay around Expiry, there arises a sudden momentum in the price of the underlying, then the Short Options to which the direction of the momentum is unfavourable  would instead of getting benefited due to Theta decay would get negatively impacted by the strong momentum in the price of the underlying, especially if such Short Option positions ends up as an ITM on Expiry\. On the other hand, even if arrival of momentum causes premium of any Short Options to rise high \(thereby generating loss\), but the Short Options \(inspite of showing loss due to rise in unfavourable momentum\) if ends up as an OTM/ ATM on Expiry, then also the Short Options position would get the full benefit of Theta decay on the premium credited on initiating Short Options position, as ATMs and OTMs become zero on Expiry\.

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1. In the event of __significant rise in Volatility near Expiry, the Time Value of Options would get expanded and consequently leading to rise in the LTP of all Options__\. If the rise in Volatility is strong/ steep, then the consequent rise in the LTP would be significantly high thereby neutralizing the impact of Theta \(which is otherwise stronger near Expiry\)\. Depending on the rise in Volatility, the Most Impacted radius Zone of Expiry may expand\. Thereby, due to significant rise in Volatility near Expiry, even Far OTMs may exhibit rise in their LTP values\.  However, if the rise in Volatility is not accompanied with any directional move in the underlying, then even though the OTMs exhibit rise in LTP \(and a consequent loss on any Far OTM Short Options positions\) eventually Theta would catch up to erode the entire Time Value in all Options on Expiry, and thereby the ATMs and the OTMs would expire worthless and the ITMs would expire with their final values equivalent to their Intrinsic Values\. Thus, rise in Volatility near Expiry without any change in the direction of the underlying price movement, may offer temporary opportunity to benefit on Long Options positions near Expiry \(to benefit from the rise in LTP of Options caused due to rise in Volatility, but before Expiry Theta catches up\); and may not cause any real loss to the Far OTM Short Options positions \(even though rise in LTP caused due to rise in Volatility shows loss, but that loss is notional\)\. Now, __if there occurs crash in Volatility near Expiry, then there would be drop in the LTPs/ premium value of Options due to contraction in their Time Value__\. Thus, in such situation Long Options position would start showing decline of LTP of Options and may lead to loss as premium decline would get accelerated due to Theta being on rise as Expiry approaches even closer\. On the other hand, due to fall in Volatility leading to decline in LTP/premium value of Options, it may become difficult to find reasonable premium credit to initiate a fresh Short Options in Far OTM Strikes and therefore may not make sense to initiate fresh Short Options positions for low premium credits or to initiate positions near OTM Strikes due to risk of sudden unfavourable movement in the price of the underlying\. But if any Short Options Far OTM were already initiated before the fall of Volatility began, then the fall of Volatility causing drop LTP/premium values which gets further accelerated due to Expiry Theta play, would yield faster profit in such Short Options positions\.
2. Even on Expiry or near Expiry too, if there is a sudden gush of momentum in the price of the underlying or sudden rise of Volatility, then the relevant Options would rise  in their LTP values \(or would not undergo decline of LTP values\) inspite of the operating strong Theta decay\. Thus, if the momentum or Volatility rises / continues to rise near Expiry, then the Options may not loose as much Time Value even due to Expiry Timetrack as they otherwise do on regular days under Expiry Timetrack\. However, having said above, inspite of the rise in momentum or Volatility on Expiry, eventually the LTP of ATMs and the OTMs would become zero on Expiry and the LTP of ITMs would be reduced to their respective Intrinsic Value \(due to erosion of Time Value\) on Expiry\.

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1. On Expiry, the Time Value of all Options under the impact of Expiry day Timetrack becomes zero, thereby LTP of ATMs and OTMs, for both CEs & PEs becomes zero; and the final LTP of ITMs are reduced to their respective Intrinsic Value\. But the same Strike OTM Options belonging to immediately next Expiry series have some LTP value in them\. Look at the following scenarios:
2. If on Expiry day of current Expiry series, there arrives a momentum in the favourable direction to the Options \(i\.e\. upward directional momentum for CEs; and downward directional momentum for PEs\), then the Far OTM CEs of the next Expiry series would have inflated value at the Expiry of the current Expiry series \(while all OTMs of current Expiry series expire worthless\)\. 
3. However, if on Expiry day of current Expiry series, there arrives a momentum in the unfavourable direction to the Options \(i\.e\. downward directional momentum for CEs; and upward directional momentum for PEs\), then the Far OTM CEs of the next Expiry series would have reduced value at the Expiry of the current Expiry series \(while all OTMs of current Expiry series expire worthless\)\. Therefore, even if there is a negative momentum or Volatility impact on Expiry day of the current Expiry series, then depending on the magnitude of the negative momentum or Volatility there would still be some LTP / premium value left in the Far OTMs of next Expiry series\.

__<start> Example: __As an illustration, have a look at the resultant LTP of Options and Intrinsic Value of ITMs on Expiry of the current Expiry series \(BankNifty Weekly Expiry series of Sep 15, 2022\. Prior to July 2023, BankNifty expiry used to occur on Thursday\) and the immediately succeeding Expiry series \(BankNifty Next Week Expiry series of Sep 22\. 2022\) as on Expiry day EOD on Sep 15, 2022\. On Sep 15, 2022, BankNifty Futures of Sep 2022 series fell by about: 0\.47% \(196 points, from previous day’s close of 41405 to close on Sep 15 at 41209\)\. VIX on Sep 15 rose higher to close at 18\.39 from previous day close of 18\.27\. With this background information, just compare the LTP values of same Strike Options between the current Weekly expiry of Sep 15, 2022 and immediately succeeding next Week Expiry series of Sep 22, 2022, as given in the tables below: __<img16>\. __This Table is the extract of Options Chain of BankNifty current Weekly Expiry of Sep 15, 2022 showing complete decay of OTMs and the resultant LTP equivalent to the Intrinsic Value of all ITMs\.

Now, have a look at the extract of Options Chain of BankNifty next Weekly Expiry of Sep 22, 2022 showing resultant LTP of Options and the Intrinsic Value of all ITMs as on the end of day of Sep 15, 2022 \(Expiry day of BankNifty current Week Expiry series of Sep 15, 2022\. Prior to July 2023, BankNifty expiry used to occur on Thursday\)\. __<img17>__

In both the above tables, we can see that the next Week Expiry series of Sep 22, 2022 exhibits reduction in the LTP values of CEs on Sep 15th \(due to BankNifty fallen by \-0\.47%\)\. However, while the OTMs of current Weekly Expiry series of Sep 15, 2022  became zero due to Theta effect on its Expiry, the next week Expiry series of Sep 22, still has resultant LTP values for each of the same Strike Options\. The LTP values in Sep 22 Expiry series are significantly higher because Banknifty had been trending upwards until Sep 14th \(registering a high of 14626 on Sep 14th , 2022\)\. Also, the LTP and the Intrinsic Value of each of the same Strike ITMs is higher in the next week Expiry series of Sep 22nd than that of the ITMs in the current Expiry series of Sep 15th , as due to expiry Theta effect the Time Value of all the ITMs of current week expiry series of Sep 15th have become zero\.  __<end>__

The point being that the __succeeding Expiry series would always have some resultant LTP for OTMs and higher LTP in ITMs,  upon Expiry of the current Expiry series, as the Expiry Series Timetrack is yet to get activated in the succeeding Expiry series \(which gets activated upon expiry of the current Expiry series in the immediately succeeding Expiry series\)__\.

__*Caution to be exercised near Expiry*__:

__Onset of 18 hour Overnight Expiry Decay in Options:__

Let us understand the various aspects which takes place between the close of trading session on on\-day prior to Expiry day of relevant Options and its actual expiry on relevant Expiry day\. This aforesaid period is here referred to as: __18 hour Overnight Expiry Decay__\. For the purpose of understanding 18 hour Overnight Expiry Decay, as an illustration, we will use Expiry day being Thursday and close of trading session at 3\.30pm IST\. Following are the relevant points, in relation to 18\-hour Overnight Expiry Decay:

1. After the close of session on Wednesday, when the market opens at 9\.15am on Thursday \(__18\-hour Overnight Expiry Decay__\), all Far OTMs and even near OTMs, CEs & PEs \(*except those OTMs which are not more than about 3 Strikes from ATM in case of Nifty; and those which are not more than about 5 Strikes from ATM in case of BankNifty*\) would open with their Time Value eroded very significantly thereby leading to reduction in their LTP \(almost close to becoming zero\)\. More deeper the OTM, more erosion in the Time Value and consequent reduction of the LTP\. For most of the Options of Indices or Stocks, this area where maximum decay occurs, is usually in the OTMs which are beyond 3 to 5 Strikes from ATM\. This phenomenon of overnight decay, between Wednesday closing session to Thursday opening session, in Far OTMs \(__Overnight Expiry Decay__\) is usually irrespective of any price movement of the underlying\. 

The usual area of OTM Strikes which gets impacted with the phenomenon of Overnight Expiry Decay \(i\.e\. *both CE & PE OTMs which are beyond 3 to 5 Strikes from ATM*\), may get wider or may even shrink due to very high rise/fall in Volatility or super gapups / gapdowns or super momentum starting with the opening on the Expiry day\.  

This Overnight Expiry Decay in the Time Value of Far OTMs, gives a huge opportunity to Options sellers to exploit gains on account of such significant and certain time decay in Far OTMs \(__Shorting Options for Overnight Expiry Decay__\)\. 

1. __However, on opening of the Expiry day, if there occurs a significant increase in Volatility or a significant gapup / gapdown \(*eg: beyond 100 points or so*\) or there arises strong momentum in the price of the underlying in any one direction, upon opening of the market on Expiry day, then the Overnight Expiry Decay may not occur \(*or be very insignificant*\) on the side of the momentum/ gapup/ gapdown__; but the Options on the opposite side of the momentum/ gapup or gapdown will suffer from significant time decay due to Overnight Expiry Decay coupled with the opposite direction of price movement\.* *

*<*__start__*>*__*Example: *__*On the expiry day of BankNifty’s Weekly Expiry Series of Sep 15, 2022 \(prior to July 2023, BankNifty Expiry used to occur of Thursday\), BankNifty opened with a gapup of 130 points \(i\.e\. from previous day’s close 41427, it opened on Thursday at 41519\)\. Consequently, all OTM CEs of BankNifty Sep 15, 2022 current Week Expiry series, which are even 1500 points away OTMs, showed rise in their LTP due to such momentum gapup in BankNifty on opening\. 41400 CE \(which was ATM on Wednesday\) of Sep 15 Expiry, rose from previous day close of 208, to 222 on opening of Sep 15th\. This rise in ATM CE was attributed to the sharp momentum in BankNifty on opening which overruled the Overnight Time Decay on CE side\. Whereas, 41200 PE \(which was an OTM on Wednesday\) of Sep 15 Expiry, exhibited sharp fall from previous day close of 165, to 49 on opening of Sep 15th\. This sharp fall in OTM PE was attributed to the sharp momentum in BankNifty, in the unfavourable direction to PE on opening which was coupled with the Overnight Time Decay\. <*__end__*>*

__Expiry related basic features, pertaining to Options__

1. Expiry day of Nifty is Thursday and for BankNifty is on Friday \(prior to July 2023, it was on Thursday\)\. Expiry day of FinNifty is on Tuesday\. All the above three Indices have Weekly Expiries \(i\.e\. *all weeks of the current month*\) and Monthly Expiry series \(i\.e\. *current month, next month and far month Expiry series*\)\. Last week of current month is considered to be current month expiry i\.e\. part of the monthly expiry series pack and not part of weekly expiry series pack\.
2. Stock Options have only pack of monthly expiries \(i\.e\. *current month, next month and far month expiry series*\)\.
3. Starting from the birth of any given Options, with the passage of time towards the Expiry day of the relevant Options, the Time Value comprised in the LTP of Options keep loosing some value \(*time decay does not cause any erosion to the Intrinsic Value comprised in the LTP of Options*\)\. This time decay in Options which erodes the Time Value in Options and thereby causing reduction in the LTP of Options, is measured with Options Greek called Theta\. Higher the Theta value higher the time decay; and lower the Theta, lower the time decay in any Options\. Every day there is some Theta decay that occurs for sure from the Time Value each day until Expiry\. As the Expiry approaches, the pace and quantum of Theta decay increases\.
4. Time decay is more and quicker in closer Expiry series than farther Expiry series\. Accordingly, Theta is higher in closer Expiry series than the farther expiry series\. Therefore, current week Expiry will experience more time decay than subsequent weekly Expiry series in the pack of weekly Expiry series; and likewise current month Expiry series will experience more time decay than next month and far month expiry series in the monthly Expiry series pack\. 
5. Also, in any given Options Chain, Theta / time decay is higher in ATM Strike and around ATM Strikes; and it decreases as we move deeper towards ITM and OTM in the Options Chain\.
6. As Expiry approaches closer for Options, the time decay in the Time Value increases rapidly i\.e\. erosion in the Time Value increases rapidly and consequently causing reduction in the LTP of Options to the extent of Time Value comprised in them\.
7. Erosion in the Time Value near Expiry starts from the deep OTMs, for both CE & PE, and the time decay rapidly moves from deep OTMs towards ATM on Expiry day\.
8. On Expiry, the Time Value of all Options \(ITM\-ATM\-OTM\), for both CE & PE becomes zero\. Consequently, all CE & PE ATM and OTM Options reduces to zero on Expiry; and the ITM CE & PE Options on Expiry are left with the LTP value equivalent to the Intrinsic Value in their LTP\.

__Impact of Change in Volatility on Expiry Day__

__*Onset of Expiry Day Timetrack in Options \(i\.e\. one day before actual Expiry day of Options\):*__

Just one day before Expiry, by around 2pm or so, the Expiry day time\-track gets activated \(__Expiry Day Timetrack__\)\. 

Expiry Day Timetrack means that the Options which are now bound to expire by the close of next day’s trading session, will demonstrate extreme decay of Time Value in all Options starting from Far OTM towards ATM, and then of ITMs, until entire Time Value comprised in the LTP of all Options becomes zero on Expiry close of trading session\. 

Let us understand the various aspects which takes place during Expiry Day Timetrack period\. For the purpose of understanding the Expiry Day Timetrack, as an illustration we will use Expiry day being Thursday and close of trading session at 3\.30pm IST\. The following aspects need to be understood in relation to Expiry Day Timetrack:

1. Expiry Day Timetrack begins by around 2pm on Wednesday \(a day before the Expiry Day, almost an hour before the close of trading session on Wednesday\) and lasts until the close of trading session on the Expiry Day i\.e\. 3\.30pm on Thursday\.
2. The Time Value comprised in the Far OTMs exhibit strong decay with the onset of Expiry Day Timetrack and by close of session of Wednesday itself, usually the Far OTMs loose significant Time Value from their LTP causing reduction in their LTP Value irrespective of movement in the price of the underlying, __except in situations where there occurs strong momentum in the price of the underlying or strong rise of Volatility until the close of session on Wednesday__ \(in which case not so far OTMs which rise in LTP due to favourable direction of momentum in the price of the underlying, may not get affected by the Expiry Day Timetrack\)\. 

<a id="_Hlk154186079"></a><__start__>__Example__: Let us understand this exception with a real illustration, as mentioned below:

1. *BankNifty September \(Current Month\) Futures opened gapdown on Sep 14, 2022 \(Wednesday, i\.e\. one day prior to its Weekly Expiry series of Sep 15, 2022\. Prior to July 2023, BankNifty expiry used to occur on Thursday\) from previous day’s close of 40492 to open on Sep 14th at 40332 \(made an opening low of 40250\) and closed on EoD at 41427 \(made an intraday high of 41680\): *__<img14>__

*Thus, following statistics was observed*:

- *BankNifty opened gapdown by 160 points i\.e\. about \-0\.4% from previous day’s close of 40492 to day’s open at 40332 \(and made an opening low of 242 points i\.e\. \-0\.6% from previous day’s close of 40492 to day’s opening low of 40250\)\. Thereafter, BankNifty showed tremendous momentum in intraday with upward  rise:*
- *of about *__*1,095 points*__* i\.e\. \+2\.71% from day’s open to day’s close \(40332 to 41427\);*
- *of about 1,430 points i\.e\. \+3\.55% from day’s low to day’s high \(40250 to 41680\)*
- *of about 503 points i\.e\. \+1\.23% from previous day’s close to day’s close \(40492 to 41427\)*
- *VIX rosed from 17\.4 to close at EoD at 18\.3 i\.e\. \+4\.62% rise in intraday*
- *Previous day’s \(i\.e\. Tuesday\) ATM for Sep 15, 2022 weekly Expiry series of BankNifty was at 40500 and by the close of trading session on Sep 14, 2022 \(i\.e\. Wednesday\) the ATM Strike was at 41400\.* <__end__>

1. <a id="_Hlk154186251"></a><__start__>__<img14> __*Here is the extract of the Options Chain, exhibiting price movement in the LTP of CE & PE Options pertaining to current Week Expiry series of BankNifty Sep 15, 2022, in view of the momentum rise on Sep 14 2022 as per EOD data\. *

*As per this Options Chain, the following price movement was observed, on Sep 14th \(Wednesday\) in Strikes from 40500 until 43000 for the Weekly Expiry series of Sep 15, 2022 \(current weekly Expiry series\), as result of strong momentum in the price of the underlying BankNifty Futures, one day prior to expiry of Options pertaining to Sep 15, 2022 weekly expiry \(prior to July 2023, BankNifty expiry used to be Thursday\)*: __<img35>__<__end__ >

1. *Usually, on Wednesday \(one day prior to Expiry\), BankNifty deep OTM Options \(which are around 600 points away from ATM and beyond\) due to  Expiry Day Timetrack, after around 2pm  suffers massive erosion of Time Value in their LTP, so much so that their LTPs fall below Rs\. 10 to 20 or so\. *

<__start__>__*Example*__*: *__<img14> __*Here is the extract of the Options Chain, exhibiting price movement in the LTP of CE & PE Options pertaining to current Week Expiry series of BankNifty Sep 15, 2022, in view of the momentum rise on Sep 14 2022 as per EOD data\. Here it can be observed that because of massive momentum on Sep 14th, deep OTM Strikes which were even beyond 1000 points away from the previous day’s ATM Strike of 40500, experienced ballistic rise in their LTP from 100% to 150% range during the day on Sep 14, 2022*\.<__end__>

1. *However, inspite of the strong momentum, deep OTMs exhibit typical phenomenon of time decay due to Expiry Day Timetrack\. *<a id="_Hlk154186334"></a>*Please note the following observations from Expiry Day Timetrack perspective, in the following example:*

<__start__>__Example__: <a id="_Hlk154186354"></a>__<img14> __*Here is the extract of the Options Chain, exhibiting price movement in the LTP of CE & PE Options pertaining to current Week Expiry series of BankNifty Sep 15, 2022, in view of the momentum rise on Sep 14 2022 as per EOD data\. Here it can be observed that:*

- *On the previous day \(i\.e\. Sep 13, 2022 i\.e Tuesday\), the ATM CE Strike of 40500 closed at an LTP of Rs\. 518; which closed on Wednesday at an LTP of Rs\. 909 as an ITM, due to upside momentum\. However, due to Expiry Day Timetrack, inspite of strong momentum, the LTP of current ATM CE Strike of 41400 is at 208 \(which is significantly low as compared to the LTP of ATM CE Strike on Tuesday\)\.*
- *While, 41400 to 42000 CE Strikes  \(which were about 900 to 1500 strike away deep CE OTMs from the previous day ATM Strike of 40500\) exhibited maximum range of percentage rise in their LTPs, but due to Expiry Day Timetrack, in absolute number terms their LTP value exhibits typically low LTP values\. Also, far OTMs beyond 500\-600 Strikes beyond ATM show extreme decay in their LTPs due to the impact of Expiry Day Timetrack by the end of trading session on Wednesday\.* <a id="_Hlk154186385"></a><__end__>

1. *In order to better appreciate the effect of Expiry day Timetrack on current Expiry \(one day prior to Expiry\) at the close of the trading session, kindly  have a look at the *<a id="_Hlk154186455"></a>*following example:*

*<*__start__*> *__*Example*__*: You may observe here the comparative LTPs \(i\.e\. premium values\) of same Strikes of OTMs between current week Expiry \(as affected by Expiry day Timetrack on Wednesday\) as against the LTP values of next weekly BankNifty Options Expiry series of Sep 22, 2022, as per the Options Chain extracts given here: *__<img15><end>__

Thus, one day prior to Expiry, Options which are about to expire in next day’s expiry trading session, exhibit phenomenal feature of significant time decay, especially after 2pm until the close of trading session on previous day to Expiry\.

__Impact of Expiry day on same strike Options of Current Expiry versus Options of subsequent Expiry__

__<start>Example: __As an illustration, have a look at the resultant LTP of Options and Intrinsic Value of ITMs on Expiry of the current Expiry series \(BankNifty Weekly Expiry series of Sep 15, 2022\. Prior to July 2023, BankNifty expiry used to occur on Thursday\) and the immediately succeeding Expiry series \(BankNifty Next Week Expiry series of Sep 22\. 2022\) as on Expiry day EOD on Sep 15, 2022\. 

On Sep 15, 2022, BankNifty Futures of Sep 2022 series fell by about: 0\.47% \(196 points, from previous day’s close of 41405 to close on Sep 15 at 41209\)\. VIX on Sep 15 rose higher to close at 18\.39 from previous day close of 18\.27\. With this background information, just compare the LTP values of same Strike Options between the current Weekly expiry of Sep 15, 2022 and immediately succeeding next Week Expiry series of Sep 22, 2022, as given in the tables below: __<img16>\. __This Table is the extract of Options Chain of BankNifty current Weekly Expiry of Sep 15, 2022 showing complete decay of OTMs and the resultant LTP equivalent to the Intrinsic Value of all ITMs\.__ __

Now, have a look at the extract of the Options Chain of BankNifty next Weekly Expiry of Sep 22, 2022 showing resultant LTP of Options and the Intrinsic Value of all ITMs as on the end of day of Sep 15, 2022 \(Expiry day of BankNifty current Week Expiry series of Sep 15, 2022\. Prior to July 2023, BankNifty expiry used to occur on Thursday\)\. __<img17>__

In both the above tables, we can see that the next Week Expiry series of Sep 22, 2022 exhibits reduction in the LTP values of CEs on Sep 15th \(due to BankNifty fallen by \-0\.47%\)\. However, while the OTMs of current Weekly Expiry series of Sep 15, 2022  became zero due to Theta effect on its Expiry, the next week Expiry series of Sep 22, still has resultant LTP values for each of the same Strike Options\. The LTP values in Sep 22 Expiry series are significantly higher because Banknifty had been trending upwards until Sep 14th \(registering a high of 14626 on Sep 14th , 2022\)\. Also, the LTP and the Intrinsic Value of each of the same Strike ITMs is higher in the next week Expiry series of Sep 22nd than that of the ITMs in the current Expiry series of Sep 15th , as due to expiry Theta effect the Time Value of all the ITMs of current week expiry series of Sep 15th have become zero\. __<end>__ 

__Onset of Timetrack in Expiry series__

1. In the pack of weekly Expiry series and monthly Expiry series, the expiry which is the current weekly Expiry and current Monthly Expiry, has the time\-track activated \(__Timetrack in Expiry Series__\)\. Timetrack activation in Expiry series means that: the Expiry which is currently closest to its Expiry, has maximum time decay \(or high Theta\) as compared to the other Expiry series amongst its pack of Expiry series\. Thus, current week Expiry will be subject to maximum decay of its Options, as compared to next week Expiry or next\-to\-next week Expiry series\. 

Likewise, current Month Expiry will be subject to maximum decay of its Options, as compared to next Month Expiry or far month Expiry series\. Also, between the first week Expiry of a given month and the monthly Expiry of that month, the first week Expiry will have Timetrack activated as that month becomes  the current month Expiry\. 

This information can be employed by Options sellers to initiate positions on relevant Expiry series, where Timetrack in Expiry Series is activated or about to get activated soon, in order to exploit from maximum decay in its Options\.

1. As the particular Expiry series draws near to its Expiry day, the time decay in the LTP of these Options, becomes rapid and keep increasing with the approach of Expiry nearer and nearer\. When a particular weekly Expiry series becomes current Weekly Expiry and when a monthly Expiry series enters into its last week in which Expiry is due, the time decay gets strong and fast and the Options of such expiry keep loosing their Time Value quite significantly, being clearly visible particularly in Far OTM Strikes to begin with\.
2. In any given current Weekly or Monthly Expiry series, the number of holidays, weekends and truncated weekly Expiry causes Theta decay with any movement in the price of the underlying\. Such situations offer relatively better opportunity for Options sellers and may pose Theta loss on Long Options positions\. 
3. In case of Nifty Options \(which Expires on Thursday\) and BankNifty Options \(which Expires on Friday; which used to be Thursday prior to July 2023\), as the current week Expiry or the last week of the monthly Expiry approaches two days before relevant Expiry Day, time decay on all Options \(impacting the Time Value in their LTP\) of that Expiry series can be clearly seen to have become rapid and strong\. 
4. Therefore, __generally it is not advisable to initiate Long positions in Nifty / BankNifty Options, atleast two days before their respective Expiry__,__ __as the time decay may even negate favourable direction in the price of the underlying thereby not letting the LTP of Options rise substantially \(except when there is huge momentum in the price of the underlying or strong rise in Volatility\)\. 

Therefore, any Long positions in Options, in the absence of a clear strong momentum in the price of the underlying, should be played out in the Next Week Expiry series in case of Current Week Expiry; and in case of Current Monthly Expiry, Next Month Options may be employed to initiate Long positions in Options instead of initiating Long Options in expiring Current Month\. 

On the contrary, a Short Options position, particularly Far OTMs starts to show\-off decent gains due to time decay being very rapid in the Current Week Expiry/ last week of current Month Expiry, from two days before relevant Expiry day\.

__Time Decay in Options on Expiry day__

1. Usually, __during the Expiry day, the time decay is relatively slower until around 12\.30pm\. __

__After 12\.30pm onwards, the time decay is quite strong and fast__, so much so that any directional move in the price of the underlying which lacks strong momentum or if the directional move is in an up & down fashion, such directional moves will not impact the LTPs of the relevant OTMs much \(*as expansion and contraction of the Time Value  causes ultimately its erosion and consequently reduction in the LTP of OTMs*\)\. 

__After about 2\.30pm on Expiry day, the time decay is super\-fast __and any momentum that arrives, will at best impact 1 or 2 strike OTMs, but if the momentum ceases or even pauses for few seconds the drop in the LTP value of these OTMs would be extremely rapid, due to super Theta being in play\. 

1. As the Expiry day advances, all the ITM Options too loses their Time Value\. Post noon on Expiry day, the ITM CE & PE Options are left with negligible Time Value and most of their LTP is comprised of Intrinsic Value\. Moreover, due to significant erosion of the Time Value from their LTPs, the ITMs are at their real reduced LTPs exhibiting their moneyness/ Intrinsic Value\. Therefore, even very near ITMs start exhibiting properties of Synthetic Futures with a Delta value close to 1\. These ITMs are relatively of lower LTP than deeper ITM Synthetic Futures, hence cost effective to initiate a Long Options trade\. 

Therefore, on Expiry day, Options buyers can also employ these Synthetic Futures available as near ITMs \(*in case of Nifty, within 2 to 3 Strike beyond ATM; and in case of BankNifty, within 2 to 5 Strikes beyond ATM*\) to exploit the benefit of Futures reaction to the favourable directional movement in the price of the underlying \(__Synthetic Futures Buying on Expiry__\)\. 

Besides, the advantage of being cost effective and an alternate to Futures, employing these near ITM Synthetic Futures also enables an Options buyer to initiate Long position to play a directional move without requiring a strong momentum to make profit \(*which is a pre\-requisite to play Long through near OTMs on Expiry day*\)\. Moreover, since these Synthetic Futures have negligible Time Value and the LTP comprises of only Intrinsic Value therefore, the risk of Option becoming zero is not there and the loss would be to the extent of difference of the final LTP of Option on Expiry and the buying price of the Option, if the trend reverses in the opposite direction\. 

1. The __only thing which is “sure to happen” regarding Options is that on the Expiry day, the Time value in all the Options would become zero and consequently all the OTMs would become zero due to Theta / time decay__\. 

This fact offers a great opportunity for Option sellers to initiate positions at such OTM Strikes which as per their technical analysis would not be breached by Expiry day and would consequently expire as OTMs\. This opportunity can be identified in both Far OTM CEs and PEs and Theta decay can be played on with suitable positions through Far OTM Options Short selling\. This Options selling can be initiated on positional trading basis \(*in current Weekly Expiry on Friday or in current Month Expiry at the start of the current Month Expiry series*\) or on Wednesday to target Overnight Expiry Decay and also for intraday trading on Expiry Day\. 

This opportunity is available to traders for every current Weekly and current Monthly Expiry\. __Idea in this type of trades is to benefit from the sure\-shot Theta decay in Far OTM Options__\. 

If the VIX is above around 16\+, then due to decent Volatility the Far OTMs even on Expiry day or prior to Expiry day would have decent LTP/ premium value at a suitably safe distance from ATM\. However, if the Volatility is low below 15 or so, then it may difficult to find reasonable premium in the Far OTM Strikes \(and creating Short positions in near OTMs may not be a safe bet, because if there arises sudden strong movement in the price of the underlying then the OTMs may become ITMs and their premiums may soar high\) and may not make sense to create a Short Options position for such low premium credits\. 

Further, if after initiating a Short positions in Far OTMs to benefit from Theta decay around Expiry, there arises a sudden momentum in the price of the underlying, then the Short Options to which the direction of the momentum is unfavourable  would instead of getting benefited due to Theta decay would get negatively impacted by the strong momentum in the price of the underlying, especially if such Short Option positions ends up as an ITM on Expiry\. 

On the other hand, even if arrival of momentum causes premium of any Short Options to rise high \(thereby generating loss\), but the Short Options \(inspite of showing loss due to rise in unfavourable momentum\) if ends up as an OTM/ ATM on Expiry, then also the Short Options position would get the full benefit of Theta decay on the premium credited on initiating Short Options position, as ATMs and OTMs become zero on Expiry\.

__Effect / Impact of sudden rise in Momentum in the price of the Underlying or rise in Volatility, on Options, on their Expiry day__

Even on Expiry or near Expiry too, if there is a sudden gush of momentum in the price of the underlying or sudden rise of Volatility, then the relevant Options would rise  in their LTP values \(or would not undergo decline of LTP values\) inspite of the operating strong Theta decay\. 

Thus, if the momentum or Volatility rises / continues to rise near Expiry, then the Options may not loose as much Time Value even due to Expiry Timetrack as they otherwise do on regular days under Expiry Timetrack\. 

However, having said above, inspite of the rise in momentum or Volatility on Expiry, eventually the LTP of ATMs and the OTMs would become zero on Expiry and the LTP of ITMs would be reduced to their respective Intrinsic Value \(due to erosion of Time Value\) on Expiry\.

__Determination of Options’ Premium value on their Expiry:__

While the Premium value of Options until their Expiry keep fluctuating up & down basis the movement in the underlying, and the future value of any given Options can be determined using the aforesaid calculations; it must also be clearly understood as to how to determine the final Premium value of any particular Options upon its Expiry\. 

The final Premium value of every Option upon its Expiry is certain and can be ascertained with absolute surety\. The following aspects must be clearly understood so as to determine the final Premium value of Options on its Expiry:

1. __all the OTMs__ \(i\.e\. all OTM CEs and all OTM PEs\) would expire worthless on Expiry i\.e\. its final Premium value would be zero\. This implies that all the Options, upon its Expiry if happens to be an OTM, then its final Premium value would be zero\.
2. __both ATMs__ \(i\.e\. all ATM CE and ATM PE\) would expire worthless on Expiry i\.e\. its final Premium value would be zero\. This implies that upon Expiry, if any particular Option Strike happens to be an ATM, then its final Premium value would be zero\.
3. __All the ITMs__ \(i\.e\. all ITM CEs and all ITM PEs\) on their Expiry would have their final Premium value equal to its Intrinsic Value i\.e\. the difference between the ATM Strike on Expiry and the given ITM Strike Price\. 

<__start__>__Example__: The following examples will help clarify this aspect further:

- on Expiry of Nifty Options, if ATM Strike is at 18000, then 17600 ITM CE would have its final premium value as 400 \(i\.e\. 18000\-17600\)
- on Expiry of BankNifty Options, if ATM Strike is at 44000, then 45000 ITM PE would have its final premium value as 1000 \(i\.e\. 45000\-44000\)<__end__>

This understanding can help us estimate that, if any particular Option Strike expires as an ITM, then its final Premium value on its Expiry will depend upon how much in\-the\-money it is from the ATM on Expiry\. 

__<start>Example__: If any given Option expires as 200 point \(round figure basis\) ITM from the ATM Strike, then its final Premium value on Expiry would be Rs\. 200 per Lot; and if any given Option expires as 200 point ITM from the ATM Strike, then its final Premium value on Expiry would be Rs\. 200 per Lot\. Similarly, if any given Option expires as 600 point \(round figure basis\) ITM from the ATM Strike, then its final Premium value on Expiry would be Rs\. 600 per Lot\.__ <end>__ 

Thus, deeper in\-the\-money an Option expires, higher will be its final Premium value \(basically, equivalent to its Intrinsic value alone\) on Expiry\.

This understanding can help a trader determine how much would be the likely Premium value of any given Option upon its Expiry\.

__Determination of tentative premium value of any Option on a future date__

In order to determine the likely Premium value of any particular Option during its lifetime \(i\.e\. before its Expiry\), we will do the calculations considering the movement in the relevant Monthly Futures \(*i\.e\. Monthly Expiry series of the Futures and the relevant Options Strike must pertain to the same calendar month*\)\. For the sake of understanding the simple calculations involved, let us consider the scenario when the relevant Futures is expected to make upward movement\. 

__In case of upward movement of relevant Futures: __

Let us understand the calculation for determination of future premium value of any given Option, in view of likely upward movement in the underlying price, with the help of following illustration\. 

__<start>__If BankNifty July Futures is at 43800; and we expect BankNifty to make about 500 points upward move shortly, then the possible Premium value on a future date of any CE Options \(if the underlying Futures does make the expected upward move shortly in few days’ time\), will be calculated as given below:

*CE side calculations:*

Now, basis the aforesaid expected upward movement of BankNifty Futures, we would expect the CE Options to rise in their Premium values and the CEs would shift towards their ITM side\. So, in order to estimate the near approx\. Premium value of any CE Strike \(*should the underlying makes the expected upward movement some time in future shortly*\), we will have to use the following simple calculations:

__Formula:__ __the new Premium value of a CE Option of any given Strike Price will be around the Premium value of the CE Strike \(of same Expiry\) which is:__ \[CE Strike Price whose new Premium is being determined\] – \[*expected movement in the underlying*\]

i\.e\. the current Premium value of a lower CE Strike, which is lower by the expected upward movement in the underlying Futures’ price, from the CE Strike whose future date Premium value is being determined\. __This lower resultant CE Strike, would be the one which is the closest Strike on round figure basis\.__ 

__*Example*__*: If BankNifty July Futures which is at 43800, is expected to make about 500 points upward movement in a few days, then:*

- *the future Premium value of say, 44000 CE, will be close to the current Premium value of 43500 CE \[i\.e\. 44000\-500\]*
- *the future Premium value of say, 43800 CE, will be close to the current Premium value of 43300 CE \[i\.e\. 43800\-500\]* <__end__>

Now, let us understand the calculations to determine the future Premium value of the PEs, as a result of expected upward movement in the underlying Futures:

__<start>__If BankNifty July Futures is at 43800; and we expect BankNifty to make about 500 points upward move shortly, then the possible Premium value on a future date of any PE Options \(if the underlying Futures does make the expected upward move shortly in few days’ time\), will be calculated as given below\.

*PE side calculations:*

Now, basis the aforesaid expected upward movement of BankNifty Futures, we would expect the PE Options to experience a drop in their Premium values and the PEs would shift towards their OTM side\. So, in order to estimate the near approx\. Premium value of any PE Strike \(*should the underlying makes the expected upward movement some time in future shortly*\), we will have to use the following simple calculations: 

__Formula: the new Premium value of a PE Option of any given Strike Price will be around the Premium value of the PE Strike \(of same Expiry\) which is:__ \[PE Strike Price whose new Premium is being determined\] – \[*expected movement in the underlying*\]

i\.e\. the current Premium value of a lower PE Strike, which is lower by the expected upward movement in the underlying Futures’ price, from the PE Strike whose future date Premium value is being determined\. __This lower resultant PE Strike, would be the one which is the closest Strike on round figure basis\.__ 

__*Example*__*: if BankNifty July Futures which is at 43800, is expected to make about 500 points upward movement in a few days, then:*

- *the future Premium value of say, 44000 PE, will be close to the current Premium value of 43500 PE \[i\.e\. 44000\-500\]*
- *the future Premium value of say, 43800 PE, will be close to the current Premium value of 43300 PE \[i\.e\. 43800\-500\]*
- *the future Premium value of say, 43200 PE, will be close to the current Premium value of 42700 PE \[i\.e\. 43200\-500\]* <__end__>

__Thus in this fashion we can compute future premium value of any Options, basis the expected movement in the price of the underlying\.__

__Determination of Options’ future Premium value: using Options Chain:__

<__start__>For the purpose of illustration, we are using the following Options Chain: __<img19>\. __

Here__, __BankNifty July Futures as on June 27 is at 44263\. Now, we can quickly determine the Premium value of any Options, by looking at the Premium value of the Options given in the Options Chain\.

__Example__:

- if BankNifty July Futures makes an upward movement of 400 points, then the Premium value of 44800 CE would be: about 537 per Lot i\.e\. same as the Premium value of 44400 CE \(44800\-400\)
- if BankNifty July Futures makes a downward movement of 600 points, then the Premium value of 44300 CE would be: about 296 per Lot i\.e\. same as the Premium value of 44900 CE \(44300\+600\)
- if BankNifty July Futures makes an upward movement of 700 points, then the Premium value of 44700 PE would be: about 477 per Lot i\.e\. same as the Premium value of 44000 PE \(44700\-700\)
- if BankNifty July Futures makes a downward movement of 800 points, then the Premium value of 44200 PE would be: about 1018 i\.e\. same as the Premium value of 45000 PE \(44200\+800\) <__end__>

Thus, this methodology helps us to determine the likely future premium value of any given Options, basis the expected move in the underlying Futures\. This, in turn is very helpful to determine the tentative profit / loss amount, If the underlying Futures takes a move in upward / downward direction, and to accordingly execute or manage or adjust a trading position\.

__In case of downward movement of relevant Futures:__

Let us understand the calculation for determination of future premium value of any given Option, in view of likely downward movement in the underlying price, with the help of following illustration

__<start>__If Nifty July Futures is at 18500; and we expect Nifty to make about 300 points downward move shortly, then the possible Premium value on a future date of any PE Options \(if the underlying Futures does make the expected downward move shortly in few days’ time\), will be calculated as given below:

Now, basis the aforesaid expected downward movement of Nifty Futures, we would expect the PE Options to rise in their Premium values and the PEs would shift towards their ITM side\. So, in order to estimate the near approx\. Premium value of any PE Strike \(*should the underlying makes the expected downward movement some time in future shortly*\), we will have to use the following simple calculations: 

__Formula: the new Premium value of a PE Option of any given Strike Price will be around the Premium value of the PE Strike \(of same Expiry\) which is:__ \[PE Strike Price whose new Premium is being determined\] \+ \[*expected movement in the underlying*\]

i\.e\. the current Premium value of a higher PE Strike, which is higher by the expected downward movement in the underlying Futures’ price, from the PE Strike whose future date Premium value is being determined\. __This higher resultant PE Strike, would be the one which is the closest Strike on round figure basis\.__

__*Example*__*: If Nifty July Futures which is at 18500, is expected to make about 300 points downward movement in a few days, then:*

- *the future Premium value of say, 18500 PE, will be close to the current Premium value of 18800 PE \[i\.e\. 18500\+300\]*
- *the future Premium value of say, 17800 PE, will be close to the current Premium value of 18100 PE \[i\.e\. 17800\+300\]* <__end__>

Now, let us understand the calculations to determine the future Premium value of the CEs, as a result of expected downward movement in the underlying Futures, as explained below\.

__start>__If Nifty July Futures is at 18500; and we expect Nifty to make about 300 points downward move shortly, then the possible Premium value on a future date of any CE Options \(if the underlying Futures does make the expected downward move shortly in few days’ time\), will be calculated as given below:

Now, basis the aforesaid expected downward movement of Nifty Futures, we would expect the CE Options to experience a drop in their Premium values and the CEs would shift towards their OTM side\. So, in order to estimate the near approx\. Premium value of any CE Strike \(*should the underlying makes the expected downward movement some time in future shortly*\), we will have to use the following simple calculations:

__Formula__: __the new Premium value of a CE Option of any given Strike Price will be around the Premium value of the CE Strike \(of same Expiry\) which is:__ \[CE Strike Price whose new Premium is being determined\] \+ \[*expected movement in the underlying*\]

i\.e\. the current Premium value of a higher CE Strike, which is higher by the expected upward movement in the underlying Futures’ price, from the CE Strike whose future date Premium value is being determined\. __This higher resultant CE Strike, would be the one which is the closest Strike on round figure basis\.__ 

__*Example*__*: if Nifty July Futures which is at 18500, and is expected to make about 300 points downward movement in a few days, then:*

- *the future Premium value of say, 18500 CE, will be close to the current Premium value of 18800 CE \[i\.e\. 18500\+300\]*
- *the future Premium value of say, 17800 CE, will be close to the current Premium value of 18100 CE \[i\.e\. 17800\+300\]*
- *the future Premium value of say, 18800 CE, will be close to the current Premium value of 19100 CE \[i\.e\. 18800\+300\]* <__end__>

__Trend Identification through Options__:

Current broader trend for any given underlying can also be determined by using Options\.

__Method for identification of current trend using Options:__

In order to determine the broader trend, prevalent on current basis, we will follow the below mentioned steps:

1. select deep ITM liquid Options of Next Month Expiry series\. We can select either CE or PE Options, but the same must be liquid deep ITM\.
2. On the Daily Timeframe Chart of such liquid ITM CE or ITM PE, we will place AVWAP \(*Anchored VWAP indicator*\) on the first candle of such Option \(*i\.e\. we will place the AVWAP on the born date of that Option*\)\.

__Conclusions from above methodology: __

Now, once we placed AVWAP on the Options Chart, we can make following observations for current trend identification:

1. If we have placed AVWAP on deep ITM liquid CE Option, and the last two candles on Daily TF are below the AVWAP, then it implies that the current trend is bearish for the underlying\. Further, if all \(or majority\) __candles \(closing basis\) on Daily TF Chart for such CE Option are below the born AVWAP \(including the last two candles\), then the trend is majorly bearish__\. 

However, if the last two candles on Daily TF for such CE Option are above the AVWAP, then it implies that the current trend is bullish for the underlying\. Further, if all \(or majority\) __candles \(closing basis\) on Daily TF Chart for such CE Option are above the born AVWAP \(including the last two candles\), then the trend is majorly bullish__\.

1. If we have placed AVWAP on deep ITM liquid PE Option, and the last two candles on Daily TF are below the AVWAP, then it implies that the current trend is bullish for the underlying\. Further, if all \(or majority\) __candles \(closing basis\) on Daily TF Chart for such PE Option are below the born AVWAP \(including the last two candles\), then the trend is majorly bullish__\. 

However, if the last two candles on Daily TF for such PE Option are above the AVWAP, then it implies that the current trend is bearish for the underlying\. Further, if all \(or majority\) __candles \(closing basis\) on Daily TF Chart for such PE Option are above the born AVWAP \(including the last two candles\), then the trend is majorly bearish__\. 

Thus, behaviour of deep ITM Options in relation to its born AVWAP, indicates the current broader trend in the underlying\. This is a very easy and reliable method to determine the current trend for any given underlying\. Having said this, the following aspects should also be borne in mind, while using this methodology for trend determination:

1. If Next Month Expiry series deep ITMs are not liquid, then Current Month liquid deep ITM can also be used, especially during first half of the calendar month\.
2. If there occurs two consecutive candle close, on Daily TF, for any such deep ITM CE or PE Option, above or below the AVWAP \(i\.e\. on the other side of AVWAP, than majority candles closing on the other side of AVWAP\), then this may indicate reversal of trend in the opposite direction\. 

Thus, such methodology helps a trader to both determine the current broader trend in the underlying, as well as, reversal in the broader trend, just by employing AVWAP on the born date of a deep liquid ITM Option\.

__Trading a F&O Instrument: Buying & Selling__

Typically, every trading comprises of both buying and selling\. When one buys, that implies that he bought from a seller; likewise, when one sells, it implies that he sold to a buyer\. Thus, generally, in every trade there will be a buyer and a seller; and the buyer would like to buy at a cheap price and a seller would like to sell at a higher price\. However, when a buyer and seller agrees on a specific price – the trade is completed, where buyer buys at the agreed price and the seller sells at the agreed price \(*thus, the completed trade comprises of buying by one and selling by another*\)\.

In the same way, in the context of F&O trading too, there will always be a buyer and a seller and trade between them is completed when the buyer’s Bid Price matches with the Ask Price of the seller\. This is true in case of both Futures and Options\. That is: 

- if a Futures or any CE or PE Options instrument is bought \(i\.e\. Long\) by a person \(buyer\) at a given ‘X’ price \(Bid Price\), then it must have been sold \(i\.e\. Short\) by some other person \(seller\) to the buyer at that given ‘X’ price \(Ask Price\); and 
- if a Futures or any CE or PE Options instrument is sold \(i\.e\. Short\) by a person \(seller\) at a given ‘Y’ price \(Ask Price\), then it must have been bought \(i\.e\. Long\) by some other person \(buyer\) at that given ‘Y’ price \(Bid Price\)\. 

Further, in F&O trading every trader first enters into a position \(with a bullish or a bearish view\) and then exits from his position \(ti\.e\. square\-off his Long or Short position to book profit or loss, as the case may be\)\. Thus, generally, in every F&O trade, there will always be minimum two legs, i\.e\. at the time of creating a position \(__Entry Leg__\) and then another at the time of exiting from his position \(__Exit Leg__\)\. In these Entry and Exit Legs, a F&O trader always has to place opposite orders i\.e\. 

- if in the Entry Leg, a Long position was created by placing a ‘buy’ order by the buyer, the Exit Leg for the above Long position will require the buyer to place a ‘sell’ order; and 
- if in the Entry Leg, a Short position was created by placing a ‘sell’ order by the seller, then Exit leg for the above Short position will require the seller to place a ‘buy’ order\.

__Selling in FNO Instrument: Ask Price matches Bid Price:__

Every seller wishes to sell at a higher price; and in the context of Shorting securities/F&O instruments the seller desires to sell at a higher price and buy at a lower price, in order to make profit\. Thus, a seller’s Entry Leg is a ‘sell’ position and Exit Leg requires him to place a ‘buy’ order\. 

In the Entry Leg, if a ‘sell’ position is initiated by a trader at a particular Ask Price for a F&O instrument for a given underlying by placing a sell order, then it means that he has entered his position with a buyer of that  instrument \(where the Bid Price of the buyer matches with the Ask Price of the trader\)\. 

In the Exit Leg, in order to book his profit or loss, the trader \(who initiated a ‘sell’ position\) will have to square\-off his ‘sell’ position by placing a ‘buy’ order i\.e\. the trader \(who was a seller at the time of initiating a trade\) has now become a buyer\. Accordingly, the trader in order to square\-off his ‘sell’ position will have to place a ‘buy’ order at a particular price \(the Bid Price\)\. The ‘sell’ position of the trader will get squared\-off when his Bid Price, matches with the Ask Price made by an interested seller of that instrument who desires to sell the instrument at the Bid Price of the trader\. Thus, in this manner, the trader will square\-off his ‘sell’ position by placing a ‘buy’ order for the instrument \(which he sold earlier\) to the interested seller of that instrument at an agreed price \(i\.e\. where the Bid Price of the trader matches with the Ask Price of the interested seller\) – thus bringing the Short position of the trader to an end with the execution of this Exit leg\.

__Buying in FNO Instrument: Bid Price matches Ask Price__

Every buyer wishes to buy at a cheap price and sell at a higher price in order to make profit\. Thus, a buyer’s Entry Leg is a ‘buy’ position and Exit Leg will require placing a ‘sell’ order\. 

In the Entry Leg, if a ‘buy’ position is initiated by a trader at a particular Bid Price for a F&O instrument for a given underlying by placing a ‘buy’ order, then it means that he has entered his position with a seller of that  instrument \(where the Ask Price of the seller matches with the Bid Price of the trader\)\. 

In the Exit Leg, in order to book his profit or loss, the trader \(who initiated a ‘buy’ position\) will have to square\-off his ‘buy’ position by placing a sell order i\.e\. the trader \(who was a buyer at the time of initiating a trade\) has now become a seller\. Accordingly, the trader in order to square\-off his ‘buy’ position will have to place a sell order at a particular price \(the Ask Price\)\. The ‘buy’ position of the trader will get squared\-off when his Ask Price, matches with the Bid Price made by an interested buyer of that instrument who desires to buy the instrument at the Ask Price of the trader\. Thus, in this manner, the trader will square\-off his ‘buy’ position by placing the ‘sell’ order for the instrument \(which he bought earlier\) to the buyer of that instrument at an agreed price \(i\.e\. where the Ask Price of the trader matches with the Bid Price of the interested buyer\), thus bringing the Long position of the trader to an end with the execution of this Exit leg\.

__F&O: Long & Short:__

Generally, when a F&O instrument is bought, we term the position as __Long__; and when a F&O instrument is sold, we term the position as __Short__\. Sometimes, people mistakenly associate the meaning of Long with ‘bullish outlook’ and Short with ‘bearish outlook’, This is not the correct interpretation, generally speaking, in the context of F&O\. As mentioned above, in the context of F&O, Long means to buy a F&O instrument and Short means to sell the F&O instrument\.

It is important to understand the meaning and purpose of creating a Long or a Short position in the context of Futures and Options, as particularly in relation to the Options these terms convey a different objective\. In relation to Futures, a Long position implies simply a bullish outlook and a Short position a bearish outlook; but it is not so when the term ‘Long’ & ‘Short’ are used in relation to Options\. The term ‘Long’ & ‘Short’ when applied to Options, signifies a bullish or bearish outlook, depending on whether the term is used in relation to a CE Option or a PE Option\. Thus, the meaning and objective of a Long or a Short position in F&O, particularly Options, need to be specifically understood\. 

Having said this, the commonality between the Futures and Options from the perspective of a Long or Short position are as follows:

- the term ‘Long’ when used in relation to both Futures or Options means a ‘buy’ position in Futures or Options, as the case may be; 
- the term ‘Short’ when used in relation to both Futures or Options means a ‘sell’ position in Futures or Options, as the case may be;
- in a Long trade, for both Futures and CE or PE Options, the buyer of these instruments stands to make profit when the LTP of the instrument rises above the Bid Price/buy price \(*a buyer always has the expectation to buy at a lower price and sell at higher*\);
- in a Short trade, for both Futures and CE or PE Options, the seller of these instruments stands to make profit when the LTP of the instrument falls below the Ask Price/sell price \(*a seller always has the expectation to sell at a higher price and buy at lower*\)\. 

Thus, it can be said that, in the context of F&O:

- Long in Futures and Options means to buy a Futures instrument or an Options \(i\.e\. buy CE or PE\)
- Short in Futures and Options means to sell a Futures instrument or an Options \(i\.e\. sell CE or PE\)

__<start> Snapshot on Long & Short in Futures & Options:__

| Instrument | Long / Short | View    | Position   | Expectation                                  | Profit                                | Loss                                  |

|\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Futures    | Long         | Bullish | Buy Futures| Futures’ LTP would rise above the buying price | Future’s LTP rises above the buying price | Future’s LTP falls below the buying price |

| Futures    | Short        | Bearish | Sell Futures | Futures’ LTP would fall below the selling price | Future’s LTP falls below the selling price | Future’s LTP rises above the selling price |

| CE Options | Long         | Bullish | Buy CE     | CE’ LTP would rise above the buying price     | CE’ LTP rises above the buying price     | CE’ LTP falls below the buying price     |

| CE Options | Short        | Bearish | Sell CE    | CE’ LTP would fall below the selling price    | CE’ LTP falls below the selling price    | CE’ LTP rises above the selling price    |

| PE Options | Long         | Bearish | Buy PE     | PE’ LTP would rise above the buying price     | PE’ LTP rises above the buying price     | PE’ LTP falls below the buying price     |

| PE Options | Short        | Bullish | Sell PE    | PE’ LTP would fall below the selling price    | PE’ LTP falls below the selling price    | PE’ LTP rises above the selling price    | __<end>__

__Long & Short in Options:__

In the context of Options, the meaning of a Long or a Short trade is the same as is generally understood i\.e\. to Long means to ‘buy’ and to Short means to ‘sell’\. Thus, Long on Options means a ‘buy’ position in Options and Short on Options mean ‘sell’ position in Options\. However, having said above, in the context of Options, Long or Short on Options does not convey the same objective as is the case for Futures\.

__Conclusions on Long & Short on Options:__

In the context of Options it can be concluded that:

- Long in Options means to buy Options \(i\.e\. to buy CE when view is bullish or buying PE when view is bearish\); and profit is generated when the LTP of CE or PE bought rises above their buying price\. LTP of CE Option would rise with the rise in the price of the underlying and the LTP of PE would rise with the fall in the price of the underlying\. In Long Options trade, buying CE or PE position is initiated \(*entry leg*\) by placing a Bid Price and the Long position is squared\-off \(*exit leg*\) by placing an Ask Price\. 
- Short in Options means to ell Options \(i\.e\. to sell CE when view is bearish or selling PE when view is bullish\); and profit is generated when the LTP of CE or PE sold falls below their selling price\. LTP of CE Option would fall with the fall in the price of the underlying and the LTP of PE would fall with the rise in the price of the underlying\. The LTP of CE or PE Option sold would also reduce due to time decay with the passage of time\. In Short Options trade, selling CE or PE position is initiated \(*entry leg*\) by placing an Ask Price and the Short position is squared\-off \(*exit leg*\) by placing a Bid Price\.   

__Long and Short in PE Options:__

When the price of the underlying goes down, the LTP of PE Options rises and when the price of the underlying rises the LTP of PE Options fall\. This is so because the PE Options have a negative Delta \(i\.e\. the direction of LTP of PE Option is inversely  proportional to the direction of the underlying, to put it simply, they move in opposite direction\)\.

Accordingly, when a trader expects a downward move in the price of the underlying \(i\.e\. bearish view\), he may consider buying PE Options\. However, as we discussed above, every instrument can be bought from the seller of the same instrument and the trade is only completed when the Bid Price of the buyer of the instrument matches with the Ask Price demanded by the seller of that instrument\. Likewise, every instrument can be sold to an interested buyer of the same instrument and the trade is only completed when the Ask Price demanded by the seller of the instrument matches with the Bid Price made by the buyer of that instrument\.

In every F&O trade there are always two legs: the __Entry Leg__ and the __Exit Leg__\. Let us see and understand how the Entry and Exit Leg plays out in case of a PE Options trade\.

__*Entry Leg of a PE Options trade:*__

In the context of PE Options, buyer of the PE Options of a particular Strike Price can only buy the PE Option if there is a seller of the PE Option available on the same Strike Price \(i\.e\. *if the PE Options on that Strike are liquid*\); and the trade will be completed between the buyer and seller of PE Option at that Strike Price only if the Bid Price of the PE Option buyer matches with the Ask Price demanded by the PE Option seller at that Strike Price \(i\.e\. *the agreed price between the PE Option buyer and seller*\)\. This is how the Entry Leg of the trade is completed\. 

In this aforementioned Entry Leg, please note that there is buyer of a particular PE Option pertaining to a given Strike Price level and a seller of the same PE Option at that Strike\. __The buyer of the PE Option is said to be Long on PE Option with a bearish view; and the seller of the PE Option is said to be Short on the same PE Option with a bullish view\.__ __The PE Option buyer profits when the LTP of his PE Option rises above his buy price; while the PE Option seller profits when the LTP of his PE Option falls below his sell price__\.

Thus, the view, trade plan and expectations of the PE Option buyer and seller are completely opposite to each other\. The following general understanding can be deduced on this Entry Leg of PE Option, from the perspective of PE buyer and seller of the same Strike PE Option:

__<start> Table:__

| PE Option Buyer | PE Option Seller |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Has a bearish view on the price of the underlying | Has a bullish view on the price of the underlying |

| Is said to be Long on PE Option \(i\.e\. buy at lower LTP and sell at higher LTP\) | Is said to be Short on PE Option \(i\.e\. sell at higher LTP and buy at lower LTP\) |

| PE Options buyer, buys a PE Options of a particular Strike Price, expecting that the price of the underlying will go lower from the current price level and will remain /close lower than his Strike Price on Expiry of that PE Options | PE Options seller, sells a PE Option of the same Strike Price, expecting that the price of the underlying will go higher from the current price level and will remain /close higher than his Strike Price on Expiry of that PE Option |

| PE Options buyer while initiating a Long trade for the PE Option of a particular Strike Price, makes a Bid Price closer to the LTP value of the PE Options of that Strike Price | PE Options seller while initiating a Short trade for the PE Option of a particular Strike Price, makes an Ask Price closer to the LTP value of the PE Options of that Strike Price |

| PE Options buyer expects that the LTP of the PE Options pertaining to a particular Strike Price which he bought, will rise higher above his Bid Price/buy price, as the price of the underlying would fall, and thus profiting on his PE Options Long trade | PE Options seller expects that the LTP of the PE Options pertaining to a particular Strike Price which he sold, will fall lower below his Ask Price/sell price, as the price of the underlying would rise, and thus profiting on his PE Options Short trade |

| PE Options Long trade of the buyer gets executed only when his Bid Price matches with the Ask Price of any seller of the PE Options at the same Strike Price level | PE Options Short trade of the seller gets executed only when his Ask Price matches with the Bid Price of any buyer of the PE Options at the same Strike Price level |

| Thus, at an agreed price, a PE Option pertaining to a particular Strike Price is bought by the buyer from the seller of the PE Options at the same Strike Price\. This is how the Entry Leg is completed\. | Thus, at an agreed price, a PE Option pertaining to a particular Strike Price is sold by the seller to the buyer of the PE Options at the same Strike Price\. This is how the Entry Leg is completed\. | __<end>__

The aforesaid situation is a universally true in every PE Option trade, i\.e\. there will be a buyer and a seller, at a given Strike Price, with contra view and expectations\.

Now, let us examine how the aforesaid PE Options trade will play out at the time of squaring\-off the positions created by the PE Options buyer and the PE Options seller in their respective Entry Leg\. 

__*Exit Leg of a PE Options trade:*__

In the context of PE Options, the buyer and the seller of the PE Options who initiated their Long and Short positions, respectively, of a particular Strike Price level will eventually have to square\-off their respective positions at some time after they initiated their Entry Leg positions\. Accordingly, at the time of squaring\-off their respective PE Options trades, the trader who entered into a Long PE Options trade will have to place a ‘sell’ order on his PE Options and the trader who entered into a Short PE Options trade will have to place a ‘buy’ order for his PE Options \(the Exit Leg of PE Options trade\)\.

Now, at the time of squaring\-off the PE Options positions, the following general understanding can be deduced on this Exit Leg trade of PE Options, from the perspective of the PE buyer and seller of the same Strike PE Options:

| At the time of initiating the PE buy position at the Entry Leg \(Long on PE Option\), the trader had a bearish view on the price of the underlying expecting that the price of the underlying will go lower from the current price level and will remain /close lower than his Strike Price on Expiry of that PE Options, and consequently the LTP of his PE Option will rise above his Bid Price \(the Entry Price\) thereby profiting him\. Thus, he has a contra view to that of Options seller\. | At the time of initiating the PE sell position at the Entry Leg \(Short on PE Option\), the trader had a bullish view on the price of the underlying expecting that the price of the underlying will go higher from the current price level and will remain /close higher than his Strike Price on Expiry of that PE Options, and consequently the LTP of his PE Option will fall below his Ask Price \(Entry Price\) thereby profiting him\. Thus, he has a contra view to that of Options buyer\. |

| Now, the Exit Leg of a Long PE Options trade, requires that the trader should square\-off his existing PE ‘buy’ position by placing a ‘sell’ order for that PE Option at a particular price i\.e\. his Ask Price \(the Exit Price\)\. | Now, the Exit Leg of a Short PE Options trade, requires that the trader should square\-off his existing PE ‘sell’ position by placing a ‘buy’ order for that PE Option at a particular price i\.e\. his Bid Price \(the Exit Price\)\. |

| The ‘sell’ order for the PE Options held by the trader gets executed only when his Ask Price matches with the Bid Price of any buyer of the PE Options at the same Strike Price level\. | The ‘buy’ order for the PE Options shorted by the trader gets executed only when his Bid Price matches with the Ask Price of any seller of the PE Options at the same Strike Price level\. |

| Thus, the PE Option pertaining to a particular Strike Price which was originally bought by the trader, gets squared\-off at an agreed price with any interested buyer of the PE Option at the same Strike Price\. This is how the Exit Leg is completed\. | Thus, the PE Option pertaining to a particular Strike Price which was originally sold by the trader, gets squared\-off at an agreed price with any interested seller of the PE Option at the same Strike Price\. This is how the Exit Leg is completed\. |

| If the Exit Price is higher than the Entry Price, then the trader makes a profit on the Long PE Options trade; but if the Exit Price is lower than the Entry Price, then the trader makes a loss on the Long PE Options trade\. | If the Exit Price is lower than the Entry Price, then the trader makes a profit on the Short PE Options trade; but if the Exit Price is higher than the Entry Price, then the trader makes a loss on the Short PE Options trade\. | __<end>__

__Now, let us understand a Long trade in PE Options with an example:__

__<start> *Example: *__*Suppose, DLF’ Futures for Aug 2022 is trading at LTP of Rs\. 370\. A trader, named Amit, has a bearish view on DLF stock, so he decides to initiate a Long trade on DLF by placing a buy order on DLF PE Option for a Strike Price of 360 at a Bid Price of Rs\. 120 per lot\. Here, the view of Amit is that the price of DLF would remain and close below his PE Strike Price of 360 on Expiry, and as the price of the underlying would move lower from Rs\. 370, the LTP of his 360 CE Option would rise\. Now, suppose Amit’s buy order at the Bid Price of Rs\. 120 per lot for the 360 Strike Price PE Option gets executed, it implies that there was a PE Option seller at the same Strike Price of 360 who was willing to sell DLF PE Option for 360 Strike to Amit at the PE LTP of Rs\. 120 \(thus, this seller was having a bullish view on DLF, and was expecting that price of DLF would remain and close above his PE Strike Price of 360 on Expiry, and as the price of the underlying would move higher from the current price of Rs\. 370, the LTP of his 360 PE Option would fall – thereby giving profit to the seller\)\. But, now, if DLF’ stock price falls down thereby causing DLF’ Futures to fall to a LTP of Rs\. 320 \(and LTP of DLF 360 PE Strike rise from Rs\. 120 to Rs\. 145, i\.e\. a net rise of Rs\. 25 per lot\), then Amit who is having a Long trade in DLF PE Option of 360 Strike can book a profit of Rs\. 25 per lot on his PE Option Long trade\. In order to book profit on his PE Option Long trade on DLF Options, Amit will have to square\-off his PE Option Long trade by placing a sell order @ Rs 145 per lot \(i\.e\. the Ask Price of Amit – the Exit leg\)\. If the sell order of Amit gets executed @ Rs 145, then that would imply that there was a buyer who was willing to buy that DLF 360 PE Strike at Rs\. 145 per lot\. Thus, in this PE Options Long trade, while Amit booked a profit of Rs\. 45 per Lot on DLF 360 PE Option, the seller who may have sold DLF 360 PE Option to Amit @ Rs 120 per lot would be running a loss of Rs\. 25 per lot in his DLF PE Options Short trade when LTP of DLF 360 PE Option rose from Rs\. 120 to 145 due to fall in DLF’ Futures LTP from Rs\. 370 to Rs\. 320\. However, in the contrary event, after Amit had initiated his Long trade on DLF’ 360 PE Option, the LTP of Futures jumps up to Rs\. 400 and consequently causing fall in the LTP of DLF 360 PE Option from Rs\. 120 to Rs\. 105, then Amit’s Long PE Option trade would be in loss of Rs\. 15 per lot and the seller who may have sold DLF’s 360 PE Options to Amit would be in a profit of Rs\. 15 per lot\. *__<end>__

__Now, let us understand a Short trade in PE Options with an example:__

__<start> *Example: *__*Suppose, Voltas’ Futures for Aug 2022 is trading at LTP of Rs\. 920\. A trader, named Sumit, has a bullish view on Voltas stock, so he decides to initiate a Short trade on Voltas by placing a sell order on Voltas PE Option for a Strike Price of Rs\. 940 at an Ask Price of Rs\. 75 per lot\. Here, the view of Sumit is that the price of Voltas would remain and close above his PE Strike Price of Rs\. 940 on Expiry, and as the price of the underlying would move higher from Rs\. 920, the LTP of his 940 PE Option would fall\. Now, suppose Sumit’s sell order at the Ask Price of Rs\. 75 per lot for the 940 Strike Price PE Option gets executed, it implies that there was a PE Option buyer at the same Strike Price of 940 who was willing to buy Voltas PE Option for 940 Strike from Sumit at the PE LTP of Rs\. 75 \(thus, this buyer was having a bearish view on Voltas, and was expecting that price of Voltas would remain and close below his PE Strike Price of 940 on Expiry, and as the price of the underlying would move lower from current price of Voltas Futures at Rs\. 920, the LTP of his 940 PE Option would rise – thereby giving profit to the buyer\)\. But, now, if the Voltas’ stock price moves up thereby causing Voltas’ Futures to rise up to a LTP of Rs\. 960 \(and LTP of Voltas 940 PE Strike falls from Rs\. 75 to Rs\. 45, thereby falling by a net Rs\. 30\), then Sumit who is having a Short trade in Voltas PE Option of 940 Strike can book a profit of Rs\. 30 per lot on his PE Option Short trade\. In order to book profit on his PE Option Short trade on Voltas Options, Sumit will have to square\-off his PE Option Short trade by placing a buy order @ Rs 45 per lot \(i\.e\. the Bid Price of Sumit – the Exit leg\)\. If the buy order of Sumit gets executed @ Rs 45, then that would imply that there was a seller who was willing to sell Voltas 940 PE Strike at Rs\. 45 per lot\. Thus, in this PE Options Short trade, while Sumit booked a profit of Rs\. 30 per Lot on Voltas 940 PE Option, the buyer who may have purchased Voltas 940 PE Option from Sumit @ Rs 75 per lot would be running a loss of Rs\. 30 per lot in his Voltas PE Options Long trade when LTP of Voltas 940 PE Option fell from Rs\. 75 to 45 due to rise in Voltas Futures LTP from Rs\. 920 to Rs\. 960\. However, in the contrary event, after Sumit had initiated his Short trade on Voltas 940 PE Option, the LTP of Futures fall to Rs\. 900 and consequently causing rise in the LTP of Voltas 940 PE Option from Rs\. 75 to Rs\. 90, then Sumit’s Short PE Option trade would be in loss of Rs\. 15 per lot and the buyer who may have purchased Voltas 940 PE Options from Sumit would be in a profit of Rs\. 15 per lot\. *__<end>__

__*  
Change of LTP in PE Long or Short trade:*__

The change in LTP of Options is not solely dependent on movement of the price of the underlying\. There are many factors which impacts the actual change in the LTP of a PE Option in a Long or a Short trade, as the case may be\. Some of these factors are the momentum of the movement in the price of the underlying, the Delta value, time decay and volatility etc\.  

__Long & Short in CE Options:__

When the price of the underlying goes up, the LTP of CE Option rises and when the price of the underlying falls the LTP of CE Options fall too\. This is so because the CE Options have a positive Delta \(i\.e\. the direction of LTP of CE Option is directly proportional to the direction of the underlying\)\.

Accordingly, when a trader expects an upward move in the price of the underlying \(i\.e\. bullish view\), he may consider buying CE Options\. However, every instrument can be bought from the seller of the same instrument and the trade is only completed when the Bid Price of the buyer of the instrument matches with the Ask Price demanded by the seller of that instrument\. Likewise, every instrument can be sold to an interested buyer of the same instrument and the trade is only completed when the Ask Price demanded by the seller of the instrument matches with the Bid Price made by the buyer of that instrument\.

Further, in every F&O trade there are always two legs: the __entry leg__ and the __exit leg__\. Let us see  below and understand how the Entry and Exit Leg plays out in case of a CE Options trade\.

__*Entry Leg of a CE Options trade:*__

In the context of CE Options, buyer of the CE Options of a particular Strike Price can only buy the CE Option if there is a seller of the CE Option available on the same Strike Price \(i\.e\. *if the CE Options on that Strike are liquid*\); and the trade will be completed between the buyer and seller of CE Option at that Strike Price only if the Bid Price of the CE Option buyer matches with the Ask Price demanded by the CE Option seller at that Strike Price \(i\.e\. *the agreed price between the CE Option buyer and seller*\)\. This is how the Entry Leg of the trade is completed\. 

In this aforementioned Entry Leg, please note that: there is buyer of a particular CE Option pertaining to a given Strike Price level and a seller of the same CE Option at that Strike\. __The buyer of the CE Option is said to be Long on CE Option with a bullish view; and the seller of the CE Option is said to be Short on the same CE Option with a bearish view__\. __The CE Option buyer profits when the LTP of his CE Option rises above his buy price; while the CE Option seller profits when the LTP of his CE Option falls below his sell price__\.

Thus, the view, trade plan and expectations of the CE Option buyer and seller are completely opposite to each other\. 

__<start>__The following general understanding can be deduced on this Entry Leg of CE Option, from the perspective of CE buyer and seller of the same Strike CE Option:

| CE Option Buyer | CE Option Seller |

| Has a bullish view on the price of the underlying | Has a bearish view on the price of the underlying |

| Is said to be Long on CE Option \(i\.e\. buy at lower LTP and sell at higher LTP\) | Is said to be Short on CE Option \(i\.e\. sell at higher LTP and buy at lower LTP\) |

| CE Options buyer, buys a CE Options of a particular Strike Price, expecting that the price of the underlying will go higher from the current price level and will remain /close higher than his Strike Price on Expiry of that CE Options | CE Options seller, sells a CE Option of the same Strike Price, expecting that the price of the underlying will go lower from the current price level and will remain /close lower than his Strike Price on Expiry of that CE Option |

| CE Options buyer while initiating a Long trade for the CE Option of a particular Strike Price, makes a Bid Price closer to the LTP value of the CE Options of that Strike Price | CE Options seller while initiating a Short trade for the CE Option of a particular Strike Price, makes an Ask Price closer to the LTP value of the CE Options of that Strike Price |

| CE Options buyer expects that the LTP of the CE Options pertaining to a particular Strike Price which he bought, will rise higher above his Bid Price/buy price, as the price of the underlying would rise, and thus profiting on his CE Options Long trade | CE Options seller expects that the LTP of the CE Options pertaining to a particular Strike Price which he sold, will fall lower below his Ask Price/sell price, as the price of the underlying would fall, and thus profiting on his CE Options Short trade |

| CE Options Long trade of the buyer gets executed only when his Bid Price matches with the Ask Price of any seller of the CE Options at the same Strike Price level | CE Options Short trade of the seller gets executed only when his Ask Price matches with the Bid Price of any buyer of the CE Options at the same Strike Price level |

| Thus, at an agreed price, a CE Option pertaining to a particular Strike Price is bought by the buyer from the seller of the CE Options at the same Strike Price\. This is how the Entry Leg is completed\. | Thus, at an agreed price, a CE Option pertaining to a particular Strike Price is sold by the seller to the buyer of the CE Options at the same Strike Price\. This is how the Entry Leg is completed\. | __<end>__

The aforesaid situation is a universally true in every CE Option trade, i\.e\. there will be a buyer and a seller, at a given Strike Price, with contra view and expectations\.

Now, let us see how the aforesaid CE Options trade will play out at the time of squaring\-off the positions created by the CE Options buyer and the CE Options seller in their respective Entry Leg\. 

__*Exit Leg of a CE Options trade:*__

In the context of CE Options, the buyer and the seller of the CE Options who initiated their Long and Short positions, respectively, of a particular Strike Price level will eventually have to square\-off their respective positions at some time after they initiated their Entry Leg positions\. Accordingly, at the time of squaring\-off their respective CE Options trades, the trader who entered into a Long CE Option trade will have to place a ‘sell’ order on his CE Options and the trader who entered into a Short CE Options trade will have to place a ‘buy’ order for his CE Options \(the Exit Leg of CE Options trade\)\.

__<start> __Now, at the time of squaring\-off the CE Options positions, the following general understanding can be deduced on this Exit Leg trade of CE Options, from the perspective of the CE buyer and seller of the same Strike CE Options:

| At the time of initiating the CE buy position at the Entry Leg \(Long on CE Option\), the trader had a bullish view on the price of the underlying expecting that the price of the underlying will go higher from the current price level and will remain /close higher than his Strike Price on Expiry of that CE Options, and consequently the LTP of his CE Option will rise above his Bid Price \(the Entry Price\) thereby profiting him\. Thus, he has a contra view to that of Options seller\. | At the time of initiating the CE sell position at the Entry Leg \(Short on CE Option\), the trader had a bearish view on the price of the underlying expecting that the price of the underlying will go lower from the current price level and will remain /close lower than his Strike Price on Expiry of that CE Options, and consequently the LTP of his CE Option will fall below his Ask Price \(Entry Price\) thereby profiting him\. Thus, he has a contra view to that of Options buyer\. |

| Now, the Exit Leg of a Long CE Options trade, requires that the trader should square\-off his existing CE ‘buy’ position by placing a ‘sell’ order for that CE Option at a particular price i\.e\. his Ask Price \(the Exit Price\)\. | Now, the Exit Leg of a Short CE Options trade, requires that the trader should square\-off his existing CE ‘sell’ position by placing a ‘buy’ order for that CE Option at a particular price i\.e\. his Bid Price \(the Exit Price\)\. |

| The ‘sell’ order for the CE Options held by the trader gets executed only when his Ask Price matches with the Bid Price of any buyer of the CE Options at the same Strike Price level | The ‘buy’ order for the CE Options shorted by the trader gets executed only when his Bid Price matches with the Ask Price of any seller of the CE Options at the same Strike Price level\. |

| Thus, the CE Option pertaining to a particular Strike Price which was originally bought by the trader, gets squared\-off at an agreed price with any interested buyer of the CE Option at the same Strike Price\. This is how the Exit Leg is completed\. | Thus, the CE Option pertaining to a particular Strike Price which was originally sold by the trader, gets squared\-off at an agreed price with any interested seller of the CE Option at the same Strike Price\. This is how the Exit Leg is completed\. |

| If the Exit Price is higher than the Entry Price, then the trader makes a profit on the Long CE Options trade; but if the Exit Price is lower than the Entry Price, then the trader makes a loss on the Long CE Options trade\. | If the Exit Price is lower than the Entry Price, then the trader makes a profit on the Short CE Options trade; but if the Exit Price is higher than the Entry Price, then the trader makes a loss on the Short CE Options trade\. | __<end>__

__Now, let us understand a Long trade in CE Options with an example:__

__<start> *Example*__*: Suppose, TCS’ Futures for Aug 2022 is trading at LTP of Rs\. 3070\. A trader, named Anil, has a bullish view on TCS stock, so he decides to initiate a Long trade on TCS by placing a buy order on TCS CE Option for a Strike Price of Rs\. 3080 at a Bid Price of Rs\. 100 per lot\. Here, the view of Anil is that the price of TCS would remain and close above his CE Strike Price of Rs\. 3080 on Expiry, and as the price of the underlying would move higher from Rs\. 3070, the LTP of his 3080 CE Option would rise\. Now, suppose Anil’s buy order at the Bid Price of Rs\. 100 per lot for the 3080 Strike Price CE Option gets executed, it implies that there was a CE Option seller at the same Strike Price of 3080 who was willing to sell TCS CE Option for 3080 Strike to Anil at the CE LTP of Rs\. 100 \(thus, this seller was having a bearish view on TCS, was expecting that price of TCS would remain and close below his CE Strike Price of Rs\. 3080 on Expiry, and as the price of the underlying would move lower from Rs\. 3070, the LTP of his 3080 CE Option would fall – thereby giving profit to the seller\)\. But, now, if the TCS’ stock price moves up thereby causing TCS’ Futures to rise to a LTP of Rs\. 4000 \(and LTP of TCS 3080 CE Strike rise from Rs\. 100 to Rs\. 110, i\.e\. a net rise of Rs\. 10 per lot\), then Anil who is having a Long trade in TCS CE Option of 3080 Strike can book a profit of Rs\. 10 per lot on his CE Option Long trade\. In order to book profit on his CE Option Long trade on TCS Options, Anil will have to square\-off his CE Option Long trade by placing a sell order @ Rs 110 per lot \(i\.e\. the Ask Price of Anil – the Exit leg\)\. If the sell order of Anil gets executed @ Rs 110, then that would imply that there was a buyer who was willing to buy that TCS’ 3080 CE Strike at Rs\. 110 per lot\. Thus, in this CE Options Long trade, while Anil booked a profit of Rs\. 10 per Lot on TCS 3080 CE Option, the seller who may have sold TCS 3080 CE Option to Anil @ Rs 100 per lot would be running a loss of Rs\. 10 per lot in his TCS’ CE Options Short trade when LTP of TCS 3080 CE Option rose from Rs\. 100 to 110 due to rise in TCS Futures LTP from Rs\. 3060 to Rs\. 4000\. However, in the contrary event, after Anil had initiated his Long trade on TCS’ 3080 CE Option, the LTP of Futures fell to Rs\. 3000 and consequently causing fall in the LTP of TCS 3080 CE Option from Rs\. 100 to Rs\. 75, then Anil’s Long CE Option trade would be in loss of Rs\. 25 per lot and the seller who may have sold TCS’s 3080 CE Options to Anil would be in a profit of Rs\. 25 per lot\.* __<end>__

__Now, let us understand a Short trade in CE Options with an example:__

__<start> *Example: *__*Suppose, BEL’ Futures for Aug 2022 is trading at LTP of Rs\. 350\. A trader, named Sunil, has a bearish view on BEL stock, so he decides to initiate a Short trade on BEL by placing a sell order on BEL CE Option for a Strike Price of Rs\. 340 at a Ask Price of Rs\. 80 per lot\. Here, the view of Sunil is that the price of BEL would remain and close below his CE Strike Price of Rs\. 340 on Expiry, and as the price of the underlying would move lower from Rs\. 350, the LTP of his 340 CE Option would fall\. Now, suppose Sunil’s sell order at the Ask Price of Rs\. 80 per lot for the 340 Strike Price CE Option gets executed, it implies that there was a CE Option buyer at the same Strike Price of 340 who was willing to buy BEL CE Option for 340 Strike to Sunil at the CE LTP of Rs\. 80 \(thus, this buyer was having a bullish view on BEL, and was expecting that price of BEL would remain and close above his CE Strike Price of Rs\. 340 on Expiry, and as the price of the underlying would move higher from current price of BEL Futures at Rs\. 350, the LTP of his 340 CE Option would rise – thereby giving profit to the buyer\)\. But, now, if the BEL’ stock price moves down thereby causing BEL’ Futures to fall to a LTP of Rs\. 300 \(and LTP of BEL 340 CE Strike falls from Rs\. 80 to Rs\. 60, thereby falling by a net Rs\. 20\), then Sunil who is having a Short trade in BEL CE Option of 340 Strike can book a profit of Rs\. 20 per lot on his CE Option Short trade\. In order to book profit on his CE Option Short trade on BEL Options, Sunil will have to square\-off his CE Option Short trade by placing a buy order @ Rs 60 per lot \(i\.e\. the Bid Price of Sunil – the Exit leg\)\. If the buy order of Sunil gets executed @ Rs 60, then that would imply that there was a seller who was willing to sell BEL 340 CE Strike at Rs\. 60 per lot\. Thus, in this CE Options Short trade, while Sunil booked a profit of Rs\. 20 per Lot on BEL 340 CE Option, the buyer who may have purchased BEL 340 CE Option from Sunil @ Rs 80 per lot would be running a loss of Rs\. 20 per lot in his BEL CE Options Long trade when LTP of BEL 340 CE Option fell from Rs\. 80 to 60 due to fall in BEL Futures LTP from Rs\. 350 to Rs\. 300\. However, in the contrary event, after Sunil had initiated his Short trade on BEL’ 340 CE Option, the LTP of Futures rose to Rs\. 400 and consequently causing rise in the LTP of BEL 340 CE Option from Rs\. 80 to Rs\. 120, then Sunil’s Short CE Option trade would be in loss of Rs\. 40 per lot and the buyer who may have purchased BEL’s 340 CE Options from Sunil would be in a profit of Rs\. 40 per lot\. *__<end>__

__*Change of LTP in CE Long or Short trade:*__

The change in LTP of Options is not solely dependent on movement of the price of the underlying\. There are many factors which impacts the actual change in the LTP of a CE Option in a Long or a Short trade, as the case may be\. Some of these factors are the momentum of the movement in the price of the underlying, the Delta value, time decay and volatility etc\.  

__Long & Short in Futures: __

In the context of Futures, the meaning of Long & Short, is as follows:

- __Long in Futures \(i\.e\. buying Futures\)__ is initiated when the view is bullish on the underlying; and profit is generated when the LTP of Futures rises \(due to rise in the price of the underlying\) above the buying price of the Futures\. In Long Futures trade, buying Futures position is initiated \(*entry leg*\) by placing a Bid Price and the Long position is squared\-off \(*exit leg*\) by placing an Ask Price\. 
- __Short in Futures \(i\.e\. selling Futures\) i__s initiated when the view is bearish on the underlying; and profit is generated when the LTP of Futures falls \(due to fall in the price of the underlying\) below the buying price of the Futures\. In Short Futures trade, selling Futures position is initiated \(*entry leg*\) by placing an Ask Price and the Short position is squared\-off \(*exit leg*\) by placing the Bid Price\.  

__Short in Futures: Selling Futures:__

Initiating a ‘sell’ position in Futures \(of a particular asset or Indices\) is said to be having a Short position in Futures \(of that asset or Indices\)\. The following points can be deduced in the context of a Short position in Futures:

- Short position is initiated in Futures, when the view is bearish and the objective is to sell the Futures at the LTP or higher than the LTP and to buy at a lower LTP of Futures;
- Entry Leg of a Short trade in Futures, comprise of placing a ‘sell’ order at a particular Ask Price \(the Entry Price\);
- Exit Leg of a Short trade, requires the trader to square\-off his existing ‘sell’ position by placing a ‘buy’ order for that instrument at a particular price i\.e\. Bid Price \(the Exit Price\);
- If the Exit Price is lower than the Entry Price, then the trader makes a profit on the Short trade; but if the Exit Price is higher than the Entry Price, then the trader makes a loss on the Short trade\.

Let us understand a Short trade in Futures with an example\. 

__<start> Example: __*Suppose, BEL Futures for Aug 2022 is trading at LTP of Rs\. 350\. A trader, named Sunil, has a bearish view on BEL stock, so he decides to initiate a Futures Short trade on BEL by placing a sell order on BEL Futures at Rs 350 per lot \(the Ask Price\)\. Suppose, the sell order for BEL Futures’ gets executed @ Rs\. 350\. Execution of sell order at Rs\. 350 implies that there was a buyer who was willing to buy BEL Futures at Rs\. 350 \(thus having a bullish view on BEL\)\. Now, if the BEL’s stock price moves down thereby causing BEL’s Futures LTP to fall to a LTP of Rs\.300, then Sunil who is having a Short trade in BEL Futures can book a profit of Rs\. 50 per lot by squaring\-off his Short trade by placing a buy order @ Rs 300 per lot \(Bid Price of Sunil\)\. If the buy order of Sunil gets executed @ Rs 300, then that would imply that there was seller who was willing to sell that BEL’s Futures instrument @ Rs\. 300 per lot\. Thus, in this Futures Long trade, while Sunil booked a profit of Rs\. 50 per Lot on BEL Futures, the buyer who may have bought BEL’s Futures from Sunil @ Rs 350 per lot would be running a loss in his BEL’ Futures Long trade when BEL Futures fell from Rs\. 350\. However, in the contrary event, after Sunil had initiated his Short trade on BEL Futures, the LTP of Futures would have risen to Rs\. 410, the Sunil’s Short Futures trade would be in loss of Rs\. 60 per lot and the buyer who may have purchased BEL’s Futures from Sunil would be in a profit of Rs\. 60 per lot\.* __<end>__

__Long in Futures: Buying Futures__

Initiating a ‘buy’ position in Futures \(of a particular asset or Indices\) is said to be having a Long position in Futures \(of that asset or Indices\)\. The following points can be deduced in the context of a Long position in Futures:

- Long position is initiated in Futures, when the view is bullish and the objective is to buy the Futures at the LTP or lower than LTP and to sell at a higher LTP of Futures;
- Entry Leg of a Long trade in Futures, comprise of a ‘buy’ order at a particular Bid Price \(the Entry Price\);
- Exit Leg of a Long trade, requires the trader to square\-off his existing ‘buy’ position by placing a ‘sell’ order for the instrument he is holding at a particular price i\.e\. an Ask Price \(the Exit Price\);
- If the Exit Price is higher than the Entry Price, then the trader makes a profit on the Long trade; but if the Exit Price is lower than the Entry Price – then the trader makes a loss on the Long trade\.

Let us understand a Long trade in Futures with an example\. 

__<start>  Example: __*Suppose, TCS’ Futures for Aug 2022 is trading at LTP of Rs\. 3070\. A trader, named Anil, has a bullish view on TCS stock, so he decides to initiate a Futures Long trade on TCS by placing a buy order on TCS at Rs 3060 per lot \(the Bid Price\)\. Fortunately for Anil, the TCS price comes down a bit and his buy order for TCS Futures’ gets executed @ Rs\. 3060 \(Entry leg\)\. Execution of buy order at Rs\. 3060 implies that there was seller who was willing to sell TCS Futures at Rs\. 3060 \(thus having a bearish view on TCS\)\. Now, if the TCS’ stock price moves up thereby causing TCS’ Futures to rise to a LTP of Rs\. 4000, then Anil who is having a Long trade in TCS Futures can book a profit of Rs\. 40 per lot by squaring\-off his Long trade by placing a sell order @ Rs 4000 per lot \(Ask Price of Anil – the Exit leg\)\. If the sell order of Anil gets executed @ Rs 4000, then that would imply that there was a buyer who was willing to buy that TCS’ Futures instrument @ Rs\. 4000 per lot\. Thus, in this Futures Long trade, while Anil booked a profit of Rs\. 40 per Lot on TCS Futures, the seller who may have sold TCS Futures to Anil @ Rs 3060 per lot would be running a loss of Rs\. 40 per lot in his TCS’ Futures Short trade when TCS Futures rose higher from Rs\. 3060 to Rs\. 4000\. However, in the contrary event, after Anil had initiated his Long trade on TCS’ Futures, the LTP of Futures fell to Rs\. 3040, Anil’s Long Futures trade would be in loss of Rs\. 20 per lot and the seller who may have sold TCS’s Futures to Anil would be in a profit of Rs\. 20 per lot\.* __<end>__

__Short position in Options \(CE or PE\):__

- Short position in CE is created when the view is bearish and a Short position is created in PE when the view is bullish
- A Short position is initiated in CE or PE by placing a sell order at an Ask Price\. The Ask Price at which the sell order is executed is the selling price of the CE or PE Short position\. The seller sells the Options to the buyer of that Option\. 

We know that, __<start> Formula: the__ __premium paid by the buyer to the seller of that Option = buying price x no\. of lots bought__\. Thus, this premium amount gets notionally credited to the seller on initiating a Short position in Options \(therefore, __Option selling is a Credit trade__\)__ <end>__\.

- LTP of CE Options rise with the rise in the price of the underlying and the LTP of the CE Option falls with fall in the price of the underlying\. LTP of PE Options rise with the fall in the price of the underlying and the LTP of the PE Option falls with rise in the price of the underlying
- Short position in Options \(i\.e\. selling CE or PE\) generates profit as soon as its LTP falls below the selling price, and starts giving loss as soon as its LTP rises above the selling price of the Short position
- As soon as the LTP of the CE or PE falls, the trader can square\-off the Short trade and book profit any time before Expiry\.
- __From Expiry perspective, in order to be profitable in an Options Short position, the seller will have to retain the premium notionally credited to him \(i\.e\. the premium received from the buyer of that Option\)__\. Thus, from Expiry perspective, the seller of Options may have to determine the profit and loss levels by determining the Breakeven Strikes \(BE Strikes\) for his Short positions\.
- __<start> Formula: __The __BE Strike for CE Option sell position would be Strike Price at which CE Option is sold \+ premium received__\.__ <end>__ Thus, by Expiry if the price of the underlying remains below  this BE Strike then CE Option Short position would generate profit\. If the Expiry happens below the Strike of which CE Option has been sold then entire premium notionally credited becomes actual profit of the seller\. However, if the Expiry happens above the CE Strike sold but below the BE Strike of CE option then the profit in CE Option Short position would be to the extent of difference between the selling price and the final LTP of that CE Option on Expiry\. But if the Expiry happens above the BE Strike then, the entire premium notionally received by the seller is exhausted and the Short position in CE Option would generate loss to the extent of difference between the final LTP and the selling price of CE Option __\(Profit & Loss Area for CE Sell\)__\.
- __<start> Formula: __The __BE Strike for PE Option sell position would be Strike Price at which PE Option is sold \- premium received__\.__ <end>__ Thus, by Expiry if the price of the underlying remains above  this BE Strike then PE Option Short position would generate profit\. If the Expiry happens above the Strike of which CE Option has been sold then entire premium notionally credited becomes actual profit of the PE seller\. However, if the Expiry happens below  the PE Strike sold but above  the BE Strike of PE Option then the profit in PE Option Short position would be to the extent of difference between the selling price and the final LTP of that PE Option on Expiry\. But if the Expiry happens below the BE Strike then, the entire premium notionally received by the seller is exhausted and the Short position in PE Option would generate loss to the extent of difference between the final LTP and the selling price of PE Option __\(Profit & Loss Area for PE Sell\)__\.
- On Expiry, final LTP of all ATM and OTM CE & PE Options  would become zero \(due to time decay\)\. However, ITM CE & PE Options on Expiry will have their final LTP equal to the Intrinsic Value \(*the Time Value of ITM Options would also become zero on Expiry*\)\. Consequently, __if a CE or PE sold expires as an ATM or OTM then the entire premium notionally received by the seller is profit of the seller__\.
- From Expiry perspective, Options seller expects that the LTP of Options should not have any Intrinsic Value or if there is any Intrinsic Value then that diminishes and the Time Value in the LTP of that Option increases\. Thus, __Option seller takes a bet on the Time Value__\.
- Profit of the seller of a CE or PE Option at a particular Strike price is the loss of the buyer of that Option; and the loss of the seller of a CE or PE Option at a particular Strike price is the profit of the buyer of that Option\. Thus, __Profit Area of Option buyer is the Loss Area of Option seller; and the Profit Area of Option seller is the Loss Area of Option buyer__\. 
- Further, from Expiry perspective, if the view of the Option seller is correct and the underlying keeps trending in the direction of the Short Options position or if the price of the underlying does not breach the BE Strike, then the seller would make limited profit to the extent of difference between the selling price and the final LTP\. However, if the view of the Option seller goes wrong and the underlying keeps trending in the opposite direction of the Short Options position and crosses beyond the relevant BE Strike, then the seller may make unlimited loss as the price of the underlying keeps moving beyond the relevant BE Strike\. Thus, __Options selling carries Limited Reward and Unlimited Risk__\.
- Thus, Option seller may not necessarily need the underlying to follow the direction of his position, __all that is required for the seller to be profitable in his Short position is that the price of the underlying does not breach the relevant BE Strike by Expiry__\.
- Short position in ITM Options should be avoided\. Selling OTM Options is a preferred Shorting bet as OTM Options are more susceptible to time decay as Expiry draws near\. Options of illiquid FNO Stocks should be strictly avoided so as to avoid getting trapped for meeting any physical delivery requirement\. Creating Short  positions in illiquid Options must be avoided\. Better play safe with liquid Options of Nifty and BankNifty \(*where there is no physical delivery requirements*\)\.
- __Margin requirement is high for Options Short  position__ and if direction of Short position reverses and consequently loss starts accruing then enough __funds need to be ensured towards meeting MTM requirements__ \(*which keeps on rising with the rising loss in the Short position and is very high near Expiry*\)\.
- The Options LTP follows the Futures price of the underlying, until on Expiry day Futures merges with the Spot price of the underlying\.

__Long & Short in F&O:__

- Long in F&O means buying Futures or CE or PE
- Short in F&O means selling Futures or CE or PE

__Example__: For Hedged F&O:

__\(i\) To play Bullish view:__

- Buy Futures or buy CE \(Long position\)
- Sell PE \(Short position\)

__\(ii\) To play Bearish view:__

- Sell Futures or sell CE \(Short position\)
- Buy PE \(Long position\)

__Price of F&O and Movement of the Underlying:__

- LTP of Futures rises with the rise in the price of the underlying and LTP of Futures fall with the fall in the price of the underlying
- LTP of CE rises with the rise in the price of the underlying and LTP of CE falls with the fall in the price of the underlying
- LTP of PE rises with the fall in the price of the underlying and LTP of PE falls with the rise in the price of the underlying\. This opposite the direction of the underlying movement for PE is denoted with a minus sign on the delta values of PE\.

__Factors impacting Options’ Premium:__

- Besides change in the price of the underlying, there are many other factors which impact the rise and fall in the LTP of CE & PE Options, *viz\. volatility, time decay, momentum of price change of the underlying, time to Expiry, Delta values etc\.*
- __LTP of Options in any given Options Chain is found in ascending order from deepest OTM towards deepest ITM__, for both CE and PE Sides\. Thus, deeper ITMs have higher LTPs and hence Options gets costlier as we move towards deeper ITMs\.
- When the __price of the underlying __rises, the LTP of CE Option rises and that of PE Option falls\. When the price of the underlying falls, LTP of CE drops and the LTP of PE rises\. More the momentum with which the price of the underlying changes, more steeper the spike or fall in the LTP of Options\.
- Volatility in the market/ underlying increases the __Implied Volatility \(IV\) __of the Options, which in turn causes the LTP of the Options \(both CE and PE\) to rise\.  LTP of Options with favourable direction \(i\.e\.* for CE if underlying is rising; and for PE if underlying is falling*\) increases with rise in IV; and the LTP of Options in opposite direction of the underlying do not fall much due to spike in IV \(*however, sometimes due to exponential increase of IV, LTP of Options which are facing the opposite direction also rises eg: even though market is falling and IV of all Options are rising, then LTP of CE Options may also rise*\)\. Generally, when VIX spikes, IV of Options rise; and when VIX crashes then IV of Options fall down\.__ Thus, when Volatility / IV rises, LTP of Options rises and when the volatility cools\-off the LTP of Options reduce down__\.  __Options with high Vega are more prone to fluctuations in IV__\. Vega of ATM Strike is highest in the Options Chain and reduces as we move deeper towards ITM or OTM on both CE and PE sides\. __Rise in Volatility is favourable factor for Options buyer \(*as LTP of Options rises*\); and fall in Volatility is a favourable factor for the Options seller \(*as LTP of Options starts reducing*\)__\. 
- Each Option in an Option Chain has a __Delta value__, which signifies change \(both rise and fall\) in the LTP of that Option due to change in the price of the underlying\. Futures has a Delta of 1 which means that with every Rs\. 1 change in the price of the underlying the Futures LTP would also change by Rs\. 1 \(*both rise and fall by Rs\. 1 with rise and fall of Rs\. 1 in the price of the underlying, respectively*\)\. __Delta value of CE and PE Option rises from 0 to 1 as we move from deep OTM towards deep ITM__\. ATM Strikes CE & PE has a Delta value of 0\.5 \(*meaning that the ATM Strike moves by 50 paisa with every Rs\. 1 change in the price of the underlying*\)\. __Thus, depending upon the Delta value of a given Option we can have an idea with regard to the change in its LTP with change in the price of the underlying__\.
- Every Option is subject to a mandatory __Theta decay__ i\.e\. every Option looses some value from the Time Value comprised in the LTP of the Option with each passing day until its Expiry\. __Theta decay only impacts the Time Value and not the Intrinsic Value in the LTP of a given Option__\. As the Expiry approaches the Theta decay becomes even faster and causes more erosion in the Time Value comprised in the LTP of Options thereby bringing down the LTP of Options \(*even if there is no unfavourable direction movement in the price of the underlying*\)\. __Theta decay is higher is near Expiry series and lesser in higher Expiry series\. Due to Theta decay, on Expiry, Time Value of all Options become zero__, consequently, LTP of all ATM and OTM CE & PE Options on Expiry becomes zero and all ITM CE & PE Options’ LTP is reduced to the extent of moneyness/Intrinsic Value comprised in them\. __Theta is maximum at ATM Strike __and reduces as we move deeper towards ITM and OTM for both CE & PE\. __ Theta decay thus is a favourable factor for Options seller and causes   loss to the Options buyer\.__

__Trading in F&O: __Can employ one or more instruments of Futures and/or Options \(CE or PE\) for trading

__Naked position in F&O: __Naked position means unhedged position in a Futures or Options instrument\.

__Hedging in F&O:__

- Hedging is creation of a contra/opposite direction position to the  primary position created with the main view, so as to curtail the loss incurred on the primary position if our main view goes wrong\. It is a risk mitigation tool/ strategy\.
- If main view is bullish, primary position is created on the bullish side; and this primary position is hedged by creating another position opposite to the primary position i\.e\. on the bearish side\.
- Likewise, if main view is bearish, primary position is created on the bearish side; and this primary position is hedged by creating another position on the bullish side
- Primary position and hedged leg are initiated in such a manner that when trade goes as per expectation then primary position generates more profit than the loss generated on the hedged leg, thus giving rise to a net profit situation\. However, if the trade does not go as expected, then while the primary position would start giving loss, this loss gets set\-off by the profit generated by the hedged leg \(*usually hedged leg helps to set\-off almost 40% or more of losses generated in the primary position*\)\.
- Hedge position also significantly reduces the margin requirement, especially in case of naked Futures or Short Options positions\.

__Short position is made with a Buyer:__

- Short position is initiated with an unknown buyer i\.e\. if you sell a F&O instrument you sell it to an unknown buyer of the same instrument 
- Thus, in every Short position \(*selling a Futures or CE or PE*\) your bet is against the buyer of the F&O instrument you sold
- Sellers and buyers of a given F&O instrument always have a contra position and expectations to each other\. Their profit and loss areas are also opposite of each other \(*profit of one is loss to other*\)\. __Factors influencing favourably to sellers are generally unfavourable to buyers and vice\-versa__\. Thus, F&O is a zero\-sum game\.

__Initiating & Exiting a Short position in F&O:__

- Entry leg is initiated for a sell position by placing a preferred Ask Price
- Ask Price at which sell order gets executed is the selling price of that F&O instrument \(*it implies that your Ask Price matched with the Bid Price of some unknown buyer for that instrument*\)
- In order to exit/ square\-off the Short position, a buy order need to be place at a Bid Price
- Bid Price at which buy order gets executed is the buying price/exit price of that F&O instrument \(*it implies that your Bid price matched with the Ask Price of some unknown seller for that instrument*\)
- If buying price is less than the selling price then the profit is booked on the Short position, but if buying price is more than the selling price then the loss is booked\.

__Types of Options \(ITM\-ATM\-OTM\): __

- Options are primarily, CE and PE Options
- The CE and PE Options, in an Options Chain, are either ITM \(*in the money*\), ATM \(*at the money*\) or OTM \(*out of the money*\)
- ATM Options are: CE and PE Options of the Strike which is closest to the prevailing Futures price
- ITM Options are: All CE Options of the lower Strikes to the CE ATM Strike are ITM CE Options\. All PE Options of the higher Strikes to the PE ATM Strike are ITM PE Options\.
- OTM Options are: All CE Options of the higher Strikes to the CE ATM Strike are OTM CE Options\. All PE Options of the lower Strikes to the PE ATM Strike are OTM PE Options\.

__Intrinsic Value & Time Value in Options’ Premium:__

- __All ATM and OTM CE & PE Options have 100% Time Value __in its LTP
- All ITM CE & PE Options have Intrinsic Value and may or may not have some Time Value, in their LTP
- __<start>Formula: Intrinsic Value for ITM CE Options__ = \[Futures price – Strike price of CE Option\] __<end>__
- __<start> Formula: Time Value of ITM CE Option__ = \[LTP of CE Option – Intrinsic Value of CE Option\] __<end>__
- __<start>Formula: Intrinsic Value for ITM PE Options__ = \[Strike Price of PE Option \- Futures price\] __<end>__
- __<start>Formula: Time Value of ITM PE Option__ = \[LTP of PE Option – Intrinsic Value of PE Option\]__ <end>__

__Long position in Options \(CE or PE\):__

- Long position in CE is created when the view is bullish and a Long position is created in PE when the view is bearish
- A Long position is initiated in CE or PE by placing a buy order at a Bid Price\. The Bid Price at which the buy order gets executed is the buying price of the CE or PE Long position\. 

<__start__>__The buying price x no\. of lots bought = the premium paid by the buyer__ to the seller of that Option \(therefore, __Option buying is a Debit trade__\)<__end__>

- LTP of CE Options rise with the rise in the price of the underlying and the LTP of the PE Option rises with fall in the price of the underlying
- Long position in Options \(i\.e\. buying CE or PE\) generates profit as soon as its LTP rises above the buying price, and starts giving loss as soon as its LTP falls below the buying price of the Long position
- As soon as the LTP of the CE or PE rises, the trader can square\-off the Long trade and book profit any time before Expiry\.
- __From Expiry perspective, in order to be profitable in an Options Long position, the buyer will have to first recover the premium paid by him__ to buy that Option\. Thus, from Expiry perspective, the buyer of Options may have to determine the profit and loss levels by determining the Breakeven Strikes \(BE Strikes\) for his Long positions\.
- __<start>Formula: __The __BE Strike for CE Option buy position would be Strike Price at which CE Option is bought \+ premium paid <end>__

Thus, by Expiry if the price of the underlying crosses above this BE Strike then CE Option Long position would generate profit to the extent of difference in the final LTP of that CE Option on Expiry and the buying price of that Option __\(Profit & Loss Area for CE Buy\)__\. But if the final LTP of CE Option on Expiry is lower than the buying price, then the Long position in CE Option would generate loss to the extent of difference between the buying price of CE Option and the final LTP on Expiry of that CE Option\.

- __<start>Formula: __The __BE Strike for PE Option buy position would be Strike Price at which PE Option is bought \- Premium paid__\.__<end>__ 

Thus, by Expiry if the price of the underlying crosses below this BE Strike then PE Option Long position would generate profit to the extent of difference in the final LTP of that PE Option on Expiry and the buying price of that Option __\(Profit & Loss Area for PE Buy\)__\. But if the final LTP of PE Option on Expiry is lower than the buying price, then the Long position in PE Option would generate loss to the extent of difference between the buying price of CE Option and the final LTP on Expiry of that CE Option\.

- On Expiry, final LTP of all ATM and OTM CE & PE Options  would become zero \(due to time decay\)\. However, ITM CE & PE Options on Expiry will have their final LTP equal to the Intrinsic Value \(*the Time Value of ITM Options would also become zero on Expiry*\)\. Consequently, __if a CE or PE bought expires as an ATM or OTM then the entire premium paid by the buyer is a loss  to the buyer__\.
- __Profit of the buyer of a CE or PE Option at a particular Strike price is the loss of the seller of that Option; and the loss of the buyer of a CE or PE Option at a particular Strike price is the profit of the seller of that Option__\.
- Further, from Expiry perspective, if the view of the Option buyer is correct and the underlying keeps trending in the direction of the Long Options position then the buyer may make unlimited profit as the price of the underlying keeps moving beyond the relevant BE Strike\. However, if the view of the Option buyer goes wrong and the underlying keeps trending in the opposite direction of the Long Options position or do not cross beyond the relevant BE Strike, then the buyer may make limited loss to the extent of premium paid by the buyer for buying that Option\. Thus, __Options buying carries Unlimited Reward and Limited Risk__\.
- From Expiry perspective, Options buyer expects that the LTP of Options should gain as much Intrinsic Value as possible by Expiry and if there is any Time Value in the LTP of that Option then that diminishes and the Intrinsic  Value in the LTP of that Option increases\. Thus, __Option buyer takes a bet on the Intrinsic Value of the Options__\. Further, Option buyer necessarily need the underlying to follow the direction of his position and that too with swift momentum, so as to cross beyond the relevant BE Strike by Expiry in order to be  profitable in his Long position\.
- Long position in Options should be avoided near to Expiry as the Options becomes more susceptible to time decay as Expiry draws near\. Not all Strikes of current Expiry are liquid\. Far Deep OTM and deep ITM are not so liquid in current Expiry\. Further, with farther Expiry series certain near ITM and OTM may also be illiquid\. Options of illiquid FNO Stocks should be strictly avoided so as to avoid getting trapped for meeting any physical delivery requirement\. Creating Long positions in illiquid Options must be avoided\. Better play safe with liquid Options of Nifty and BankNifty \(*where there is no physical delivery requirements*\)\.
- __Margin requirement for Long Options trade is not more than the premium cost for buying__ the Options\. Further, there is __no requirement of meeting MTM__ if the Long Options position starts going wrong and giving loss \(*because the maximum loss that can occur in Long Options position is to the extent of the premium paid, and that much amount is already blocked as margin requirement for the Long position, hence no MTM requirement / additional funds required*\)\.
- The __Options LTP follows the Futures price of the underlying, until on Expiry day Futures merges with the Spot price of the underlying__\.

__Long & Short Buildup, Long Unwinding & Short Covering:__

- Long buildup = rise in Open interest \(OI\) and rise in price

\(*indicates bullish sentiment in the underlying*\)

- Short buildup = rise in OI, but fall in price

\(*indicates bearish sentiment in the underlying*\)

- Long Unwinding = fall in OI and fall in price

\(*indicates cessation of bullish sentiment in the underlying, and likely reversal towards bearishness*\)

- Short covering = fall in OI, but rise in price

\(*indicates cessation of bearish sentiment in the underlying, and likely reversal towards bullishness*\)

__Long position is made with a Seller:__

- Long position is initiated with an unknown seller i\.e\. if you buy a F&O instrument you buy it from an unknown seller of the same instrument 
- Thus, in every Long position \(*buying a Futures or CE or PE*\) your bet is against the seller of the F&O instrument you bought
- __Buyers and sellers of a given F&O instrument always have a contra position and expectations to each other__\. Their profit and loss areas are also opposite of each other \(*profit of one is loss to other*\)\. Factors influencing favourably to buyers are generally unfavourable to sellers and vice\-versa\. Thus, __F&O is a zero\-sum game__\.

__Initiating & Exiting a Long position in F&O:__

- Entry leg is initiated for a Long position by placing a preferred Bid Price
- Bid Price at which buy order gets executed is the buying price of that F&O instrument \(*it implies that your Bid price matched with the Ask Price of some unknown seller for that instrument*\)
- In order to exit/ square\-off the Long position, a sell order need to be place at an Ask Price 
- Ask Price at which sell order gets executed is the selling price/exit price of that F&O instrument \(*it implies that your Ask Price matched with the Bid Price of some unknown buyer for that instrument*\)
- If selling price is more than the buying price, then a profit is booked in the Long F&O position, but if selling price is less than the buying price then loss is booked\.

__Liquidity in F&O:__

- Futures do not pose any problem with regard to liquidity in Futures instrument
- However, deep ITMs & OTMs in any given Options Chain or farther expiry series \(like Next Monthly Expiry series of Far Monthly expiry series etc\.\) have liquidity issues\.  Moreover, Stock Options of certain F&O stocks are also illiquid\. 
- Since, in illiquid Options there is a wide gap in the price being bid by the Options buyer and the price demanded by the Options seller, therefore liquidity issue can be checked by comparing the Bid Price and Ask Price for any given instrument or Strike Price\. __If the difference between the Bid Price and the Ask Price is in decimals then it exhibits sufficient liquidity and if the gap is more that implies that there is illiquidity in that instrument/ Strike Price__\.

__Long positions in Futures:__

- In Futures, there is no need for any calculations from Expiry perspective\.
- Long position in Futures \(i\.e\. buying Futures\) generates profit as soon as its LTP rises above the buying price, and starts giving loss as soon as its LTP falls below the buying price of the Long position
- Long position in Futures can be created and exited any point in time \(even closer to its Expiry\)\. Generally, there is sufficient liquidity in Futures\. However, positions in Futures in illiquid Stocks or holding positions near Expiry should be strictly avoided so as to avoid getting trapped for meeting any physical delivery requirement\. Better play safe with Futures of Nifty and BankNifty where there is no physical delivery requirements\.
- __Margin requirement is high for Futures Long position__ and if bullish position reverses for bearish and consequently loss starts accruing then __enough funds need to be ensured towards meeting MTM requirements __\(*which keeps on rising with the rising loss in the trade and is very high near Expiry*\)\.
- The __Futures LTP merges with the Spot price of the underlying on Expiry__\.
- Naked Long Futures position may generate unlimited profit or unlimited loss\.

__Short position in Futures:__

- Short position in Futures \(i\.e\. selling Futures\) generates profit as soon as its LTP falls below the selling price, and starts giving loss as soon as its LTP rises above the selling price of the Short position
- Short position in Futures can be created and exited any point in time \(even closer to its Expiry\)\. Generally there is sufficient liquidity in Futures\. However, positions in Futures in illiquid Stocks or holding positions near Expiry should be strictly avoided so as to avoid getting trapped for meeting any physical delivery requirement\. Better play safe with Futures of Nifty and Banknifty where there is no physical delivery requirements\.
- __Margin requirement is high for Futures Short  position__ and if bearish position reverses for bullish and consequently loss starts accruing then __enough funds need to be ensured towards meeting MTM requirements __\(*which keeps on rising with the rising loss in the trade and is very high near Expiry*\)\.
- The Futures LTP merges with the Spot price of the underlying on Expiry\.
- Naked Short Futures position may generate unlimited profit or unlimited loss\.

Options indisputably has, not only the potential to generate huge profits, but more importantly provides a “safer way” to ride the trade profitably and most distinctly has the capability to turnaround a losing trade into a winning trade\.

__*Impact of Implied Volatility \(IV\) on Options’ Premium:*__

As IV of Options rise, the pricing/premium \(i\.e\. LTP value\) rises\. If IV rises sharply, so does the Premium value of Options\. Thus, on the occurrence of any uncertain or frightening event, generally all the Options become costlier due to rise in their IV\. However, this does not mean that the IV \(and consequently, the Premium value\) of all the Options in an Options Chain \(or same strike of different series of Expiry\) increases at the same rate with the rise in Volatility in the market\. IV of different Options rises at different rates \(and consequently, their Premium value\) with rise in volatility in the market\. If VIX goes below 12 or so then the Premium value of Options drop significantly and not enough Premium is available for Options sellers to create Shorts on Options; on the other hand if VIX rises above 20 or 25 then very high Premiums are available on Options which tend to remain unaffected due to the usual Theta impact \(ofcourse, on Expiry of Options, the full Theta effect would take place on relevant Options regardless of Volatility\)\. 

Likewise, when the uncertain event unfolds or the fear factor is settled, and positivity & normalcy is restored in the market sentiment, the IV of Options starts to cool\-off sharply resulting in steep fall in their Premium value values\. Again, this does not mean that the IV \(and consequently, the Premium value\) of all the Options in an Options Chain \(or same strike of different series of Expiry\) decreases at the same rate with the fall in volatility in the market\. IV of different Options reduces at different rates \(and consequently, their Premium value\) with fall of Volatility in the market\.

__Implied Volatility of Options:__

__*IV of CE & PE:*__

IV stands for implied volatility\. Implied volatility is the measure of uncertainty or fear in the market, i\.e\. when fear or uncertainty rises / persists, the volatility in the market rises\. Rise in volatility implies that due to fear or uncertainty of an event – the market may react positively or negatively on the outcome of the event or as the situation persists, i\.e\. the market may either sharply rise or steeply fall\. IV indicates magnitude of rise or fall  in the price of the underlying \(i\.e\. fluctuation in price\) and not the direction of rise / fall\. Please note that volatility has a very significant bearing on the Options, i\.e\. on their LTP values and their other behaviour aspects, thus, understanding the impact of volatility is very important for a F&O trader\.

__*Summary points on Implied Volatility in Options:*__

Thus, in nutshell, in the context of Implied Volatility, we note the following: 

- Rise in volatility in the market means rise in VIX; and fall in volatility means fall in VIX
- Generally, rise in VIX implies rise in IV of Options and fall in VIX would mean fall in IV of Options
- Rise in IV leads to rise in LTP of Options and fall of IV leads to fall in Premium value of Options
- Low IV of an Option means lower LTP for that Option; high IV implies higher Premium value\.
- IV value for both CE and PE for a particular Strike Price, in a given Option Chain, are same\.
- In the context of equity based Options \(like FNO Stocks and Nifty, BankNifty\), IV value for Options are in descending order in the Options Chain i\.e\. the lower Strike Price has higher IV and decreases as we move from one higher strike Price to another higher Strike Price level\.

Generally, for the purpose of reference of IV of the Options of a particular Option Chain for a given Expiry, the IV of the prevalent ATM Strike is referred to\.

__*IV of each Option in the Option Chain:*__

Each Option in the Option Chain, for any given Expiry has its own IV value\. Implied Volatility in the context of Options, means the magnitude of fluctuations \(up and down\) the price of the underlying asset or Indices can likely make\. This IV of Options  also gets impacted the same way as India VIX reacts to any uncertain or frightening situation \(*like, pandemic, war, terrorist activity, RBI announcement, global event, change in Government, political outcomes, Government decisions or policies, budget etc*\)\. Thus, when such frightening or uncertain events occur, then IV of Options rise; and as soon as the event gets unfolded or settled leading to easing of market sentiment the IV of the Options drops down, almost as quickly as they rose \(exactly like the reaction of India VIX\)\. Thus, mostly, one can expect the impact on the IV of Options, of any given Option Chain for any underlying asset or indices etc\., looking at the reaction of India VIX to any such uncertain event\. IV of an Option may also increase if the Bid Prices rapidly increase, indicating demand for that Options by Options buyers\. 

Further, as mentioned above, that usually, but not necessarily, when India VIX rises, then the market falls\. Thus, if India VIX rises and market falls, the IV of all Options \(both CE & PE\) would rise and thus their LTP; but the LTP of PE Options would rise even further due to the downward direction of the market\. But if India VIX rises and market also rises, the IV of all Options \(both CE & PE\) would rise and thus their LTP; but the LTP of CE Options would rise even further due to the upward direction of the market\.

__<start> __In a given Options Chain for FNO Stocks or Nifty & BankNifty: 

- the IV value for both CE and PE for a particular Strike Price are same\. However, if there is some mismatch in the IV value between a CE and a PE at the same Strike level, then follow the IV for the OTM Option between the two\.
- the IV value for Options are in descending order in the Options Chain i\.e\. the lower Strike Price has higher IV and decreases as we move from one higher strike Price to another higher Strike Price level\. This implies that the lower PEs will have higher IV than the higher CEs\.
- Generally, for the purpose of reference of IV of the Options of particular Option Chain of a given Expiry, the IV of the prevalent ATM Strike is referred to\. While, the ATM strike would keep shifting due to fluctuation in the price movement of the underlying, the IV of the ATM Strike remains constant in normal situations \(*and when volatility rises the IV of ATM Strike shoots up; and when volatility drops the IV of ATM drops down*\)\. __<end>__

__<start> <img1> __Kindly refer to the Options Chain of Nifty, and the see the IV value given for the relevant Option\(s\) __<end>__; and

__<start>__ __<img3>__ the snapshot from NSE’ website, and the see the IV value given for the relevant Option\(s\)\.__<end>__

__*India VIX:*__

The index which measures volatility of the Indian capital market as a whole is called the India VIX or India Volatility Index\. VIX gives a general indication of the state of volatility in the Indian market\. Volatility level indicated by VIX means that the market by go up & down by that level in percentage terms \(*eg: VIX at 15 would mean that the market may go up & down by 15%*\)\. During Corona breakout in March 2020, India VIX rose to unprecedent levels of \+86\. 

In a normal state, India VIX remains within a range of 12 to 18\. In recent times in February 2022 \(particularly, in the last three weeks\), on account of attack by Russia on Ukraine, India VIX made a high of \+33 from an opening level of around 22 in the month of February and closed in that month at around 28\. 

Thus, when generally, due to occurrence of some event or expectation of some event to occur or unfold or if some uncertain situation dawns, then the fear or uneasiness becomes the market sentiment which causes India VIX to rise\. Usually, but not necessarily, when India VIX rises, the market falls\.

__*Liquidity of Options:*__

Liquidity implies extensive participation of traders at a particular strike or Option\. Liquidity may be higher or lower at certain strike levels in the same Option Chain of an indices or asset; or between the same strike levels in different Expiries of the same underlying indices or asset\. __Higher OI or higher volume at a Strike level indicates greater liquidity at that Strike Price, and lower OI or lower volume indicates lesser liquidity__\.

__*Benefits of liquidity in Options:*__

In liquid Options or at strike prices with sufficient liquidity, since there is greater participation of traders at those levels, the buyers and sellers at those strike levels /Options compete for their preferred prices close to the prevailing LTP, as a result the Bid Price and the Ask Price in such options or strike levels are very close and have differences only in decimals\. As mentioned, the prevailing LTP of Options is due to movement in price of the underlying and other factors such as volatility, momentum in price of the underlying, type of Option \(ITM / ATM / OTM\), time to expiry etc\.

Whereas, in Options / strike levels with less liquidity, due to less participation of traders or less competition, there is significant gap between the Bid Price and Ask Price \(which are quite distant from the prevailing LTP of that Option\), consequently, an Option buyer gets a price higher than the LTP \(*because the prevailing Ask Price is usually higher than the prevailing LTP*\) and an Options seller gets a lower price than the LTP \(*because the prevailing Bid Price is usually lower than the prevailing LTP*\)\.

Thus, looking at the difference between the Bid Price and the Ask Price in the market depth of a given Option, one can determine whether or not that particular Options is liquid or not__, i\.e\. if the difference between the Bid Price and the Ask Price is very less \(almost in decimals\), such Options are generally liquid; and those with higher difference in values of the Bid Price and the Ask Price are illiquid__\.

Liquidity in Options is of great significance and comfort for a trader \- as it implies the following crucial benefits:

- In liquid Options, an Option buyer and an Option seller will be able to execute or exit their positions almost at the LTP value, hence there is no risk of taking any haircut on profit margin in liquid Options as the Bid Price and Ask Price would be found available almost at / around the LTP value\.
- In liquid Options \- creation of a position or exit therefrom, is not a challenge, as great number of traders are participating at that Option, hence there is no risk of getting trapped by not being able to exit near Expiry, due to liquidity issues in such Options\. Thus, a trader can create or exit his position in liquid Options, almost instantly\.

__*Risks in illiquid Options:*__

Thus, in trading with liquid Options, the trade plan does not face any challenge on account of liquidity issues\. On the contrary, illiquid Options, poses a great difficulty for the traders to initiate or exit their position instantly at their preferred Bid Price or Ask Price close to the LTP value\. This aspect is explained further below:

We know that the LTP of an Option is the last price at which a buyer’s Bid Price matched with the Ask Price of a Seller of that Option and thus a trade was consummated/ executed at the most recent common price point\. Now, in the context of trading there is always a tussle between the buyers and sellers of an instrument\. Where the participation of buyers and sellers are dense \(i\.e\. liquid Options\) there would be a stiff competition amongst the buyers to out\-bid other buyers; and amongst sellers to demand a competitive Ask Price, which causes the real\-time ongoing LTP to be changing in decimal values, thereby making the Bid Price and Ask Price being made very close to the last prevailing LTP\. 

Whereas, on the contrary, in case of illiquid instruments/ Options, because of fewer buyers and sellers, the buyers wish to buy cheap and thus make lower Bid Price than the most recent LTP, and the sellers wish to demand higher Ask Price than the most recent LTP\. Thus, fewer participation causes a wide gap between the Bid Price and the Ask Price, quite distant from the prevailing LTP at which most recent trade got executed\. Thus, in such Options, until a new trade is executed pursuant to either a buyer matching its Bid Price with an Ask Price or by a seller matching its Ask Price with the Bid Price, the LTP would not be revised/ updated\. And usually, because there is fewer traders in illiquid Options the trades between buyers and sellers in such options takes place not very frequently and thus the LTP gets revised accordingly not very quickly \(unlike in liquid Options, where LTP revises every fraction of seconds\)\.

Therefore, since in illiquid Options, there is extremely less trades amongst the buyers and sellers of such Options; consequently, the LTP is not updated very frequently\. Moreover, in such Options, buyers make a Bid Offer much less than the prevailing LTP in order to buy cheap; and the Seller of such Option asks for a higher price as they wish to sell at a higher Premium than the LTP\. This results in a huge gap between the Bid Price and the Ask Price\.  This situation may therefore sometimes leave the traders stranded without any buyer/ seller near the LTP or their preferred price \(even if the underlying has made a favourable move\), thus leaving little room for the traders to enter or exit at their preferred price\. By the time the revised LTP gets reflected on the trading terminal, the underlying price had move significantly and the Bid Price and Ask Price which would now be made would be around this revised LTP value as a reference point, which was updated due to execution of a trade between a buyer & a seller after significant change in the price of the underlying\. Thus, due to such late occurrence of trades in illiquid Options owing to fewer traders, the revision of LTP takes place after significant movement in the price of the underlying a trader, which may impair an ample buying / selling opportunity at an optimum price point \(as after revision of the LTP, the Bid / Ask Price would again be found distant from the revised LTP\)\.

Since, in illiquid Options there is a significant gap between the Bid Price and Ask Price from the prevailing LTP of Options, consequently: 

- for initiating a position in such illiquid Options, an Option buyer may have to buy at a price higher than the LTP and an Option seller may have to sell lower than the LTP; and 
- while exiting a position from such illiquid Options, an Option seller may have to exit at a price higher than the LTP \(*i\.e\. the Option seller will have to square\-off his Short position by placing a buy order, hence will have to match the Bid Price*\); and an Option buyer may have to exit at a price lower than the LTP \(*i\.e\. the Option buyer will have to square\-off his buy/Long position by placing a sell order, hence will have to match the Ask Price*\)\.
- a trader may have to wait in expectation to get a preferred price point for his entry or exit, else may have to face a haircut in profit margin or incur loss\. 

Furthermore, an Option trader will have to be particularly careful in dealing with illiquid Options near Expiry, as he may not be able to square\-off his position from such Options due to absence of traders on such Options; or even if there are few traders on that Strike level, the prevailing Bid Price or Ask Price, as the case may be, might be such, which may cause the Option trader to take a huge haircut on his profit margin on that Option to exit before Expiry or may even require to book a loss due to such issues\. The situation may become worse on account of illiquidity in Options, if a trader is not able to square\-off his ITM Option position of an instrument which requires compulsory exercise of Option or fulfil obligation, as the case may be, towards physical delivery of the underlying asset or securities, in which case the trader will be required to meet the onerous physical delivery requirements\.

Precisely, because of aforesaid reasons, certain brokers do not allow orders to be placed on certain illiquid Options\. The illiquid Options are marked as illiquid in the Options Chain maintained by the brokers on their trading terminal\.  

__*Certain Options with liquidity issues:*__

The following Options are generally illiquid:

- Except few Stock Options which are quite liquid \(like Reliance, SBI, Tata Steel, HDFC Bank, ICICI Bank, Bajaj Finance etc\), most of the other Stock Options are illiquid\.

Stock Options with less liquidity \(even on Current Month Expiry\) must be avoided, and certainly should not be held close to Expiry \(*every effort must be made atleast a week ago to square\-off positions from illiquid Stock Options, as it will keep getting difficult to exit your position with approaching Expiry as liquidity will dry up even more in such Options as Expiry draws near*\) and may result in huge haircut on profit margin or falling into compulsory requirement of the physical delivery: as ITM Stock Options have to be settled with physical delivery\.

- In case of Options of Nifty and BankNifty: Deep ITM and OTM Options of even current Monthly or Weekly Expiry are illiquid\. Also, Options of Next Month and Far Month Expiry in these indices are not so liquid\.

Unlike Stock Options, ITM Options of Nifty and BankNifty are cash settled on Expiry \(i\.e\. *there is no requirement of physical delivery of any underlying securities, if somebody happens to hold Deep ITMs in the Options of these Indices*\)\. 

__*Trading in certain illiquid Options:*__

It is also pertinent to note here that, making positions in Deep ITM Options or Options of Next Month or Far Month Expiry of Nifty or BankNifty Options, which are generally illiquid, have certain significant advantages – from the perspective of Options behaviour and hedging\. Therefore, with proper planning and knowhow, positions can be created in such Options of these Indices to harness certain potential benefits\. Risk in making positions in certain Options in Next Month or Far Month Expiry of these Indices gets mitigated by the fact that in these Indices liquidity gets created as Far Month Expiry becomes Next Month Expiry and then Current Month\. Moreover, there is no requirement of physical settlement of any ITM Option of these Indices with any securities on Expiry\.

__Options Chain:__

CE & PE Options of each securities, assets or benchmark \(*which have been allowed by the stock exchanges to be available in the form of Options instruments*\) are always arranged and maintained in a tabular format by the stock exchanges, called “Options Chain” of that particular securities/ benchmark or asset\. 

These Options Chain are available on the website of the relevant stock exchanges \(which monitors that F&O segment of that particular stock/benchmark/asset\) on real time basis\. The Options Chain are also made available by the brokers on their trading portal  / application, on real time basis, to their users/traders by taking subscriptions from the stock exchanges\.

<__start__>Just to demonstrate: the Options Chain for Nifty, available on the website of NSE as on July 18, 2022 of weekly expiry, is provided here for your reference\. __<img1>__

Kindly take note of the terms given in the heading of the Options Chain: *Calls, Puts, Strike Price, Bid Quantity, Bid Price, Ask Quantity, Ask Price, Price, LTP, Change in LTP, IV, Volume, OI and Change in OI*\. It is important to understand these terms in the Option Chain\.<__end__>

Each Options Chain typically contain the aforesaid information, however, the real\-time Options Chain provided by various broker on their trading terminal also provides the trader/user the flexibility to display real\-time Greek values of Options and certain other information\. The trader/user can also customize the Options Chain provided by the broker on their trading terminal, with only those set of information which a trader wishes to focus/evaluate for his trade or analysis\.   

The Options Chain contains very important information, basis which an Options trader initiates his buy and sell positions in Options\. Let us decode the Option Chain to appreciate the significance of the information it contains, and understand the meaning of each of the basic terms appearing on top of the Options Chain of Nifty given above\.

__*Options Chain of Index Options:*__

Futures & Options of Nifty and BankNifty indices are heavily traded in India, one of the reasons why trading in F&O of these indices attracts heavy volume i\.e\. participation of traders is that, these instruments \(*unlike Futures & Options of Stocks, Commodities etc\.*\) do not require making or taking of physical delivery of any securities, even on Expiry of these instruments\. Thus, F&O traders can comfortably hold their positions even until the final Expiry of Futures or Options of these indices or even initiate fresh positions for trading on Expiry Days of these instruments\.

Each security, benchmark or asset, which is traded in Options, has separate Options Chain for different Expiry Dates of those Options\.

__*O*__<a id="_Hlk109081845"></a>__*pen Interest \(OI\) in Options:*__

OI is the short form, generally, used for the term Open Interest, employed mostly in the context of F&O instruments\. As we know that F&O are derivative instruments, which when traded results in execution of a financial contract \(*Futures Contract or Options Contract, as the case may be for Futures trade or Options trade, respectively*\) between the buyer and the seller of that instrument, entered into for a particular price, upto the relevant Expiry Date\. Number of such financial contracts, so executed for a particular price which are currently open or outstanding \(i\.e\. being held by the buyer/seller for their trade\) and not closed out / settled \(by exiting the trade\), is referred to as the Open Interest for that instrument at a given price\. 

Thus, __Open Interest is the total number of Options Contract executed \(whether as buyer or seller\), not the total of Options contracted by buyer plus seller\. Also, it is important to note that Open Interest equals the total number of contracts, not the total of each transaction by every buyer and seller__\.

In the context of Options, when a fresh Options trade is executed between a buyer and a seller for a particular strike price \(for a given Expiry Date\), an Options Contract for a particular strike price comes into existence between the buyer and seller of such Option\. 

Number of Options Contract, executed for a particular strike price, and existing at a given point in time, would be the number of Open Interest\. 

__<start>__*Example: For example, the Nifty Options Chain: shows an Open Interest of  82,638 contracts at the ATM CE strike price of 16300 and an Open Interest of 39,435 at the ATM PE strike price of 16300\. *__*<*img1*>*__ __<end>__

Increasing Open Interest represents new or additional money coming into the underlying while decreasing Open Interest indicates money flowing out of the underlying\.

__*OI created with fresh Contract, not transfer of Contract:*__

The Open Interest number only changes when a new buyer and seller enter to execute a fresh trade at a particular Strike level, creating a new Contract, or when a buyer and seller meet, thereby closing/squaring\-off both positions\. *For example, if a trader has five Contracts of Options sell and another has five Contracts of Options buy at the same Strike Price, and these two traders then buy and sell their respective five Contracts to each other, thereby squaring\-off their respective positions and thus closing out their five contracts, then the Open Interest at that strike level would be deducted by five*\.* However, if the holder of the Options buy position sells his position to a new trader who wishes to create an Options sell position for himself, then the trade between them will result in transfer of Contract between them and not creation of a fresh Contract, consequently in such case there will be no change in the OI at that Strike Price\.*

__*Change in Open Interest \(OI\) on real\-time basis & its significance:*__

The Open Interest \(OI\) of F&O instruments keep fluctuating, on real\-time basis, as the traders keep making fresh positions and exiting their existing positions as per their ongoing analysis of market and market\-influencing factors\. This change in OI is also provided for in the Options Chain, on real time basis\. * *

__<start> *Example*__*: *__<img1> __*In the Nifty’s Option Chain given here, maximum positive change \(addition of fresh OI\) is seen at 16200 PE strike, where about 1,08,159 fresh OI addition has occurred\. In the same Options Chain, maximum negative change \(reduction in OI\) is seen at 16000 CE strike: where about –35,971 OI have been reduced\. Moreover, the aforesaid Options Chain also reflects more additions of OI on PE side than CE side\. This data on standalone basis seems to suggest that most traders are bullish than bearish\.*__ <end>__* *

Please note that the data reflected in the Options Chain, shows the participation of big players like banks, financial institutions, FIIs, hedge funds etc \(*that is to say, the retail participation does not count on relative basis to the participation of these big institutions in the financial market*\)\. More often, these big institutions create their positions on the Options sell side than buy side\. Therefore, as an indication whilst interpreting Options Chain, if there is higher OI in PE side than CE; then that means that the big institutions have created PE sell positions \(*PE sell means: underlying is expected to remain above the particular strike price where PE sell is executed*\) more than CE sell positions \(*CE sell means: underlying is expected to remain below the particular strike price where CE sell is executed*\), and vice\-versa\.

__*Significance of Open Interest \(OI\):*__

OI data is a critical piece of valuable information required for overall Option data analysis\. Change in OI helps determine the reversal of trend\.  Further, CE or PE Options / strike levels with high OI indicates sufficient liquidity in those Options, which is comforting for a F&O trader; and low liquidity may be a cause of concern for a F&O trader\. 

Moreover, a lot of other Option data points are arrived at by analysing the OI data, *viz\.* Max OI Concentration on CE & PE side to determine Resistance & Support, respectively; PCR; etc\.

__Different ITM\-ATM\-OTM for CE & PE Options, in a given Options Chain__:

__<img2>__

- ATM strike is same for CE ATM and PE ATM
- CE ITM Options are diagonally placed in an Options Chain to the PE ITM Options \(*vice\-versa*\)
- CE OTM Options are diagonally placed in an Options Chain to the PE OTM Options \(*vice\-versa*\)
- All CE ITM Options are PE OTM Options \(*vice\-versa*\)
- All Near CE ITM Options are Near PE OTM Options \(*vice\-versa*\)
- All Deep CE ITM Options are Deep PE OTM Options \(*vice\-versa*\)
- All CE OTM Options are PE ITM Options \(*vice\-versa*\)
- All Near CE OTM Options are Near PE ITM Options \(*vice\-versa*\)
- All Deep CE OTM Options are Deep PE ITM Options \(*vice\-versa*\)\.__<end>__

It is important to note that these different type of Options, basis their money\-ness and position in the Options Chain has different behavioural characteristics, which are exhibited differently as per various factors influencing them, *viz *movement of the underlying price, price momentum, volatility, time to expiry etc\. Thus, Options is not a plain vanilla derivative instrument; as several factors may cause Options to behave differently and eventually causes rise and fall in the pricing or LTP of the Options\. This behavioural aspect of Options requires that every aspiring F&O trader must understand the influencing factors and the behavioural aspect of Options to such factors, and the consequential impact that may occur to Long & Short trade on Options\.

__OTM \(out\-of\-the\-money\) Options__*:* 

On the CE side: all CE Options of strikes higher than the ATM Strike are called __CE OTM Options__\. This signifies that the Futures price of the underlying asset or indices is yet to cross above these CE strikes, and consequently these CE strikes are out of the money \(or has no moneyness or value in them\)\. Likewise, on the PE side \- all PE Options of strikes lower than the ATM Strike are called __PE OTM Options__\. This signifies that the Futures price of the underlying asset or indices are yet to cross below these PE strikes, and consequently these PE strikes are out of the money \(or has no moneyness or value in them\)\. OTM Options relatively closer to the ATM Strike are called __Near OTM Options __and those OTM Options which are farther from the ATM Strike are called __Far__ __OTM Options / Deep OTM Options__\. 

Accordingly, CE OTM Options of strike levels near and above the CE ATM Strike, are __Near OTM CE Options__ and those CE Options strike which are at much higher Strikes from the CE ATM Strike \(i\.e\. of even higher strike levels than the Near OTM CE strikes\) are referred to as __Far__ or __Deep OTM CE Options__\. Likewise, PE OTM Options of strike levels near and below the PE ATM Strike – are __Near OTM PE Options__ and those PE Options strike which are at much lower Strikes below the PE ATM Strike \(i\.e\. of even lower  strike levels than the Near OTM PE strikes\) are referred to as __Far__ or __Deep OTM PE Options__\. 

It may be noted that, depending on the price movement of the underlying indices or assets, if an OTM CE Options goes deeper in the money, then certain Near ITM PE Options would cease to remain an ITM PE Options and may become ATM / OTM and Near OTM PE Options would become Far OTM PE Options; and vice\-versa\.

In the Options Chain, the OTM CE and OTM PE Options are not shaded \(unlike ITM Options\) for identification purposes; and always happens to be appearing diagonally in the Options Chain because higher CEs have no money\-ness and lower PE strikes have no money\-ness\. 

__<start>__Example: For example, in the Nifty’s Options Chain given here: __<img1>__ 

1. *All the CE Strikes from one strike level higher than the ATM Strike upto the highest CE Options on the Options Chain i\.e\. 16350 upto 17650 would be CE OTM Options\. Also, OTM CE strikes from 16350 till about 16550 strike can be called Near CE OTM Options and those OTM CEs which are at even higher strike than 16550 can be called Deep OTM CE Options*\. *However, depending on the price movement of the underlying indices or assets OTM CE Options may or may not remain an OTM\. *
2. *All the PE Strikes from the lowest PE strike level upto just one level lower strike from the ATM PE Strike in the Options Chain i\.e\. 15550 upto 16250 would be PE OTM Options*\. *Also, OTM PE strikes from 16250 till about 16600 strike can be called Near PE OTM Options and those OTM PEs which are at even lower strike than 16250 can be called Deep OTM PE Options*\. *However, depending on the price movement of the underlying indices or assets OTM PE Options may or may not remain an OTM\.*__<end >__

__*Strike Price, CE Side & PE Side, In Options Chain:*__

In any given Options Chain, there are two broad vertical divisions: one side is of CE Options and the other side is of PE Options\. Usually, in an Options Chain the CEs are provided on the left side in the Options Chain and the PEs are provided on the right side of the Options Chain; but not necessarily, it may also be provided otherwise in any particular Option Chain\. It is not of significance on which side in an Options Chain, CEs or PEs are mentioned\. In the Options Chain maintained by NSE, CEs are arranged on the left side and the PEs on the right side in an Options Chain\. 

The Options Chain, usually in the centre \(i\.e\. in the middle of the CE & PE side\) provides the price range of the underlying asset / indices/ securities on which the price of underlying would travel as of current basis\. This price range, which the underlying may travel to & fro on current basis, is referred to as the __Strike Price__\. The Strike Price may be arranged in ascending or descending order in the Options Chain\. In the Options Chain maintained by NSE, the Strike Price is centrally placed between the CE side and the PE side; and is provided in the ascending order \(i\.e\. the lowest price on top to the highest price on bottom\)\. 

__<start>__Kindly refer to the Options Chain of Nifty given here, which contains the Strike Price for Nifty from 15000 to 17650\. __<img1>__

The Strike Price for each asset, securities or benchmark are in different multiples, like multiples of 10, 20, 50, 100, 200 etc\. as designated by the stock exchanges\. For example, stock exchanges have designated that the Strike Price of Nifty shall be provided in the multiples of 50 \(example – 15000, 15050, 16000, 16050, 17000 and so on\) in the Options Chain of Nifty Options\. Likewise, stock exchanges have designated that the Strike Price of SBI Options shall be provided in the multiples of 5 \(example – 480, 485, 490, 495, 500 and so on\) in the Options Chain of SBI Options\. Thus, strikes with lower value would be referred to as lower strikes of an Option Chain and strikes with higher value would be referred to as the higher strikes\.__ <end>__

Also, Options Chain, for a given asset, benchmark or securities, in their farther Expiry may have fewer lower and higher Strikes\.

The current price of the underlying asset, benchmark or securities, as per its Futures price, is centrally located in the column for the Strike Price\. It must be remembered that the price of the Options before its Expiry follows the price of the Futures of the underlying asset, benchmark or indices \(*and not the spot price of the underlying asset or benchmark*\)\. Only on the day of Expiry the price of Options starts to follow the Spot price of the underlying asset or benchmark, as on Expiry the Futures price of the underlying asset merges/coincides with the Spot price of the underlying asset or benchmark\.  Thus, on Expiry Day the ATM Strike would be calculated as per the Spot Price of the underlying asset, securities or benchmark and not by its Futures value\.

The Futures price of the underlying is rounded\-off and accordingly pegged to the relevant Strike Price in the Options Chain\. Further, each Strike Price level has a pair of CE and PE on its either side, in the Options Chain\.

You may consider referring to any Option Chain, for exploring and understanding these features of an Options Chain, as may be available on the website of NSE or MCX or as made available by your broker, for different asset, benchmark or securities for different Expiry Dates\.

__ITM \(in\-the\-money\) Options__: 

On the CE side, all CE Options of strikes lower than the ATM Strike are called __CE ITM Options__\. This signifies that the Futures price of the underlying asset or indices have crossed above these CE strikes, and consequently these CE strikes are in the money \(or has moneyness or value in them\)\.

Likewise, on the PE side, all PE Options of strikes higher than the ATM Strike are called __PE ITM Options__\. This signifies that the Futures price of the underlying asset or indices have already crossed below these PE strikes, and consequently these PE strikes are in the money \(or has moneyness or value in them\)\. ITM Options relatively closer to the ATM Strike are called __Near ITM Options __and those ITM Options which are farther from the ATM Strike are called __Deep ITM Options__ \(i\.e\. these are deep in the moneyness\)\. 

Accordingly, CE ITM Options of strike levels near and below the CE ATM Strike, are __Near ITM CE Options__ and those CE Options strike which are at much lower Strikes from the CE ATM Strike \(i\.e\. of even lower strike levels than the Near ITM CE strikes\) are referred to as __Deep ITM CE Options__\. Likewise, PE ITM Options of strike levels near and above the PE ATM Strike, are __Near ITM PE Options__ and those PE Options strike which are much higher from the PE ATM Strike \(i\.e\. of even higher  strike levels than the Near ITM PE strikes\) are referred to as __Deep ITM PE Options__\. 

It may be noted that, depending on the price movement of the underlying indices or assets, if an ITM CE Options goes deeper in the money, then certain Near ITM PE Options would cease to remain an ITM PE Options and may become ATM / OTM; and vice\-versa\. 

In the Options Chain, the ITM CE and ITM PE Options are generally shaded for identification purposes; and always happens to be appearing diagonally in the Options Chain because lower CEs have money\-ness and higher PE strikes have moneyness\. 

__<start>__Example: In the Nifty’s Options Chain given here: __<img1>__

*All the CE Strikes from the lowest strike in the Options Chain i\.e\. 15500 upto 16250 \(i\.e\. just one lower strike to ATM Strike\) would be CE ITM Options\. Also, ITM CE strikes from 16250 till about 16000 strike can be called Near CE ITM Options and those ITM CEs which are at even lower strike than 16000 can be called Deep ITM CE Options*\. *However, depending on the price movement of the underlying indices or assets ITM CE Options may or may not remain an ITM\. *

*All the PE Strikes after ATM Strike \(i\.e\. just one higher strike to ATM Strike onwards\) in the Options Chain i\.e\. 16350 upto the highest strike in the Options Chain i\.e\. 17650 would be PE ITM Options*\. *Also, ITM PE strikes from 16350 till about 16600 strike can be called Near PE ITM Options and those ITM PEs which are at even higher strike than 16600 can be called Deep ITM PE Options*\. *However, depending on the price movement of the underlying indices or assets ITM PE Options may or may not remain an ITM\.*__<end>__

__ATM \(at\-the\-money\) Options__*: *

The current Futures price  of the underlying asset, benchmark or securities, which is rounded\-off and pegged to the relevant Strike Price in the Options Chain \(and accordingly centrally located in the column for the Strike Price\): is the __ATM Strike__\. This signifies that the particular strike level is closest to the prevailing Futures price \(as rounded\-off\) of the underlying asset or indices, and consequently the Options at this strike level are at the money\. The CE on the left side of such ATM Strike is called the __ATM CE Option__ and the PE on the right side of such ATM Strike is called the __ATM PE Option__\. 

__<start>__Example: In the Nifty’s Options Chain given here:__ <img1> __

*The Nifty’s Futures price of 16280 is rounded\-off and pegged to the Strike Price of 16300\. Thus, 16300 is the ATM Strike in that Options Chain for a particular time \(until on real\-time basis the price of the Nifty’s Futures changes to another Strike Price level on rounding\-off\) and uptill such time the 16300 CE shall be referred to as ATM CE Option and 16300 PE Option shall be referred to as the ATM PE Option\. However, depending on the price movement of the underlying indices or assets, a particular strike level may or may not remain an ATM\.*__<end>__

__*Relationship / Inter\-play between the Premium value of CEs & PEs:*__

It may be generally noted that: 

- If the price of the underlying rises \(*other factors being constant*\), the LTP of CE at each Strike Price levels rises; but the LTP of PE for each of the corresponding Strike Price levels falls; and
- If the price of the underlying falls \(*other factors being constant*\), the LTP of PE at each Strike Price levels rises; but the LTP of CE for each of the corresponding Strike Price levels falls\.

This movement of CEs & PEs in response to the movement in the price of the underlying can be understood in the context of demand and supply getting generated on CE & PE sides\. With the rise in the price of the underlying, the demand for the CEs by their buyers rises and therefore a higher Bid Price for CEs pushes the LTP of CEs higher, but on the contrary supply on PEs rises leading to drop in the LTP of PEs\. Likewise, when the price of the underlying falls, the demand for the PEs by their buyers rises and therefore a higher Bid Price for PEs pushes the LTP of PEs higher, but on the contrary supply on CEs rises leading to drop in the LTP of CEs\. 

Thus, the increase or decrease in the LTP values of CE and PE are always opposite to each other \(i\.e\. if CE LTP rises, PE LTP falls and vice\-versa\)\. 

Let us understand this with an example\. 

__<start>*Example*__: *Suppose SBI’s prevailing Futures’ Price is Rs\. 400\. Now, the Options Chain of SBI provides, the Strike Price levels in the multiples of Rs 5\. Thus, the ATM Strike of SBI would be 400 and now there may be 20 Strike Price levels higher than the ATM Strike of 400 \(i\.e\. upto a Strike Price of 500\) and 20 Strike Price levels lower than the ATM Strike of 400 \(i\.e\. upto a Strike Price of 300\)\. We know that at each Strike Price levels from 300 to 500 there will be a pair of CE and PE Options\. The Options Chain will provide the prevailing LTP value of each of the CEs and PEs at each Strike Price levels\. Now, if the Futures price of SBI moves from Rs\. 400 to Rs\. 422, the LTP of CE Options in the Options Chain would rise, while the LTP of the corresponding PE Options in the Options Chain at each relevant Strike price level would fall\.*__ <end>__ 

__*Options, until their Expiry Day, follow the respective Futures’ LTP:*__

The Options follow the movement in the Futures price of the underlying asset or indices before its Expiry and on the Expiry Day when the Futures price of the underlying merges with the prevailing Spot price of the underlying on the stock exchange, that the Options starts following the Spot price of the underlying, after about 12 noon on the Expiry day of relevant Options\. 

It is important to note that only the Options which are expiring on its given Expiry day will make a shift after about 12 noon, from following its Current Month’s Futures price to follow the Spot value; but all other Options will continue to follow their respective Monthly Futures’ LTP\.   

__*Last Traded Price \(LTP\) of CE & PE in Options Chain: *__

The most critical information which is available in the Options Chain, with respect to each of the CE & PE Options, is their LTP \(i\.e\. *last traded price*\) generally also referred to as the Premium of the Options\. Thus, the broker terminal displays the Premium value of Options, as its LTP\.

LTP / Premium of the Options means the price at which a given Options is trading at a given point in time, which means that the latest price at which a trade \(i\.e\. a buy and sell\) in a particular Option occurred\. The LTP of each Options in an Options Chain changes on almost real\-time basis depending on the price at which a buyer and a seller agree to execute a trade \(*which ofcourse is based on the current and expected price movement of the underlying as may be expected by the buyer and the seller of the same Option*\), besides other market factors\. 

__Thus, in an Options Chain: LTP values of the Options are usually found to be in increasing order, as we go from the Deepest OTM towards the Deepest ITM\.__

This holds good for each side of CE and PE Options in any Options Chain of any asset or indices for any Expiry Date\. 

Depending on the expected move of the underlying and other influencing market factors, the interested buyers of an Option of a given Strike Price makes a bid to buy that Option and interested sellers of that Option demand a particular price for that Option from the buyer\. The moment the buyer’s bid price matches with the ask price of the seller, a buy & sell trade for a given Option is executed\. This price at which the last/ latest trade got executed becomes the LTP of that Option\. This LTP of an Option then acts as a reference price point, basis which the buyer\(s\) of an Option makes a Bid Price and the Seller of that Option demands his Ask Price, both the buyers and sellers consider the expected move in the underlying and other market factors influencing the LTP of that Option while making their Bid & Ask Price\. This is an ongoing process, basis which the last price at which buyer’s Bid Price matches with the Ask Price of the seller for a given Option \(and consequently an Options’ trade is executed\), becomes the next real\-time LTP for that Option\.  An Option buyer prefers to make a Bid Price lower than the prevailing LTP and an Option seller desires to demand for an Ask Price higher than the LTP, but the common price point at which a Bid Price matches with the Ask Price constitutes the latest LTP for any given Option\. 

In liquid Options \(since these are thickly traded\), the Bid Price and Ask Price are quite closer to the LTP \(consequently the difference in the Bid Price and Ask Price is in decimals\) and thus the Option buyer and the seller usually tend make their Bid & Ask Price closer to the LTP\.

__*Determination of LTP value \(or Premium Value\) for CE & PE:*__

Obviously, because Options are a derivative instrument, the LTP of each of the CE or PE Options is derived from the price movement of the underlying asset or indices\. Depending on the expected move in the underlying \(i\.e\. whether there is a demand getting generated or supply in the price of the underlying\), the traders would make a Bid Price as Option buyers or demand an Ask Price as the seller of an Option\. 

The nearest common price point becomes the price at which an Option trade gets executed between an Options buyer and an Options seller i\.e\. the latest LTP for that Option\.  

Besides the demand & supply factor in the underlying, there are other factors which influences the LTP of an Option, which makes Options a very dynamic and little complex derivative instrument\. These factors influencing LTP of Options is briefly discussed below\.

__*Change in LTP of CE & PE on real\-time basis in Options Chain:*__

The Options Chain, besides showing the prevailing real\-time LTP of both CE & PE Options at each of the Strike levels, also shows the real\-time day’s change that occurred in the LTP value of each of the Options at each of the strike levels \(in absolute terms or in percentage terms\)\. This change in LTP of Options, as reflected in the Options Chain on real\-time basis, helps a trader to analyse, as to which Options are exhibiting what quantum of change in their LTP basis the current market situation\. In Options trading, a trader tries to generate profit by taking a trading decision on the movement of the price or LTP of the Options of an underlying asset or Indices \(*ofcourse, due to favourable price movement of the underlying asset / Indices*\)\. 

__<start>__Please refer to the Options Chain of Nifty given here and refer to the LTP value and the ‘Change in the LTP’ Column for each of the Options at each strike levels\. __<img1> <end>__

__*Factors influencing LTP \(or Premium Value\) of Options:*__

In the context of LTP of Options and change in its value, it is pertinent to note that, generally, neither \(a\) the rise of LTP of all CE Options in the Options Chain would be in the same proportion; nor \(b\) rise in LTP of CE Options and fall in LTP value of corresponding PE Option at that Strike Price level would be in same proportion \(or vice\-versa\)\. This is because the LTP value of Options are dependent of many factors like price momentum,  volatility, time to expiry, Options Greeks etc\., besides direction of movement in price of the underlying\. 

Consequently, __the LTP value and the change in the LTP in each pair of CE & PE at a given Strike level are not same or pro\-rata__\.

__*LTP of Options on Same Strike with higher Expiry: *__

The LTP value of a same Strike Option increases as we move to a farther Expiry series\.

__Major Options Greek:__

There are four important parameters in Options, which are referred to as Options Greeks\. These Options Greeks are measures of certain important factors \(*like momentum of price, volatility, time decay etc\.*\) which influences the Premium value of Options\.  

The __four major Options Greek are Delta, Gamma, Theta and Vega__\. Each Options of any Expiry series has a specific values for each of the aforesaid four major Options Greeks\. The Greek values for every Options, for both CE and PE at any given Strike level, is provided for in the Options Chain maintained by the broker’s trading terminal or can be looked into on the website of the relevant stock exchanges\. 

Each of these Option Greeks has a value, for each CE & PE Options, and each of the Greeks indicates a particular kind of information for the relevant CE and PE Option\.  Having said this, one should also note that the values of these Greeks also have an inter\-play with each other and influences the value of other Greeks for a given Option\. Thus, the value of a particular Greek as being indicated in the Options Chain, may not be sacrosanct for all times and may keep changing on real\-time basis as per the change in values of other Greeks, besides price movement of the underlying\. Thus, these __Greek values need to be interpreted to mean: that if all other factors remain constant, then the Premium value of a given Option can be said to be impacted as per the prevailing value of a particular Greek__\.

__Summary of Greek Values in Options Chain and Change in Greek Values For Same Strike different Expiry series:__

<__start__> Let us see how the Greek values and Premium value of Options play out, generally, for various Options in an Options Chain for a given Expiry, as well as how they change as we move from a near Expiry series to a Far Expiry series of the Options at the same Strike level:

| Greeks | In Options Chain of a Given Expiry | For Same Strike  Options towards higher Expiry series |

|\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Delta  | CE side: 0 to \+1 from Deep OTM towards Deep ITM \(with ATM having \+0\.5\) <br> PE side: 0 to \-1 from Deep OTM towards Deep ITM \(with ATM having \-0\.5\) <br> For CE & PE at same Strike: Ignoring \+ & \- signs, Delta aggregates to 1 and is split between CE and PE; where ITMs have higher Delta and corresponding OTM at same Strike has lower Delta | OTM CEs & PEs: Increases <br> ITM CEs & PEs: Decreases |

| Gamma  | CE & PE side: Maximum at ATM and reduces from ATM towards Deep ITM as well as towards Deep OTM <br> For CE & PE at same Strike: Gamma value is same\. | Increases |

| Theta  | CE & PE side: Maximum at ATM and reduces from ATM towards Deep ITM as well as towards Deep OTM <br> For CE & PE at same Strike: Theta value is same\. | Decreases |

| Vega   | CE & PE side: Maximum at ATM and reduces from ATM towards Deep ITM as well as towards Deep OTM <br> For CE & PE at same Strike: Vega value is same\. | Increases |

| \*      | \* | \* |

| LTP    | Increases from Deep OTM Strikes towards Deep ITM Strikes, for both CE & PE | Increases | <__end__>

__*Illustration of Greek Values in an Options Chain:*__

The Greek Values of the CE and PE Options can be found in the Options Chain maintained by the trader’s terminal of the brokers\. 

<__start__> __<img4> __Given here is the Options Chain of BankNifty for Monthly Expiry of August 25, 2022, as of August 9, 2022, displaying the values for each of the four major Greek Values for 10\-15 Strike levels above and below the ATM Strike of 38300\. Have a look and try to identify the order of the Greek Values and the LTP for Options for both CE and PE side of the Options Chain\. In the said Options Chain, we can deduce the following pattern / order:

- 38300 is the ATM Strike with CE Delta value of \+0\.5 and PE Delta value of \-0\.5
- Delta value is increasing from 0 to \+1, as we move from CE OTM 37900 towards CE ITM 37000\. 
- Delta value is increasing from 0 to \-1, as we move from PE OTM 37000 towards PE ITM 37900 \(*negative value for PE only represents inversely proportional relationship between the LTP values of PE Options to the direction of the price of the underlying i\.e\. LTP of PE increase if underlying price falls and their LTP falls if price of the underlying rises*\)\.
- Delta values of CE & PE at each given Strike level, add upto 1 \(ignoring the minus sign for PEs\)\. Thus, if Delta of a CE or PE Option of a particular Strike price is known, then the Delta value for the other Option \(CE or PE, as the case may be\) of the same Strike would be the residual value after subtracting the known Delta value from 1\.
- Vega \(of 33\) and Gamma \(of 0\.0003\) are maximum around ATM Strike of 38300, for both CE and PE sides, and reduces towards OTM and ITM as we move deeper into them from the ATM Strike\. Further the Vega and Gamma values for both CE & PE at any given Strike level are same\.
- Theta value is also maximum \(\-18\) around ATM Strike of 38300, for both CE and PE sides, and reduces towards OTM and ITM as we move deeper into them from the ATM Strike\. However, Theta value is marked negative for all CE and PE Options as they tend to face erosion in their LTP values with the passage of time \(*time decay*\)\. Further the Theta value for both CE & PE at any given Strike level are same\.
- LTP values of CE Options rise as we move from Deeper OTM towards Deeper ITM \(i\.e\. from Rs\. 134 to Rs\. 1497\)\. LTP values of PE Options rise as we move from Deeper OTM towards Deeper ITM \(i\.e\. from Rs\. 221 to Rs\. 1803\)\. 

If you observe any Option Chain with Greek Values of CE & PE side, you would notice a similar pattern/order, which holds true for all the Option Chain\. <__end__>

<__start__> The usual order of values of the four major Options Greek and the LTP values for both CE & PE side Options in an Options Chain is presented here below pictorially for the ease of understanding and remembrance\. __<img5> __<__end__>

__Other Options’ Greek:__

Besides the aforesaid four major Greeks, there are a few other Greeks\. However, since other Greeks are not very significant for day\-to\-day trading, we are not discussing those here\. We would just touch upon one such Greek called Rho, which measures the change in Premium value of Options with 1% change in the rate of interest\. Generally, with rise in interest rate, the Rho value increases and consequently the LTP of Options\.

__Vega: __

Vega indicates the rate at which the <a id="_Hlk140268259"></a>Premium value of Options would change, due to changes in Volatility pertaining to a particular asset class or Indices\. While discussing Implied Volatility \(IV\), that volatility impacts the Premium value of Options \(i\.e\. Premium rises with rise in volatility and falls with drop in volatility\)\. Thus, Vega helps us to understand the approximate likely increase or decrease in the Premium value of a given Options as a result of 1% increase or decrease in the IV\. 

__<start> Example__: *Vega value of ‘X’ of any Option would mean that: with1% rise in Volatility, that Option would exhibit rise by  ‘X’ points in its Premium value provided all other factors remain constant; and with1% fall in Volatility, that Option would exhibit fall of ‘X’ points in its Premium value provided all other factors remain constant*\.__ <end>__

Vega of an Options gets impacted from the factors which influences Implied Volatility of Options, *viz\. any news, event, market uncertainty, demand or supply of the underlying or a particular Options *etc\. Vega decreases with the approach of Expiry, therefore, on the Expiry Day of Options, the Far OTMs do not showing any significant rise in their Premium value with rise in IV / India VIX\.

In any Options Chain, Vega is maximum at ATM and reduces as we go deep towards ITM or OTM from the ATM strike\. This holds true for both CE and PE Options\. Also, the Vega value for both CE and PE Option at the same Strike level of a given Expiry are always same\. Further the Vega value of a same Strike Option increases as we move to a farther Expiry series \(*accordingly, the same Strike Option on farther Expiry will experience relatively higher rise in its Premium value in absolute terms, as compared to a near Expiry same Strike Option*\)\.

__Gamma:__

Gamma is a measure of rate of change in the Delta value for a given Option over a period of time\. We know that Delta values keep fluctuating for Options as they keep moving up & down the different Strike Price levels as per the change in the price movement of the underlying; however, the Gamma value of each Option is constant and factors the rate of change in Delta value of that Option\. Which means that a higher Gamma value of an Option indicates that the Option’s Delta may fluctuate a lot indicating ‘not so stable’ Option\. 

Thus, amongst two Options with same Delta value, the one with low Gamma is considered, relatively, to be a better bet\. 

In any Options Chain, Gamma is highest at the ATM level and reduces as we go deep towards ITM or OTM from the ATM strike\. This holds true for both CE and PE Options\. 

Also, the Gamma value for both CE and PE Options at the same Strike level of a given Expiry are always same\. 

Further the Gamma value of a same Strike Option decreases as we move to a farther Expiry series\.

__Delta__:

Delta is a measure of change in the Premium value of Options due to change in the price of the underlying i\.e\. Delta reflects how much LTP of a give Option may change due to change in the price of the underlying asset or Indices\.

__*Delta value on CE side:*__

In any given Options Chain, Delta value for CE Options increases from Deepest OTM towards Deepest ITM\. In the Options Chain Delta value of Deepest OTM is 0 and that of Deepest ITM is \+1\. ATM CE \(*which comes in between at the centre on the CE side*\) has a Delta of 0\.5\. 

Thus, in an Options Chain the Delta value of CE Options ranges between 0 to \+1; wherein: 

- OTM CE has a Delta range of 0 to 0\.5 \(i\.e\. from the Deepest OTM CE level towards the ATM CE level\); and 
- ITM CE has a Delta range of 0\.5 to 1 \(i\.e\. from the ATM CE level towards the Deepest ITM CE level\)\. 

The positive values of Delta on CE side signifies a proportional relation with the direction of the price movement of the underlying \(i\.e\. *if Price of underlying rises, CE Options’ LTP rise; and if price of the underlying falls, the LTP of the CE Options reduces*\)\.

Further, these Delta values of CE Options implies, that a CE Option with Delta value of \+1 would increase by 1 Rs\. in its Premium value with every 1 Rs rise in the price of the underlying asset or indices and would decrease by 1 Rs\. with every 1 Rs fall in the price of the underlying asset or indices\. Thus, a CE Option with delta value of 1 moves for equal amount \(*in the same direction*\) as per the movement in the price of the underlying\. Likewise, an ATM CE \(which has the Delta value of 0\.5\) would increase by 0\.5 Rs\. in its Premium value with every 1 Rs rise in the price of the underlying asset or indices and would decrease by 0\.5 Rs\. with every 1 Rs fall in the price of the underlying asset or indices\.

Thus, as per the movement of the price of the underlying, a given CE Option may become an ATM, ITM or an OTM, which may change from time to time\. Consequent to the aforesaid change in the CE Option, the prevalent Delta value of that CE Option also keeps on changing; and basis its current Delta value there is rise or fall in the Premium value of the CE Option \(i\.e\. *pro\-rata to its Delta value*\) as and when there is rise or fall in the price of the underlying\. Accordingly, an OTM CE Option would rise and fall less in relation to the price movement of the underlying, as compared to the ITM CE Options\. Also, adjacent or close\-by CE Options may have same  Delta values or Delta with minor differences; thus two or more CE Options may have same or nearly same Delta\.

__*Delta value on PE side:*__

In any given Options Chain, Delta value for PE Options becomes increasingly negative from Deepest OTM towards Deepest ITM\. In the Options Chain Delta value of Deepest OTM is 0 and that of Deepest ITM is \-1\. ATM PE has a Delta of \-0\.5\. Thus, in an Options Chain the Delta value of PE Options ranges between 0 to \-1\. 

Thus, in an Options Chain the Delta value of PE Options ranges between 0 to \-1; wherein: 

- OTM PE has a Delta range of 0 to \-0\.5 \(i\.e\. from the Deepest OTM PE level towards the ATM PE level\); and 
- ITM PE has a Delta range of \-0\.5 to \-1 \(i\.e\. from the ATM PE level towards the Deepest PE ITM level\)\.

The negative values of Delta on PE side signifies an inversely proportional relation with the direction of the price movement of the underlying \(i\.e\. *if Price of underlying rises, PE Options’ *Premium value *reduces; and if price of the underlying falls, the *Premium value *of the PE Options rise*\)\. Thus, as the Delta value of PE gets more negative, the PE becomes more inversely proportional to the direction of the price of the underlying i\.e\. the Premium value of such PE would rise more with the fall in price of the underlying and would fall more with the rise in the price of the underlying \(as compared to PEs with relatively less negative Delta value\)\.

Accordingly, a PE Option with Delta value of \-1 would decrease by 1 Rs\. in its LTP value with every 1 Rs rise in the price of the underlying asset or indices and would increase by 1 Rs\. with every 1 Rs fall in the price of the underlying asset or indices\. Thus, a PE Option with delta value of \-1 moves for equal amount \(*though in opposite direction*\) as per the movement in the price of the underlying\. Likewise, an ATM PE \(which has the Delta value of \-0\.5\) would decrease by 0\.5 Rs\. in its Premium value with every 1 Rs rise in the price of the underlying asset or Indices and would increase by 0\.5 Rs\. with every 1 Rs fall in the price of the underlying asset or Indices\. __Thus, more negative Delta value of PE signifies more inverse relationship with the direction of the underlying price__\.

Thus, as per the movement of the price of the underlying, a given PE Option may become an ATM, ITM or an OTM, which may change from time to time\. Consequent to the aforesaid change in the PE Option, the prevalent Delta value of that PE Option also keeps on changing; and basis its current Delta value there is rise or fall in the Premium value of the PE Option \(i\.e\. *pro\-rata to its Delta value; but in opposite direction to the price movement of the underlying*\) as and when there is rise or fall in the price of the underlying\. Accordingly, an OTM PE Option would rise and fall less in relation to the price movement of the underlying, as compared to the ITM PE Options\.

Also, adjacent or close\-by PE Options may have same  Delta values or Delta with minor differences; thus two or more PE Options may have same or nearly same Delta\.

__*Co\-relation between Delta values & LTP of CEs with PEs:*__

In any Options Chain: 

1. Delta value of certain ITM CEs matches with the Delta values of certain ITM PEs, between 0\.5 to 1; and 
2. Delta value of certain OTM CEs matches with the Delta values of certain OTM PEs, between 0 to 0\.5\. Delta values of ATM CE & PE have a Delta value of 0\.5; and 
3. OTM CEs & PEs having same/ close Delta values, would have same/ close LTP values \(or,* OTM CEs & PEs having same/ close Premium values, would have same/ close Delta values*\); and 
4. ITM CEs & PEs having same/ close Delta values, would have same/ close LTP values \(or,* ITM CEs & PEs having same/ close Premium values, would have same/ close Delta values*\)\.

__*Delta value of same Strike Option for different Expiry series:*__

As we move from a closer Expiry to a far and farthest Expiry, we see some amazing data points from the perspective of the Delta value for the same Strike Options\. 

<__start__> Let us examine the Delta values for certain OTM to ITM CE & PE Options Strikes for different Expiry series for Nifty \(ATM strike being at 17400\) as on August 3, 2022, as given in the table below:

| Same Strikes of different Expiry | CE Delta Values \- Deep OTM 18000 | CE Delta Values – Near OTM 17600 | CE Delta Values – Near ITM 17200 | CE Delta Values \- Deep ITM 16500 | PE Delta Values \- Deep OTM 16500 | PE Delta Values – Near OTM 17200 | PE Delta Values – Near ITM 17600 | PE Delta Values \- Deep ITM 18000 |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Current Week Expiry             | \+0\.01                            | \+0\.09                            | \+0\.86                            | \+0\.99                            | \-0\.01                            | \-0\.14                            | \-0\.91                            | \-0\.99                            |

| Next Week Expiry                | \+0\.08                            | \+0\.33                            | \+0\.67                            | \+0\.94                            | \-0\.06                            | \-0\.33                            | \-0\.67                            | \-0\.92                            |

| Monthly Expiry                 | \+0\.20                            | \+0\.41                            | \+0\.63                            | \+0\.87                            | \-0\.13                            | \-0\.37                            | \-0\.59                            | \-0\.80                            |

| Next Month Expiry              | \+0\.33                            | \+0\.47                            | \+0\.61                            | \+0\.79                            | \-0\.21                            | \-0\.39                            | \-0\.53                            | \-0\.67                            |

| Far Month Expiry               | \+0\.38                            | \+0\.49                            | \+0\.60                            | \+0\.76                            | \-0\.24                            | \-0\.40                            | \-0\.51                            | \-0\.62                            | 

Examining the above data of Delta values, we can conclude the following significant analysis:

- In each given Expiry series, Delta value of CE increases from Deepest OTM towards Deepest ITM\. In each given Expiry series, Delta value of PE increases from Deepest OTM towards Deepest ITM \(*the negative sign on PE Delta values only signifies inverse relationship between the LTP of PEs to the direction of the price of the underlying*\)\.
- For each given Expiry series, the Delta value of CE & PE at each Strike level adds up to 1 \(*ignoring the plus and minus sign*\)\. This implies that whatever is the Delta value of a CE Option at a given Strike level, the PE Option of that Strike would have the residual Delta  after subtracting the CE Delta value from 1 \(and vice\-versa\)\.
- Delta values of same Strike OTM CEs \(*eg: 18000 and 17600*\) increases as we move towards higher Expiry series; whereas the Delta values of same Strike ITM CEs  \(*eg: 17200 and 16500*\) decreases as we move towards higher Expiry series\. Thus, traction with the price movement of the underlying: \(a\) increases in OTM CE Options with farther Expiry; and \(b\) decreases in ITM CE Options towards farther Expiry\.

Delta values of same Strike OTM PEs \(*eg: 16500 and 17200*\) increases as we move towards higher Expiry series; whereas the Delta values of same Strike ITM PEs \(*eg: 17600 and 18000*\) decreases as we move towards higher Expiry series\. The negative sign on PE Delta values only signifies inverse relationship between the LTP of PEs to the direction of the price of the underlying\. Thus, negative traction in opposite direction to the price movement of the underlying: \(a\) increases in OTM PE Options with farther Expiry; and \(b\) decreases in ITM PE Options with farther Expiry\. <__end__>

__Theta:__

Every Options from the time it is born until its Expiry Date, keep losing some Premium \(i\.e\. some part from its LTP value\) automatically and mandatorily with the passage of each day as it draws closer to its Expiry\. This loss/erosion of LTP value from the Options is called __‘time decay’__ of Options\. ITM Options suffer less from time decay than OTM Options\. As a consequence of time decay, ATM CE & PE and all the OTM CE & PE Options, mandatorily becomes zero in their LTP value on the relevant Expiry Date\. ITM CE & PE Options too face erosion from their LTP value due to time decay, but only to the extent of ‘extrinsic value’ or ‘__time value__’ in their LTP\. 

Also, near Expiry series has more incidence of time decay than far Expiry series\. Further, as the Expiry draws near, the pace and quantum of time decay increases\.

Theta is the Options Greek which measures the rate of time decay in the LTP of an Option or its Premium\.  Theta value is low at the beginning of an Expiry series, but rises and accelerates as the Expiry draws near\. Theta value is represented with a minus, as the LTP value depreciates with passage of time\. 

The __Theta value for an Option signifies that amount of money which will be lost by the passing of 1 day, if there is no other change in any other factor which may influence the LTP of Options__\. 

__<start> *Example:*__* If an ATM CE \(with a LTP of 358\) has a Theta value of 168, then if there occurs no change in the price of the underlying or in volatility etc\. then due to the impact of time decay on the Time Value, 1 Lot of this ATM would experience a decay of 168 points from its LTP with the passage of 1 day \(i\.e\. on coming closer to its Expiry by 1 day\)\.*__ <end>__*  *

1. Theta \(i\.e\. time decay\) is highest at the ATM level and reduces as we go deep towards ITM or OTM from the ATM strike\. This holds true for both CE and PE Options\. 
2. Theta value for both CE and PE Option at the same Strike level of a given Expiry are always same\. 
3. Theta values between ITMs & OTMs on CE sides are close\-by / same, as well as Theta values between ITMs & OTMs on PE sides are close\-by / same\. 
4. Theta values between OTMs on CE sides and OTMs on the PE side are close\-by / same; and likewise Theta values between ITMs on CE sides and ITMs on the PE side are close\-by / same\.
5. Theta value of a same Strike Option decreases as we move to a farther Expiry series \(as farther Expiry will experience less time decay, as compared to a near Expiry\)\.  

Theta is a very important aspect of Options, and must be understood in order to trade in Options\.

__Bid Price in Options:__

Bid Price is the price at which, buyer of Options is willing to buy an Option of a particular Strike level\. A buyer always wishes to buy cheap and sell at higher price thus making profit\. Thus, the Bid Price is usually is desired to be made at or lower than the prevailing LTP of an Option at the give Strike level, as mostly Option buyers bid for buying the relevant Option at a price equal or lower than the prevailing LTP of that Option\. The key point to note here is that an Option buyer buys an Option from the seller of that Option; and the trade is completed only when the Bid Price matches with the price demanded or asked by the seller of that Option i\.e\. the Ask Price, irrespective of the prevailing LTP of that Option\. Thus, LTP of the Option acts as a referring price point, basis which the buyer of an Option makes a Bid Price and the seller of that Option makes an Ask Price\. Consequently, a trader who wishes to place a buy order for an Option, whether as an Option buyer or as Option seller desiring to square\-off his Option Short position, will have to meet the Ask Price to get his buy order completed/ executed\. 

In case of liquid Options, since these Options are aggressively and thickly traded, as a result the Bid Price and Ask Price are usually close to the last prevailing LTP value\. But in case of illiquid Options, there is a significant difference between the prevailing LTP on one hand and the Bid & Ask Price, because in illiquid Options there are few sellers & buyers, and the buyers desirous of buying at their preferred lower price makes Bid Price lower than the LTP and the sellers tend to demand their own preferred higher price to sell an Option to an interested buyer thus making Ask Price higher than the LTP\. 

Thus, in illiquid Options, the Ask Price demanded by the sellers from an interested buyer of that Option are mostly significantly higher than the most recently traded price/ LTP for that Option, this causes the Option buyer \(*who certainly wants to buy the Option without waiting for another opportunity*\) to make a Bid Price matching the Ask Price thereby resulting in a costlier purchase than the prevailing LTP value of that Option\. This aspect is further explained below in the context of liquidity in Options\. The Bid Price keeps fluctuating on real\-time basis, due to the bids made for buying by the Option buyers at a particular Strike Price level, from time to time\.

__Bid Quantity in Options:__

Bid Quantity is the quantity of Options \(in Lot sizes\), being bid by the Option buyers for buying the Option at a particular Bid Price\. The Bid Quantity also keeps fluctuating on real\-time basis, due to the bidding quantity being made by the Option buyers at a particular Strike Price level, from time to time\. In this context it may be noted that while placing an order, trading terminals of certain brokers allows a trader to conceal the quantity he wishes to trade; consequently, the Bid Quantity against a particular Bid Price may or may not be the actual Bid Quantity that is being bided for\.

__Importance of Bid Price & Ask Price in Options:__

Thus, the Bid Price and the Bid Quantity helps an Option buyer to understand the price at which buyers are making a bid for an Option; and also helps an Option seller to understand the price at which he can square\-off his existing Options sell position with an Option buyer \(at the prevailing Bid Price\)\. Likewise, the Ask  Price and the Bid Ask Quantity helps an Option seller to understand the price being demanded by the sellers for selling the relevant Option; and also helps an Option buyer to understand the price at which he can square\-off his existing Options buy position with an Option seller \(at the prevailing Ask Price\)\. The Bid Price & Ask Price and the Bid Quantity& Ask Quantity, as being traded on real\-time basis, are also reflected in the Options Chain\. 

__<start> <img1> __Kindly refer to the Nifty’s Options Chain given here and locate the Columns on both CE and PE side, for the Bid Price and Bid Quantity against each Strike Price levels\.__ <end>__ 

However, the trading terminal of the brokers or the website of the stock exchange can further give the market depth of a particular Option \(Eg: 16300 CE or any other such Option\), providing details about the various Bid Prices for specific Bid Quantity and the Ask Prices for specific Ask Quantity which are prevalent in the market on a real\-time basis, from time to time\. 

__<start> <img3> __Given here is a screenshot from the website of NSE for the market depth of Nifty Option 17100 CE for Weekly Expiry of 4th August 2022\. This provides details for the Bid Price, Ask Price, bid Quantity, Ask Quantity, Volume, OI, Change in OI and IV etc\.__ <end>__ 

Thus, at any given time these details can be referred to on the website of NSE, besides the trading terminal of the broker\.

__Ask Price in Options:__

Ask Price is the price at which, seller of Options asks or demands to sell \(i\.e\. Short\) an Option of a particular Strike level to an interested buyer of that Option\. A seller always wishes to sell an Option \(i\.e Short\) at a high price and to square\-off his short position by placing a buy order for the Option sold, at a lower price thus making profit in Shorting Options\. Thus, the Ask Price is usually preferred to be made by traders at or higher than the prevailing LTP of an Option at the given Strike level, as mostly Option sellers desires to Short an Option at a price equal or higher than the prevailing LTP of that Option i\.e to sell costlier than LTP to the buyers\. The key point to note here is that an Option seller sells an Option to an interested buyer of that Option; and the trade is completed only when the Ask Price matches with the price being bid by an interested buyer of that Option i\.e\. the Bid Price, irrespective of the prevailing LTP of that Option\. The prevailing LTP of an Option may act as a referring price point, basis which the seller of an Option demands the Ask Price and the buyer of that Option makes a Bid Price\. Consequently, a trader who wishes to place a sell order for an Option, whether as an Option seller or as an Option buyer desiring to square\-off his Option buy \(i\.e\. Long\) position, will have to meet the Ask Price to get his sell order completed/ executed\.

In case of liquid Options, since these Options are aggressively and thickly traded, as a result the Bid Price and Ask Price are usually close to the last prevailing LTP value\. But in case of illiquid Options, there is a significant difference between the prevailing LTP on one hand and the Bid & Ask Price on the other hand, because in illiquid Options there are few sellers & buyers, and therefore the sellers tend to demand their own preferred higher price to sell an Option to an interested buyer thus making Ask Price higher than the LTP and likewise the buyers desirous of buying at their preferred lower price makes Bid Price lower than the LTP\. Thus, in illiquid Options, the Bid Price made by interested buyers of an Option are mostly significantly lower than the most recently traded price/ LTP for that Option, this causes the Option seller \(*who certainly wants to sell / Short the Option without waiting for another opportunity*\) to make a lower Ask Price matching the Bid Price thereby resulting in a cheaper sell than the prevailing LTP value of that Option\. The Ask Price keeps fluctuating on real\-time basis, due to the sell price being demanded by the Option sellers at a particular Strike Price level, from time to time\.

__Ask Quantity in Options:__

Ask Quantity is the quantity of Options \(in Lot sizes\), being sold by the Option sellers for Shorting the Option at a particular Ask Price\. The Ask  Quantity also keeps fluctuating on real\-time basis, due to the ask quantity being made by the Option sellers at a particular Strike Price level, from time to time\. In this context it may be noted that while placing an order, trading terminals of certain brokers allows a trader to conceal the quantity he wishes to trade; consequently, the Ask Quantity against a particular Ask Price may or may not be the actual Ask Quantity that is being sold at that Strike level\.

__*Volume in Options Strike:*__

Volume is the amount or quantity of an instrument \(in the present case, a given Option\) that is traded \(buying and selling of one Option constitutes one trade\) over some period of time\. 

Volume in the Options Chain represent a particular Option traded during the course of a day\. Generally, securities/ Options with more daily volume are more liquid than those without, since they are more "active"\.

Every transaction that takes place between a buyer and a seller of an Options contributes to the total volume count of that Option\. One trade transaction occurs when a buyer agrees to purchase at a certain LTP \(*for a particular strike price*\) and the seller agrees to sell at that given LTP\. If only ten transactions / trade occur in a day at a particular Strike Price, then the volume for that day at that Strike Price level would be ten\. 

__<start> *Example*__*: *__* <img1>*__* In the Nifty’s Options Chain given here \- if a trader wishes to buy an ATM 16300 CE Option at LTP of 94 and places an order for buying 1 Lot at 94 and the order gets executed at 94 – then it means that the seller of that 16300 CE Option is also willing to sell that Option at 94 – this way 1 trade transaction is completed*\. *If during the day, for 16300 CE Option – 10 such trades are executed between buyer and seller, may be even for different LTP values – then the volume count for 16300 CE would be 10 for that day\. *__<end>__

__*Volume not same as Open Interest \(OI\):*__

Here it needs to be understood that volume is not same as OI\. 

OI are the number of contracts in existence at a particular strike level, while volume is the count of trades that are done at a particular strike level\. Let us understand the difference with an example\. 

__<start> *Example*__*: Suppose, at a particular strike level 15 Options Contract are existing\. Out of these 15 Contracts 10 Contracts are sold by the holder of these Contracts to a new buyer who wishes to create a fresh position at that strike level – then there will effectively be no change in the OI for the day \(as no fresh Contract has taken place, but only transfer of 10 Contracts\)\. However, even while for the day the OI will remain 15 at that strike level in the aforesaid transaction – the volume count at that strike level would be 10 \(i\.e\. the number of trades/ contracts \(i\.e\. pair of buy & sell basis\) executed during the day\)*\. __<end>__

__*Significance of Volume in Options:*__

Volume indicates market's activity and liquidity in Options of particular strike levels\. __Higher trade volumes for a specified Options mean higher liquidity, better order execution and a more active market for connecting a buyer and seller__\. Higher liquidity is comforting for a F&O trader; and low liquidity may be a cause of concern for a F&O trader\. 

__*Born Date & Expiry Date in Options and Options with different Expiry series with different Options Chain:*__

Options come into existence \(or would become available\) for entering into Options contract / creating trading positions in that Option from a particular date \(*referred to as the *__*Born Date*__* of that Options*\) and would cease to be in such existence on a particular date \(*referred to as the *__*Expiry Date*__* of that Options*\)\. Every Option is available for trading from its Born Date upto its Expiry Date \(*the lifetime of an Option*\)\.

Options for each asset, benchmark or securities may be allowed by the relevant Exchanges \(*viz\. NSE, BSE, MCX, NCDEX etc\.*\) with different expiry, namely, Weekly Expiry and/or Monthly Expiry and/or Quarterly Expiry and so on\. Each of the Weekly, Monthly and Quarterly  expiry series of Options of a particular asset/securities/benchmark, as the case may be, has separate Options Chain \(*wherein the premium or LTP of the same Strike Options differ in value\.*

Most active Stock Indices Options like Nifty Options and BankNifty Options have Weekly, Monthly and Quarterly Expiry series; whereas Stock Options have only Monthly Expiry series\. 

__*Expiry Series available for Options Trading in different Underlying \(i\.e\. Indices, Securities and Assets\):*__

In India, popularly traded Options of different assets, securities or benchmark with different Expiry, currently made available by relevant Exchanges, are as follows:

__Different Expiry series for Options of Stock Indices, like Nifty, BankNifty and FinNifty: __

- Current Week Expiry Options \(*Eg: 7th July 2022 Options*\) 
- Next Week Expiry Options \(*Eg: 14th July 2022 Options*\)
- Next\-to\-Next Week Expiry Options \(*Eg: 21st July 2022 Options*\) 
- Current Month Expiry Options \(*Eg: July 2022 Options*\)
- Next Month Expiry Options \(*Eg: August 2022 Options*\) 
- Far Month \(*i\.e\. *next*\-to\-next month*\) Expiry Options \(*Eg: September 2022 Options*\) 

Thus, Nifty and BankNifty Options available for trading, at any given point\-in time are: atleast 4 Weekly Expiry Options \(*where last week would be the Monthly Expiry* series for that calendar month\) and each of these Weekly Option Series have separate Options Chain\. If in a given calendar month there are 5 weeks, then for that calendar month there will be 4 separate Weekly Expiry Options with 4 separate Options Chain and the 5th week \(last week\) Options Chain would be called the Monthly Expiry series for that calendar month\. 

Stock Exchanges also provides for 3 separate Monthly Expiry Options for Stock Indices Options for each calendar month at any given point in time i\.e\. for current calendar month, next calendar month \(called Next Month Expiry Series\) and next\-to\-next calendar month \(called Far Month Expiry Series\)\. Besides, Monthly Expiry series, Stock Exchanges also offer Quarterly Options for these indices\. However, for the purpose of our discussions in the Book, we will confine ourselves to Weekly and Monthly Options’ Expiry series\.

__Different Expiry series for Options of F&O Stocks__: Stock Options are available with Current Month Expiry Options, Next Month Expiry Options and Far Month \(*i\.e\. *next*\-to\-next month*\) Expiry Options\.

Thus, Stock Options available for trading, at any given point\-in time are: 3 separate Monthly Expiry Options; and each of these Option Series have different Options Chain\.

<a id="_Hlk140272487"></a>__Different Expiry series for Options of Commodities__: In India, commodity Options are traded on the Multi Commodity Exchange of India \(MCX\)\. MCX has launched commodity Options in Gold, Gold Mini, Silver, Silver Mini, Crude Oil, Natural Gas, Copper, Nickel, and Zinc\. The Expiry day for these Commodity Options are basically a few days earlier to the relevant tender delivery date; and most of these have Monthly Expiry series\. Certain Commodity Options, like: Gold, Natural Gas, Copper, Silver, Crude etc\., are also traded on NSE’s Commodity Derivative segment\.

__Different Expiry series for Options of Currency__: In India, different INR based Currency Options like: USD\-INR, JPY\-INR, EUR\-INR, GBP\-INR etc\. are available with serial weekly cycle Expiry series\.

__Expiry Date of different Series of Weekly & Monthly Options*:*__

Weekly Expiry Series for Options: Expiry Day for the Weekly Expiry series of FinNifty Options, Nifty Options and BankNifty Options is the last Tuesday, Thursday and Friday of the relevant week, respectively\. BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\.

If the relevant Expiry Day for a given week is a trading holiday, then the Options of that Weekly Expiry series would expire on the previous trading day and the relevant Expiry Day for that particular Expiry series accordingly shifts to previous trading day\. In the context of Options with Weekly Expiry series, the relevant Exchange maintains about 4 Weekly Expiry series at any given point in time \(for successive calendar weeks\)\. The last week of a calendar month actually coincides with the Monthly Expiry series for that calendar month, and there is no separate Weekly Expiry series for the last week of any given calendar month\.

Monthly Expiry Series for Options: Likewise, Expiry Day for the Monthly Expiry series of FinNifty Options, Nifty Options and BankNifty Options is the last Tuesday, Thursday and Friday of the relevant calendar month, respectively\. The Stock Options however have only Monthly Expiry series and their Expiry Day has been prescribed to be the last Thursday of the relevant calendar month\. <a id="_Hlk140481413"></a>BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\.

If the relevant Expiry Day for a given Month is a trading holiday, then the Options of that Month’s Expiry series would expire on the previous trading day and the relevant Expiry Day for that particular Expiry series accordingly shifts to previous trading day\. In the context of Options with Monthly Expiry series, the relevant Exchange maintains about 3 Monthly Expiry series at any given point in time, pertaining to successive calendar months \(*i\.e\. one pertaining to current calendar month, another for the next calendar month and third series pertaining to next\-to\-next calendar month*\)\.

Accordingly, each Options are identified by their Expiry Date, whether they pertain to Weekly Expiry series or Monthly Expiry series for any given underlying\. 

__<start>__For example: 

- Weekly Options of Nifty for the second last week of July 2022 will be recognised/ referred to as __Nifty Weekly Options of 21st July 2022__ \(*please note here that 21st July is the Thursday of the second last week of July 2022*\)
- Monthly Options of Nifty for the month of July 2022 will be recognised/ referred to as __Nifty__ __Monthly Options of July 2022\.__ 

Please note here that this July month Options would expire on last Thursday \(28th\) of the July, which also happens to be/coincides with the Weekly Options for the last week of July, however this last week of July Option would be   identified as __Nifty__ __Monthly  Options of July 2022 __or __Nifty July 2022 Options__ and the Options Chain would be for the month of July 2022 and not separately for the last week of July 2022 \(*which implies that this same Monthly Options, for practical purposes, is the Options for the July last week too; and there are no separate monthly Options and last week Options\)\.* However, from the perspective of Options behaviour, the last week Options of a calendar month behaves like a Monthly Expiry Options and not like Weekly Expiry Options and therefore the last weekly Expiry series is considered to be part of the Monthly Expiry series and not Weekly Expiry series\.__<end>__

Addition of fresh Weekly / Monthly Expiry Series for Options: As Expiry of each week of a calendar month lapses, Weekly Expiry of next calendar month is made available by the stock exchange on the trading day following the Expiry of the Current Week contract – such that at any given point in time 4 Weekly Expiry Options \(for successive calendar weeks\) are generally available for trading\. 

Likewise, as the current calendar month Expiry lapses, succeeding calendar month becomes the Current Month Expiry series; and the second succeeding calendar month becomes Next Month Expiry series; the third succeeding calendar month is made freshly available by the Exchange as Far Month Expiry series \(which is born on the trading day, following the Expiry of the Current Month contract\)\. Thus, every fresh Expiry series of Options with Monthly Expiry series, is born as a Far Month Expiry Series Options, which subsequently becomes a Next Month Expiry Series Options and thereafter Current Month Expiry Series Options\. Thus, in case of Monthly Expiry Options, the Exchanges ensure that at any given point in time there are 3 separate Options Contract with successive Monthly Expiry series, which are available for trading \(*i\.e\. one pertaining to the current calendar month, another for the next calendar month and third series pertaining to next\-to\-next calendar month*\)\.

__Historical Volatility:__

Historical Volatility \(HV\) is not the same as Implied Volatility \(IV\)\. As mentioned above, Implied Volatility means the magnitude of fluctuation \(up and down\) the price of the underlying asset or Indices can likely make\. On the other hand, Historical Volatility means the magnitude of fluctuation \(up and down\) the price of the underlying asset or Indices made in recent past for  a specific period of time, *viz\. last one day, one week, a fortnight, a month, last 60 days or 90 days and so on\.*

Thus, IV is the measure of projected volatility in the price movement of the underlying, whereas, HV is the price range made by the underlying in recent past\. HV data is used to calculate future projections of IV or price movement of the underlying\.

__*MaxPain:*__

Maxpain is that Strike price level in the Options Chain of a given Expiry, which has the maximum open Options’ contracts\.  

We know that the big institutions have the requisite capital, the information and better understanding of the financial markets, to create substantial positions in the F&O segment\. Since, they are the main players of the financial markets, they strive by strategizing and creating such complex trade positions \(which are generally difficult to see\-through by ordinary retailers\) to steer through the markets towards their desired target levels\. 

Thus, for a given Expiry, the Strike level where the big institutions would stand profitable in their Option positions: is the Maxpain Strike level\. It is called ‘maxpain’ as it may cause immense pain to the Options buyers who are betting/trading against these big institutions, if the given Options actually Expire at the Maxpain Strike level\. This Maxpain level also keeps changing, as the big institutions keep shifting their positions\.

__Options Other Data Points__

There are certain other features \(other than Options’ Greek\), which keep coming up for analysis of Options and their trading, hence an acquaintance with these terms and features will be an added advantage to the trader\.

These are, like:

- Max Open Interest \(OI\) Concentration
- PCR \(Put Call Ratio\)
- MaxPain
- Historical Volatility

__Tools For Options Data Analysis:__

There are many software which provide the analysis basis the OI data, PCR and Greek values etc, for an underlying indices or asset, on almost real time basis, which may be looked upon to get additional information\. 

However, from a practical standpoint, these may not be the piece of information solely basis \(or even primarily relying\) which an ordinary retail F&O trader can place his trading bet, since these data points reflect the position currently employed by big institutions which can be part of their larger strategy and subject to change at any point in time\. The best and safest way for a trader is to rely on price action and Chart reading for doing his analysis about the probability of price movement of the underlying, as that is relatively more concrete data to consider for initiating or exiting a trading position\.

__*PCR \(Put Call Ratio\):*__

PCR is the abbreviated form for Put\-Call Ratio\. Generally, PCR value is arrived at by dividing the total OI for all PEs with OI for all CEs for a specific period of time, in a given Option Chain\. 

PCR indicate the market sentiment for the underlying indices or asset\. If PCR value is 1, then it means that are equal PE writings and CE writing, indicating an indecisive market situation or a rangebound market\. However, if PCR value is greater than 1, then it means that PE writings are more than the CE writing, indicating a bullish biased in the market; and if PCR value is lower than 1, then it means that PE writings are less than the CE writing, indicating a bearish biased in the market\. 

The PCR value keeps fluctuating on real\-time basis, due to change in the OIs for CE and PEs on real\-time basis\. It is also pertinent to mention here that, generally it is considered that if the PCR value reaches around 1\.3, then it is an overbought zone and the market may likely reverse downward\. Likewise, if the PCR value reaches around 0\.3, then it is an oversold zone and the market may likely reverse upward\.

__Max Open Interest \(OI\) Concentration: __

We know that the big positions in the financial markets, including F&O space, are made by the big financial institutions and usually as Option writers i\.e\. Option sellers; and thus the OI data in the Option Chain gives an indication about the existing Option sell contracts at a particular Strike Price level\.

We also know that: 

- CE sell at a Strike Price level means that the Call seller’s outlook is bearish and he expects the price of the underlying to remain and close below the Strike at which he has sold the CE, on Expiry; and
- PE sell at a Strike Price level means that the Put seller’s outlook is bullish and he expects the price of the underlying to remain and close above the Strike at which he has sold the PE, on Expiry\.

Thus, the Strike Price level on the CE side where there is maximum amount of OI, indicates \- maximum number of Call writing at that Strike level, meaning that the maximum number of Call sellers think that the price of the underlying will remain and close below their CE Strike Price level on Expiry\. This Strike Price level on the CE side having maximum concentration of OI, as explained above – seems to suggest a resistance level at that Strike Price level\.

Likewise, the Strike Price level on the PE side where there is maximum amount of OI, indicates \- maximum number of Put writing at that Strike level, meaning that the maximum number of Put sellers think that the price of the underlying will remain and close above their PE Strike Price level on Expiry\. This Strike Price level on the PE side having maximum concentration of OI, as explained above – seems to suggest a support level at that Strike Price level\.

A F&O trader can get an indication of a range, by identifying the Max concentration of OI on PE and CE side\. 

__<start> Example: <img1>__* in the given Nifty Options Chain, the maximum OI on the PE side is at the strike price of 16000 \(1,27,519\); and the maximum OI on the CE side is at the strike price of 16600 \(1,12,791\)\. On the standalone basis, this OI data can be interpreted to mean that the maximum participation of Option sellers is at the level of 16000 PE and 16600 CE, which also be said to kind of indicating a range within which most of the traders feel that the underlying would trade in the given Expiry period for those Options*\.__ <end>__

__Intro: Procedural Aspect of FNO Trading__

Now, we must also pay attention to learn about another basic aspect of F&O trading, which is essentially the __procedural aspect of trading i\.e\. order placements to carry out different actions in relation to trading__\.  Order placement is required to be made for initiating fresh positions, putting stop loss and also for exiting/ squaring\-off existing trades etc\. Clear understanding about the relevant type of order placements and their implementation is extremely important and integral part of trading process\.

Here, we will therefore focus on certain important aspects in relation to order placements, such as: 

1. Placement of order for initiating a fresh trading position and exiting / squaring\-off an existing trading position; 
2. Placing stop loss for an existing position;
3. Trailing stop loss;
4. Placing orders for intraday or positional basis;
5. Placing order after market hours;
6. Roll\-over of existing FNO positions into next Expiry series;
7. Reduction of margin utilisation with nominal cost, etc\.
8. Overcoming restrictions on buying Far OTMs

__Conclusion__

Thus, while Order execution may be procedural part of trading process, but it is definitely an important part of the whole trading\. Every trader must have a very good understanding of its proper handling, whether for initiating trades, squaring\-off an existing trade or placement of stop loss orders or making roll\-overs etc\. Order placement must be fast and error free\. 

It is important that the trader develops a habit of punching correct orders using proper Order types as per the trade requirement, and does it quickly\. It is observed, however, that traders do tend to make silly mistakes while punching orders, and therefore, one must develop the habit of quickly double\-checking the order details carefully \(*viz*\. *whether it is buy or sell, intraday or positional, limit order or market order or SL order, number of quantity etc*\.\), before pressing the execute button\. 

Also, once the order is executed, then again one must check if the order which got executed is correct in all manner, as desired per the trade plan\. But if by any chance, the order details got wrongly executed, then try to immediately exit from the trade position carrying wrong particulars, and punch a fresh order instead\.

__Basket Order:__

Basket Order is extremely helpful to place ‘buy’ or ‘sell’ orders for multiple \(more than one\) trading positions simultaneously, at their respective most current prevalent market price/ LTP\. Since, this order type is executed at the current market price/ LTP of the instruments, therefore, it can only be employed in case of only liquid instruments/ Options \(i\.e\. where the ‘bid price’ and ‘ask price’ are quite close in decimals\)\. In other words, this order type enables the trader to place Market Order in more than one liquid instruments simultaneously\.

Basket Order is helpful in placing orders for both the primary leg and the hedged leg of a hedged trade, simultaneously\. In using Basket Order for a hedged trade having a ‘buy leg’ and a ‘sell leg’, a trader must __first have the ‘buy leg’ and then the ‘sell leg’, while creating the basket__, prior to executing the Basket Order\. Such placement of ‘buy leg’ above the ‘sell leg’ in a Basket Order will help the trader to derive the benefit of margin reduction, and thus make optimum use of his trading capital\. 

<__start__>The following Table shows placing of a Basket Order for Bull CE Spread in Nifty \(comprising of a buying lower Strike CE and selling a higher Strike CE, both of same Expiry\): __<img25> <end>__

Thus, in a Basket Order, multiple ‘buy’ and ‘sell’ positions, for same or different instruments, on the respective current market LTP of those instruments, can be executed simultaneously by a single click\.

__ORDER TYPES FOR INITIATING AND EXITING TRADING POSITIONS__:

In the context of placing order for initiating fresh trades and squaring\-off existing positions, a trader need to know the significance and utility of the following type of Orders:

1. __Market Order;__
2. __Limit Order__; and
3. __Basket Order__\.

Each of these Order types need to be understood as they have their own significance in trading\. Let us begin with “Market Order”\.

__Limit Order:__

Limit Order” is used when ‘buy’ or ‘sell’ is intended by the trader to be made at a particular preferred Price/ Premium \(i\.e\. not at the prevailing LTP/ market price\)\. 

<__start__>The following table shows selection of “Limit Order” for placing a ‘buy’ order for Nifty Jan 2023 Futures at a preferred price of 18142\.85, while the LTP is at 18149\.90: __<img23>__<__end__>

When a trader places a ‘buy’ order for an instrument, at his preferred price through a Limit Order, then it becomes his ‘bid price’\. And when a trader places a sell order for an instrument, at his preferred price through a Limit Order, then it becomes his ‘ask price’\. If a Limit Order is placed by a trader, for placing any buy or sell position in any F&O instrument, then obviously it would be different from the current LTP \(i\.e\. current market price\) and such Limit Order would only get triggered when the price quoted vide the Limit Order is accepted by any available buyer or seller as the case may be i\.e\. when ‘bid price’ of a trader matches with the ‘ask price’ of another trader \(and vice versa\)\. Thus, the Limit Order placed by a trader \(as ‘bid price’ or ‘ask price’\) may or may not get triggered, as it depends upon acceptance / matching of that price by another trader\. 

After placing a Limit Order, a trader may have to wait and check if his ‘buy’ or ‘sell’ order got executed or not, as execution of Limit Order placed by a trader will happen when it will match with the corresponding bid price or ask price, as the case may be\. Therefore, a trader may check the prevailing “bid price” / “ask price” from the Marketdepth available on the trading terminal of the broker or from NSE website, to get an idea as to at what price buyers and sellers are placing their bets\. 

<__start__>For example, the prevailing “bid price” and “ask price” \(also called “offer price”\) of FINNIFTY Futures for the current month of January 2023 is given in the table below: __<img24> __

The above table shows that while the LTP of FINIFTY Jan Futures is at 18844\.90, the closest ‘bid price’ is at 18838\.95 and the closest ‘ask price’ \(or ‘offer price’\) is at 18844\.90, which basically means that while a seller has put his ask price at the LTP \(*the last traded price*\), however, the closest bid price placed by the buyers is lesser than about 6 points from the LTP\. Consequently, it is pertinent to note here that there is quite a difference \(of about 6 points\) between the ‘bid price’ and ‘ask price’ of FINIFTY Jan Futures indicating that this instrument is not liquid \(indicating that not many participants are trading this instrument\)\. <__end__>

In such illiquid instruments, orders for ‘buy’ or ‘sell’ may not get successfully executed through “Market Order”; hence __“Limit Orders” must be used for placing trading bets in illiquid instruments / Options__ \(wherein the preferred price may be used as the ‘bid price’ / ‘ask price’ for placing the requisite order\)\. 

Deep ITM & OTM Options in a given Options Chain of closer Expiry Series and generally Options in farther Expiry series, are illiquid\. Positions may be created in these Options by using Limit Order \(and not Market Order\)\. Likewise, certain Stocks and FNO instruments of certain Stocks are also not\-so\-liquid, and if needed to be traded as per some trading plan, then the same must be done using the Limit Order\. In such instruments, Limit Order should be used for creating fresh trading positions, as well as to square\-off existing positions\. 

__Market Order:__

“Market Order” is used when ‘buy’ or ‘sell’ is intended by the trader to be made at the prevailing market price\. As the market price keeps fluctuating on real time basis, therefore, upon placement of a Market Order \(for initiating fresh trade or squaring\-off existing trades\), the system / broker terminal will by default execute the order at the most relevant market price at the time when the order was received by the broking terminal\. Sometimes, due to technical glitch or sudden fluctuations in the market price of the instrument intended to be bought or sold, the Market Order may be executed by the broking terminal at such prevalent price which may be quite distant \(too high or too low\) that the market price which was prevalent at the time the trader decided to execute the ‘buy’ or ‘sell’ order\. 

<__start__>The following table shows selection of “Market Order” for placing a ‘sell’ order for BankNifty Jan 2023 Futures at the prevalent market price \(currently trading at 42445\.10\): __<img20> __<__end__>

When a trader places a ‘buy’ order of an instrument, then it becomes his ‘__bid price__; and when a trader places a sell order of an instrument, then it becomes his ‘__ask price__’\. The ‘bid price’ and ‘ask price’ of every instrument can be seen by scrolling down the marketdepth of that instrument\. In case of Options, besides the market depth, the ‘bid price’ and ‘ask price’ can also be viewed in the Options Chain available with the broking terminal or on NSE website\. 

<__start__>Below Table exhibits ‘bid price’ and ‘ask price’ in the Options Chain for CEs and PEs of BankNifty Weekly Options available on NSE website \(under Derivative section\): __<img21> __<__end__>

Instruments/Options which are thickly traded and are therefore quite liquid \(i\.e\. *number of buyers and sellers on that instrument or Strike Price are many*\), have very close ‘bid price’ and ‘ask price’\. In liquid instruments / Options, the buyers and sellers are competing around the most current market price, therefore, the difference between the ‘bid price’ of buyers and the ‘ask price’ \(also called ‘offer price’\) is in decimals\. Thus, the Market Order when placed by a trader in liquid instruments, gets executed at the closest ‘bid price’ / ‘ask price’, as the case may be \(which are usually very close to the current  LTP of the instrument/ Option, for liquid instruments, at the relevant point in time of order placement\)\. 

<__start__>__<img22> __The Table here shows the ‘bid price’ and ‘ask price’ of ATM PE Option of BankNifty Current Week Expiry series\. <__end__> BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\. Also, its Lot size used to be 25, which has been changed to 15 with effect from July 2023\.

The __Market Order works only on liquid instruments__ and not on not\-so\-liquid instruments\. For instruments which are not so liquid, a trader must use Limit Order instead of Market Order\. For liquid instruments / Options, Market Order can be used for creating fresh trading positions, as well as to square\-off existing positions\.

__Overcoming Restrictions on Buying Far OTMs__

We know that taking Long positions in Far OTM is often restricted\. However, sometimes it may be important for a seasoned trader to take some Longs in Far OTMs, may be to reduced margin requirement as discussed above or as part of a wholistic trade plan\. Therefore, restrictions on initiating Longs on Far OTMs may pose some bit of a problem for the intended trade and frustrate the trade plan of a trader\.

Well, this sort of restrictions on Longs on far OTMs may be avoided by a trader in the following ways:

1. A trader must check out for other brokers, who might be allowing for initiating Longs on Far OTMs\. If yes, then the trader may consider opting for other brokers to execute his trades requiring to buy far OTMs\. In any case, a trader must have trading accounts with atleast two or more brokers depending upon his specific trading needs being met by those brokers \(it could be least brokerage plan or allowing initiating Longs on far OTMs\)\.
2. The other way, to kind of circumvent the restriction on initiating Longs on Far OTMs imposed by your broker, is to first make a temporary ‘sell’ on any OTM Strike of same side Options where you intend to initiate Longs \(*for example: if you intend to initiate Longs on Far OTM CEs, then you may sell some near OTM CEs; and if you intend to initiate Longs on Far OTM PEs, then you may sell some near OTM PEs*\) and then initiate your desired Longs for same quantity for which you had executed Short on relatively near OTM\. In this fashion, you may be able to get desired quantity of Longs on Far OTMs, by taking temporary Short positions with same quantity\. Immediately, after the Longs gets successfully executed, you may square\-off the Shorts\. Basically, the Shorts are executed, just to be able to initiate the desired Longs on Far OTMs and once so initiated, the Shorts must be immediately exited\. Therefore, this whole process of initiating Shorts and then initiating Longs, and then exiting from Short positions, must be done very quickly, so as to avoid any unnecessary losses on temporary Shorts that are taken\.

Further, in this situation, before initiating Shorts, it is very important to ensure that the underlying is not catching momentum on the opposite side of the Shorts or the volatility is not on the rise, so as to avoid loosing some reasonable money on the temporary Shorts that are taken just to be able to initiate certain Longs on Far OTMs as part of the larger trade plan\. Thus, this process must be implemented when the volatility is just fine and opposite direction momentum \(which may cause temporary Shorts to bleed\) is not immediately expected\.

__Initiating fresh trading position in FNO instruments__

In order to initiate fresh trading position in FNO instruments, the trader may create positions in the following manner:

- To initiate a fresh ‘buy’ position, the trader may use ‘Limit Order’ to place ‘buy’ order at a particular price; or can use ‘Market Order’ to place ‘buy’ order for liquid instruments at the prevalent market price;
- To initiate a fresh ‘sell’ position, the trader may use ‘Limit Order’ to place ‘sell’ order at a particular price; or can use ‘Market Order’ to place ‘sell’ order for liquid instruments at the prevalent market price;
- To initiate fresh multiple ‘buy’ and/or ‘sell’ positions in liquid instruments at the prevalent market price, the trader may use ‘Basket Order’ for all the buy and sell positions \(*with buy orders placed above than the sell orders while creating the basket of trading positions*\)\.

__Order Placement for Trailing Stop Loss__

Trailing the SL means to revise the SL upwardly as the Long trade goes right; and in case of Short trade the SL can be trailed by lowering the SL as the Short trade moves as expected\. Idea behind trailing the SL is to not let the profit accruing on the trade to slip away of to curtail the potential loss on the running trades\.

In order to trail the Stop Loss, the SL order will have to be modified and pegged at the desired price\.

__ORDER PLACEMENT FOR STOP LOSS__:

In the context of placing stop loss orders in respect existing trading positions, a trader need to know the significance and utility of the following type of Orders:

1. __SL or SL Limit __\(i\.e\. Stop Loss Limit Order\);__ __and
2. __SL\-M __\(i\.e\. Stop Loss Market Order\)\.

After a trader has punched ‘buy’ or ‘sell’ order\(s\) for his trade, whether as a Limit Order or Market Order, the trader may also place a Stop Loss order for his running trade in order to cap the maximum drawdown/ loss the trader would like to book for his trading position\. 

It is a good practice to keep a Stop Loss in the system at a reasonable level,  in order to avoid huge drawdown situations which may arrive in the market all of sudden without any prior notice or warning\. 

The Stop Loss can be placed by punching orders on existing trading positions\. A trader may use either of the following two order types to place orders for the Stop Loss\.

__Stop Loss Market Order \(SL\-M\):__

	__SL\-M __\(i\.e\. Stop Loss Market Order\) are used to take a stop loss at a the current prevalent market price\. This can be used when the trade has gone wrong and the trader wishes to exit immediately at whatever is the market price\. Sometimes there is a sudden reversal in the market \(against your trading positions\) and such reversal continue rapidly and steeply\. In such situation that the losses in the trading positions increases rapidly\. Thus, if already a SL order \(i\.e\. SL Limit Order\) was not placed on the running positions at certain reasonable levels, then upon steep rapid reversals it becomes extremely difficult to place a SL order subsequently\. In such situations, it is better to get out at whatever best market price one can take a stop and exit by using SL\-M\. 

<__start__>The Table below shows placement of a SL\-M order at the  Trigger Price of 625 to square\-off / exit  \(by placing buy order\) from a running ‘sell trading position’ in SBI in cash segment already taken at some lower sell price \(say, at 600 for a target of 425\): __<img28>__

In case of a sell / Short trade, if there is a sudden steep reversal on the upside, then the SL\-M order will get triggered as soon as Trigger Price of 625 for SL\-M is touched\. Consequently, the stop loss will get triggered at whatever is the prevalent LTP after the Trigger Price is touched and the sell trade will get squared\-off at such prevalent higher LTP generating loss in that SBI Short trade\.

SL\-M explained above in the illustration for a Short trade, will be similarly applied for a Long trade \(except that SL\-M will be placed on a sell order window in case of a running Long position, by placing a Trigger Price for SL\-M lower than the buy price of the Long trade\)\.<__end__>

However, SL\-M orders have been barred by the Stock Exchange for FNO segment\. Thus, for FNO trades, SL order type must be used by placing stop loss at reasonable levels and then by constantly trailing them so as to not let the profits slip away\. 

__Stop Loss Limit Order:__

__SL __\(i\.e\. Stop Loss Limit Order\) are used to put stop loss at a particular price\. For a ‘buy’ leg, SL will be put as a sell order obviously lower than the buy price; and for a ‘sell’ leg, SL will be put as buy order higher than the sell price\. 

<__start__>The Table below shows placement of a SL order at 17900 to sell\-off/ exit from a running ‘buy trading position’ in Nifty Futures already taken at some higher buy price \(say, at 17950 for a target of 18050\): <__img26>__<__end__>

	The Trigger Price for the SL is to be additionally provided\. Once the Trigger Price is touched as the LTP, the SL price becomes active\. Consequently, Trigger Price has to be higher or equal to than the SL price in case of a sell order for stop loss\.

<__start__><__img27> __Likewise, this Table here shows placement of a SL order at 43000 to square\-off / exit  \(by placing buy order\) from a running ‘sell trading position’ in BankNifty Futures already taken at some lower sell price \(say, at 42950 for a target of 42900\)\. <__end__>

BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\. Also, its Lot size used to be 25, which has been changed to 15 with effect from July 2023\.

In this case also, the Trigger Price for the SL is to be additionally provided\. Once the Trigger Price is touched as the LTP, the SL price becomes active\. Consequently, Trigger Price has to be lower or equal to than the SL price in case of a buy order for stop loss\.

__Order Placement for Intraday Trade and Holding Positions__

We must also be mindful to make suitable selection for the trades that we plan to initiate depending upon its holding time\. 

If we plan to hold the trade for the same day then we must select ‘Intraday’ \(or MIS\); and if we wish to take trading positions overnight \(i\.e\. with a holding time of more than a day\) then we must select ‘Overnight’ / ‘Delivery’\(or NRML\), at the time of initiating trading positions, under the Regular head\.   

<__start__>The Table below shows relevant tabs which needs to be selected depending upon whether we intend to take positions for intraday or positional basis: __<img29>__

Once, the intraday or Overnight tab is selected, then the Order type \(Limit or Market\) can be suitably used to initiate the trading position\.__ <end>__

__Order Placement for Roll\-Overs__

Roll\-over means to continue with a particular position on a given instrument\(s\) until the desired target, beyond its Expiry, by squaring\-off that position \(*booking whatever MTM loss or profit in the position*\), close to but before its Expiry, and then immediately or simultaneously taking up a fresh position in that instrument \(around the same LTP at which the original position was squared\-off\) in the next Expiry series\. Thus, roll\-overs requires to book the intermittent profit/loss in the current trading position before its Expiry, and then carrying forward the same position into next Expiry series for the targeted objective of higher profit \(*which obviously must set\-off the intermittent loss booked at rolling over, if any*\)\.

Roll\-over are particularly of significance in case of FNO instruments, which mandates physical delivery on Expiry for ITMs, *viz\. *Stock FNO\. A trader if has trading position in such instruments, and his overall view on his trade plan is intact and he wishes to continue with the position towards his target, then before Expiry of such instruments, he must roll\-over his positions into next Expiry series, and thus avoiding physical delivery requirement if his trading position expires as an ITM\.

Also, roll\-over is important in case of Options, which would expire on coming Expiry as OTMs \(i\.e\. *total loss*\) or as ITMs, without having to meet the targeted objective by the approaching Expiry as planned by the trader\. Thus, if a trader is having trading position in Options, which does not appear to meet the targeted objective as per his trade plan by the coming Expiry, and his overall view on his trade plan is intact and he wishes to continue with the position towards his target, then before Expiry of such Option, he must roll\-over his Options position\(s\) into next Expiry series, and thus avoiding his existing OTM positions to expire worthless on the approaching Expiry or ITM positions to diminish in its LTP by losing its Time Value on the approaching Expiry\.  

__Example__: The following examples will help simplify how to place orders for rolling\-over FNO positions:

<__start__>__Rolling\-over Long position in Nifty Futures from Jan Expiry to Feb Expiry__:

1. First, square\-off Nifty Jan Fut before its Expiry: i\.e\. place ‘sell’ order on Nifty Jan Futures through Market Order or Limit Order \(*booking whatever MTM loss or profit in the position*\); 
2. Then, take fresh position in Feb Expiry Series: i\.e\. by placing ‘buy’ on Nifty Jan Futures using Market Order or Limit Order \(*at nearly same LTP at which Jan Expiry was sold\-off*\)

The above roll\-over at Market Order can be accomplished using the Basket Order with first ‘sell’ order on Jan Expiry placed above and thereafter the ‘buy’ order on Feb Expiry\. <__end__>

<__start__>__The Options position can also be rolled\-over as illustrated below__:

Rolling\-over Short position in SBIN CE 460 from Oct Expiry to Nov Expiry:

1. First, square\-off SBIN CE 460 before its Expiry: i\.e\. by placing ‘buy’ on SBIN CE 460 through Market Order or Limit Order \(*booking whatever MTM loss or profit in the position*\); 
2. Then, take fresh position in Nov Expiry Series: i\.e\. by placing ‘sell’ on SBIN CE 460 using Market Order or Limit Order \(*at nearly same LTP at which Oct Expiry was squared\-off*\)\.

The above roll\-over at Market Order can be accomplished using the Basket Order with first ‘buy’ order on Oct Expiry placed above and thereafter the ‘sell’ order on Nov Expiry\. <__end__>

Further, in case of roll\-over of Options, a trader may also consider taking up position in relatively better Strike \(i\.e\. not necessarily take fresh position in new Expiry series on the same old Strike\), however, the underlying view/ direction or target would continue as the trade plan\.

__Procedure to square\-off existing Trading Position__

In order to exit from an existing trading position, the trader need to remember to square\-off his position in the following manner:

1. To exit from a running ‘buy’ position, the trader may use either: 
2. ‘Limit Order’ to place ‘sell’ order at a particular price, so as to square\-off his ‘buy’ position at a particular price; or 
3. ‘Market Order’ to place ‘sell’ order for liquid instruments at the prevalent market price, so as to square\-off his ‘buy’ position at the most current market price for that instrument\.

Thus, if a trader is able to square\-off his running ‘buy’ position by selling it at a higher price \(than the buy price\), then the buy trade is profitable\.

1. To exit from a running ‘sell’ position, the trader may use either: 
2. ‘Limit Order’ to place ‘buy’ order at a particular price, so as to square\-off his ‘sell’ position at a particular price; or 
3. ‘Market Order’ to place ‘buy’ order for liquid instruments at the prevalent market price, so as to square\-off his ‘sell’ position at the most current market price for that instrument\.

Thus, if a trader is able to square\-off his running ‘sell’ position by buying it at a lower price \(than the sell price\), then the sell trade is profitable\.

Besides, a trader can also simply select the running trades \(one or more\) he wishes to square\-off at the market price, and press the ‘exit’ button in order to simultaneously exit from the selected trading positions\. This can be done on all instruments with sufficient liquidity\. Where liquidity is not sufficient, ‘Limit Order’ will have to be used to square\-off existing positions from such instruments\.

__Order Placement for Target and Exit in Single Order __

Broker’s trading terminal may provide for Order placement for fresh trading positions with mentioning stop loss level \(*in percentage or absolute number terms*\) and the target level \(*in percentage or absolute number terms*\), all in a single window, within a single Order\. This is usually allowed for Overnight orders and not for Intraday orders\. 

<__start__>The following table exhibits, such a facilitation being offered by a broker on his trading terminal: __<img30>__

In the above Table, Nifty Jan 18500 CE which is trading at Rs\. 29 is being desired to be bought in 500 quantities at a Limit Order of Rs\. 25, with a Stop Loss of \-5% and a target price of \+10%\. Thus, ‘buy’, ‘stop loss’ and ‘target’, all three in one window through one click can be placed\. <__end__>

Similarly, buy can also be done through Market Order type \(instead of Limit Order\) with simultaneously placing the stop loss level and the target level through such facilitation\. Also, Shorts can also be placed through Market Order or Limit Order type, with simultaneously placing the stop loss level \(*which will be in plus*\) and the target level \(*which will be in minus*\), through such windows\. 

This type of Order placement facilitation is very important, as all orders i\.e\. pertaining to trade initiation, stop loss and target, can be punched\-in quickly with a single click, rather than punching three different orders\. A trader may decide on his stop loss and target levels and quickly make selection of appropriate levels and execute the order\. 

However, if a trader wishes to modify his target level or stop loss levels that he has placed in the aforesaid manner, then he may do so by either modifying the aforesaid order carrying target levels/ stop loss levels; or by cancelling the aforesaid order and manually placing separate order for target level and stop loss by using Limit Order and SL order type respectively\.

__Order Placement for Margin Reduction__

We know that creating positions in Futures and Shorting Options requires good amount of margin, which consumes good amount of trading capital\. We can and we should make optimum use of trading capital by using possible ways to reduce the margin utilisation on trading positions involving Futures and Short Options positions\. Margin reduction also enables the trader to scale up volume in his trading positions\. 

Few ways by which trading margin can be reduced, so that larger capital can be deployed on the intended trades are as illustrated below\.

__Margin Reduction: Through Proper Hedging:__

Hedging Futures position /Short Options positions not only reduces the risk but also helps reduce the margin required on the trade\. Therefore, instead of a naked Futures position or Short Options position, a relevant hedged Strategy involving the relevant Futures or Short options trade may be used to play the intended trend\.

__Margin Reduction: Through Nominal Buying:__

Well, besides a general way of using a hedged strategy instead of a naked position, margins can be reduced by taking a Long position on a Far OTM Option with minimum LTP value \(say Rs\. 1 or 2\) in equal quantity to that of the main leg \(involving Futures or Short Options position\), in the same underlying\. However, the Long Option must represent the opposite direction of the main leg i\.e\. if the main leg is in the upward direction then the Long position should be taken in Options representing downward \(i\.e\. opposite direction to the direction of the main leg\) and vice\-versa\. 

Taking Long position in Far OTM Options of nominal value, to reduce margin, can be used against a naked Futures or Short Options position or even in certain hedged Strategies *viz\. Call Spread Ratio*\. 

__<start>Example__: The following illustrations will clarify this:

| Main Leg Position | For Margin Reduction |

|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-|

| Long Futures \(naked\) | Long Far OTM PE of nominal LTP in same quantity as that of Futures in the Main Leg |

| Short Futures \(naked\) | Long Far OTM CE of nominal LTP in same quantity as that of Futures in the Main Leg |

| Short CE \(naked\) | Long Far OTM CE of nominal LTP in same quantity as that of Short CE Lot in Main Leg |

| Short PE \(naked\) | Long Far OTM PE of nominal LTP in same quantity as that of Short PE Lot in Main Leg |

| CE Ratio Spread \(hedged Strategy\): Short higher Strike Far OTM CE \(2 or 4 Lots\); and Long lower Strike CE \(1 Lot\) | Long Far OTM CE of nominal LTP in same quantity as that of Short CE Lot in Main Leg |

| PE Ratio Spread \(hedged Strategy\): Short lower Strike Far OTM PE \(2 or 4 Lots\); and Long higher Strike PE \(1 Lot\) | Long Far OTM PE of nominal LTP in same quantity as that of Short PE Lot in Main Leg | __<end>__

If the main leg has Futures position or Short Options position in Monthly Expiry series, then to reduce the margin, Long Option positions of nominal LTP can also be initiated in the Weekly Options of the same underlying, if available\. 

The cost of buying Far OTMs on aggregate basis in the overall scheme of trade is very  nominal \(*even if the entire cost incurred on these Far OTM Long Options is lost on Expiry, as most likely these Long Options would expire worthless on Expiry*\) as against the margin benefit a trader derives using these Long Options\. 

The Long Options position must be held so long the Futures or Options Short position is held in the main leg\. Also, at the time of squaring\-off the trade, always be mindful to first square\-off the main leg comprising of Futures position / Short Options position before squaring\-off the Long Options deployed for margin reduction \(else there will be a huge margin shortfall leading to margin calls from the broker\)\. However, in the unfortunate situation where the Long Options deployed merely for margin reduction are squared\-off first, thereby triggering margin shortfall, and there is no further capital to deploy, then it is better to square\-off the main leg at the earliest\.

The Far OTM Options with a nominal value \(of say Rs\. 1 or 2\) would be too deep OTMs; and there could be restrictions in executing a Long position in such Far OTMs\. This may, however, be overcome by first taking a temporary Short position in the same side Option\.

__Order Placement for After\-market Hours__

After the market is closed, a trader may desire to place a ‘buy’ or ‘sell’ order, either to: 

1. initiate a fresh trade or to square\-off an existing position; or 
2. place a stop loss order for an existing trades, either as a SL or SL\-M \(*not for FNO*\), 

then the trader can make use of AMO \(after\-market\-order\) head\. 

When this order head is used, the ‘buy’ or ‘sell’ order placed under AMO whether as a Limit Order or Market Order or Stop Loss Limit order, will get activated accordingly upon opening of the market automatically in the next trading session\. One need to bear in mind that if Market Order is used under AMO, then the order will be placed at the prevalent market price immediately upon opening of the trading session \(which may be a gapup or a gapdown\)\. 

__<start><img31> __The table here shows placing orders after market hour using the AMO head for buying BankNifty 42300 CE Option by placing buy order at a limit price of Rs 200 \(while the LTP at the end of session is 235\.90\) for intraday trading for the new trading session\. BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\. Also, its Lot size used to be 25, which has been changed to 15 with effect from July 2023\.

Now, when the market opens on the next trading session, the ‘buy’ order will get placed and activated at a buying price of Rs\. 200 \(*provided there is sufficient margin / capital in the trading account*\)\. If upon opening of the market the BankNifty 42300 CE Option opens at 200 or below then this buy order will get automatically executed\.<__end__>

Likewise, using AMO window, a trader can even place stop loss for his running trading positions, which will get placed immediately upon opening of the market in the next trading session\.

__*Short Covering:*__

When the OI of an underlying asset or Indices is decreasing and the price of the underlying asset or Indices is increasing, then we say that Short Covering is happening in the underlying asset or Indices\.

If the OI is decreasing then it implies that Contracts are getting settled/ square\-off in a given underlying asset or Indices i\.e\. the traders are exiting their positions in that underlying asset or Indices\. Besides fall in OI if the price / LTP of the underlying asset or Indices is increasing then that clarifies that the Short positions are getting squared\-off by traders by placing buy orders to exit from their existing sell positions \(i\.e\.* Shorts are getting covered*\), resulting in fall in the OI in that underlying asset or Indices but rise in the price of the underlying asset or Indices\.

Thus, Short Covering indicates discontinuation of Short side view in the underlying asset or Indices, i\.e\. cessation of bearish view \(which may also lead to reversal of trend on the bullish side\)\.

__*Long Unwinding:*__

When the OI of an underlying asset or Indices is decreasing and the price of the underlying asset or Indices is also decreasing, then we say that Long Unwinding is happening in the underlying asset or Indices\.

If the OI is decreasing then it implies that Contracts are getting settled/ square\-off in a given underlying asset or Indices i\.e\. the traders are exiting their positions in that underlying asset or Indices\. Besides fall in OI if the price / LTP of the underlying asset or Indices is also decreasing then that clarifies that the Long positions are getting squared\-off by traders by placing sell orders to exit from their existing buy positions \(i\.e\.* Longs are getting unwinded*\), resulting in fall in the OI in that underlying asset or Indices and also fall in the price of the underlying asset or Indices\.

Thus, Long Unwinding indicates discontinuation of Long side view in the underlying asset or Indices, i\.e\. cessation of bullish view \(which may also lead to reversal of trend on the bearish side\)\.

__Long & Short Buildup, Long Unwinding & Short Covering in  Futures:__

These terms are data points generated on the basis of combination of following two aspects:

- Changes to the Open Interest \(OI\) of an underlying asset or Indices; and
- Movement in the price of the relevant underlying asset or Indices\.

__<start> __These concepts of Long & Short Buildup and Long Unwinding & Short Covering are given in the table below for ease of understanding and remembrance:

| Open Interest \(OI\) in the underlying | Price / LTP of the underlying | Conclusion | View |

| \-\-\- | \-\-\- | \-\-\- | \-\-\- |

| Increasing | Increasing | Long Buildup | Bullish |

| Increasing | Decreasing | Short Buildup | Bearish |

| Decreasing | Decreasing | Long Unwinding | Cessation of Bullish trend and likely reversal to Bearish |

| Decreasing | Increasing | Short Covering | Cessation of Bearish trend and likely reversal to Bullish | __<end>__

__*Short Buildup:*__

When the OI of an underlying asset or Indices is increasing and the price of the underlying asset or Indices is decreasing, then we say that Short Buildup is getting generated in the underlying asset or Indices\.

If the OI is increasing then it implies that fresh Contracts are getting executed in a given underlying asset or Indices i\.e\. the interest of the traders are getting generated in that underlying asset or Indices\. Besides rise in OI if the price / LTP of the underlying asset or Indices is decreasing then that clarifies that there is supply getting generated in the underlying asset or Indices as more and more traders are selling the underlying asset or Indices \(*i\.e\. fresh Short positions are getting generated*\) resulting in rise of the OI on the Short side in that underlying asset or Indices\.

Thus, Short Buildup indicates supply / selling in the underlying asset or Indices, i\.e\. a bearish outlook\.

__*Long Buildup:*__

When the OI of an underlying asset or Indices is increasing and the price of the underlying asset or Indices is also increasing, then we say that Long Buildup is getting generated in the underlying asset or Indices\.

If the OI is increasing then it implies that fresh Contracts are getting executed in a given underlying asset or Indices i\.e\. the interest of the traders are getting generated in that underlying asset or Indices\. Besides rise in OI if the price / LTP of the underlying asset or Indices also increases then that clarifies that there is demand getting generated in the underlying asset or Indices as more and more buyers are buying the underlying asset or Indices \(*i\.e\. fresh Long positions are getting generated*\) resulting in rise of the OI on the Long side in that underlying asset or Indices\.

Thus, Long Buildup indicates demand / buying in the underlying asset or Indices, i\.e\. a bullish outlook\.

__*Open Interest in Futures Contract:*__

As already mentioned in the context of Options in the previous Chapter \- OI is the short form, generally, used for the term Open Interest\. As we know that Futures is a derivative instruments, which when traded results in execution of a Futures contract between the buyer and the seller of that instrument, entered into for a particular price, upto the relevant Expiry Date of that Futures\. Number of such Futures contracts, so executed for a particular asset or Indices, as the case may be, which are currently open or outstanding \(i\.e\. being held by the buyer/seller for their trade\) and not closed out / settled \(by exiting the trade\) – is referred to as the Open Interest for that Futures contract\.

More precisely, when a fresh Futures trade is executed between a buyer and a seller for a particular asset or Indices at a given price \(for a given Expiry Date\) – a Futures Contract comes into existence between the buyer and seller of such Futures\. Number of Futures Contract, executed for a particular asset or Indices, and existing at a given point in time  \- would be the number of Open Interest\. Increasing Open Interest represents new or additional money coming into the underlying while decreasing Open Interest indicates money flowing out of the underlying\.

__*Open Interest \(OI\) created with fresh Contract, not transfer of Contract:*__

The Open Interest number only changes when a new buyer and seller enter to execute a fresh trade for a particular asset or Indices’ Futures, creating a new Contract, or when a buyer and seller meet, thereby closing/squaring\-off both positions\. 

__*Change in Futures’ OI on real\-time basis & its significance:*__

The OI of Futures keep fluctuating, on real\-time basis, as the traders keep making fresh positions and exiting their existing positions as per their ongoing analysis of market and market\-influencing factors\. 

__*Significance of Futures’ OI:*__

OI data is a critical piece of valuable information required for overall Futures data analysis\. Change in OI helps determine the continuation of trend or reversal of trend\.

__Volume in Futures Contract:__

Volume is the amount or quantity of a Futures instrument, for a particular asset or Indices, that is traded \(buying and selling of one Futures constitutes one trade\) over some period of time\. Generally, Futures with more daily volume are more liquid than those without, since they are more "__active__"\.

Every transaction that takes place between a buyer and a seller of Futures of an asset or Indices contributes to the total volume count of that Futures\.

__*Volume not same as Open interest \(OI\):*__

Here it needs to be understood that volume is not same as Open Interest \(OI\)\. 

OI are the number of contracts in existence for a Futures of a particular asset or Indices, while volume is the count of trades that are done in that Futures\. 

__*Significance of Volume:*__

Volume indicates market's activity and liquidity in Futures of a particular asset or Indices\. __Higher trade volumes for a specified Futures mean higher liquidity, better order execution and a more active market for connecting a buyer and seller__\. Higher liquidity is comforting for a F&O trader; and low liquidity may be a cause of concern for a F&O trader\. Usually there are no liquidity issues in Futures\.

__Liquidity in Futures:__

Liquidity implies extensive participation of traders in the Futures instrument of a particular asset or Indices, as the case may be\. __Higher OI or higher Volume for a particular Futures instrument indicates greater liquidity in that Futures instrument, and lower OI or lower Volume indicates lesser liquidity__\.

Generally, Futures instrument are quite liquid, since there is greater participation of traders in such instruments\. However, it may be noted that liquidity in Futures instruments in the Current Month Expiry is higher than the Next Month or Far Month Expiry\. 

In liquid Futures instruments, the buyers and sellers of such Futures instrument compete for their preferred prices close to the prevailing LTP, as a result the Bid Price and the Ask Price in such Futures instrument are very close and have differences only in decimals\. Whereas, in Futures with less liquidity, due to less participation of traders or less competition, there is significant gap between the Bid Price and Ask Price \(which are quite distant from the prevailing LTP of that Futures\), consequently, a Futures buyer gets a price higher than the LTP \(*because the prevailing Ask Price is usually higher than the prevailing LTP*\) and the seller of such Futures instrument gets a lower price than the LTP \(*because the prevailing Bid Price is usually lower than the prevailing LTP*\)\.

Thus, looking at the difference between the Bid Price and the Ask Price in the market depth of a given Futures instrument, one can determine whether or not that particular instrument is liquid or not\. If the difference between the Bid Price and the Ask Price is very less \(almost in decimals\), such instruments are generally liquid; and those with higher difference in values of the Bid Price and the Ask Price are illiquid\.

Liquidity in Futures too is of great significance and comfort for a trader, as it implies the following crucial benefits:

- In liquid Futures, a buyer of the Futures instrument and its seller will be able to execute or exit their positions almost at the LTP value, hence there is no risk of taking any haircut on profit margin in liquid Futures as the Bid Price and Ask Price would be available almost at the LTP value\.
- In liquid Futures, creation of a position or exit therefrom, is not a challenge, as great number of traders are participating/ trading in that Futures instrument, hence there is no risk of getting trapped by not being able to exit near Expiry, due to liquidity issues in such Futures\. Thus, a trader can create or exit his position in liquid Futures, almost instantly\.

__*Risks in illiquid Futures instruments:*__

Thus, in trading with liquid Futures, the trade plan does not face any challenge on account of liquidity issues\. Furthermore, there are seldom any liquidity issues in Futures instruments\. Most of the Futures instruments are quite liquid; however, one need to be careful and must be sure about enough liquidity in Futures before taking position, as liquidity issues may pose a great deal of difficulty for a trader\. Thus, it is imperative to highlight the risks associated with illiquidity in Futures\.

In illiquid Futures the LTP, there is extremely less trades amongst the buyers and sellers of such Futures; consequently, the LTP is not updated very frequently\. Moreover, in such Futures, buyers make a Bid Offer much less than the prevailing LTP in order to buy cheap; and the Seller of such Futures asks for a higher price as they wish to sell at a higher selling price than the prevailing LTP\. This results in a huge gap between the Bid Price and the Ask Price in any given illiquid Futures instrument\.  This situation may therefore sometimes leave the traders stranded without any buyer/ seller near the LTP or their preferred price \(even if the underlying has made a favourable move\), thus leaving little room for the traders to enter or exit at their preferred price\. By the time the revised LTP gets reflected on the trading terminal, the underlying price had move significantly and the Bid Price and Ask Price which would now be made would be around this revised LTP value which was updated after significant change in the price of the underlying\. Thus, the Bid Price and Ask Price are quite distant from the actual updated LTP value of such illiquid Futures\.

Since, in illiquid Futures there is a significant gap between the Bid Price and Ask Price from the prevailing LTP of Futures, consequently: 

- for initiating a position in such illiquid Futures, a buyer of such Futures may have to buy at a price higher than the LTP and a seller of such Futures may have to sell lower than the LTP; and 
- while exiting a position from such illiquid  Futures, a seller of such Futures may have to exit at a price higher than the LTP \(i\.e\. *Seller of illiquid Futures instrument will have to square\-off his Short position by placing a buy order, hence will have to match the Bid Price*\); and a buyer of such Futures may have to exit at a price lower than the LTP \(i\.e\. *Buyer of such illiquid Futures will have to square\-off his buy/Long position by placing a sell order, hence will have to match the Ask Price*\)\. 

Thus, traders of Futures instruments which are not liquid, may have to lose some profit margin due to significant gaps between the Bid Price and Ask Price in such illiquid Futures instruments\. 

Furthermore, a Futures trader will have to be particularly careful in dealing with illiquid Futures instruments near Expiry, as he may not be able to square\-off his position from such Futures instruments due to absence of traders on such instruments; or even if there are few traders on that Futures, the prevailing Bid Price or Ask Price, as the case may be, might be such \- which may cause the trader of such Futures instruments to take a huge haircut on his profit margin on that instrument to exit before Expiry or may even require to book a loss due to such issues\. The situation may become worse on account of illiquidity in Futures instruments, if a trader is not able to square\-off his position of a Futures instrument which requires compulsory fulfilment of the physical delivery obligation of the underlying asset or securities, in which case, the trader will be required to meet the onerous physical delivery requirements\.

__*Futures: its Born date & Expiry date:*__

Futures, like Options come into existence \(or would become available\) for entering into Futures contract / creating trading positions in that Futures from a particular date \(*referred to as the *__*Born Date*__* of that Futures*\) and would cease to be in such existence on a particular date \(*referred to as the *__*Expiry Date*__* of that Futures*\)\. Every Futures is available for trading from its Born Date upto its Expiry Date \(*the lifetime of a Futures*\)\.

The relevant Exchanges prescribe the Futures for each assets, benchmark or securities with different expiry, from time to time\. Most of the Futures are prescribed with Monthly Expiry series\.

__*Expiry Series for Futures of Stock Indices & Stock Futures:*__

Expiry Day for the Futures of Nifty and FNO Stocks is the last Thursday of the relevant calendar month\. Expiry Day for the Futures of FinNifty and BankNifty are on the last Tuesday and Friday of the relevant calendar month, respectively\. BankNifty’s F&O Expiry used to be on Thursday; and it has been changed with effect from July 2023 to be on Friday\. If the relevant Expiry Day of the Month is a trading holiday, then the contracts expire on the previous trading day and the relevant Expiry Day for that particular Futures accordingly shifts to previous trading day\. For example, Monthly Futures of Nifty for the month of July 2022 will be recognised/ referred to as __Nifty__ __Monthly Futures of July 2022, which will expire on the last Thursday in the calendar month of July 2022__ \(*unless last Thursday of July 2022 is not a business day, in which case: the Expiry Day for July 2022 Futures will expire on the previous trading day on which is business is conducted as usual*\)\. 

In case of Stock Futures and Futures Contract for most active Stock Indices like Nifty Futures, BankNifty Futures, FinNifty Futures, the Stock Exchanges prescribe three separate Monthly Expiry series for Futures in the order of successive calendar months \(i\.e\. Current Month, Next Month and Far Month\)\. As the current calendar month Expiry lapses, succeeding calendar month becomes the Current Month Expiry series; and the second succeeding calendar month becomes Next Month Expiry series; the third succeeding calendar month is made freshly available by the stock exchange as Far Month Expiry series \(which is born on the trading day, following the Expiry of the Current Month contract\)\. Thus, every fresh Expiry series of Futures for such instruments is born as a Far Month Expiry, which subsequently becomes a Next Month Expiry and thereafter Current Month Expiry series\. Thus, in case of aforesaid Futures instruments, the Stock exchanges ensures that at any given point in time there are 3 separate Futures Contract with successive Monthly Expiry series, which are available for trading \(*i\.e\. one pertaining to current calendar month, another for the next calendar month and third series pertaining to next\-to\-next calendar month*\)\.

__Expiry series for Futures Contract of Commodities__: In India, commodity Futures are traded on the Multi Commodity Exchange of India \(MCX\)\. Futures Contract of various commodities like Aluminium, Copper, Gold, Gold Mini, Silver, Silver Mini, Crude Oil, Natural Gas, Copper, Nickel, and Zinc etc\. are traded on MCX\. The Expiry day for most of these Commodity Futures have Monthly Expiry series\. Certain Commodity Futures, like: Gold, Natural Gas, Copper, Silver, Crude etc\., are also traded on NSE’s Commodity Derivative segment\.

__Expiry series for Futures Contract of Currency__: In India, different INR based Currency Futures like: USD\-INR, JPY\-INR, EUR\-INR, GBP\-INR etc\. are available with serial weekly cycle Expiry series, as well as in Monthly Expiry series\.

__Bid Price in Futures:__

In the context of Futures, Bid Price is the price at which, buyer of Futures is willing to buy a Futures of a particular asset or Indices at a particular price\. A buyer always wishes to buy cheap and sell at higher price thus making profit\. Thus, the Bid Price is usually desired to be made at or lower than the prevailing LTP of the Futures, as mostly buyers of Futures bid for buying the relevant Futures at a price equal or lower than the prevailing LTP of that Futures\. The key point to note here is that the buyer of Futures buys a Futures instrument from the seller of that Futures; and the trade is completed only when the Bid Price matches with the price demanded or asked by the seller of that Futures i\.e\. the Ask Price, irrespective of the prevailing LTP of that Futures\. 

Thus, LTP of the Futures acts as a referring price point, basis which the buyer of a Futures makes a Bid Price and the seller of that Futures makes an Ask Price\. Consequently, a trader who wishes to place a buy order for the Futures, whether as a fresh buyer of that Future or as a seller of a Future desiring to square\-off his Short position in Futures, will have to meet the Ask Price to get his buy order completed/ executed\. 

Since, mostly the Futures instruments are quite liquid, as a result the Bid Price and Ask Price are usually close to the prevailing LTP value of Futures\. But in case of any illiquid Futures, there is a significant difference from the prevailing LTP and the Ask Price, and the Ask Price in such cases are mostly significantly higher than the LTP, this causes the buyer of the Futures \(*who certainly wants to buy the Futures without waiting for another opportunity*\) to make a Bid Price matching the Ask Price thereby resulting in a costlier purchase than the prevailing LTP value of that Futures\. This aspect is further explained below in the context of liquidity in Futures\. The Bid Price keeps fluctuating on real\-time basis, due to the bids made for buying by the buyers of Futures, from time to time\.

__Bid Quantity in Futures__:

Bid Quantity is the quantity of Futures \(in Lot sizes\), being bid by the buyers of the Futures for buying the Futures instrument at a particular Bid Price\. The Bid Quantity also keeps fluctuating on real\-time basis, due to the bidding quantity being made by the Futures’ buyers at a particular price, from time to time\. In this context it may be noted that while placing an order, trading terminals of certain brokers allows a trader to conceal the quantity he wishes to trade; consequently, the Bid Quantity against a particular Bid Price may or may not be the actual Bid Quantity that is being bided for\.

__Significance of Bid Price & Bid Quantity and Ask Price & Ask Quantity in Futures:__

Thus, the Bid Price and the Bid Quantity helps the Futures’ buyer to understand the price at which buyers are making a bid for a Futures instrument; and also helps the seller of the Futures to understand the price at which he can square\-off his existing Futures’ sell position with an interested buyer of the Futures \(at the prevailing Bid Price\)\. 

Likewise, the Ask  Price and the Bid Ask Quantity helps the seller of the Futures instrument to understand the price being demanded by the sellers for selling the relevant Futures; and also helps a buyer of the Futures to understand the price at which he can square\-off his existing Futures’ buy position with an interested seller of that Futures \(at the prevailing Ask Price\)\. The trading terminal of the brokers or the website of the stock exchange provide the market depth of a particular future instrument – providing details about the various Bid Prices for specific Bid Quantity and the Ask Prices for specific Ask Quantity which are prevalent in the market on almost real\-time basis, from time to time\. 

__<start> <img6> __Given here is a screenshot from the website of NSE for the market depth of Nifty Futures for Monthly Expiry of 25th August 2022\. This provides details for the Bid Price, Ask Price, Bid Quantity, Ask Quantity, Volume, OI and Change in OI etc\. Thus, at any given time these details can be referred to on the website of NSE, besides the trading terminal of the broker\.__ <end>__

__Ask Price in Futures:__

Ask Price is the price at which, seller of Futures instrument asks or demands to sell \(i\.e\. Short\) a Futures of a particular asset or Indices\. A seller always wishes to Short at a high price and buy at a lower price thus making profit\. Thus, the Ask Price is usually made by traders at or higher than the prevailing LTP of a Futures, as mostly sellers desires to Short Futures at a price equal or higher than the prevailing LTP of that Futures i\.e\. to sell costlier than LTP to the buyers\. The key point to note here is that the seller of a Futures instrument pertaining to a particular asset or Indices, sells the Futures to the buyer of that  Futures; and the trade is completed only when the Ask Price matches with the price being bid by an interested buyer of that Futures i\.e\. the Bid Price, irrespective of the prevailing LTP of that Futures\. Thus, LTP of the Futures acts as a referring price point, basis which the seller of a Futures instrument demands the Ask Price and the buyer of that Futures makes a Bid Price\. Consequently, a trader who wishes to place a sell order for a Futures instrument, whether as a seller of the Futures or as a buyer of the Futures desiring to square\-off his  Futures’ buy \(i\.e\. Long\) position, will have to meet the Ask Price to get his sell order completed/ executed\.

Since, mostly the Futures instruments are quite liquid, as a result the Bid Price and Ask Price are usually close to the prevailing LTP value of Futures\. But in case of illiquid Futures instrument, there is a significant difference from the prevailing LTP and the Bid Price, and the Ask Price in such cases are mostly significantly lower than the LTP, this causes the seller of the Futures instrument \(*who certainly wants to sell / Short the Futures without waiting for another opportunity*\) to make a lower Ask Price matching the Bid Price thereby resulting in a cheaper sell than the prevailing LTP value of that Futures\. This aspect is further explained below in the context of liquidity in Futures\. The Ask Price keeps fluctuating on real\-time basis, due to the sell price being demanded by the sellers of the Futures instrument at a particular price, from time to time\.

__Ask Quantity in Futures: __

Ask Quantity is the quantity of Futures \(in Lot sizes\), being sold by the sellers of the Futures instrument for Shorting the Futures at a particular Ask Price\. The Ask  Quantity also keeps fluctuating on real\-time basis, due to the ask quantity being made by the sellers of the Futures at a particular price, from time to time\. In this context it may be noted that while placing an order, trading terminals of certain brokers allows a trader to conceal the quantity he wishes to trade; consequently, the Ask Quantity against a particular Ask Price may or may not be the actual Ask Quantity that is being sold at that price\.

__About Futures:__

Futures as a derivative financial instrument is pretty simple instrument to understand and trade\. Futures, derive its value from the price of the underlying asset or Indices, as the case may be\. <a id="_Hlk110632519"></a>The price of the underlying security in the cash market or that of an underlying Indices is called the __Spot Price__\.

Futures do not have a concept like that of an Options Chain \(*having multiple Options for a given Expiry*\) etc\., as is the case for Options\. In case of Futures, it is pretty straight forward, that there is one Futures instrument for a given Expiry series and that the price of the Futures \(also called the LTP \(*i\.e\. last traded price*\) of Futures\) derives its value from the Spot Price of the relevant underlying\.

__*Last Traded Price \(LTP\) of Futures, Discount and Premium:*__

The last traded price of the Futures \(i\.e\. LTP\) for a given Expiry is usually higher than the Spot Price\. When the Futures is trading at the LTP higher than the Spot then it is said to be trading at a ‘__Premium’__\. However, when the Futures is trading at the LTP lower than the Spot then it is said to be trading at a ‘__Discount’__\.

On Expiry Day, relevant Futures eventually merges with the Spot Price and they become equal on Expiry\.

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__List of Expiry Day Strategies:__

The Expiry Day Strategies, which we have discussed in our Book, are outlined in the Table below:

“__Sl\. No\.__”: “1”, “__Strategy__”: “__Expiry Day: Intraday Momentum Play through Naked OTM Buying__”, “__Trade Positions__”: “\[OTM CE Buy\]”, “__To Play the Trend__”: “Bullish Momentum”,

“__Sl\. No\.__”: “__2__”, “__Strategy__”: “__Expiry Day: Intraday Momentum Play through Naked OTM Buying__”, “__Trade Positions__”: “\[OTM PE Buy\]”, “__To Play the Trend__”: “Bearish Momentum”,

“__Sl\. No\.__”: “3”, “__Strategy__”: “__Expiry Day: Intraday Trend Play through Naked Synthetic Futures \(ITM\) Buying__”, “__Trade Positions__”: “\[ITM CE Buy\]”, “__To Play the Trend__”: “Bullish Momentum”,

“__Sl\. No\.__”: “4”, “__Strategy__”: “__Expiry Day: Intraday Trend Play through Naked Synthetic Futures \(ITM\) Buying__”, “__Trade Positions__”: “\[ITM PE Buy\]”, “__To Play the Trend__”: “Bearish Momentum”,

“__Sl\. No\.__”: “5”, “__Strategy__”: “__Expiry Day: Intraday Trend Play through Futures Hedge__”, “__Trade Positions__”: “\[Futures Hedge: \(Futures Long \+ ITM PE Long\)\]”, “__To Play the Trend__”: “Bullish Momentum”,

“__Sl\. No\.__”: “6”, “__Strategy__”: “__Expiry Day: Intraday Trend Play through Futures Hedge__”, “__Trade Positions__”: “\[Futures Hedge: \(Futures Short \+  ITM CE Long\)\]”, “__To Play the Trend__”: “Bearsh Momentum”,

“__Sl\. No\.__”: “7”, “__Expiry Day: Trading Gap between Futures and Spot through Gap Hedge Strategy__”: “\[Gap Hedge when Futures trading in excessive discount than Spot: \(Long Deep ITM CE Current Week \+ Short same strike Deep ITM CE Next Week\)\]”, “__To Play the Trend__”: “Expected Rise in CE premium”,

“__Sl\. No\.__”: “8”, “__Expiry Day: Trading Gap between Futures and Spot through Gap Hedge Strategy__”: “\[Gap Hedge when Futures trading with excessive LTP than Spot: \(Long Deep ITM PE Current Week \+ Short same strike Deep ITM PE Next Week\)\]”, “__To Play the Trend__”: “Expected Rise in PE premium”,

“__Sl\. No\.__”: “9”, “__Expiry Day: Non\-Directional, Half Diagonal Hedged Strategy__”: “\[Long CE Near OTM \+ Short CE Far OTM \(*with quantity higher than CE Long*\) \+ Long PE Near OTM \+ Short PE Far OTM \(*with quantity higher than PE Long*\)\]”, “__To Play the Trend__”: “Expected rise in either direction”, <__end__>

<a id="_Hlk160574686"></a>

__Word of Caution:__

Before we start discussions on various Strategies, we would like to again upfront highlight as a __caution that:__ __one must avoid to trade in FNO instruments of such asset class / underlying \(*like FNO stocks*\), where there is a requirement to comply with physical delivery, especially on or near to their Expiry Day__\. Because if the FNO instruments of such underlying / assets \(*which is subject of physical delivery requirements*\) expires as an ITM, then even though any given Strategy may be overall profitable, but such situation may warrant the trader to unnecessarily comply with the physical delivery requirements\. Thus, it is strongly advised to play any Expiry Day Intraday Strategy\(ies\), only on Indices/ assets, where there is no requirements towards physical delivery *viz\. Nifty FNO / BankNifty FNO / FinNifty FNO etc\., *so as completely avoid unwarranted situation which may fall upon due to any factor beyond one’s control\.

<a id="_Hlk138692530"></a>Also, it must be clearly understood that knowing Strategies alone is not sufficient to be profitable in a trade, as the market can be unexpectedly very volatility \(especially on Expiry Days\) and there can be numerous factors beyond the knowledge and control of a trader which may influence the trade plan or outcome of a Strategy\. Therefore, every trader must first acquire the relevant knowledge and then devote time to develop his trading skill by testing different Strategies in different market conditions, by practicing first on some virtual trading platform and then starting with real trades in just one or two Lots\. We have discussed about this aspect of learning and skill development in detail in our __Chapter: Golden Rules \(‘Dos’ & Don’ts in Trading’\)__ contained in Volume I\. Please go through that Chapter, before you decide to start initiating real trades\.

__Expiry Day Strategies:__

We have discussed about 9 different Expiry Day Strategies, to play strong bullish / bearish momentum on an Expiry Day\. Each Strategy is different and would be suitable considering specific factors which are also mentioned in the context of each Strategies\. To illustrate and explain the various parameters, we have based our analysis and discussions on the liquid Weekly Options of Indices \(like Nifty & BankNifty\)\. We would accordingly recommend you to explore the Strategies mentioned below in this Chapter on such liquid Options only\.

*Note: Kindly ensure liquidity in Options before planning to execute a trade\. Very Deep ITMs would be illiquid and should be avoided\.*

We shall discuss each of the aforesaid Strategy,  providing for both bullish and bearish momentum play through that Strategy\.

Thus, we shall explore around 9 Expiry Day Strategies which can be successfully deployed to play out the specific market  trend/ momentum for which they are designed, on intraday basis\. I am sure, you must have gained a deep insight into the constructs of these Strategies and appreciate how these Strategies have been developed using peculiar behaviour by Options on the day of their Expiry\. These Strategies must be considered by traders; and after learning and analysing them well, can consider to deploy them to play out intraday momentum on Expiry Day\.

__Expiry Days__

Now we would be discussing about one of the most sought after and thrilling trading opportunity, by a large number of traders and that is opportunities to play Theta or Delta play specifically on Expiry Day on intraday basis\. 

Ofcourse, we are talking in the context of assets/ underlying which are not subject to the physical delivery requirements, *viz FNO instruments pertaining to Equity Indices\.*

__Safe play in Expiry Day Trading__:

Now, with the Exchanges segregating the Expiry Days for Nifty & BankNifty and lately introducing other Indices \(like FinNifty, MidcapNifty, Sensex etc\.\) to the Equity FNO segment with Weekly Expiry series, the traders’ community gets to play their most preferred trading opportunity almost every day in a Week on Indices\.  

Following are the most liquid Weekly Options of certain Indices, with their relevant Expiry Days falling in a Week:

- __Tuesday:__ FinNifty Weekly Options
- __Thursday:__ Nifty Weekly Options
- __Friday:__ BankNifty Weekly Options\.

Besides, the aforesaid most liquid Weekly Options, there are few other Indices where Weekly Options for Expiry Day trading may be considered \(*even though they are relatively not liquid as aforesaid Options, but on their Expiry Day they would have liquidity in near ATM Options*\)\. These Weekly Options of certain other Indices, with their relevant Expiry Days falling in a Week are as follows:

- __Wednesday:__ MidcapNifty Weekly Options
- __Thursday:__ BSE’ Sensex50 Weekly Options
- __Friday:__ S&P BSE’ Sensex Weekly Options and Bankex Weekly Options

These Expiry Days are certainly the most preferred days of trading for the traders to implement their intraday trading Strategies, either to exploit benefits from Theta decay of Expiry day in Far OTMs; or to target exponential profit yield from strong Delta moves in the underlying on Expiry Day, as per their preferred style or basis their Technical Analysis\.

__Expiry Day : Trading opportunities in F&O__

The Expiry Days of F&O instruments are certainly the most preferred days of trading for the traders to implement their intraday trading Strategies, either to exploit benefits from Theta decay of Expiry day in Far OTMs; or to target exponential profit yield from strong Delta moves in the underlying on Expiry Day, as per their preferred style or basis their Technical Analysis\.

__Expiry Day Strategies targeting Theta:__

So far as the Theta\-decay based Strategies for  Expiry Day are concerned, we have already got them covered in our previous Chapters \(*refer Customised Strategies, like: 1:4 Diagonal Spread and Toofani Hedge etc\., which are an advanced Strategies with high probability yield, for Theta play targeting BTST/STBT Overnight Decay or Intraday on Expiry Day*\)\. Therefore, in this Chapter, we will be focussing mainly on Intraday Strategies to play strong Delta moves in the underlying on the Expiry Day\.

__Expiry Day, Delta play: __

The Intraday Strategies for Expiry Day discussed here are designed to play an expected strong momentum in the underlying on Expiry Day\. However, there is no one\-fit Strategy to play intraday momentum on Expiry Day, at all times\. __There can be various factors which may need to be considered in order to decide which will be the best course of action for an expected Delta play on a given Expiry Day__\. Some of these factors are: *the strength of expected momentum, relevant underlying, timing of arrival of momentum on an Expiry Day, volatility status & India VIX, capital targeted for deployment, risk appetite of trader *etc\. Therefore, a straitjacket formula is definitely a mis\-fit for playing Delta moves on Expiry Day\.

Also, there can be numerous ways of identifying arrival of momentum, particularly on an Expiry Day\. __We have provided a list of some of the Technical parameters which can be used as an indicator to identify the expected trend / momentum during Expiry Day for intraday trading__\. Some of these parameters are completely unique and offers an insight into the likely trend that may arrive, and thus can help a trader to identify a trading opportunity for the day\.       

Therefore, as aforesaid, we have attempted to cover in this Chapter, certain unique ways and parameters of identifying intraday trend/ momentum for the Expiry Day and have also provided some unique trading Strategies to exploit the Delta play on Expiry Day, which can be executed basis best\-fit approach considering relevant factors prevalent at that time\.

In order to appreciate the design and the relevant factors which defines and optimises these Expiry Day Strategies, it is very important to have a sound understanding about the following concepts regarding FNO, broadly segregated below: 

1. The basic features about the Futures and Options, behavioural aspects of Options under different market dynamics, especially during Expiry Day, and the understanding about the impact of Delta and Theta on Long Options and Short Options positions on Expiry Day; and
2. Factors to be considered for initiating / designing a trading position / Strategy \(*viz\., trend, Premium debit/credit, effects of Options Greeks, etc\.*\) from Expiry perspective\. 

These aforesaid aspects are extremely crucial for playing Expiry Day Strategies\. Of these two broadly categorised concepts, topics mentioned as \(i\) above are explained in Volume\-I of the Book and those mentioned as \(ii\) above have been explained in the previous Chapters in this Volume\-II itself\. Make sure that you have a sound understanding of these important concepts, as it will help you to plan, identify, execute, ride and manage a trading position, basis the dynamic and usually extremely volatile market conditions on Expiry Day\. 

However, as mentioned above, it is extremely important to first understand certain methods and parameters which can be used for the identification of intraday trend on Expiry Day / arrival of expected momentum, to play Expiry Day Strategies basis the prevalent factors\. Let us therefore, have a look at the different parameters which may indicate regarding Expiry Day trend / expected momentum\.

__Speciality about Expiry Day Trading through F&O:__

Expiry Day offers a variety of opportunities to play intraday momentum / strong one\-sided trend\. This strong intraday momentum / trend on Expiry day can be played through naked Options as well as hedged Strategies\.

__Options behaviour Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)__

On Expiry Day, after 12 noon, the Options expiring on that Expiry would start following Spot \(and would shift from following Futures to following Spot\)\. This is because the Options expire as  per Spot and not as per Futures\.

Thus, accordingly, when Futures is trading in discount than Spot on Expiry day, we know that the Current Week CE Options would experience significant rise in their Premium Value due to shift of Options towards following Spot \(from following Futures\) and eventually expiring as per Spot\. This rise in the premium of CE Options, due to such gap phenomenon, can be played by executing Long positions in CE Options of Current Week Expiry\. 

However, the CE Options of Next Week Expiry, would continue to follow the Futures until the Expiry day of those Options\. Therefore, the Next Week Options \(on which CE Short leg is initiated\) would not get impacted due to gap between the Futures and Spot and accordingly the Premium value of Next Week CE Options would not rise \(*whereas the Current Week Expiry CE Options rise in their Premium value due to their expiry as per Spot value*\)\.

Thus, the significant rise in the premium value of the Current Week Expiry CEs, and not much deviation in the premium value of the Next Week Expiry CEs, results in good profit in this Gap Hedge Strategy\.

However, if the trend reverses on the bearish side with strong momentum / gapdown, then:

- If the underlying falls, but Expiry happens above the Selected Strike: In such situation, the Current Week CE Options Long position would generate loss, but even then the CE Long Strike would be an ITM on Expiry\. Thus, as a result of CE Long leg expiring as an ITM \(*may be a Near ITM*\), there will be some Intrinsic Value left in this CE Long leg i\.e\. this CE would not become zero\. Further, in such event, the Next Week CE Short position, would generate decent profit, because the Gap Hedge will be net negative Delta \(*as the Strategy is  a Credit Calendar Spread, with more negative Delta on Next Week CE Short leg than positive Delta on Current Week CE Long leg*\)\. Thus, the fall in the underlying may also generate some profit if the underlying does not breach on the lower side the Strike at which positions have been initiated \(*or may generate some minor loss on the overall Strategy by Expiry, depending on the way the fall occurs and any adverse impact of Volatility*\); and
- If the underlying falls strongly, even breaching the Selected Strike on the lower side by Expiry: In such situation, the Current Week CE Long leg would become an OTM and thus entire Premium at which this CE was bought would become zero on Expiry, but at the same time the Next Week CE Short position would also become an OTM and would generate decent profit, because this Gap Hedge Strategy is  a Credit Calendar Spread with net negative Delta \(*i\.e\. more negative Delta on Next Week CE Short leg than positive Delta on Current Week CE Long leg*\)\. Moreover, such steep fall may also help generate more profit on CE Short leg than the loss on the CE Long leg, because the Net Premium Credit available on this Strategy would keep generating profit from such steep continuous fall\.   Thus, such steep fall in the underlying would also generate some profit \(*or may generate some minor loss on the overall Strategy by Expiry, depending upon the final levels at which the Expiry occurs, and if there is rise in Volatility impacting profitability on CE Short leg*\)\.

__Trade Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)__

__Requisite Technical Conditions to Trade Gap Between Futures & Spot \(where Futures is in excessive discount than Spot\):__

If at anytime during Expiry day or one day previous to Expiry day, it is observed that the Current Month Futures LTP is trading at a discount than the Spot value by atleast \+100 or more points, then it may be expected that the Current Week CE Options may experience an exponential rise in their Premium value due to their shift from following Futures to following Spot after 12 noon on Expiry\. Since Spot value is higher than Futures, therefore, as soon as the CE Options start following the Spot closer to Expiry, the CE Options will rise in their Premium value \(*because CE Option would shift from following lower LTP of Futures, to higher Spot value*\)\.

*Note:* *In case of Nifty, the LTP of current Month’s Futures usually trades by around 50 points higher than Spot; and in case of BankNifty, the LTP of current Month’s Futures usually trades by around 100 points higher than Spot\.*

This shifting of Options pricing on Expiry day after 12noon,  from following Futures to Spot, is due to the Options Behaviour that the Options of Current Expiry would expire as per the Spot value and not Futures value\.

Such heavy discounted Futures than Spot is usually found during heavily falling market, like during Corona times\. Thus, such tradable Gap \(with Futures on excessive discount than Spot\) are seldom available, but Gaps \(with Futures on excessively high LTP than Spot\) can be usually found and are tradable\.

__Objective in Trading Gap Between Futures & Spot \(where Futures is in excessive discount than Spot\)__: 

Since, near Expiry of Current Week Options, if the Futures is trading in heavy discount than the Spot, then it can be expected that the CE Option around 12noon on Expiry Day would experience rise in their Premium as they start following the Spot value \(*due to adjustments in the premium value of CE Options, as result of shifting to follow higher Spot value from lower Futures*\)\. 

Thus, such gap when arises on or near Expiry of relevant Options \(*i\.e\. on the day of the Expiry of such Option or a day before to their Expiry*\) between Futures and Spot, can be traded for a significant premium movement in the current Expiry CE Options, especially when such gap is formed in an upward market condition\. Such gap can be traded through a hedge strategy created on the CE side, called Gap Hedge Strategy \(CE side\)\.

This trading strategy can be executed for intraday or BTST, until the gap persists \(*i\.e\. so long the Futures trades in discount than Spot*\) or Expiry of Current Week Options, whichever is earlier\.

__Trade Leg in Trading Gap Between Futures & Spot \(where Futures is in excessive discount than Spot\)__:

- Long Deep ITM CE \(*which is expiring on same day Expiry / next day Expiry i\.e\. current week Expiry series*\)
- Short Deep ITM CE \(*which belongs to next week Expiry series*\) 

Both legs would have equal quantity and shall pertain to same Strike \(*but different Expiry series*\)

Long CE is initiated as the primary leg to get benefitted from the expected rise in the Premium value of CE Options \(*due to their shift in following Spot on Expiry day, which is trading on Expiry day higher than the Futures*\)\. 

The Short CE is initiated as the hedged leg to cover the loss that may arise on the CE Long leg if the trend gets reversed on the bearish side \(and the underlying makes a big fall / gapdown on Expiry day\)\.

__Significance of Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)__

__*Speciality of Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__: 

It is a hedged Strategy to play special situations between the pricing of the Futures with respect to the Spot price\. The excessive discount in Futures than the Spot value offers a special opportunity to play CE Long for Current Expiry Options, as such CE Options would adjust themselves to match the Spot price \(*which is trading higher than the Futures*\) and thus experience exponential rise in their premium value\. The profit potential is huge\.

Also, since it is a hegded Strategy, the possibility of opportunity to play CE Long on expiring Options is adequately secured to cover even the extreme bearish move in the underlying\.

__*Merits of Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__: 

Since, it is a hedged Strategy, therefore, large quantity positions can be initiated, instead of naked Long CE \(*which might be very risky if trend reverses on the bearish side*\) or Long Futures \(*which would also require large capital on similar quantity*\)\.

It is a high probability trade, purely due to Options Behaviour applicable on Expiry day \(*i\.e\. the Current expiring Options would match the Spot for expiry*\)\. The profit margins are usually quite high\. Moreover, since, it is a hedged Strategy, therefore, it is a safe play\.  

__Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\): Capital, Risk, Adjustment & Target__

__*Capital deployment in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__: 

Since, this is a hedged Strategy and not so risky trade and loss in this Strategy is pre\-estimated and reasonable; and further even Counter Adjustments can be initiated in intraday to cover for loss on CE Long leg upon trend reversal on bearish side, therefore, this Strategy can be initiated with reasonable volumes \(*upto 50% of the total trading capital*\), subject to calculation of loss on this Strategy in absolute terms, before initiating this trade\. The loss amount in absolute terms should be reasonable and okay with respect to trader’s own risk appetite\.

__*Risk & Stop Loss in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__: 

Risk is quite controlled in this Strategy, as it is adequately hedged with same strike ITM on Next Week Expiry CE Short positions\. Moreover, it is a Credit Spread and therefore, net negative Delta on this Strategy should adequately cover the loss generated on the CE Long leg due to extreme bearish move in the underlying, subject to rise in Volatility and the levels at which the underlying expires\. 

Further, if the trend appears to be reversing strongly on bearish side, convincingly on 30 min TF or Hrly TF in intraday, then Counter Adjustment positions \(*as explained below*\) can be initiated for intraday to secure the potential loss in this Strategy\.

__*Trade Adjustment in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__:

If the trend in intraday completely reverses on the bearish side, then the loss situation on the Strategy  can also be avoided by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM CEs of next week/ Monthly Expiry series in quantity \(atleast 25% of the original quantity in the Strategy\) which would give additional premium credit on aggregate basis to cover for potential loss on CE Long leg by its Expiry; or
2. Initiate Long positions on Far OTM PEs of next week/ Monthly Expiry series in such quantity which will generate sufficient profit so as to cover for potential loss on CE Long leg by its Expiry\.

__*Target on Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)*__: 

Target on this Strategy will depend upon the gap with which the Futures is trading in discount before 12noon on Expiry Day, than Spot\. Higher the difference, higher the probability of profit due to adjustment of CE Long leg’s pricing as per Spot by Expiry\. 

Further, if the underlying moves slightly downward by end of Expiry day, so as to generate some profit on CE Short leg; and the CE Long leg gets benefitted due to price adjustments with Spot value, then sometimes even both legs can generate profit\.

__Strike Selection in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive discount than Spot\)__

__*Strike Selection Trading Gap Between Futures & Spot \(where Futures is in excessive discount than Spot\)*__: 

Both Long & Short leg, should be of the same Strike level which must be of such major Support level upto which the market is not expected to fall by Expiry of the Long leg Options \(*thus, the Strike would be a deep ITM*\)\. Lower the Support level targeted for this Strategy \(*i\.e larger the distance from ATM*\), better & safer it is\.

Further, the Long CE \(*i\.e\. on current week Expiry*\) __must have lower premium value than the CE Short leg __\(*on same Strike, but of next week Expiry*\)\. Thus, the trade is a net Credit Calendar Spread\. However, if the Gap between Futures and Spot exists, but the Long CE leg is not lower in its premium value than the CE Short leg as per the Options Chain, then no trading position should be initiated unless CE Long leg in current week Expiry starts becoming available at lesser premium than the CE Short on next week Expiry in the Options Chain\. Once, Options Chain starts showing that the CE Long is trading at a premium value lower than the CE Short leg, then the trade is good for execution of Gap Hedge Strategy \(*on CE side*\)\.

__*<*start*> Example of Trading Gap Between Futures & Spot \(where Futures is in excessive discount than Spot\)*__*: *

- *Nifty Spot: 17200*
- *Nifty Futures:  17000 \(i\.e\. @200 point discount than Spot\)*
- *Major Support zone: 16000 Strike \(i\.e\. around 1000 points lower than Spot & Futures\)*

*Accordingly, trade positions will be:*

- *Long CE 16000 \(current week Expiry\) at LTP of Rs\. X;*
- *Short CE 16000 \(next week Expiry\) at LTP of Rs\. \+X*

*Strike selection takes into account such large area from the current Spot & Futures value upto which the underlying is not expected to fall by Expiry which is maximum one day away \(if the trend reverses on the bearish side or due to some bad news etc\.\)\. Thus, in the above example, 1000 distant ITM Strike from the Spot value seems ideal as it at the major Support zone and also offers large room for any untoward / unexpected fall in the underlying\. *__*<*end*>*__

__Options Behaviour in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)__

Thus, accordingly, when Futures is trading at excessively higher LTP than Spot on Expiry day, we know that the Current Week PE Options would experience significant rise in their Premium Value due to shift of Options towards following Spot \(from following Futures, which are trading unusually higher than Spot\) and eventually expiring as per Spot\. This rise in the premium of PE Options, due to such gap phenomenon, can be played by executing Long positions in PE Options of Current Week Expiry\.

However, the PE Options of Next Week Expiry, would continue to follow the Futures until the Expiry day of those Options\. Therefore, the Next Week Options \(on which PE Short leg is initiated\) would not get impacted due to gap between the Futures and Spot and accordingly the Premium value of Next Week PE Options would not rise \(*whereas the Current Week Expiry PE Options rise in their Premium value due to their expiry as per Spot value*\)\.

Thus, the significant rise in the premium value of the Current Week Expiry PEs, and not much deviation in the premium value of the Next Week Expiry PEs, results in good profit in this Gap Hedge Strategy\.

However, if the trend reverses on the bullish side with strong momentum / gapup, then: 

- If the underlying rises upwardly, but Expiry happens below the Selected Strike: In such situation, the Current Week PE Options Long position would generate loss, but even then the PE Long Strike would be an ITM on Expiry\. Thus, as a result of PE Long leg expiring as an ITM \(*may be a Near ITM*\), there will be some Intrinsic Value left in this PE Long leg i\.e\. this PE would not become zero\. Further, in such event, the Next Week PE Short position, would generate decent profit, because the Gap Hedge will be net positive Delta \(*as the Strategy is  a Credit Calendar Spread, with more positive Delta on Next Week PE Short leg than negative Delta on Current Week PE Long leg*\)\. Thus, the rise in the underlying may also generate some profit if the underlying does not breach on the upper side the Strike at which positions have been initiated \(*or may generate some minor loss on the overall Strategy by Expiry, depending on the way the uptrend occurs and any adverse impact of Volatility*\); and
- If the underlying rises strongly, even breaching the Selected Strike on the upper side by Expiry: In such situation, the Current Week PE Long leg would become an OTM and thus entire Premium at which this PE was bought would become zero on Expiry, but at the same time the Next Week PE Short position would also become an OTM and would generate decent profit, because this Gap Hedge Strategy is  a Credit Calendar Spread with net positive Delta \(*i\.e\. more positive Delta on Next Week PE Short leg than negative Delta on Current Week PE Long leg*\)\. Moreover, such steep rise may also help generate more profit on PE Short leg than the loss on the PE Long leg, because the Net Premium Credit available on this Strategy would keep generating profit from such steep continuous upward rise in the underlying\. Thus, such steep upward move in the underlying would also generate some profit \(*or may generate some minor loss on the overall Strategy by Expiry, depending upon the final levels at which the Expiry occurs, and if there is rise in Volatility impacting profitability on PE Short leg*\)\.

__Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)__

__\(Objective: To benefit from expected rise PE Premium\)__

__*Requisite Technical Conditions for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*:__

If at anytime during Expiry day or one day previous to Expiry day, it is observed that the Current Month Futures is trading at excessively  high LTP than the Spot value \(*i\.e\. In case of Nifty, by atleast \+100 points; and in case of BankNifty, by atleast \+200 points*\), then it may be expected that the Current Week PE Options may experience an exponential rise in their Premium value due to their shift from following Futures to following Spot after 12 noon on Expiry\. Since Spot value is unusually low than Futures, therefore, as soon as the PE Options start following the Spot closer to Expiry, the PE Options will rise in their Premium value \(*because PE Option would shift from following higher LTP of Futures, to much lower Spot value*\)\. This shifting of Options pricing on Expiry day after 12noon,  from following Futures to Spot, is due to the Options Behaviour that the Options of Current Expiry would expire as per the Spot value and not Futures value\.

*Note: In case of Nifty, the LTP of current Month’s Futures usually trades by around 50 points higher than Spot; and in case of BankNifty, the LTP of current Month’s Futures usually trades by around 100 points higher than Spot\.*

Such tradable Gap \(with Futures on excessively high LTP than Spot\) can be usually found and are tradable\. Thus, mostly we will get opportunity to make Gap hedge on PE side\.

__*Objective in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

Since, near Expiry of Current Week Options, if the Current Month Futures is trading at excessively high LTP than the Spot value, then it can be expected that the PE Option around 12noon on Expiry Day would experience rise in their Premium as they start following the Spot value \(*due to adjustments in the premium value of PE Options, as result of shifting to follow lower Spot value from higher Futures LTP*\)\.

Thus, such gap when arises on or near Expiry of relevant Options \(*i\.e\. on the day of the Expiry of such Option or a day before to their Expiry*\) between Futures and Spot, can be traded for a significant premium movement in the current Expiry PE Options, especially when such gap is formed in a downward market condition\. Such gap can be traded through a hedge strategy created on the PE side, called Gap Hedge Strategy \(PE side\)\.

This trading strategy can be executed for intraday or BTST, until the big gap persists \(*i\.e\. so long the Futures trades excessively higher than usual from the Spot*\) or Expiry of Current Week Options, whichever is earlier\.

__*Trade Position for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__:

- Long Deep ITM PE \(*which is expiring on same day Expiry / next day Expiry i\.e\. current week Expiry series*\)
- Short Deep ITM PE \(*which belongs to next week Expiry series*\) 

Long PE is initiated as the primary leg to get benefitted from the expected rise in the Premium value of PE Options \(*due to their shift in following Spot on Expiry day, which is trading on Expiry day much lower than the Futures*\)\. 

The Short PE is initiated as the hedged leg to cover the loss that may arise on the PE Long leg if the trend gets reversed on the bullish side \(and the underlying makes a big rise / gapup on Expiry day\)\.

__Significance of Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)__

__*Speciality of Strike Selection for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

It is a hedged Strategy to play special situations between the pricing of the Futures with respect to the Spot price\. The excessive high LTP in Futures than the Spot value offers a special opportunity to play PE Long for Current Expiry Options, as such PE Options would adjust themselves to match the Spot price \(*which is trading much lower than the Futures*\) and thus experience exponential rise in their premium value\. The profit potential is huge\.

Also, since it is a hegded Strategy, the possibility of opportunity to play PE Long on expiring Options is adequately secured to cover even the extreme bullish move in the underlying\.

__*Merits of Strike Selection for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

Since, it is a hedged Strategy, therefore, large quantity positions can be initiated, instead of naked Long PE \(*which might be very risky if trend reverses on the bullish side*\) or Short Futures \(*which would also require large capital on similar quantity*\)\.

It is a high probability trade, purely due to Options Behaviour applicable on Expiry day \(*i\.e\. the Current expiring Options would match the Spot for expiry*\)\. The profit margins are usually quite high\. Moreover, since, it is a hedged Strategy, therefore, it is a safe play\.

__Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\): Capital, Risk, Adjustment & Target__

__*Capital deployment in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

Since, this is a hedged Strategy and not so risky trade and loss in this Strategy is pre\-estimated and reasonable; and further even Counter Adjustments can be initiated in intraday to cover for loss on PE Long leg upon trend reversal on bullish side, therefore, this Strategy can be initiated with reasonable volumes \(*upto 50% of the total trading capital*\), subject to calculation of loss on this Strategy in absolute terms, before initiating this trade\. The loss amount in absolute terms should be reasonable and okay with respect to trader’s own risk appetite\.

__*Risk & Stop Loss in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__:

Risk is quite controlled in this Strategy, as it is adequately hedged with same strike ITM on Next Week Expiry PE Short positions\. Moreover, it is a Credit Spread and therefore, net positive Delta on this Strategy should adequately cover the loss generated on the PE Long leg due to extreme bullish move in the underlying, subject to rise in Volatility and the levels at which the underlying expires\. 

Further, if the trend appears to be reversing strongly on bullish side, convincingly on 30 min TF or Hrly TF in intraday, then Counter Adjustment positions \(*as explained below*\) can be initiated for intraday to secure the potential loss in this Strategy\.

__*Trade Adjustment in Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__:

If the trend in intraday completely reverses on the bullish side, then the loss situation on the Strategy  can also be avoided by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM PEs of next week/ Monthly Expiry series in quantity \(atleast 25% of the original quantity in the Strategy\) which would give additional premium credit on aggregate basis to cover for potential loss on PE Long leg by its Expiry; or
2. Initiate Long positions on Far OTM CEs of next week/ Monthly Expiry series in such quantity which will generate sufficient profit so as to cover for potential loss on PE Long leg by its Expiry\.

__*Target on Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

Target on this Strategy will depend upon the gap with which the Futures is trading with excessively high LTP before 12noon on Expiry Day, than Spot\. Higher the difference, higher the probability of profit due to adjustment of PE Long leg’s pricing as per Spot by Expiry\. 

Further, if the underlying moves slightly upward by end of Expiry day, so as to generate some profit on PE Short leg; and the PE Long leg gets benefitted due to price adjustments with Spot value, then sometimes even both legs can generate profit\.

__Strike Selection for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)__

__*Strike Selection for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__: 

Both Long & Short leg, should be of the same Strike level which must be of such major Resistance level upto which the market is not expected to rise by Expiry of the Long leg Options \(*thus, the Strike would be a deep ITM*\)\. Higher the Resistance level targeted for this Strategy \(*i\.e larger the distance from ATM*\), better & safer it is\.

Further, the Long PE \(*i\.e\. on current week Expiry*\) __must have lower premium value than the PE Short leg __\(*on same Strike, but of next week Expiry*\)\. Thus, the trade is a net Credit Calendar Spread\. However, if the big Gap between Futures and Spot exists, but the Long PE leg is not lower in its premium value than the PE Short leg as per the Options Chain, then no trading position should be initiated unless PE Long leg in current week Expiry starts becoming available at lesser premium than the PE Short on next week Expiry in the Options Chain\. Once, Options Chain starts showing that the PE Long is trading at a premium value lower than the PE short leg, then the trade is good for execution of Gap Hedge Strategy \(*on PE side*\)\.

__<start> *Example for Trading Gap Between Futures & Spot on Expiry Day \(where Futures is in excessive premium than Spot\)*__*: *

- *Nifty Spot: 17500*
- *Nifty Futures:  17610 \(i\.e\. unusually 110 point higher than Spot\)*
- *Major Resistance zone: 18200 Strike \(i\.e\. around 600 points higher than Spot & Futures\)*

- *Long PE 18200 \(current week Expiry\) at LTP of Rs\. X;*
- *Short PE 18200 \(next week Expiry\) at LTP of Rs\. \+X*

*Strike selection takes into account such large area from the current Spot & Futures value upto which the underlying is not expected to rise by Expiry which is maximum one day away \(if the trend reverses on the bullish side or due to some news etc\. the underlying rises significantly\)\. Thus, in the above example, 600 distant ITM PE Strike from the Spot & Futures value seems ideal as it at the major resistance zone and also offers large room for any untoward / unexpected exponential rise in the underlying\. *__<end>__

__Bullish trade involving buying  naked ITM CEs \(synthetic Futures\) on Expiry: Capital, Risk, Adjustment & Target__

__Capital deployment in buying  naked ITM CEs \(synthetic Futures\)__: 

Since, this is a risky trade \(*if the bullish trend, completely reverses on the bearish side*\), the capital deployment should be such quantity that even if 5\-10% capital deployed is eroded then also the overall loss amount is not significant\. Example: Synthetic CE buying with a total of Rs 1–2 Lakhs only, with stop loss of maximum 10% on the deployed capital \(i\.e\. Rs\. 10,000/\- to 20,000 loss maximum\)\.

__Risk & Stop Loss in this Long naked ITM CEs \(synthetic Futures\)__: 

It must be borne in mind that this trade is in naked Synthetic CE Options \(*which behaves like naked Futures trade*\)\. Usually on Expiry day, the movement in the underlying is very volatile\. Thus, if the underlying gets little sideways or mild bullish, then these Synthetic CE Long would not yield loss more than the Time Value comprised in the CEs at the time of initiating Long\. 

But the risk is if after initiating Long positions, the trend gets completely bearish with momentum, then on account of strong  bearish momentum, these naked Synthetic CEs would initially bleed like Futures \(*as these Synthetic CEs would have a Delta close to 1, on per Lot basis*\) thus generating substantial loss on these Long positions\. Thus, this trade should be initiated in reasonable volume \(*not on heavy volumes*\) and only when the bullish trend does not appear to reverse \(*watch out for strong resistances zones from where the bullish trend can reverse downwardly*\) and maintain strict stop loss \(*immediate exit on reversal candle on 10 min TF etc or upon technical signal on cessation of bullish trend on 10 min TF*\)\.

__Trade Adjustment in Long naked ITM CEs \(synthetic Futures\)__:

If the trend in intraday completely reverses on the bearish side, then the loss situation on Synthetic CEs can be avoided by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM CEs of next week/ Monthly Expiry series in such quantity which gives premium credit on aggregate basis higher than the premium paid for the Synthetic CE; or
2. Initiate Long positions on Far OTM PEs of next week/ Monthly Expiry series in such quantity which will make the net Delta position on the trade: net Delta negative, thus generating more profit on PEs from the fall in the underlying than the loss from the Synthetic CEs\.

__Target on this Long naked ITM CEs \(synthetic Futures\)__: 

As soon as the bullish momentum arrives and the trade is played through buying Synthetic CEs, it must be watched for on Futures as well as relevant CE Options Chart if the bullish trend appears to last or fizzle out\. If the bullish trend does not seem to last then as soon as there appears signals of cessation of bullish trend, then  whatever profit on the traded CE Options must be immediately booked\.

However, if the bullish trend seems to last basis Futures Chart as well as relevant CE Options Chart, then target should be to keep trailing the profit by revising the stop loss to ensure that the profit is not lost\. Better practice would be to keep booking decent profits and to trail the stop loss\.

If trade is allowed to continue during failing bullish trend or reversal towards bearish side for intraday, then such situations is capable of wiping all the profit generated on the trade within a few minutes and even generate huge loss if the trend suddenly reverses strongly on the bearish side, which usually is observed during Expiry days\. During Expiry day, the underlying usually makes very volatile move, therefore, upon first reversal signals on sideways to bearish side, this trade must be immediately exited \(*eg: if reversal signal is generated on 5min or 3 mins TF*\)\. 

Further, in the event of trend reversal on bearish side, loss situation on Synthetic CEs can be mitigated by initiating Counter Adjustment positions\.

__Bullish Trend on Expiry Day: through Naked Synthetic Futures __

__\(ITM CE\)__

__Requisite Technical Conditions for bullish momentum:__

If __bullish trend__ appears in intraday, which seems to last\.

If during the Expiry day, there appears some pattern / formation which indicates bullish trend in intraday \(*including those provided above*\), then such expected bullish trend can be played through Deep ITM CE having almost close to 100% Intrinsic Value, thus are Synthetic Futures \(__Synthetic CE Options__\)\.

__Objective in trading bullish momentum through Naked Synthetic Futures \(ITM CE\)__: 

In Expiry day, if bullish trend arrives \(*whether strong or mild*\), then such bullish trend can be played through Synthetic CE Options which are expiring the same day, as they have Delta value close to 1, per Lot basis \(*thus they behave like Futures*\), and are generally available as Near CE ITMs \(*especially after 12 noon*\) at relatively very low LTP value\. Thus, such Synthetic CE Options, which are available at relatively cheap buying price, can be used to play intraday bullish momentum on Expiry day instead of buying Futures \(*which require more capital*\) or instead of buying OTM CEs \(*which are subject to strong Expiry Theta decay*\)\.

Therefore, if arrival of strong bullish momentum is not very sure but trend is confirmed to be bullish in intraday and naked Option buying with low capital is the preferred choice, then on Expiry day, expected bullish trend can be played through Long Synthetic CE Options\.

This trading method can be executed for intraday scalping or trend following on Expiry day\.

__Strike Selection for trading bullish momentum through ITM CE \(synthetic Futures\)__: 

If momentum is expected to be super bullish \(*like: in case of upward Bollinger band blast on 10min TF or higher TF*\), then even Near ITM CE Strike \(*which are expiring same day*\) which is around 1\-2 Strike away from ATM can be bought, else in other cases even more deeper ITM CE which is 3\-4 Strike away from ATM should only be bought\.

However, if on Expiry day, the bullish momentum starts around 3pm \(*say, upper bollinger band blast on 10min TF or so*\), then ITM CE which is just one Strike in\-the\-money from ATM, should be bought\. Such ITM CE would be trading around 3pm at low LTP \(*Rs 45\-65 in Nifty; and about Rs 95\-115 in BankNifty*\)\. Such low premium ITM CE will have almost 99% Intrinsic Value around 3pm, and hence behave like Futures\. Thus, if strong momentum on the upside seems confirmed, then bullish momentum can be played through buying these ITMs in reasonable volumes to take advantage of Futures like movement from these ITM CEs i\.e\. Synthetic Futures\. This trade would therefore give advantage of buying reasonably high volumes of Synthetic Futures \(ITM CEs\) as compared to buying Futures, to derive the benefit of Futures movement for the upward momentum in the underlying\)\.

<a id="_Hlk160576270"></a>__Significance of this bullish trade involving buying  naked ITM CEs \(synthetic Futures\) on Expiry__

__Speciality of this trade __<a id="_Hlk160576297"></a>__involving trading bullish momentum through Naked Synthetic Futures \(ITM CE\)__: 

Such Synthetic CEs \(*expiring same day*\) which are not more than 2\-4 Strikes away from ATM, during the Expiry day are usually available at relatively low LTP, and thus can be used instead of Futures \(*which requires more capital*\)\. Therefore, with relatively low capital, large quantity of Synthetic CEs can be bought to play intraday bullish trend\. Thus, in this trade benefit of naked Futures buying can be derived through naked Long Synthetic CEs, even with relatively low capital\. 

Also, even if the bullish trend is not strong but mild, then also this naked Synthetic CE positions will be subject to minimum loss \(*as max loss in such situation will be limited to the extent of Time Value comprised in these Synthetic CEs at the time of initiating position*\)\.

__Options behaviour __<a id="_Hlk160576319"></a>__in this trade involving trading bullish momentum through Naked Synthetic Futures \(ITM CE\)__: 

In this trading method, Synthetic CEs \(*which are expiring same day*\)  usually have Delta close to 1 per Lot basis, thus such Synthetic CEs exhibit behaviour like that of Long Futures\. Thus, if bullish trend continues, then the trend would cause significant rise in the LTP of these Synthetic CEs in the same manner as if it is a naked Long Futures trade\. 

Further, since these Synthetic CEs have Intrinsic Value close to 100%, Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX, would be minimal on these CEs\.

Also, since these Synthetic CEs have Intrinsic Value close to 100%, therefore, the risk in initiating Long positions in these Synthetic CEs is to the extent of Time Value comprised in the final LTP of these Options on Expiry\. Therefore, if the bullish trend is mild or gets mild sideways, the max loss in these Long Synthetic CEs would be to the extent of Time Value comprised in the LTP at the time of initiating Long position in such Synthetic CEs\. 

But if the trend in intraday reverses towards bearish side, and the Synthetic CE starts shifting towards ATM / OTM, then these naked Synthetic CEs would initially bleed like Futures \(*as these Synthetic CEs would have a Delta close to 1, on per Lot basis*\); but as the bearish reversal would continue the quantum of loss generation will keep getting slowing down due to shifting of these Synthetic CEs from higher Delta towards lower Delta\. 

__Merits of this trade involving trading bullish momentum through Naked Synthetic Futures \(ITM CE\)__: 

Large quantity Long positions can be initiated with very less capital, instead of Long Futures \(*which would require large capital on similar quantity*\), without compromising on the effect of Futures Long to play bullish trend for intraday on Expiry day\. 

Further, since these Synthetic Futures \(CEs\) have Intrinsic Value close to 100%, Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX, is minimal on these CEs\.

Also, playing strong bullish momentum through naked Synthetic Futures \(CEs\) has unlimited upside profit potential  but limited downside risk \(max risk will be limited to the extent of premium paid on Long CEs\), instead of playing through naked Long Futures \(*which offers unlimited downside risk upon trend reversal on bearish side, besides huge margin requirements & MTM*\)\.

__Bearish trade involving buying  naked ITM PEs \(synthetic Futures\) on Expiry: Capital, Risk, Adjustment & Target__

__Capital deployment in Long naked ITM PEs \(synthetic Futures\)__: 

Since, this is a risky trade \(*if the bearish trend, completely reverses on the bullish side*\), the capital deployment should be such quantity that even if 5\-10% capital deployed is eroded then also the overall loss amount is not significant\. Example: Synthetic PE buying with a total of Rs 100,000/\- only, with stop loss of maximum 10% on the deployed capital \(i\.e\. Rs\. 10,000/\- to 20,000 loss maximum\)\.

__Risk & Stop Loss in this Long naked ITM PEs \(synthetic Futures\)__: 

It must be borne in mind that this trade is in naked Synthetic PE Options \(*which behaves like naked Futures trade*\)\. Usually on Expiry day, the movement in the underlying is very volatile\. Thus, if the underlying gets little sideways or mild bearish, then these Synthetic PE Long would not yield loss more than the Time Value comprised in the PEs at the time of initiating Long\. 

But the risk is if after initiating Long positions, the trend gets completely bullish with momentum, then on account of strong  bullish momentum, these naked Synthetic PEs would initially bleed like Futures \(*as these Synthetic PEs would have a Delta close to 1, on per Lot basis*\) thus generating substantial loss on these Long positions\. Thus, this trade should be initiated in reasonable volume \(*not on heavy volumes*\) and only when the bearish trend does not appear to reverse \(*watch out for strong support zones from where the bearish trend can reverse upwardly*\) and maintain strict stop loss \(*immediate exit on reversal candle on 10 min TF or upon technical signal on cessation of bearish trend on 10 min TF*\)\.

__Trade Adjustment in Long naked ITM PEs \(synthetic Futures\)__:

If the trend in intraday completely reverses on the bullish side, then the loss situation on Synthetic PEs can be avoided by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM PEs of next week/ Monthly Expiry series in such quantity which gives premium credit on aggregate basis higher than the premium paid for the Synthetic PE; or
2. Initiate Long positions on Far OTM CEs of next week/ Monthly Expiry series in such quantity which will make the net Delta position on the trade: net Delta positive, thus generating more profit on CEs from the bullish trend in the underlying than loss generated from the Synthetic PEs\.

__Target on this Long naked ITM PEs \(synthetic Futures\)__: 

As soon as the bearish momentum arrives and the trade is played through buying Synthetic PEs, it must be watched for on Futures as well as relevant PE Options Chart if the bearish trend appears to last or fizzle out\. If the bearish trend does not seem to last then as soon as there appears signals of cessation of bearish trend, then  whatever profit on the traded PE Options must be immediately booked\.

However, if the bearish trend seems to last basis Futures Chart as well as relevant PE options Chart, then target should be to keep trailing the profit by revising the stop loss to ensure that the profit is not lost\. Better practice would be to keep booking decent profits and to trail the stop loss\.

If trade is allowed to continue during failing bearish trend or reversal towards bullish side for intraday, then such situations is capable of wiping all the profit generated on the trade within a few minutes and even generate huge loss if the trend suddenly reverses strongly on the bullish side, which usually is observed during Expiry days\. During Expiry day, the underlying usually makes very volatile move, therefore, upon first reversal signals on sideways to bullish side, this trade must be immediately exited \(*eg: if reversal signal is generated on 5min or 3 mins TF*\)\.

Further, in the event of trend reversal on bullish side, loss situation on Synthetic PEs can be mitigated by initiating Counter Adjustment positions\.

__Bearish Trend on Expiry Day: through Naked Synthetic Futures __

__\(ITM PE\)__

__Requisite Technical Conditions for bearish momentum:__

If __bearish trend__ appears in intraday, which seems to last\.

If during the Expiry day, there appears some pattern / formation which indicates bearish trend in intraday \(*including those provided above*\), then such expected momentum  bearish trend can be played through Deep ITM PE having almost close to 100% Intrinsic Value, thus are Synthetic Futures \(__Synthetic PE Options__\)\. 

__Objective in trading bearish momentum through Naked Synthetic Futures \(ITM PE\)__: 

In Expiry day, if bearish trend  arrives \(*whether strong or mild*\), then such bearish trend can be played through Synthetic PE Options which are expiring the same day, as they have Delta value close to 1, per Lot basis \(*thus they behave like Futures*\), and are generally available as Near PE ITMs \(*especially after 12 noon*\) at relatively very low LTP value\. Thus, such Synthetic PE Options, which are available at relatively cheap buying price, can be used to play intraday bearish momentum on Expiry day instead of selling Futures \(*which require more capital*\) or instead of buying OTM PEs \(*which are subject to strong Expiry Theta decay*\)\.

Therefore, if arrival of strong bearish momentum is not very sure but trend is confirmed to be bearish in intraday and naked Option buying with low capital is the preferred choice, then on Expiry day, expected bearish trend can be played through Long Synthetic PE Options\.

__Strike Selection in trading bearish momentum through Naked Synthetic Futures \(ITM PE\)__: 

If momentum is expected to be super bearish \(*like: in case of downward bollinger band blast on 10min TF or higher TF*\), then even Near ITM PE Strike \(*which are expiring same day*\) which is around 1\-2 Strike away from ATM can be bought, else in other cases even more deeper ITM PE which is 3\-4 Strike away from ATM should only be bought\.

However, if on Expiry day, the bearish momentum starts around 3pm \(*say, lower bollinger band blast on 10min TF or so*\), then ITM PE which is just one Strike in\-the\-money from ATM, should be bought\. Such ITM PE would be trading around 3pm at low LTP \(*Rs 45\-65 in Nifty; and about Rs 95\-115 in BankNifty*\)\. Such low premium ITM PE will have almost 99% Intrinsic Value around 3pm, and hence behave like Futures\. Thus, if strong momentum on the downside seems confirmed, then bearish momentum can be played through buying these ITMs in reasonable volumes to take advantage of Futures like movement from these ITM PEs i\.e\. Synthetic Futures\. This trade would therefore give advantage of buying reasonably high volumes of Synthetic Futures \(ITM PEs\) as compared to Shorting Futures, to derive the benefit of Futures movement for the downward momentum in the underlying\)\.

__Significance of this bearish trade involving buying  naked ITM PEs \(synthetic Futures\) on Expiry__

__Speciality of this trade involving trading bearish momentum through Naked Synthetic Futures \(ITM PE\)__: 

Such Synthetic PEs \(*expiring same day*\) which are not more than 2\-4 Strikes away from ATM, during the Expiry day are usually available at relatively low LTP, and thus can be used instead of Futures \(*which requires more capital*\)\. Therefore, with relatively low capital, large quantity of Synthetic PEs can be bought to play intraday bearish trend\. Thus, in this trade benefit of naked Futures selling can be derived through naked Long Synthetic PEs, even with relatively low capital\.

Also, even if the bearish trend is not strong but mild, then also this naked Synthetic PE positions will be subject to minimum loss \(*as max loss in such situation will be limited to the extent of Time Value comprised in these Synthetic PEs at the time of initiating position*\)

__Options behaviour in this trade involving trading bearish momentum through Naked Synthetic Futures \(ITM PE\)__: 

In this trading method, Synthetic PEs \(*which are expiring same day*\)  usually have Delta close to 1 per Lot basis, thus such Synthetic PEs exhibit behaviour like that of Short Futures\. Thus, if bearish trend continues, then the trend would cause significant rise in the LTP of these Synthetic PEs in the same manner as if it is a naked Short Futures trade\. 

Further, since these Synthetic PEs have Intrinsic Value close to 100%, Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX, would be minimal on these PEs\.

Also, since these Synthetic PEs have Intrinsic Value close to 100%, therefore, the risk in initiating Long positions in these Synthetic PEs is to the extent of Time Value comprised in the final LTP of these Options on Expiry\. Therefore, if the bearish trend is mild or gets mild sideways, the max loss in these Long Synthetic PEs would be to the extent of Time Value comprised in the LTP at the time of initiating Long position in such Synthetic PEs\. 

But if the trend in intraday reverses towards bullish side, and the Synthetic PE starts shifting towards ATM / OTM, then these naked Synthetic PEs would initially bleed like Futures \(*as these Synthetic PEs would have a Delta close to 1, on per Lot basis*\); but as the bullish reversal would continue the quantum of loss generation will keep getting slowing down due to shifting of these Synthetic PEs from higher Delta towards lower Delta\. 

__Merits of this trade involving trading bearish momentum through Naked Synthetic Futures \(ITM PE\)__:

 Large quantity Long positions can be initiated with very less capital, instead of Short Futures \(*which would require large capital on similar quantity*\), without compromising on the effect of Futures Short to play bearish trend for intraday on Expiry day\. 

Further, since these Synthetic Futures \(PEs\) have Intrinsic Value close to 100%, Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX, is minimal on these PEs\.

Also, playing strong bearish momentum through naked Synthetic Futures \(PEs\) has  unlimited downside profit potential  but limited upside risk \(max risk will be limited to the extent of premium paid on Long PEs\), instead of playing through naked Short Futures \(*which offers unlimited upside risk upon trend reversal on bullish side, besides huge margin requirements & MTM*\)\.

__Profit & Loss situation in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__

__*Max Loss in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day*:__

If the momentum does not arrive as expected or the day remains rangebound, then in this Strategy, the max loss shall be equal to the net premium incurred on this Strategy, if the positions are held till the close of trading session on Expiry day\. In this Strategy, the Near OTMs on Long leg are lesser in quantity than the Far OTMs on the Short leg\. Near OTMs are on relatively higher premium value than the Far OTMs of that side Options\. Taking slightly higher quantity of Far OTMs on the Short leg, helps to get almost same value of premium credits on the Short leg which  matches almost with the premium debit incurred on the Long leg, thus making both CE & PE side legs with no much premium debit situation, which in turn keeps the max loss under check and extremely low\. The max loss, from Expiry perspective, to the extent of net premium debit incurred on this Strategy, on aggregate basis on both sides, if any\. Since, the max loss situation on this Strategy can be pre\-defined and ascertained, basis the premium debit on the Long leg and the premium credit received on the Short leg, therefore, the max loss on this Strategy can be accordingly pre\-defined, and this aspect of pre\-defined max loss helps to take a defined volume as per one’s risk profile by a trader\.

Further, if there arises a super bullish/bearish momentum of about more than 800 points in BankNifty in intraday, then also this Strategy may yield loss situation because strong momentum may cause the Short leg to rise in premium value exponentially; and since the quantity is higher on the Short leg \(*whether CE side or PE side as the case may be*\) therefore super strong momentum on either side would yield more loss on the Short leg than the profit on the Long leg\. This situation of super strong lasting momentum of about more than 800 points in intraday, may also result in yielding loss on the Strategy, which ofcourse cannot be pre\-quantified, as it will depend on the rise/fall in VIX and the strength and extent of the momentum, besides the quantity/volume of trading positions \(leading to tangible Gamma effect\)\.

__*Time of Initiating Half\-Diagonal \(non\-directional\) Strategy for Expiry Day*:__

This Strategy should be implemented only after 9\.30 am i\.e\. after 15mins of opening of the market on the Expiry day \(i\.e\. *on Friday, because weekly BankNifty Options expire on Friday*\)\.

Between 9\.15\-9\.30am, the market usually makes a huge volatile move and so does India VIX \(*which impacts the premium of expiring Options*\), thus, it is not advisable to initiate this Strategy immediately upon opening of the market on the Expiry day\. Once, the premium of same day expiring Options, settles down around 9\.30am, that one should be ready with the Strikes on which Long & Short need to be initiated, and using the Basket Order, all 4 legs of the Strategy can be initiated with one click\.

After initiating the Strategy between 9\.30\-9\.40 am, we can expect a momentum to arrive on either side by 12noon at the maximum\. 

__*Profit / Loss in Half\-Diagonal \(non\-directional\) Strategy, by 12 noon Rule of Expiry Day*__:

If the Strategy has been implemented between 9\.30\-9\.40am, and the momentum arrives in either direction by this 12 noon, then the profit must be immediately booked as soon as there is 30\-50 points profit on per Lot basis, then this Strategy with all its 4 legs must be exited booking the profit generated\. Booking profit quickly before momentum has ceased/ reversed, is the safest and best approach in this trade\.

However, in the aforesaid trade of 9\.30am, the momentum does not arrive by 12 noon, then this Strategy with all its 4 legs must be exited booking whatever minor profit/loss\. 

While, net premium loss situation on per Lot basis on the trade positions would be significantly low, but with large quantities it may be a significant amount on aggregate basis\. Thus, it is advisable to not hold the trade till close of day on Expiry, but to exit when the wave of momentum as expected to arrive does not arrive within the targeted time range\.

__*Re\-entry in Half\-Diagonal \(non\-directional\) Strategy,  after 12 noon on Expiry Day & Exit*__:

If the momentum failed to arrive by 12 noon, then this Strategy can again be implemented for an expected momentum after 1pm in intraday, selecting the Long & Short Strikes basis the then prevalent ATM Strike \(as per the prevalent VIX, for Strike selection\)\. Further, this Strategy can also again be implemented between 1pm to 2pm \(even if the profit was already booked in the 9\.30am trade\), if there appears to be an opportunity on technical analysis basis or on the Chart of the BankNifty Spot/Futures for the arrival of momentum on either direction\.

Now, after the Strategy is again implemented around 1pm, and the momentum arrives in either direction, then the profit must be immediately booked as soon as there is 30\-50 points per Lot profit, then this Strategy with all its 4 legs must be exited booking the profit generated\. Booking profit quickly before momentum has ceased/ reversed, is the safest and best approach in this trade\.

However, in the aforesaid trade of 1pm, the momentum does not arrive by 2pm, then this Strategy with all its 4 legs must be exited booking whatever minor profit/loss\. However, if the second fresh trade was initiated around 2pm basis technical analysis/Chart reading, and the momentum fails to arrive by 2\.45pm, then this Strategy with all its 4 legs must be exited booking whatever minor profit/loss\.

__NON\-DIRECTIONAL, HALF\-DIAGONAL EXPIRY DAY TRADE__

For playing intraday momentum on Expiry day, a non\-directional & half\-diagonal hedged trade can be implemented\. This trade Strategy is for intraday only and to be played on Expiry day exclusively\. On Expiry day, the underlying \(especially in Indices\) is very volatile and it takes big swings during Intraday sometimes on both directions\. Thus, this Strategy has been devised focussing the aforesaid aspect, i\.e\. of playing the momentum that   may arise on Expiry day on any side, rather than to chase the momentum of any particular direction\. This Strategy offers good probability to make profits, if the Expiry day gets trending on one side significantly\. However, if the underlying on Expiry day remains rangebound then this Strategy may yield some minor pre\-calculated defined loss\. 

Thus, keeping the aforesaid factors in mind \(and to avoid the physical delivery risk in Stock Options\), this Strategy has been designed as a hedged non\-directional Strategy, to be played through BankNifty Options \(*which are expiring on that day of Expiry*\), and this Strategy is to be played during a certain time on Expiry day for profit; but if the profit does not arise then we should exit booking loss on the Strategy \(which is usually not very significant\)\. A detailed explanation on various aspects of this Strategy is discussed below\. 

__Technical Conditions for considering Half\-Diagonal \(non\-directional\) Strategy for Expiry Day:__

This Strategy is non\-directional, hence no fixed technical pattern is required to be followed\. Except that it must be ensured that any time before or after this Strategy is implemented, there appears any pattern/ technical signal which indicates that the Expiry may be within a tight range in Intraday, then this Strategy should not be executed \(or if already initiated, then must be immediately exited booking whatever minor loss\)\.

Thus, this Strategy is based on the expectation that there would arrive a strong momentum on either side \(*upward or downward*\) soon during the Expiry day\.  

In order to capture the benefit of volatility & momentum of Expiry day, BankNifty Current Week Expiring Options are selected to implement this Strategy, as BankNifty is a very volatile Index in itself and on Intraday normally makes a move of about 200 points on either direction\. Such a move in intraday on Expiry day when arrives with momentum, then the Strategy can generate profits in a very short span of time\.

__Objective in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__: 

On Expiry day, if __bullish strong momentum arrives__, then very near CE OTM which are expiring the same day \(generally have relatively low LTPs\),  can exponentially rise in its LTP value within a very short span of few minutes, generating sometimes more than 100% profit on the capital deployed on such CE OTM\.

Likewise, on Expiry day, if __bearish strong momentum arrives__, then very near PE OTM which are expiring the same day \(generally have very low LTPs\),  can exponentially rise in its LTP value within a very short span of few minutes, generating sometimes more than 100% profit on the capital deployed on such OTM PEs\.

Thus, trading positions in this Strategy are initiated on both Near OTM CEs and  Near OTM PEs, with the objective to catch profit as the premium of these OTMs exponentially rise due to bullish / bearish momentum \(*as aforesaid*\), within a span of few minutes without waiting for these Strikes to become ITM unless the momentum is super strong and appears to continue \(*else the premium of these OTMs would immediately fall back as soon as the momentum takes a pause*\)\. Thus, this way this Strategy is designed & constructed as a non\-directional Strategy for intraday on Expiry day\. However, a substantial profit in this Strategy would be generated if there is atleast about 200 points swift move in either direction in BankNifty, and the profit must be booked while the momentum is ongoing\.

__Options Behaviour in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__

In this trading Strategy, Near OTM CEs & PEs \(*which are expiring same day*\)  usually have very low and falling Delta as they are OTMs and are expected to expire worthless in intraday if they continue as an OTM\. But if a strong momentum arrives \(i\.e\. upward momentum favouring CEs or downward momentum favouring PEs\), then the arrival of momentum immediately adds Time Value to the LTP of these expiring OTMs, thereby causing significant rise in the LTP of these Near OTMs\.

Further, if the momentum survives and continues then it may even cause relevant  Near OTMs to become an ITM, thereby raising the Delta value of these Near OTMs by virtue of they becoming ITMs, and accordingly causing significant rise in the LTPs of such Options as the momentum further continues\.

The Options behaviour of Expiry day is the key for the success rate in this Strategy\. In accordance with the said Options behaviour, while the Long leg may get benefitted due to arrival on momentum favouring the relevant Near OTMs, the Far OTMs even though  higher in number on the Short leg of that side Option would not exhibit rise in their premium value with the same speed as compared to the relevant Near Options\. This phenomenon is typically observed on Expiry day, because the momentum on Expiry day impacts the Near OTMs, but not the Far OTMs\. Thus, even though we keep higher number of Far OTMs on the Short leg, this Strategy would remain profitable, if the momentum in intraday is within a range of about 800 points swing of BankNifty Spot\. 

__Half\-Diagonal \(non\-directional\) Strategy for Expiry Day: Capital, Risk, Adjustment & Target__

__Capital deployment in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__: 

This is a high probability profit trade/ Strategy, hence, you may consider deploying substantial quantity, like about 900 quantity on Long legs and about 1200\-1500 qty on Short leg\. For margin reduction, the abovementioned process/technique can be implemented, which will help optimise the capital deployment on this Strategy\.

__Profit Target in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__:

Generally speaking a profit of about 30\-50 points per Lot, on the quantity deployed, can be a reasonable profit on this trade\. However, if there appears on the Chart that there is a strong possibility of the momentum to continue \(and there is no strong resistance on the Chart of that relevant Option as well as on the Chart of the Spot\), then the target \(point\-wise on per Lot basis\) can be further increased\.

__Stop Loss in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day:__

However, as already mentioned if the BankNifty Spot appears in intraday to have become rangebound or is expected to remain rangebound then the Strategy should not be implemented, or if already implemented then it must be exited with whatever minor profit/loss, as the case may be\.

Also, if after the Strategy is implemented at 9\.30am, there does not arise momentum in either direction by 12 noon, then too this Strategy must be exited with whatever minor profit/loss, as the case may be\. Likewise, if the Strategy was initiated at around 1pm, and there does not arise momentum in either direction by 2pm to 2\.15pm, then too this Strategy must be exited with whatever minor profit/loss, as the case may be\.

__Risk & Adjustment in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day:__

If in intraday, the momentum in any one direction becomes strong, such that Far OTMs on Short leg appears to become ATM or ITM, then by virtue of they being on higher number on the Short leg, this Strategy may start posing loss\. In such event, the quantity on the Long leg must be immediately increased to match the quantity on the Short leg of that side Options where the momentum has arrived \(while the other side Options can be booked if showing some profit or left as such\)\.

__Margin Requirement in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day: __

Extra Lots on the Short leg taken increases the margin requirement on this trade\. The margin can be reduced by buying same day Expiry Far OTM CEs & PEs \(with very nominal premium of Rs 1\-2\) against the extra Lots on the Short leg\.

__Speciality of Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__: 

This is a very high profit probability trade, because usually, BankNifty Index makes a sudden 200 or points move in either direction with strong momentum, on an Expiry day\. Hence, this Strategy can be initiated with good quantity, like 900 qty on Long leg\.

Trade positions can be initiated with relatively very low capital on Expiry day, because the premiums of the expiring Options are available at a very low premium on Expiry day\.

Thus, this Strategy offers an opportunity to make decent returns in a few minutes with a very low capital deployment\. Moreover, the Strategy is non\-directional, we do not have to bet on the direction of the underlying\. If the underlying moves with a gush of momentum on either side, the Strategy would quickly generate profits \(*which must be quickly booked, as the profits may disappear if the momentum ceases or reverses*\)\.

__Strike Selection in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day__

__*Half\-diagonal, Hedged Strategy, for Expiry Day*__:

Besides, having non\-directional positions through Longs in near OTM CEs and Near OTM PEs \(in equal quantities\), this Strategy is implemented as a  hedged Strategy by adding Short positions in Far OTM CEs & PEs\. However, Short positions on  Far OTMs are slightly more than the quantity as that of the Long positions, thus making this Strategy as a half\-diagonal Strategy\. The quantities of Short positions on Far OTM CEs & Far OTM PEs, would in equal quantities\.

__<start> For example__:

- Long Near OTM CEs 10 Lots
- Short Far OTM CEs 12\-14 Lots
- Long Near OTM PEs 10 Lots
- Short Far OTM PEs 12\-14 Lots

If we expect the momentum to be strong in any either direction, then we will keep 12 Lots on Short leg \(instead of 14 Lots\) in above example\. But if we expect the momentum to be not very strong  in any either direction, then we can keep 14 Lots on Short leg \(instead of 12 Lots\) in above example\.   All the Long & Short positions, must be of same day expiring Options of BankNifty\. __<end>__

__*Strike Selection in Half\-Diagonal \(non\-directional\) Strategy for Expiry Day*__:

When VIX is between 11\-14 range, then Near OTM CEs & PEs Strike which is 3 Strike away from ATM can be bought, in equal quantities\. Such Near OTMs would be available usually at a premium value of Rs\. 40\-60 per Lot\. Further, Far OTM CEs & PEs, which are 2 Strike away from the Options on which Longs have been initiated need to be Short\. 

As mentioned above, both the Short legs will have quantities which are slightly higher than half the quantity on a particular Long leg\. 

<__start__> For example, if BankNifty ATM Strike is at 33,000, then the following positions can be initiated for this Strategy:

- Long BankNifty CE 33,300 10 Lots
- Short BankNifty CE 33,500 12\-14 Lots
- Long BankNifty PE 32,700 10 Lots
- Short BankNifty PE 32,500 12\-14 Lots <__end__>

However, when VIX is between 15\-18 range, then Near OTM CEs & PEs Strike which is 5 Strike away from ATM can be bought, in equal quantities\. Such Near OTMs would be available usually at a premium value of Rs\. 110\-120 per Lot\. Further, Far OTM CEs & PEs, which are 3 Strike away from the Options on which Longs have been initiated need to be Short\. As mentioned above, both the Short legs will have quantities which are slightly higher than half the quantity on a particular Long leg\. 

- Long BankNifty CE 33,500 4 Lots
- Short BankNifty CE 33,800 6\-7 Lots
- Long BankNifty PE 32,500 4 Lots
- Short BankNifty PE 32,200 6\-7 Lots <__end__>

__Futures Hedge \(bearish momentum\) Strategy: Capital, Risk, Adjustment & Target__

__Capital deployment in Futures Hedge \(bearish momentum\) Strategy__: 

Since, this is a hedged Strategy and not so risky trade and max loss in this Strategy is pre\-defined and minimal; and further even Counter Adjustments can be initiated in intraday to cover for max loss upon trend reversal on bullish side, therefore, this Strategy can be initiated with reasonable volumes \(*upto 50% of the total trading capital*\), subject to calculation of max loss on this Strategy in absolute terms, before initiating this trade\. Max loss amount in absolute terms should be reasonable and okay with respect to trader’s own risk appetite\.

__Risk & Stop Loss in this Futures Hedge \(bearish momentum\) Strategy__:

Risk is minimal in this Strategy, and the max loss is limited to the extent of Time Value comprised in the ITM CE at the time initiating Long positions on ITM CE\.

Further, if instead of Short Futures, __Long__ __Synthetic Futures __\(i\.e\. buying Deep ITM PE with almost 100% Intrinsic Value\) is used, then any Time Value in such Synthetic Futures will add up towards the max loss besides the Time Value comprised in the ITM CE\.

Further, if the trend appears to be reversing on bullish side, convincingly on 30 min TF or Hrly TF, then either this Strategy can be exited by taking a stop loss \(before max loss situation occurs on this Strategy\); or Counter Adjustment positions \(*as explained below*\) can be initiated for intraday\.

__Trade Adjustment in Futures Hedge \(bearish momentum\) Strategy__:

If the trend in intraday completely reverses on the bullish side, then the max loss situation can also be avoided in this Strategy by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM PEs of next week/ Monthly Expiry series in such quantity which gives premium credit on aggregate basis atleast equivalent to the Time Value in ITM CEs on aggregate basis, or more; or
2. Initiate Long positions on Far OTM CEs of next week/ Monthly Expiry series in such quantity which will generate sufficient profit so as to cover the max loss situation on this Futures Hedge Strategy \(CE side\)\.

__Target on this Futures Hedge \(bearish momentum\) Strategy__: 

As soon as the bearish momentum arrives and the trade is played through Futures Hedge \(*on CE side*\), it must be watched for on Futures Chart if the bearish trend appears to last or fizzle out\. If the bearish trend does not seem to last then as soon as there appears signals of reversal of bearish trend on bullish side, then  whatever profit on the Strategy is available, such profit must be immediately booked\.

However, if the bearish trend seems to last basis Futures Chart, then target should be to keep trailing the profit by revising the stop loss to ensure that the profit is not lost\. Better practice would be to keep booking decent profits and to trail the stop loss\.

In this Strategy even if trade is allowed to continue during failing bearish trend or reversal towards bullish side for intraday, then even such situation is not capable of generating loss beyond pre\-calculated max loss situation\. Further, in the event of trend reversal on bullish side, max loss situation can be mitigated by initiating Counter Adjustment positions\.

__Futures Hedge on Expiry Day, With Minimal Risk, for Bearish Momentum__

__Requisite Technical Conditions for Bearish Momentum:__

If during the Expiry day, there appears some pattern / formation which indicates bearish trend in intraday \(*including those provided above*\), then such expected bearish trend can be played through Futures Hedge Strategy \(C*E side*\)\. 

__Objective in Futures Hedge \(bearish momentum\) Strategy__: 

In Expiry day, if bearish trend arrives \(*whether strong or mild*\), then such bearish trend can be played through Futures Hedge Strategy \(*using ITM CE, which is expiring the same day\)\. *

On Expiry day, even Near ITM CEs \(*2\-3 Strikes away from ATM*\) are available with extremely low Time Value \(*especially after 12 noon*\)\. 

Thus, such Futures Hedge Strategy \(*using Current Month Futures and same day expiring Near ITM CEs, which has very low Time Value\), can be employed to play the expected bearish trend for intraday on Expiry Day, as the maximum loss on this Strategy would be very minimal, limited to the maximum extent of the Time Value comprised in the ITM CEs\. *

On Expiry day, such Futures Hedge can be used to play intraday bearish trend on Expiry day instead of employing naked Short Futures or Long PEs, as the overall risk in this Strategy is extremely low, even if the trend completely reverses on the bullish side with strong momentum or gets sideways / volatile in intraday\.

Further, this hedged Strategy can be deployed in good volumes, as this Strategy does not require huge capital\.

This trading Strategy can be executed for intraday bearish trend following on Expiry day\. Continuous bearish intraday trend is a must for profit in this trade\.

__Trade Position in Futures Hedge \(bearish momentum\) Strategy__:

- Short Futures \(Current Month\)
- Long Near ITM CE \(*with 80% Intrinsic Value*\), expiring same day 

Such Near ITM CE would be available with 2\-3 Strike distance from ATM, and will have minimal Time Value in absolute terms \(*which will be the amount of risk, per Lot basis*\)\.

Both legs would have equal quantity\.

Further, instead of Short Futures, __Long__ __Synthetic Futures__ __\(i\.e\. buying Deep ITM PE with almost 100% Intrinsic Value\)__ can also be used\. Use of such Synthetic Futures will save the Strategy from MTM requirements in the event of reversal of trend on bullish side\. 

__Significance of Futures Hedge \(bearish momentum\) Strategy__

__Strike Selection in Futures Hedge \(bearish momentum\) Strategy__: 

Near ITM CE should be such which has a reasonable Time Value, so as to control the overall max loss situation on the Strategy\.

*<*__start__*> Example: In BankNifty Options, if Near ITM CE has Time Value of 20 points, then per Lot basis max loss in this Futures Hedge Strategy would be 25 \(BankNifty Lot size\) x 20 \(Time Value of Near ITM PE\) = Rs 500 per Lot\.*

*Accordingly, if Futures Hedge is executed in 4 Lots, using 4 Lots of Short BankNifty Futures & 4 Lots of Long Near ITM CE \(having 20 points Time Value in each Lot\), then max loss on this Strategy would be Rs\. 2000/\-*\.

*Note: BankNifty’s F&O Lot size used to be 25, which has been changed to 15 with effect from July 2023\. While discussing this Strategy, we have used erstwhile BankNifty with Lot size of 25\. * *<*__end__*>*

If, however instead of Short Futures, __Long__ __Synthetic Futures __\(i\.e\. buying Deep ITM PE with almost 100% Intrinsic Value\) is used, then any Time Value in such Synthetic Futures will add up towards the max loss besides the Time Value comprised in the ITM CE\.

It must be noted that higher Time Value in ITM CE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bearish move in the underlying in the intraday*\)\. And if the Time Value in ITM CE leg is kept low then the max loss on the trade would also be low, but the breakeven for profit would get longer \(*requiring much longer bearish move in the underlying in the intraday*\)\.

Accordingly, if the long & strong bearish trend is confirmed during the Expiry day, then ITM CE Strike with higher Time Value can be selected \(*such ITM CEs would be those which are towards ATM*\)\. But if the bearishness of the trend is not very sure, then relatively deeper ITM CE with lesser Time Value can be selected \(*in which case the max loss would be lesser*\), but in such case profit will be generated only when the bearish move is much longer\.

__Speciality of this Futures Hedge \(bearish momentum\) Strategy__: 

It is a hedged Strategy with pre\-defined max loss\. In this Strategy, the max loss can be pre\-decided \(*basis the Time Value in the Near ITM CE, as explained above*\), and this trade can be implemented to play expected bearish trend without feeling concerned for reversal\.  Because, even if the trend gets completely reversed on the bullish side with strong momentum, the max loss is pre\-calculated and known in this Strategy\.

Moreover, since it is a hegded Strategy, the margin requirement is low\.

Further, instead of Short Futures, Synthetic Futures \(Deep ITM PE with almost 100% Intrinsic Value\) can also be used, which will not subject the Strategy towards any MTM requirements in the event of trend reversal on bullish side\.

It is a complete peace of mind Strategy to play bearish trend for the intraday on Expiry day, where max loss is in full control and pre\-defined\.

__Options behaviour in Futures Hedge \(bearish momentum\) Strategy__: 

In this trading method, Futures Short leg has Delta value of 1, per Lot basis; while Near ITM CE with minimum Time Value would have a Delta value close to 0\.8

Further, instead of Short Futures, if Long Synthetic Futures \(i\.e buying Deep ITM PE with almost 100% Intrinsic Value\) is used, even then the Delta value of such Synthetic Futures \(deep ITM PE\) would be close to 1, and would therefore, behave exactly like Futures  Short position\.

Thus, if the bearish trend continues with momentum, then this Futures Hedge Strategy would give huge profit, as the Futures Short leg being on higher Delta would keep generating profit as the bearish trend continues; but Near ITM CE would generate loss and due to underlying being bearish, ITM CE would soon get shifted towards OTM  and would therefore generate lesser loss \(*due to shift of Near ITM CE towards OTM i\.e\. from higher Delta to lower Delta*\)\. Therefore, if bearish trend continues with momentum then Futures Short leg would generate more profit with continued downtrend, but CE leg would keep generating lesser losses with continuation of bearish trend\. Thus, this Strategy offers unlimited profit on the downside\.

However, if after initiating the trade, the underlying gets sideways or even super bullish, the Futures Short leg would generate loss \(@ Delta value of 1\), but ITM CE would start getting deeper & deeper ITM \(*thereby getting shifted to higher positive Delta\)\. *If bullish move keeps continuing with strong momentum then CE would soon become Synthetic Futures \(CE\) thereby behaving like Futures Long position\. Thus, at no point in time there will be loss incurred on this Strategy beyond the pre\-calculated max loss which is limited to the extent of Time Value comprised in buying price of the Near ITM CE leg at the time of initiating Long CE\. Thus, this Strategy offer limited upside risk\. 

However, higher Time Value in ITM CE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bearish move in the underlying in the intraday*\)\. And if the Time Value in ITM CE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bearish move in the underlying in the intraday*\)\.

Further, since primary leg on this Strategy is Futures Short, therefore,  there will be no Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX on the primary leg\. 

__Merits of this Futures Hedge \(bearish momentum\) Strategy__: 

Large quantity positions can be initiated with very less capital, instead of naked Short Futures \(*which would require large capital on similar quantity*\) or naked PE Long, with pre\-defined max loss even in extreme situation / reversals\.

Trade plan can be devised in this Strategy by keeping max loss situation at the pre\-calculated optimum levels\.

MTM requirements on this Strategy can be avoided by using Synthetic Futures \(*i\.e\. deep ITM PE with 100% Intrinsic Value*\) instead of Short Futures for the primary leg\.

This Strategy offers unlimited profit potential on the downside and limited upside risk\.

__Futures Hedge \(bullish momentum\) Strategy for Expiry Day: Capital, Risk, Adjustment & Target__

__Capital deployment in Futures Hedge \(bullish momentum\) Strategy__: 

Since, this is a hedged Strategy and not so risky trade and max loss in this Strategy is pre\-defined and minimal; and further even Counter Adjustments can be initiated in intraday to cover for max loss upon trend reversal on bearish side, therefore, this Strategy can be initiated with reasonable volumes \(*upto 50% of the total trading capital*\), subject to calculation of max loss on this Strategy in absolute terms, before initiating this trade\. Max loss amount in absolute terms should be reasonable and okay with respect to trader’s own risk appetite\.

__Risk & Stop Loss in this Futures Hedge \(bullish momentum\) Strategy__: 

Risk is minimal in this Strategy, and the max loss is limited to the extent of Time Value comprised in the ITM PE at the time initiating Long positions on ITM PE\. 

Further, if instead of Long Futures, __Long__ __Synthetic Futures __\(i\.e\. buying Deep ITM CE with almost 100% Intrinsic Value\) is used, then any Time Value in such Synthetic Futures will add up towards the max loss besides the Time Value comprised in the ITM PE\.

Further, if the trend appears to be reversing on bearish side, convincingly on 30 min TF or Hrly TF, then either this Strategy can be exited by taking a stop loss \(before max loss situation occurs on this Strategy\); or Counter Adjustment positions \(*as explained below*\) can be initiated for intraday\.

__Trade Adjustment in Futures Hedge \(bullish momentum\) Strategy__:

If the trend in intraday completely reverses on the bearish side, then the max loss situation can also be avoided in this Strategy by initiating following Counter Adjustment positions:

1. Initiate Short positions on Far OTM CEs of next week/ Monthly Expiry series in such quantity which gives premium credit on aggregate basis atleast equivalent to the Time Value in ITM PEs on aggregate basis, or more; or
2. Initiate Long positions on Far OTM PEs of next week/ Monthly Expiry series in such quantity which will generate sufficient profit so as to cover the max loss situation on this Futures Hedge Strategy \(PE side\)\.

__Target on this Futures Hedge \(bullish momentum\) Strategy__: 

As soon as the bullish momentum arrives and the trade is played through Futures Hedge \(*on PE side*\), it must be watched for on Futures Chart if the bullish trend appears to last or fizzle out\. If the bullish trend does not seem to last then as soon as there appears signals of reversal of bullish trend on bearish side, then  whatever profit on the Strategy is available, such profit must be immediately booked\.

However, if the bullish trend seems to last basis Futures Chart, then target should be to keep trailing the profit by revising the stop loss to ensure that the profit is not lost\. Better practice would be to keep booking decent profits and to trail the stop loss\.

In this Strategy even if trade is allowed to continue during failing bullish trend or reversal towards bearish side for intraday, then even such situation is not capable of generating loss beyond pre\-calculated max loss situation\. Further, in the event of trend reversal on bearish side, max loss situation can be mitigated by initiating Counter Adjustment positions\. 

__Futures Hedge on Expiry Day, With Minimal Risk, for Bullish Momentum__

__Requisite Technical Conditions for Bullish Momentum:__

If during the Expiry day, there appears some pattern / formation which indicates bullish trend in intraday \(*including those provided above*\), then such expected bullish trend can be played through Futures Hedge Strategy \(*PE side*\)\.

__Objective in Futures Hedge \(Bullish momentum\) on Expiry Day__: 

In Expiry day, if bullish trend arrives \(*whether strong or mild*\), then such bullish trend can be played through Futures Hedge Strategy \(*using ITM PE, which is expiring the same day\)\. *

On Expiry day, even Near ITM PEs \(*2\-3 Strikes away from ATM*\) are available with extremely low Time Value \(*especially after 12 noon*\)\. 

Thus, such Futures Hedge Strategy \(*using Current Month Futures and same day expiring Near ITM PEs, which has very low Time Value\), can be employed to play the expected bullish trend for intraday on Expiry Day, as the maximum loss on this Strategy would be very minimal, limited to the maximum extent of the Time Value comprised in the ITM PEs\. *

On Expiry day, such Futures Hedge can be used to play intraday bullish trend on Expiry day instead of employing naked Long Futures or CEs, as the overall risk in this Strategy is extremely low, even if the trend completely reverses on the bearish side with strong momentum or gets sideways / volatile in intraday\.

This trading strategy can be executed for intraday bullish trend following on Expiry day\. Continuous bullish intraday trend is a must for profit in this trade\.

__Trade Position for Futures Hedge \(Bullish momentum\) on Expiry Day__:

- Long Futures \(Current Month\)
- Long Near ITM PE \(*with 80% Intrinsic Value*\), expiring same day 

Such Near ITM PE would be available with 2\-3 Strike distance from ATM, and will have minimal Time Value in absolute terms \(*which will be the amount of risk, per Lot basis*\)\.

Further, instead of Long Futures, __Long__ __Synthetic Futures \(i\.e\. buying Deep ITM CE with almost 100% Intrinsic Value\) __can also be used\. Use of such Synthetic Futures will save the Strategy from MTM requirements in the event of reversal of trend on bearish side\. 

__Significance of Futures Hedge \(bullish momentum\) Strategy for Expiry Day__

__Strike Selection in initiating Futures Hedge \(bullish momentum\) Strategy for Expiry Day__: 

Near ITM PE should be such which has a reasonable Time Value, so as to control the overall max loss situation on the Strategy\.

<__start__> *Example: In Nifty Options, if Near ITM PE has Time Value of 20 points, then per Lot basis max loss in this Futures Hedge Strategy would be 50 \(Nifty Lot size\) x 20 \(Time Value of Near ITM PE\) = Rs 1000 per Lot\.*

*Accordingly, if Futures Hedge is executed in 4 Lots, using 4 Lots of Long Nifty Futures & 4 Lots of Long Near ITM PE \(having 20 points Time Value in each Lot\), then max loss on this Strategy would be Rs\. 4000/\-\. *<__end__>

If, however instead of Long Futures, __Long__ __Synthetic Futures __\(i\.e\. buying Deep ITM CE with almost 100% Intrinsic Value\) is used, then any Time Value in such Synthetic Futures will add up towards the max loss besides the Time Value comprised in the ITM PE\.

It must be noted that higher Time Value in ITM PE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bullish move in the underlying in the intraday*\)\. And if the Time Value in ITM PE leg is kept low then the max loss on the trade would also be low, but the breakeven for profit would get longer \(*requiring much longer bullish move in the underlying in the intraday*\)\.

Accordingly, if the long & strong bullish trend is confirmed during the Expiry day, then ITM PE Strike with higher Time Value can be selected \(*such ITM PEs would be those which are towards ATM*\)\. But if the bullishness of the trend is not very sure, then relatively deeper ITM PE with lesser Time Value can be selected \(*in which case the max loss would be lesser*\), but in such case profit will be generated only when the bullish move is much longer\. 

__Speciality of this Futures Hedge \(bullish momentum\) Strategy for Expiry Day__: 

It is a hedged Strategy with pre\-defined max loss\. In this Strategy, the max loss can be pre\-decided \(*basis the Time Value in the Near ITM PE, as explained above*\), and this trade can be implemented to play expected bullish trend without feeling concerned for reversal\.  Because, even if the trend gets completely reversed on the bearish side with strong momentum, the max loss is pre\-calculated and known in this Strategy\.

Further, instead of Long Futures, Synthetic Futures \(Deep ITM CE with almost 100% Intrinsic Value\) can also be used, which will not subject the Strategy towards any MTM requirements in the event of trend reversal on bearish side\.

It is a complete peace of mind Strategy to play bullish trend for the intraday on Expiry day, where max loss is in full control and pre\-defined\.

__Options behaviour in Futures Hedge \(bullish momentum\) Strategy for Expiry Day__: 

In this trading method, Futures Long leg has Delta value of 1, per Lot basis; while Near ITM PE with minimum Time Value would have a Delta value close to 0\.8 

Further, instead of Long Futures, if Long Synthetic Futures \(i\.e\. buying Deep ITM CE with almost 100% Intrinsic Value\) is used, even then the Delta value of such Synthetic Futures \(deep ITM CE\) would be close to 1, and would therefore, behave exactly like Futures Long position\.

Thus, if the bullish trend continues with momentum, then this Futures Hedge Strategy would give huge upside profit, as the Futures Long leg being on higher Delta would keep generating profit as the bullish trend continues; but Near ITM PE would generate loss and due to underlying being bullish, ITM PE would soon get shifted towards OTM  and would therefore generate lesser loss \(*due to shift of Near ITM PE towards OTM i\.e\. from higher Delta to lower Delta*\)\. Therefore, if bullish trend continues with momentum then Futures Long leg would generate more profit with continued uptrend, but PE leg would keep generating lesser losses with continuation of bullish trend\. Thus, this Strategy offers unlimited upside\.

However, if after initiating the trade, the underlying gets sideways or even super bearish, the Futures Long leg would generate loss \(@ Delta value of 1\), but ITM PE would start getting deeper & deeper ITM \(*thereby getting shifted to higher negative Delta\)\. *If bearish move keeps continuing with strong momentum then PE would soon become Synthetic Futures \(PE\) thereby behaving like Futures Short position\. Thus, at no point in time there will be loss incurred on this Strategy beyond the pre\-calculated max loss which is limited to the extent of Time Value comprised in buying price of the Near ITM PE leg at the time of initiating Long PE\. Thus, this Strategy offer limited downside\.

However, higher Time Value in ITM PE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bullish move in the underlying in the intraday*\)\. And if the Time Value in ITM PE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bullish move in the underlying in the intraday*\)\.

Further, since primary leg on this Strategy is Futures Long, therefore,  there will be no Theta impact of Expiry or adverse impact of fluctuations in volatility / VIX on the primary leg\.

__Merits of this Futures Hedge \(bullish momentum\) Strategy for Expiry Day__: Large quantity positions can be initiated with very less capital, instead of naked Long Futures \(*which would require large capital on similar quantity*\) or naked CE Long, with pre\-defined max loss even in extreme situation / reversals\.

MTM requirements on this Strategy can be avoided by using Synthetic Futures \(*i\.e\. deep ITM CE with 100% Intrinsic Value*\) instead of Long Futures for the primary leg\.

This Strategy offers unlimited profit potential and limited downside risk\.

__Trading bullish momentum through buying  Naked OTM CEs on Expiry: Capital, Risk & Target__

__Capital deployment in Long Naked OTM CEs__: 

Since, this is a risky trade \(*if the bullish momentum, as expected does not arrive or last/ quickly fades away*\), the capital deployment should be such quantity that even if 50% capital deployed is eroded then also the overall loss amount is not significant\. Example: CE buying with a total of Rs 10,000/\- only, with stop loss of maximum 50% on the deployed capital \(i\.e\. 5000/\- loss maximum\)\.

__Risk & Stop Loss in this Long Naked OTM CEs__: 

It must be borne in mind that this trade in naked OTM CE Options on Expiry day is very risky on account of strong Expiry day Theta impact\. If the strong bullish momentum as expected does not immediately arrive \(*or such momentum does not last/ ceases shortly upon its arrival*\) after initiating the CE Long position, then this trade would immediately start posing loss or the risen LTP of these OTM CEs would soon decline, even if the Futures/ Spot value is static or sluggishly rising\. 

Therefore, if the strong bullish momentum as expected does not arrive or last satisfactorily, immediately within 10\-15mins after initiating the naked CE buy positions, then this position must be exited booking the stop loss\. A stop loss at a maximum of 50% of the capital deployed can be put in the system\. 

Thus, strong bullish momentum is a must, for this trade; else this trade may give recurring loss on each Expiry if bullish momentum is not captured\.

__Target on this Long Naked OTM CEs__: 

As soon as the bullish momentum arrives and the trade is played through buying Near OTM CEs, it must be watched for on Futures as well as relevant CE Options Chart if the bullish momentum appears to last or fizzle out\. If the bullish momentum does not seem to last then as soon s there appears signals of cessation of bullish momentum, then  whatever profit on the traded CE Options must be immediately booked\.

However, if the bullish momentum seems to last basis Futures Chart as well as relevant CE options Chart, then target should be to book 50% quantity immediately upon 80% or 100% profit generated on such CE Options \(*so as to retrieve the capital deployed on the trade*\)\. The balance quantity can be held until a time the bullish momentum seems to continue; because if the bullish momentum continues strongly then the balance quantity of CE Option can generate profit as high as 200% to 500% in intraday\. In such event, after continuation of strong bullish momentum during the intraday, there appears signal that the bullish momentum seems to get weaker, then the profit generated on the balance quantity should be immediately booked\. Better practice would be to keep booking decent profits and to trail the stop loss\.

If trade is allowed to continue during failing bullish momentum or reversal of bullish trend for intraday, then such situations is capable of wiping all the profit generated on the trade within a few minutes\. During Expiry day, the underlying usually makes very volatile move, therefore, upon first reversal signals on sideways to bearish side, this trade must be immediately exited \(*eg: if reversal signal is generated on 5min or 3 mins TF*\)\. 

__Trading Bullish Momentum on Expiry Day: through Long CE Naked OTMs__

__Requisite Technical Conditions confirming Bullish Trend:__

If __strong bullish momentum__ appears in intraday, which seems to last for atleast a few minutes\. 

If during the Expiry day, there appears some pattern / formation which indicates arrival of strong bullish momentum \(*including those provided above*\), then such expected momentum can be played through Near OTM CE \(*which is not more than 3 Strikes away from ATM*\)\.

__Objective in trading through OTM CEs on Expiry__: 

In Expiry day, if bullish strong momentum arrives, then very near CE OTM \(*which is not more than 3 Strikes away from ATM*\) which are expiring the same day, generally have very low LTPs,  can exponentially rise in its LTP value within a very short span of few minutes, generating more than 100% profit on the capital deployed\.

The idea in this trade is to catch profit as the premium of these OTMs exponentially rise due to bullish momentum, within a span of few minutes without waiting for these Strikes to become ITM unless the momentum is super strong and appears to continue \(*else the premium of these OTMs would immediately fall back as soon as the momentum takes a pause*\)\. Thus, keep booking profit while momentum is on by squaring\-off few quantities is the safest and best approach in this trade\.

__Strike Selection for buying OTM CEs on Expiry__: 

If momentum is expected to be super bullish \(*like: in case of upward bollinger band blast on 10min TF or higher TF*\), then even OTM CE Strike \(*which are expiring same day*\) which is around 3 Strike away from ATM can be bought, else in other cases near OTM CE which is 1 Strike or 2 Strike away from ATM should only be bought\.

However, if on Expiry day, the bullish momentum starts around 3pm \(*say, upper bollinger band blast on 10min TF or so*\), then OTM CE which is just one Strike out of\-the\-money from ATM, should be bought\. Such OTM CE would be trading around 3pm at very nominal LTP \(*Rs 1\-3 or less in Nifty; and about Rs 15\-25 or less in BankNifty*\)\. Such low premium OTM CE can be bought in good volumes with very low capital, thus the overall risk can be controlled with reasonable buying volumes\. If strong momentum on the upside continues as expected, then within 5 – 10 minutes this OTM CE would rise phenomenally depending upon the strength of bullish momentum \(*such CE in Nifty, may rise from Rs 3 to Rs 40 or even more*\)\. 

Further, if it is not clear in which direction the momentum would arrive then both CE & PE \(which are one Strike OTM from ATM\) can be bought \(*Long Strangle*\) as both would be trading at very low premium around that time\. The direction in which momentum arrives, relevant Options will give huge profit\. Also, if bullish momentum arrives and there is some resistance on the upside, then OTM CE profit should be booked near resistance and OTM PE should be held – because if underlying hits the resistance and falls, then even PE can generate huge profit\. Thus, last 30mins momentum on Expiry day can be traded in this manner\. 

<a id="_Hlk160575480"></a>__Significance of this bullish trade involving buying  OTM CEs on Expiry__

__Speciality of this trade __<a id="_Hlk160575504"></a>__involving buying OTM CEs on Expiry__: 

Such Near OTM  CE Strikes \(*expiring same day*\) which are not more than 2\-3 Strikes away from ATM, during the Expiry day are usually available at a very low LTP \(*i\.e\. generally trading from Rs 3\-15 in case of Nifty Options and about Rs\. 15\-50 in case of BankNifty Options, per Lot basis*\)\. Therefore, with very low capital also large quantity of such naked OTM CEs can be bought\. Thus, in this trade initiating Long CE in heavy volume even with low capital is possible\.

__Options behaviour __<a id="_Hlk160575521"></a>__in this trade involving buying OTM CEs on Expiry__: 

In this trading method, Near OTM CEs \(*which are expiring same day*\)  usually have very low and falling Delta as they are OTMs and are expected to expire worthless in intraday if they continue as an OTM\. But if a strong bullish momentum arrives, then the arrival of momentum immediately adds Time Value to the LTP of these expiring OTMs, thereby causing significant rise in the LTP of these Near OTM CEs\. 

Further, if the bullish momentum survives and continues then it may even cause these Near OTM CEs to become an ITM, thereby raising the Delta value of these Near OTM CEs by virtue of they becoming ITMs, and accordingly causing significant rise in the LTPs of these CE Options as the momentum further continues\. In such event, the LTP of these OTM CEs would sustain atleast to an extent of their Intrinsic Value if they expire as ITMs\.

__Merits of this trade involving buying OTM CEs on Expiry__: 

Large quantity Long positions can be initiated with very less capital, as such Near OTM CEs are available at very low LTP\. Also, if strong bullish momentum is certain then playing through naked OTM CEs would offer limited downside risk \(max risk will be limited to the extent of premium paid on Long CEs\), instead of playing through naked Long Futures \(*which offers unlimited downside risk upon trend reversal on bearish side, besides high margin and MTM requirements*\)\.

Further, if the stop loss situation arrives, the capital deployed should be such quantity such that even if 50% capital is eroded, the overall loss on the capital is not significant\.

__Trading bearish momentum through buying  Naked OTM PEs on Expiry: Capital, Risk & Target__

__Capital deployment in Long Naked OTM PEs__: 

Since, this is a risky trade \(*if the bearish momentum, as expected does not arrive or last/ quickly fades away*\), the capital deployment should be such quantity that even if 50% capital deployed is eroded then also the overall loss amount is not significant\. Example: PE buying with a total of Rs 10,000/\- only, with stop loss of maximum 50% on the deployed capital \(i\.e\. 5000/\- loss maximum\)\.

__Risk & Stop Loss in this Long Naked OTM PEs__: 

It must be borne in mind that this trade in naked OTM PE Options on Expiry day is very risky on account of strong Expiry day Theta impact\. If the strong bearish momentum as expected does not immediately arrive \(*or such momentum does not last/ ceases shortly upon its arrival*\) after initiating the PE Long position, then this trade would immediately start posing loss or the risen LTP of these OTM PEs would soon decline, even if the Futures/ Spot value is static or sluggishly falling\. 

Therefore, if the strong bearish momentum as expected does not arrive or last satisfactorily, immediately within 10\-15mins after initiating the naked PE buy positions, then this position must be exited booking the stop loss\. A stop loss at a maximum of 50% of the capital deployed can be put in the system\.

Thus, strong bearish momentum is a must, for this trade; else this trade may give recurring loss on each Expiry if bearish momentum is not captured\.

__Target on this Long Naked OTM PEs__: 

As soon as the bearish momentum arrives and the trade is played through buying Near OTM PEs, it must be watched for on Futures as well as relevant PE Options Chart if the bearish momentum appears to last or fizzle out\. If the bearish momentum does not seem to last then as soon  as there appears signals of cessation of bearish momentum, then  whatever profit on the traded PE Options must be immediately booked\.

However, if the bearish momentum seems to last basis Futures Chart as well as relevant PE options Chart, then target should be to book 50% quantity immediately upon 80% or 100% profit generated on such PE Options \(*so as to retrieve the capital deployed on the trade*\)\. The balance quantity can be held until a time the bearish momentum seems to continue; because if the bearish momentum continues strongly then the balance quantity of PE Option can generate profit as high as 200% to 500% in intraday\. In such event, after continuation of strong bearish momentum during the intraday, there appears signal that the bearish momentum seems to get weaker, then the profit generated on the balance quantity should be immediately booked\. Better practice would be to keep booking decent profits and to trail the stop loss\.

If trade is allowed to continue during failing bearish momentum or reversal of bearish trend for intraday, then such situations is capable of wiping all the profit generated on the trade within a few minutes\. During Expiry day, the underlying usually makes very volatile move, therefore, upon first reversal signals on sideways to bullish side, this trade must be immediately exited \(*eg: if reversal signal is generated on 5min or 3 mins TF*\)\.

__Trading Bearish Momentum on Expiry Day: through Long PE Naked OTMs__

__Requisite Technical Conditions confirming Bearish Trend:__

If __strong bearish momentum__ appears in intraday, which seems to last for atleast a few minutes\.

If during the Expiry day, there appears some pattern / formation which indicates arrival of strong bearish momentum \(*including those provided above*\), then such expected momentum can be played through Near OTM PE \(*which is not more than 3 Strikes away from ATM*\)\. 

__Objective in trading through OTM PEs on Expiry__: 

In Expiry day, if bearish strong momentum arrives, then very near PE OTM \(*which is not more than 3 Strikes away from ATM*\) which are expiring the same day, generally have very low LTPs,  can exponentially rise in its LTP value within a very short span of few minutes, generating more than 100% profit on the capital deployed\.

The idea in this trade is to catch profit as the premium of these OTMs exponentially rise due to bearish momentum, within a span of few minutes without waiting for these Strikes to become ITM unless the momentum is super strong and appears to continue \(*else the premium of these OTMs would immediately fall back as soon as the momentum takes a pause*\)\. Thus, keep booking profit while momentum is on by squaring\-off few quantities is the safest and best approach in this trade\.

__Strike Selection for buying OTM PEs on Expiry__: 

If momentum is expected to be super bearish \(*like: in case of downward bollinger band blast on 10min TF or higher TF*\), then even OTM PE Strike \(*which are expiring same day*\) which is around 3 Strike away from ATM can be bought, else in other cases near OTM PE which is 1 Strike or 2 Strike away from ATM should only be bought\.

However, if on Expiry day, the bearish momentum starts around 3pm \(*say, lower bollinger band blast on 10min TF or so*\), then OTM PE which is just one Strike out of\-the\-money from ATM, should be bought\. Such OTM PE would be trading around 3pm at very nominal LTP \(*Rs 1\-3 or less in Nifty; and about Rs 15\-25 or less in BankNifty*\)\. Such low premium OTM PE can be bought in good volumes with very low capital, thus the overall risk can be controlled with reasonable buying volumes\. If strong momentum on the downside continues as expected, then within 5 – 10 minutes this OTM PE would rise phenomenally depending upon the strength of bearish momentum \(*such PE in Nifty, may rise from Rs 3 to Rs 40 or even more*\)\. 

Further, if it is not clear in which direction the momentum would arrive then both PE & CE \(which are one Strike OTM from ATM\) can be bought \(*Long Strangle*\) as both would be trading at very low premium around that time\. The direction in which momentum arrives, relevant Options will give huge profit\. Also, if bearish momentum arrives and there is some support zone on the downside, then OTM PE profit should be booked near support zone and OTM CE should be held – because if underlying hits the support and  bounces upwardly with good rise, then even CE can generate huge profit\. Thus, last 30mins momentum on Expiry day can be traded in this manner\.

__Significance of this bearish trade involving buying  OTM PEs on Expiry__

__Speciality of this trade involving buying OTM PEs on Expiry__: 

Such Near OTM  PE Strikes \(*expiring same day*\) which are not more than 2\-3 Strikes away from ATM, during the Expiry day are usually available at a very low LTP \(*i\.e\. generally trading from Rs 3\-5 in case of Nifty Options and about Rs\. 15\-20 in case of BankNifty Options, per Lot basis*\)\. Therefore, with very low capital also large quantity of such naked OTM PEs can be bought\. Thus, in this trade initiating Long PE in heavy volume even with low capital is possible\.

__Options behaviour in this trade involving buying OTM PEs on Expiry__: 

In this trading method, Near OTM PEs \(*which are expiring same day*\) usually have very low and falling Delta as they are OTMs and are expected to expire worthless in intraday if they continue as an OTM\. But if a strong bearish momentum arrives, then the arrival of momentum immediately adds Time Value to the LTP of these expiring OTMs, thereby causing significant rise in the LTP of these Near OTM PEs\. 

Further, if the bearish momentum survives and continues then it may even cause these Near OTM PEs to become an ITM, thereby raising the Delta value of these Near OTM PEs by virtue of they becoming ITMs, and accordingly causing significant rise in the LTPs of these PE Options as the momentum further continues\. In such event, the LTP of these OTM CEs would sustain atleast to an extent of their Intrinsic Value if they expire as ITMs\.

__Merits of this trade involving buying OTM PEs on Expiry__: 

Large quantity Long positions can be initiated with very less capital, as such Near OTM PEs are available at very low LTP\.

Also, if strong bearish momentum is certain then playing through naked OTM PEs would offer limited upside risk \(max risk will be limited to the extent of premium paid on Long PEs\), instead of playing through naked Short Futures \(*which offers unlimited upside risk upon trend reversal on bullish side, besides high margin and MTM requirements*\)\. 

__Technical Parameters to identify Intraday Bullish Momentum on Expiry Day__

In order to identify the strong intraday bullish momentum / trend on Expiry day, the following technical parameters can be looked into:

__Bullish Momentum / Trend:__

Bullish momentum pattern could be, like:

1. If there occurs open=low in 1st candle formation on 10 min timeframe on Futures Chart, after opening of the market, which closes and sustains above VWAP and thereafter 2nd candle closes above the high of the 1st candle, then bullish trade for intraday can be initiated when Futures price is near VWAP on the 3rd candle \(*or when Futures price comes near 1/3rd of the 2nd candle *\); or 
2. If soon after opening of the market, on 10 min timeframe on Futures Chart, one green candle closes and sustains above VWAP as well as a nearby Pivot on 10min TF, then bullish trade for intraday can be initiated when Futures price is near VWAP or Pivot; or

1. If bollinger band blasts on the upper band side on 5min or 10min TF of Futures Chart; then bullish trade for intraday can be initiated near the upper band level on that TF; or
2. If Futures LTP is in discount than Spot by atleast 20 points, then then bullish trade for intraday can be initiated\.
3. If ITM CE which is expiring in intraday on Expiry day, is in discount \(*i\.e\. having LTP lesser than its Intrinsic Value by more than 10 points in Nifty/BankNifty for about 10\-15 minutes from both Spot & Current Month Futures*\) and Current Month’s Futures is trading higher than Spot value, then bullish trade for intraday can be initiated\.

Strong bullish momentum / trend on Expiry day, upon satisfactory confirmation basis Technical parameters as discussed aforesaid, can be traded through following Intraday Strategies meant specifically for Expiry Day\.

__Technical Parameters to identify Intraday Bearish Momentum on Expiry Day__

In order to identify the strong intraday bearish momentum / trend on Expiry day, the following technical parameters can be looked into:

__Bearish Momentum / Trend:__

Bearish momentum pattern could be, like: 

1. If there occurs open=high in 1st candle formation on 10 min timeframe on Futures Chart, after opening of the market, which closes and sustains below VWAP and thereafter 2nd candle closes below the low of the 1st candle, then bearish trade for intraday can be initiated when Futures price is near VWAP on the 3rd candle \(*or when Futures price comes near 1/3rd of the 2nd candle *\); or

1. If soon after opening of the market, on 10 min timeframe on Futures Chart, one red candle closes and sustains below VWAP as well as a nearby Pivot on 10min TF, then bearish trade for intraday can be initiated when Futures price is near VWAP or Pivot; or 
2. If bollinger band blasts on the lower band side on 5min or 10min TF of Futures Chart; then bearish trade for intraday can be initiated near the lower band level on that TF;
3. If Futures LTP is excessively high than Spot \(*i\.e\. by atleast 100 points in Nifty and more than 200 points in BankNifty*\), then then bearish trade for intraday can be initiated\.
4. If ITM PE which is expiring in intraday on Expiry day, is in discount \(*i\.e\. having LTP lesser than its Intrinsic Value by more than 10 points in Nifty/BankNifty for about 10\-15 minutes, from both Spot & Current Month Futures*\) and Current Month’s Futures is trading higher than Spot value, then bearish trade for intraday can be initiated\.

Strong bearish momentum / trend on Expiry day, upon satisfactory confirmation basis Technical parameters as discussed aforesaid, can be traded through following Intraday Strategies meant specifically for Expiry Day\.

__Steps Involved in F&O Trading:__

Broadly, trading in F&O, requires beforehand planning and identification of the following factors / steps involved:

1. Trend / view on the underlying
2. Decision to execute a Hedged trade or a naked trade
3. Implementation of most suitable Strategy to play the Trend
4. Adjustment of the trade, if view goes wrong

These four factors must be thoroughly analysed and planned by a smart trader\. If a trader understands how F&O instruments play out and various factors concerning them, then he will be able deploy right instrument or mix of instruments and design a suitable Strategy to play out his view on the underlying and would also know how to wriggle his way out if the trade does not go as per plan by making suitable adjustments to his trade\. 

Our discussion on these important aspects here, narrates the thought process which will help in selection / designing of a suitable Strategy also making suitable adjustments to curtail the potential loss that arise on the trade \(if the view goes wrong\)\. These factors basically empowers a trader to plan what he should play, how he should play and how best he can mitigate the loss\.

__Strike Selection of Options in Hedged Strategies:__

Strike level of Options, are most important, for the purpose of designing a suitable hedged Strategy/ position in order to maintain pre\-calculated suitable profit & loss balance in the Strategy\. This is because each Strike level in the Options Chain offer two most critical piece of information, basis which a hedged position/ Strategy must be planned\. These are:

1. Delta values of Strike levels
2. Premium / LTP of the Options at different Strike levels and Expiry series

These two important factors, which has a direct relevance for deciding the primary leg and/or the hedged leg for any given Options Strategy, are discussed below\.

__Delta Values of trade legs in Hedged Strategies:__

The Options Chain, provided by the stock brokers on their trading terminal, gives the Delta values for each of the CE & PE Options \(for single Lot basis\)\. A good understanding about Delta values and their interplay helps a trader to plan a better trading position or design a robust Strategy\. Few most important factors regarding the Delta value of Options, which every trader must borne in mind while designing a hedged Options Strategy, are mentioned below:

- On CE & PE sides: deep OTMs to ATM, Delta value progressively increases from 0 to 0\.5\. Further, from ATM towards deep ITMs, the Delta value progressively increases from 0\.5 at ATM to 1\. Delta value of both CE & PE ATM Strike is 0\.5\.
- In the Options Chain, for the CE side: the Delta values are \+ve as it denotes proportional relationship of rise/fall in the LTP of CE Options with the movement of the underlying, i\.e\. if the underlying moves up, the CE Options’ LTP moves up; and if the underlying moves down, the CE Options’ LTP moves down\. On the contrary, in the Options Chain, for the PE side: the Delta values are \-ve as it denotes inversely proportional relationship of rise/fall in the LTP of PE Options with the movement of the underlying, i\.e\. if the underlying moves up, the PE Options’ LTP moves down; and if the underlying moves down, the PE Options’ LTP moves up\.
- On CE & PE OTM sides: Both Delta value and Theta value progressively decreases from ATM towards deep OTM\. 
- On CE & PE ITM sides: Delta values progressively increases from ATM towards deep ITM; whereas  Theta value progressively decreases from ATM towards deep ITM\.
- Delta values of CE OTMs somewhat matches with those of the PE OTMs\. Also, Delta values of CE ITMs somewhat matches with those of the PE ITMs\.
- On CE side, lower Strike has more Delta value and more Premium; and higher strike has lower Delta and lower Premium\.  On the contrary, for the PE side, higher Strike has more Delta value and more Premium; and lower strike has lower Delta and lower Premium\.
- A given CE OTM having similar Delta value as that of any PE OTM, are likely to have somewhat similar LTPs \(or vice\-versa\)\. Also, any given CE ITM having similar Delta value as that of any PE ITM, are likely to have somewhat similar LTPs \(or vice\-versa\)\.
- Futures have a Delta of 1\.
- Deep ITM Options \(both CE & PE\) have almost 100% Intrinsic Value has a Delta value close to 1, and thus behaves like Futures\.
- Each Strike has a CE and a PE Option, and their aggregate Delta value is always 1\. Therefore, if at same Strike one side Option is on Long and another side Option on Short, then such position will have a Delta value of 1, and thus behaves like Futures\.
- For ITM Options \(both CE & PE\), the Delta value of same strike ITMs decreases as we move from closer Expiry series towards farther Expiry series\. On the contrary, for OTM Options \(both CE & PE\), the Delta value of same Strike OTMs increases as we move from closer Expiry series towards farther Expiry series\.
- Delta effect on a Strategy/ hedged position depends upon the aggregate Delta value in the primary leg and the hedged leg\.  Delta values gets added up depending upon the number of Lots used to create a position, i\.e\. for example: if in a hedged Strategy, the primary leg has 3 Lots Options of a given Strike and the hedged leg is initiated with 6 Lots of Options on a different Strike, then the final Delta effect on this  Strategy, will be determined basis the aggregate Delta value on the primary leg \(i\.e\. Delta value for 1 Lot x 3\) and the aggregate Delta value in the hedged leg \(i\.e\. Delta value for 1 Lot x 6\)\. 
- CE Long and PE Short has a \+ve Delta which denotes that if the underlying moves up, the CE Long and PE Short yields profit\. While, CE Short and PE Long has a \-ve Delta which denotes that if the underlying moves down, the CE Short and PE Long yields profit\. Thus, in a hedged Strategy, if the net Delta value \(i\.e\. aggregate Delta value of primary leg – aggregate Delta value of hedged leg\) is \+ve then the Strategy is tilted towards bullish side and will generate profit if the underlying moves higher; and if the net Delta value of the Strategy is \-ve then the Strategy will yield profit if the underlying will slide down\.
- Accordingly, a bullish Strategy can be designed with more aggregate \+ve Delta on the Strategy than the aggregate \-ve Delta\. Likewise, a bearish Strategy can be designed with more aggregate \-ve Delta than the aggregate \+ve Delta\. And a neutral strategy would involve Options with same / similar Delta values\.
- When the Options position keep advancing in the money, the effect of climbing higher Delta ladder causes rise in the Premium up in a compounding manner as the position keeps moving deeper in the money drifting from higher Delta levels to even higher Delta levels\.  In such case, the Premium of the Options position increases at a higher rate with every move to a higher Delta level than the previous rate \(due to current higher Delta value than that of the previous lower level\)\. However, when the Options position keep advancing out of the money, the effect of coming down from the Delta ladder \(i\.e\. from higher Delta level to lower level\) causes lesser and lesser fall in the Premium as the position keeps moving deeper out of the money drifting from higher Delta levels to lower and then even lower Delta levels\.  In such case, the Premium of the Options position decreases at a reduced rate with every move to a lower Delta level than the previous rate \(due to current lower Delta value than that of the previous higher level to next lower level\)\.
- On Expiry day, all Options loose the Time Value comprised in the  Premium\. Accordingly, on Expiry day, Delta values of all OTMs starts to exceedingly reduce to become zero by the end of the Expiry \(from deep OTMs towards ATM\); and the Delta values of all ITMs tend to become 1 by the close of the Expiry \(from deep ITMs towards ATM\)\. Thus, by mid\-day on Expiry, even very near ITMs get on to the Delta value of 1 and thereby starts behaving like Futures\.    

Options behaviour, such as above, helps a trader to design a suitable hedged position depending upon his view on the underlying\. The aforesaid information can be used to maintain a specific distance / tilt on the bullish side or the bearish side in a given Strategy at the time of initiating the positions; or to maintain a non\-directional neutral Strategy by having Options of same Delta values for the primary leg and the hedged leg of the Strategy\. The Delta values would help ensure the change in the Premium values of the Options at the primary leg and the hedged leg, in response to both, the favourable and unfavourable movement in the underlying\. Thus, the bullish/ bearish tilt or neutrality in the Strategy is ensured by choosing appropriate Strike levels with the requisite Delta values and maintaining a proper difference in the Delta values between the primary leg and the hedged leg of the Strategy at the time of initiating the positions/ Strategy\. 

Now let us discuss and understand the importance of Strike levels for a suitable hedge design, from the perspective of their Premium\.

__Premium of Options in different Strikes & Expiry Series:__

The Options Chain provides the LTP/ premium value of each of the CE and PE Options at each Strike level on almost real time basis\. Certain important aspects pertaining to the Premium of Options, which must be borne in mind, while designing a Strategy are summarised below: 

- On CE & PE sides: the Premium progressively increases from deep OTMs towards deep ITMs\.
- On CE side: lower Strike has more Premium and more Delta value; and higher strike has lower Premium and lower Delta\.  
- On the PE side, higher Strike has more Premium more and Delta value; and the lower strike has lower Premium and lower Delta\.
- Premium of CE OTMs somewhat matches with those of the PE OTMs\. Also, Premium of CE ITMs somewhat matches with those of the PE ITMs\.
- A given CE OTM having similar Premium value as that of any PE OTM, are likely to have somewhat similar Delta value \(or vice\-versa\)\. Also, any given CE ITM having similar Premium value as that of any PE ITM, are likely to have somewhat similar Delta value 	\(or vice\-versa\)\.
- All OTMs and ATMs \(both CEs & PEs\) only have Time Value in their Premium/ LTP\. 
- Only ITMs \(both CEs & PEs\) have Intrinsic Value in their Premium/ LTP\. For both CEs & PEs, from ATM towards deep ITM, the Intrinsic Value component in the Premium/LTP of ITMs keeps increasing and the Time Value keeps decreasing\. Deepest ITMs have only Intrinsic Value and no Time Value\. Such deepest ITMs have a Delta value of 1 and behave like Futures\.  
- Options’ Premium follows the Futures’ LTP of the relevant underlying until Expiry and on the Expiry day the Options starts following the Spot value of the underlying\.
- With each passing day towards the Expiry of the Options, the Time Value of all the Options undergo decay on account of time decay/ Theta effect\.
- On Expiry of the relevant Options, Time Value in all the Options become zero\. Consequently, on Expiry, both ATMs and all OTMs expire worthless as their Premium has 100% Time Value; while the ITMs are left with the final LTP equal to their Intrinsic Value\.
- On Expiry, the ITMs would have final Premium left equal to their Intrinsic Value\. Since, on Expiry day, Intrinsic value of ITMs is the difference between the Spot value of the underlying \(*or the ATM Strike on Expiry*\) and the Strike value of the relevant ITM, therefore, in effect the Premium of each of the ITM Options would be the distance between the ITM Strike and the ATM\. For example: the Premium of an ITM which is 7th Strike from ATM of BankNifty Options would be 700 \(*because distance between each Strike in the BankNifty Options Chain is in multiples of 100*\); and the Premium of an ITM which is 7th Strike from ATM of Nifty Options would be 350 \(*because distance between each Strike in the Nifty Options Chain is in multiples of 50*\)\. However, the final Premium value of ITMs, sometimes, may not exactly be the same as the distance between their Strike and the ATM, due to final effects of rise / drop in Volatility thereby closing marginally higher or lower than the actual difference between the ITM Strike and the ATM\.
- Time decay which erodes the Time Value of Options, becomes fast and Theta value increases as the Expiry draws near\.
- On Expiry day, the Premium value of all OTMs starts to exceedingly reduce to become zero by the end of the Expiry from deep OTMs towards ATM; and the Premium value of all ITMs tend to get reduced to their Intrinsic Value from deep ITMs towards ATM\. Thus, by mid\-day on Expiry, even very near ITMs have their Premium value almost close to their Intrinsic Value \(which starts behaving like Futures, as such ITMs have their Delta value of 1\)\. 
- Premium of same Strike Options, from closer to farther Expiry series, increases\. Theta value is higher in closer Expiry series than farther Expiry series\.
- Long Options \(buying CE or PE\) involves payment of Premium, thus it is a debit position\. Short Options \(selling CE or PE\) involves receiving credit of Premium, thus it is a credit position\.
- Long Options should be preferably initiated on farther Expiry series \(with lower Theta value\) for a long holding period; and Short Options should be initiated on closer Expiry series \(with higher Theta value\) for a shorter holding period\.
- When the underlying moves higher, Premium of CE Options rises; and that of the PE Options fall\. However, when the underlying moves lower, Premium of CE Options falls; and that of the PE Options rises\. Higher the momentum in the underlying upwardly, higher the CE Options’ Premium may rise \(like 300% or 400% etc\.\), but the Premium of the PEs can fall as much as 100%\. Likewise, higher the momentum in the underlying downwardly, higher the PE Options’ Premium may rise \(like 300% or 400% etc\.\), but the Premium of the CEs can fall as much as 100%\.
- Long Options may have unlimited reward if the trend is favourable and with momentum; but would have a maximum loss limited to the extent of Premium paid on them\. While, Short  Options may have unlimited risk potential if the trend is unfavourable with momentum; but would have a maximum  profit limited to the extent of Premium credit received on them\. 
- Rise in Volatility causes rise in the Premium or keeps the Premium value from falling much\. This is because the rise in Volatility causes expansion in the Time Value comprised in the Premium\. Fall in Volatility causes drop in the Premium or keeps the Premium value from rising much\. This is because the fall in Volatility causes contraction in the Time Value comprised in the Premium\.
- Impact of momentum and volatility is felt in the Most Impacted Radius Zone in the Options Chain, which is mainly concentrated upto a few Strikes around ATM particularly towards OTM\.  Options at the Strike levels outside the Most Impacted Radius Zone may not get much or negligibly impacted with the momentum / Volatility\.
- During low Volatility periods, for Short Options positions, closer Expiry series may not offer suitable Premium credit\. Therefore, in such cases, subject to market condition, farther Expiry series Strike levels may be considered for Shorting to play movement in the underlying \(which may not be necessarily suitable to play Theta decay, as Theta value would be lower in farther Expiry\)\.
- Since Long Options are debit positions, from Expiry perspective, the underlying must cross\-over the Breakeven Strike of the Long Options\. Breakeven Strike of CE Long position is: CE Strike \+ Premium paid\. Breakeven Strike of PE Long position is: PE Strike \- Premium paid\. If by Expiry, the underlying does not cross the Breakeven Strike then the entire Premium paid is a loss\. Thus, in Long Options, from Expiry perspective, profit begins after crossing the Breakeven Strike\.
- Since Short Options are credit positions, from Expiry perspective, the underlying must not cross\-over the Breakeven Strike of the Short Options\. Breakeven Strike of CE Short position is: CE Strike \+ Premium credit\. Breakeven Strike of PE Short position is: PE Strike – Premium credit\. If by Expiry, the underlying does not cross the Breakeven Strike then the Short Options position yields profit\. However, if by Expiry, the Short Options position crosses beyond the Breakeven Strike then the Short Options position may suffer unlimited loss\.
- In Long Options, the Premium rises \(thus generating profit\) as the Long Strike keeps moving in the money \(in which case it moves up the Delta ladder\)\. In Short Options, the Premium falls \(thus generating profit\) as the Short Strike keeps moving out of the money \(in which case it moves down the Delta ladder\)\.
- When the Options position keep advancing in the money, the Premium of the Options rises up in a compounding manner i\.e\. the Premium of the Options position increases at a higher rate with every move in to the money \(due to the Strike getting drifted in to the money from current higher Delta value than that of the previous level\)\. However, when the Options position keep advancing out of the money, the Premium of the Options falls at a reduced rate than the previous rate with every move out of the money \(due to the Strike getting drifted further out of the money from current lower Delta value to even lower next Delta level\)\.  

Using the aforesaid information, a trader can plan to design his Strategy by selecting appropriate Strike levels at which primary legs and hedged legs may be initiated, in order to play out a particular market condition by  creating a net debit or credit Strategy\. Net Debit and Net Credit hedged positions are discussed below\.

__Decision to execute a Hedged Trade or a Naked trade__

After first step of identification of the trend is done, the next logical step will be whether we should play out the trend with a naked position or a hedged position/Strategy\. The concept of a naked position or a hedged position, is discussed below\.

__Naked Positions / Strategies in F&O:__

When basis our view on the underlying, we may consider to initiate our single position to play out the view/ trend\. When a trend is played out through Long or Short position by employing single F&O instruments or instruments favouring the direction of the trend, then such positions are referred to as __naked positions/ Strategies__\.  

__<start>Example__: For example, the aforementioned trends can be played out by initiating Long or Short in single F&O instruments or through instruments favouring the direction of the trend, in the following manner:

“__Sl\. No\.__”: “1”, “__Trend/ view on the Underlying__”: “__Bullish__”, “__Naked F&O position\(s\)__”: “CE Long; or Futures Long”,

“__Sl\. No\.__”: “2”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bullish__”, “__Naked F&O position\(s\)__”: “PE Short; or Futures Long”,

“__Sl\. No\.__”: “3”, “__Trend/ view on the Underlying__”: “__Bearish__”, “__Naked F&O position\(s\)__”: “PE Long; or Futures Short”,

“__Sl\. No\.__”: “4”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bearish__”, “__Naked F&O position\(s\)__”: “CE Short; or Futures Short”,

“__Sl\. No\.__”: “5”, “__Trend/ view on the Underlying__”: “__Rangebound / sideways__”, “__Naked F&O position\(s\)__”: “CE Short & PE Short”,

“__Sl\. No\.__”: “6”, “__Trend/ view on the Underlying__”: “__Non\-directional \(may either breakout or breakdown from the range\)__”, “__Naked F&O position\(s\)__”: “CE Long & PE Long”,__ <end>__

__Construction of hedged Positions / Strategies:__

When a trader decides to play cautiously and initiates a position to play his view on the underlying as the main position through F&O instruments favouring the direction of the trend \(referred to as the __primary leg\)__, but also adds to this naked primary leg position a counter position with a opposite view to the primary leg \(i\.e\. through F&O instruments in the opposite direction of the trend\), then this counter position is referred to as the __hedged leg__\. This counter position or hedged leg is added to the primary leg, with an understanding that if the technical analysis about the trend goes wrong or there occurs some unplanned developments which goes against / opposite to the trend being played out through primary leg, then the hedged leg will help mitigate the losses that might occur on the primary leg\. Thus, the significance of hedged leg is to cover for losses to some extent, that may occur on the primary leg when the main position \(initiated to follow the trend / view on the underlying\) goes wrong\.

Therefore, generally, when a particular view on the underlying is played out through a primary leg and also another leg is also simultaneously initiated to counter the primary leg in order to mitigate the potential losses on the primary leg, then such trades are referred to as __hedged positions/ Strategies__\. In a hedged trade/ Strategy, the hedged leg is added to the primary leg with a conscious understanding that if the primary leg goes as per plan i\.e\. as expected per technical analysis, then the hedged position \(being opposite to the primary leg\) would yield loss and therefore would cut some profit from the primary leg\. But inspite of this loss of profit in the primary leg caused by the hedged leg in the event of a successful trade, it is advisable to initiate a trade as a __hedged trade__ and not a __naked trade__, because from trading perspective it is better to make some profit than to book a loss, as these small\-small profits make a compounding effect in overall profitability\. Moreover, the hedged trade, besides covering for risk, also helps to reduce the margin on the main position thereby enabling the trader to increase their trading volume\.  

In the above example of naked positions, these can be converted to a hedged position by simultaneously executing a counter position as a hedged leg, such as:

__<start>Table:__

“__Sl\. No\.__”: “1\(a\)”, “__Trend/ view on the Underlying__”: “__Bullish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Long”, “__Hedged Leg \(Counter position\)__”: “CE Short”,

“__Sl\. No\.__”: “1\(b\)”, “__Trend/ view on the Underlying__”: “__Bullish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “Futures Long”, “__Hedged Leg \(Counter position\)__”: “PE Long”,

“__Sl\. No\.__”: “2\(a\)”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bullish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “PE Short”, “__Hedged Leg \(Counter position\)__”: “PE Long”,

“__Sl\. No\.__”: “2\(b\)”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bullish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “Futures Long”, “__Hedged Leg \(Counter position\)__”: “CE Short”,

“__Sl\. No\.__”: “3\(a\)”, “__Trend/ view on the Underlying__”: “__Bearish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “PE Long”, “__Hedged Leg \(Counter position\)__”: “PE Short”,

“__Sl\. No\.__”: “3\(b\)”, “__Trend/ view on the Underlying__”: “__Bearish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “Futures Short”, “__Hedged Leg \(Counter position\)__”: “CE Long”,

“__Sl\. No\.__”: “4\(a\)”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bearish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Short”, “__Hedged Leg \(Counter position\)__”: “CE Long”,

“__Sl\. No\.__”: “4\(b\)”, “__Trend/ view on the Underlying__”: “__Mildly__ __Bearish__”, “__Primary Leg__ \(__Naked F&O position\)__”: “Futures Short”, “__Hedged Leg \(Counter position\)__”: “PE Short”,

“__Sl\. No\.__”: “5\(a\)”, “__Trend/ view on the Underlying__”: “__Rangebound / sideways__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Short”, “__Hedged Leg \(Counter position\)__”: “PE Short”,

“__Sl\. No\.__”: “5\(b\)”, “__Trend/ view on the Underlying__”: “__Rangebound / sideways__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Short & PE Short”, “__Hedged Leg \(Counter position\)__”: “CE Long & PE Long”,

“__Sl\. No\.__”: “6\(a\)”, “__Trend/ view on the Underlying__”: “__Non\-directional \(may either breakout or breakdown from the range\)__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Long”, “__Hedged Leg \(Counter position\)__”: “PE Long”,

“__Sl\. No\.__”: “6\(b\)”, “__Trend/ view on the Underlying__”: “__Non\-directional \(may either breakout or breakdown from the range\)__”, “__Primary Leg__ \(__Naked F&O position\)__”: “CE Long & PE Long”, “__Hedged Leg \(Counter position\)__”: “CE Short & PE Short”,__ <end>__

Further, in certain kind of market situations, such hedged Strategies may also be designed or employed, which may be targeted to yield profit on both the primary leg \(due to successful trend identification\) as well as on the hedged leg\. Thus, in these Strategies, depending on specific market conditions, the hedged leg is simultaneously initiated \(or sometimes added later upon further confirmation of the trend\) in order to not only mitigate the loss that may arise on the primary leg if the trend does not go as expected, but also to yield profit even if the primary leg does not yield any loss and plays out the trend as expected\.

__Thus, the hedged leg is primarily initiated / added to the naked position, to mitigate the loss \(if the trend does not play out as expected\)\. But sometimes, depending on the view on the underlying, the hedged leg is initiated / added to the naked position also because the trend may appear to be such that: not only when the primary leg would yield loss that the hedged leg would yield profit, but even if the trend is played out well by the primary naked leg generating profit, the hedged leg may also likely yield profit__\. For example: a mild bullish view through Call Ratio Spread\.

__It can be concluded that the hedged positions/ Strategies are safer from the perspective of overall loss and also require less capital for implementation i\.e\. lower margin requirement__\. 

Now, let us also understand how profit & loss situation gets balanced out in a hedged position/ Strategy\.

__Net Debit Hedged Positions / Strategy:__

If a trader plans to play a strong momentous move in the underlying, he may opt to play such momentum through a net debit Strategy by having Long Options with higher aggregate Premium and Short Options with lesser aggregate Premium\. Higher aggregate Premium can be achieved: 

- by having higher number of Long Options than Short Options, such that the aggregate Premium of Long Options leg is higher than the aggregate Premium on Short Options leg; or 
- by initiating equal number Long Option at higher Premium Strike \(i\.e\. lower Strike for CEs and higher Strike for PEs\) and equal number of Short Options initiated at lower Premium Strike \(i\.e\. higher Strike for CEs and lower Strike for PEs\); or
- by initiating equal number Long Option at farther Expiry series Options \(which have higher Premium value for same Strike Options\) and equal number of Short Options initiated at closer Expiry series \(which have lower Premium value for same Strike Options\)

In the Net Debit hedged positions, a trader can pre\-calculate the Breakeven Strike, risk & reward in the Strategy and plan his positions accordingly\.

__Net Credit Hedged Positions / Strategies:__

If a trader wishes to play a mild directional move or a sideways movement of the underlying, then he may opt to design a suitable credit Strategy by having Short Options with higher aggregate Premium and Long Options with lesser aggregate Premium\. Higher aggregate Premium can be achieved: 

- by having higher number of Short Options than Long Options, such that the aggregate Premium of Short Options leg is higher than the aggregate Premium on Long Options leg; or 
- by initiating equal number Short Option at higher Premium Strike \(i\.e\. lower Strike for CEs and higher Strike for PEs\) and equal number of Long Options initiated at lower Premium Strike \(i\.e\. higher Strike for CEs and lower Strike for PEs\); or
- by initiating equal number Short Option at farther Expiry series Options \(which have higher Premium value for same Strike Options\) and equal number of Long Options initiated at closer Expiry series \(which have lower Premium value for same Strike Options\)\.

In the Net Credit hedged positions, a trader can pre\-calculate the Breakeven Strike upto which the Strategy is safe and accordingly select suitable Strikes for the primary and the hedged leg\. 

Thus, the aforesaid Options behavioural aspects which have an impact on the Options’ Premium value, helps a trader to design a suitable hedged position with pre\-calculated profit & loss areas and risk to reward ratio and taking into account the favourable and unfavourable factors prevalent at the time of initiating the hedged debit/ credit Strategy and during the lifetime of the Strategy\. Ultimately, it is about the Premium of the Options that we trade for\. Hence, these factors must be considered for selecting suitable Strikes in order to design a particular Strategy to play out the trend / movement of the underlying\.

Basis the aforesaid discussions on the relevance of Strike levels from the perspective of the Delta value and the Premium at those Strike levels, suitable Strategies can be designed for the different market situations / trend in the underlying by identification of appropriate Strikes for the primary leg and the hedged leg\. Strike levels at which the primary leg and the hedged leg can possibly be initiated to play out the trend would constitute a hedged Strategy\. A few hedged Strategies are briefly discussed below in view of the possible trend in the underlying\.

__Profit & Loss Scenario in trade legs of Hedged Strategies:__

As mentioned above, the primary leg is initiated as our main position basis our view / technical analysis\. Hedged leg is added to the primary leg mainly in order to cover for losses that may occur in the primary leg if our view concerning our main position goes wrong\. Thus, if our main position goes as per our view, then the primary leg generates profit but the hedged leg generates loss\. But if our main position does not go as per our view, then the primary leg generates loss but the hedged leg generates profit\. 

Thus, in any hedged position / Strategy, the basic intention is that the following balance is maintained between the primary leg and hedged leg of a given hedged Strategy: 

- when the main position goes as per plan, then the primary leg generates more profit than the loss generated in the hedged leg, thereby the hedged strategy/position generates net profit; and
- when the main position does not go as per plan, then the primary leg generates a loss but the hedged leg should generate some reasonable profit such that the net loss in the hedged strategy/position is reasonably contained\.

Therefore, the hedged leg must be such that it should not eat the profit generated by the primary leg, yet at the same time must be able to generate suitable profit to reasonably absorb the loss in the primary leg\.

This aforesaid __balance between the primary leg and the hedged leg of a hedged position/ Strategy is primarily maintained in case of Options, through selection of Options pertaining to: relevant Strike level\(s\) and of a given closer or farther Expiry series__\. The relevance of the Strike selection of a specific Expiry series of Options, in case of hedged Strategies/ positions involving Options, is explained below\.

__Trend Identification / View on the Underlying__

Before, we decide on whether to Long or Short an Option or which particular Strategy to deploy, we need to be clear about our view on the underlying\. Therefore, basis the technical analysis, generally speaking, we may have any of the following views on the underlying we wish to play out by trading in Options/ F&O instrument pertaining to that underlying:

- Bullish
- Mildly Bullish
- Bearish
- Mildly Bearish
- Rangebound / sideways \(with narrow range\)
- Rangebound / sideways \(with  wide range\)
- Non\-directional \(may either breakout or breakdown from the range\)

A trader must have proper understanding about determining the trend, as this is the first step of trading\.

__Selection of Suitable Strategy to Play the Trend__

Once, the trend is identified as the first step, and then suitable Strike levels are analysed \(*keeping in mind their Premium, Theta value, Delta value, Expiry etc\.*\) to play out the trend though initiating Long or Short positions for the primary leg and hedged leg, then a most suitable hedged positions/ Strategy can be planned and implemented\.

__Examples of Hedged Strategies to play specific Trend:__

The Table below broadly outlines the Strategy that can be implemented to play out the possible Bearish trend scenario\.

__<start> Bearish Trend__:

“__Trend / view on the underlying__”: “Bearish”, “__Primary Leg \(Naked F&O position\)__”: “PE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Long higher Strike PE having higher Delta \(*primary leg*\); and \(ii\) Short lower Strike PE lower Delta \(*hedged leg*\)”, “__Explanation__:”: “Bearish trend is planned to be played through Long PE\. A PE Short counter position is also executed to mitigate for any loss on the primary leg if the bearish trend reverses\. PE Long is to be initiated on higher Delta thus higher Strike PE, and PE Short is initiated on lower Delta thus lower PE Strike, so that if bearish trend continues then primary leg yields higher profit than the loss on the hedged leg; and if the trend reverses then the hedged leg is not too low on Delta than that of the primary leg so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Further, since higher PE Strike is the Long leg therefore Long leg requires more Premium payment than the Premium credit received on the hedged leg, thus making it a net debit strategy\. Both the primary and hedged leg can be initiated on the same Expiry if Expiry is still far to avoid time decay on the Long leg\. Moreover, the Long leg should be within the Most Impacted Radius Zone in order to get benefited most from the expected bearish momentum\.  This Strategy is called __Bear PE Spread__\.”,

“__Trend / view on the underlying__”: “Bearish”, “__Primary Leg \(Naked F&O position\)__”: “Futures Short”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Long”, “__Strategy / Hedge Design:__”: “\(i\) Short Futures with Delta of 1 \(*primary leg*\); and \(ii\) Long ITM Strike CE with Delta of around 0\.6 or higher \(*hedged leg*\)”, “__Explanation__:”: “Bearish trend is planned to be played through Short Futures\. This primary leg is hedged with a Long CE so that if the trend reverses to an upward momentum then CE Long is able to set\-off the losses on Futures position\. Futures have a Delta of 1, therefore, CE Long must not be having greater difference in the Delta value with the Futures position, so that in case of reversal towards upward momentum CE generates decent profit and can reasonably set\-off losses on Futures\. However, in case of reversal towards slow upward trend, this position should be held only upto a time before Theta starts overpowering profits on the CE Long\. But if the bearish momentum continues as originally envisaged, then Futures being on a higher Delta would yield more profit than the loss incurred on CE Long\. Also, in case of bearish momentum, the maximum loss that can be incurred on the PE hedged leg is to the limited extent of the Premium paid on CE\.”, __<end>__

Thus, suitable hedged strategies can be planned and executed to play a specific market trend with good understanding of the Options behaviour\. 

The Strategies mentioned in the above table briefly gives the reasoning behind its design\.

The Table below broadly outlines the Strategy that can be implemented to play out the possible Bullish trend scenario\.

__<start> Bullish Trend:__

“__Trend / view on the underlying__”: “Bullish”, “__Primary Leg \(Naked F&O position\)__”: “CE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Short”, “__Strategy / Hedge Design:__”: “\(i\) Long lower Strike CE having higher Delta \(*primary leg*\); and \(ii\) Short higher Strike CE with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “Bullish trend is planned to be played through Long CE\. A CE Short counter position is also executed to mitigate for any loss on the primary leg if the bullish trend reverses\. CE Long is to be initiated on higher Delta thus lower Strike CE, and CE Short is initiated on lower Delta thus higher CE Strike, so that if bullish trend continues then primary leg yields higher profit than the loss on the hedged leg; and if the trend reverses then the hedged leg is not too low on Delta than that of the primary leg so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Further, since lower CE Strike is the Long leg therefore Long leg  requires more Premium payment than the Premium credit received on the hedged leg, thus making it a net debit strategy\. Both the primary and hedged leg can be initiated on the same Expiry if Expiry is still far to avoid time decay on the Long leg\. Moreover, the Long leg should be within the Most Impacted Radius Zone in order to get benefited most from the expected bullish momentum\.  This Strategy is called __Bull CE Debit Spread__”,

“__Trend / view on the underlying__”: “Bullish”, “__Primary Leg \(Naked F&O position\)__”: “Futures Long”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Long Futures with Delta of 1 \(*primary leg*\); and \(ii\) Long ITM Strike PE with Delta of around 0\.6 or higher \(*hedged leg*\)”, “__Explanation__:”: “Bullish trend is planned to be played through Long Futures\. The primary leg is hedged with a Long PE so that if the trend reverses to a downward momentum then PE Long is able to set\-off the losses on Futures position\. Futures have a Delta of 1, therefore, PE Long must not be having greater difference in the Delta values with the Futures position, so that in case of reversal towards downward momentum PE generates decent profit and can reasonably set\-off losses on Futures\. However, in case of reversal towards slow downward trend, this position should be held only upto a time before Theta starts overpowering profits on the PE Long\. But if the bullish momentum continues as originally envisaged, then Futures being on a higher Delta would yield more profit than the loss incurred on PE Long\. Also, in case of bullish momentum, the maximum loss that can be incurred on the PE hedged leg is to the limited extent of the Premium paid on PE\.”,__ <end>__

The Table below broadly outlines the Strategy that can be implemented to play out the possible Mildly Bearish trend scenario\.

__<start> Mildly Bearish Trend__:

“__Trend / view on the underlying__”: “Mildly Bearish”, “__Primary Leg \(Naked F&O position\)__”: “CE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Long”, “__Strategy / Hedge Design:__”: “\(i\) Short CE at lower Strike with higher Delta \(*primary leg*\); and \(ii\) Long CE at higher Strike with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “Mild bearish trend is planned to be played through CE Short\. A CE Long counter position is also executed to mitigate for any loss on the primary leg if the mild bearish trend reverses on the upside\. CE Short is to be initiated on higher Delta thus lower Strike CE, and CE Long is initiated on lower Delta thus higher CE Strike, so that if mild bearish trend continues then primary leg yields higher profit than the loss on the hedged leg; and if the trend reverses then the hedged leg is not too low on Delta than that of the primary leg so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Further, since lower CE Strike is the Short leg therefore Short leg  received more Premium credit than the Premium paid on the higher CE Strike Long leg, thus making it a net credit strategy\. Both the primary and hedged leg can be initiated on the same Expiry\. The net Premium credit received in this strategy needs to be protected and the net credit of premium received shall be the maximum profit in this strategy\. The Short leg should be such which must be at Far OTM Strike so that it expires as OTM on Expiry\.  This Strategy is called __Bear CE Credit Spread__\.”,

“__Trend / view on the underlying__”: “Mildly Bearish”, “__Primary Leg \(Naked F&O position\)__”: “Futures Short”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Short Futures with Delta of 1 \(*primary leg*\); and \(ii\) Short OTM Strike PE \(*hedged leg*\)”, “__Explanation__:”: “Mild bearish trend is planned to be played through Short Futures\. This primary leg is hedged with a Short PE so that if the trend reverses to an upward momentum then PE short is able to set\-off the losses on Futures position\. Further, in order to benefit from Theta the PE Short leg should be such which must be at Far OTM Strike so that it expires as OTM on Expiry\. If PE Short leg expires as OTM then the hedged leg position yields profit\. Futures have a Delta of 1, therefore, if the mild bearish trend reverses to a steep upward momentum, then the PE short leg would not be able to absorb the loss on the Futures Short leg more than the Premium credit received on the PE short leg \(the maximum profit of the hedged leg\)\. Moreover, since PE Short leg is initiated on Far OTM Strike, the Delta value of Short leg will be too less as compared to that of the Futures Short leg, therefore, the loss incurred on account of steep reversal on the upside would be phenomenally higher\. Thus, instead of Far OTM PE, near OTM PE or ATM PE or even near ITM PE can be Shorted for the hedged leg\. This Strategy is called __Covered Put__\.”, __<end>__

The Table below broadly outlines the Strategy that can be implemented to play out the possible Rangebound/ Sideways \(*non\-directional*\) Trend scenario\.

__<start> Rangebound/ Sideways \(*non\-directional*\) Trend__:

“__Trend / view on the underlying__”: “Rangebound / sideways”, “__Primary Leg \(Naked F&O position\)__”: “CE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Short ATM CE \(*primary leg*\); and \(ii\) Short ATM PE \(*primary leg*\)”, “__Explanation__:”: “When underlying is expected to remain within a very tight range from its current level and Expiry is expected almost close to the current price level, then ATM CE & PE can be shorted to benefit from the rangebound up & down move of the underlying which causes erosion of the Time Value in the Shorted Options; and also to benefit from Theta decay: as by Expiry both or one of the Short leg would Expire worth less yielding entire Premium credit on that leg as profit and the other leg may also face some decay of the Time Value even if it expires as an ITM very close to ATM\.  The ATM Strike commands a very good Premium with highest Theta value and 100% Time Value in the Premium\. However, this Strategy comprises of naked Short positions, which may yield potentially unlimited loss if the underlying breaksout in either direction\. However, so long the underlying hovers up & down within the tight range, the two Short legs in this strategy being ATM Strikes have same Delta values and therefore have a neutral or balanced Delta effect \(i\.e\. when one leg profits other looses in almost same proportion\)\. The strategy has an aggregate Premium credit, which needs to be retained for deriving profit\. This Strategy is called __Short Straddle__\.”,

“__Trend / view on the underlying__”: “Rangebound / sideways”, “__Primary Leg \(Naked F&O position\)__”: “CE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Short OTM CE with similar Delta value as that of PE leg \(*primary leg*\); and \(ii\) Short OTM PE with similar Delta value as that of CE leg \(*primary leg*\)”, “__Explanation__:”: “When the underlying is expected to remain within a wide range and Expiry is expected somewhere between the anticipated wide range from the current price level, then OTM CE & PE can be shorted to benefit from the rangebound up & down move of the underlying which causes erosion of the Time Value in the Shorted Options; and also to benefit from Theta decay: as by Expiry at best both of the  Short leg would Expire worthless yielding entire Premium credit on both the legs as profit\. The OTM Strike has relatively less Premium but has 100% Time Value in the Premium\. However, this Strategy comprises of naked Short positions, which may yield potentially unlimited loss if the underlying breaksout in either direction and one of the Short leg ends up as an ITM by Expiry\. The two OTM strikes which are selected  must be having similar Delta values \(and almost same Premium values\), so that so long the underlying hovers up & down within the wide defined range, the two Short legs would  have a neutral or balanced Delta effect \(i\.e\. when one leg profits other looses in almost same proportion\)\. The strategy has an aggregate Premium credit, which needs to be retained for being profitable\. This Strategy is called __Short Strangle__\.”,

“__Trend / view on the underlying__”: “Rangebound / sideways”, “__Primary Leg \(Naked F&O position\)__”: “CE Short & PE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Long & PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Short ATM CE with higher Delta \(*primary leg*\) and Long OTM CE at higher Strike with lower Delta \(*hedged leg*\); and \(ii\) Short ATM PE with higher Delta \(*primary leg*\) and Long OTM PE at lower Strike with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “When underlying is expected to remain within a very tight range from its current level and Expiry is expected almost close to the current price level, then ATM CE & PE can be shorted for the reasons explained in case of Short Straddle Strategy\. However, in this strategy, both the naked Short positions are hedged by simultaneously initiating Long counter position to mitigate for any loss on the primary Short leg if the underlying breakouts the narrow range and starts trending in one direction\. Both CE Long and PE Long hedged legs are initiated on lower Delta thus OTM CE & PE Strike\. Consequently, Short legs receives more Premium credit than the premium paid for the Long legs\. Thus this strategy is a net premium credit strategy, which needs to be retain for being profitable in this strategy\. If the underlying by Expiry remains within the narrow range then the primary Short leg yields higher profit than the loss on the hedged leg; and if the underlying breaks out of the narrow range in either direction, then the hedged leg must not be too low on Delta than that of the primary leg, so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Both the primary and hedged leg can be initiated on the same Expiry\. The net Premium credit received in this strategy shall be the maximum profit in this strategy\.  This strategy is therefore hedged Short Straddle, referred to as__ Iron Fly or Iron Butterfly\.__”,

“__Trend / view on the underlying__”: “Rangebound / sideways”, “__Primary Leg \(Naked F&O position\)__”: “CE Short & PE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Long & PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Short OTM CE at lower Strike with higher Delta \(*primary leg*\) and Long CE at higher Strike with lower Delta \(*hedged leg*\); and \(ii\) Short OTM PE at higher Strike with higher Delta \(*primary leg*\) and Long PE at lower Strike with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “When the underlying is expected to remain within a wide range and Expiry is expected somewhere between the anticipated wide range from the current price level, then OTM CE & PE can be shorted for the reasons explained in case of Short Strangle Strategy\. However, in this strategy, both the naked Short positions are hedged by simultaneously initiating Long counter position to mitigate for any loss on the primary Short leg if the underlying breakouts the defined range and starts trending in one direction\. Both CE Long and PE Long hedged legs are initiated on lower Delta thus even Far OTM CE & PE Strikes\. Consequently, Short legs receives more Premium credit than the premium paid for the Long legs\. Thus this strategy is a net premium credit strategy, which needs to be retained for being profitable in this strategy\. If the underlying by Expiry remains within the defined range then the primary Short leg yields higher profit than the loss on the hedged leg; and if the underlying breaks out of the defined range in either direction, then the hedged leg must not be too low on Delta than that of the primary leg, so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Both the primary and hedged leg can be initiated on the same Expiry\. The net Premium credit received in this strategy shall be the maximum profit in this strategy\.  This strategy is therefore hedged Short Strangle, referred to as__ Iron Condor__\.”, __<end>__

The Table below broadly outlines the Strategy that can be implemented to play out the possible Rangebound/ Sideways \(*non\-directional*\)__ __trend scenario\.

“__Trend / view on the underlying__”: “Non\-directional \(may either breakout or breakdown from the range\)”, “__Primary Leg \(Naked F&O position\)__”: “CE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Long ATM CE \(*primary leg*\); and \(ii\) Long ATM PE \(*primary leg*\)”, “__Explanation__:”: “When underlying is expected to take a sudden strong momentous move shortly in any one direction from its current level \(owing to some news, event or results etc\.\), about which there is no certainty as to in which direction the momentum would arrive, then such expected momentous move can be played out by initiating a neutral position through Long ATM CE & ATM PE\. However, in this strategy, the requirement is that momentum should be strong and must arrive soon before Theta starts eroding the Premium\. Both the positions are naked Long positions initiated at ATM thereby maintaining a neutral Delta position on the strategy\. Moreover, since both the positions are Long positions therefore this strategy is an aggregate Premium debit strategy, which needs to be first set\-off from the profits so as to be net profitable in this strategy\. Both the positions can be initiated on the same Expiry\. If the momentum fails to arrive soon or is feeble then the maximum loss that may occur in this strategy shall be limited to the extent of the aggregate premium paid on this strategy\.  This strategy is referred to as__ Long Straddle__\.”,

“__Trend / view on the underlying__”: “Non\-directional \(may either breakout or breakdown from the range\)”, “__Primary Leg \(Naked F&O position\)__”: “CE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Long OTM PE with similar Delta value as that of CE leg \(*primary leg*\); and \(ii\) Long OTM PE with similar Delta value as that of CE leg \(*primary leg*\)”, “__Explanation__:”: “When underlying is expected to take a sudden strong momentous move shortly in any one direction from its current level and keep trending in that direction \(owing to some news, event or results etc\.\), about which there is no certainty as to in which direction the momentum would arrive, then such expected momentous move can be played out by initiating a neutral position through Long OTM CE & OTM PE\. However, in this strategy, the requirement is that momentum should be strong and must arrive soon before Theta starts eroding the Premium on both OTM legs\. Both the positions are naked Long positions initiated at OTM Strikes having similar Delta values \(and similar Premium values\), thereby maintaining a neutral Delta position on the strategy\. Moreover, since both the positions are Long positions therefore this strategy is an aggregate Premium debit strategy, which needs to be first set\-off from the profits so as to be net profitable in this strategy\. Both the positions can be initiated on the same Expiry, provided, the Theta value is still less and favourable \(i\.e\. there is reasonable time for Expiry\)\. However, if the momentum fails to arrive soon or is feeble, then the maximum loss that may occur in this strategy shall be limited to the extent of the aggregate premium paid on this strategy\.  This strategy is referred to as__ Long Strangle__\.”,

“__Trend / view on the underlying__”: “Non\-directional \(may either breakout or breakdown from the range\)”, “__Primary Leg \(Naked F&O position\)__”: “CE Long & PE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Short & PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Long ATM CE having higher Delta \(*primary leg*\) and Short higher Strike OTM CE with lower Delta \(*hedged leg*\); and \(ii\) Long ATM PE having higher Delta \(*primary leg*\) and Short lower Strike PE with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “When underlying is expected to breakout / take a strong momentous move in any one direction from its current level, then Long position on ATM CE & PE can be  initiated for the reasons explained in case of Long Straddle Strategy\. However, in this strategy, both the naked Long positions are hedged by simultaneously initiating Short counter positions on OTM Strikes to mitigate for any loss on the primary Long leg\(s\) if the underlying fails to breakout and take a strong momentous move in any one direction shortly, because then the rangebound underlying will eat away the premium on the Long legs and Theta will further erode their premium value\. In such situation, the Short legs will also face erosion in their premium value and therefore will generate some profit which will mitigate the losses on the Long legs\(s\)\. Both CE Long and PE Long hedged legs are initiated on higher Delta as they are ATM Strikes, while the Short legs initiated on OTM Strikes are on lower Delta\. Consequently, Long legs pays more Premium than the premium credit received on the Short legs\. Thus this strategy is a net premium  debit strategy, which needs to be first recovered in order for this strategy to be profitable, for which the underlying must soon take a momentous move in any one direction such that the net profit will be much higher than the aggregate net premium paid on the strategy\. If the underlying by Expiry remains within a range or momentum is slow and weak, then this strategy may suffer loss to the maximum extent of the aggregate net  premium paid on this strategy\. Both the primary and hedged leg can be initiated on the same Expiry\. This strategy is, therefore, hedged Long Straddle, and is called __Reverse Iron Butterfly or Reverse Iron Fly__\.”,

“__Trend / view on the underlying__”: “Non\-directional \(may either breakout or breakdown from the range\)”, “__Primary Leg \(Naked F&O position\)__”: “CE Long & PE Long”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Short & PE Short”, “__Strategy / Hedge Design:__”: “\(i\) Long OTM CE at lower Strike having higher Delta \(*primary leg*\) and Short higher Strike OTM CE with lower Delta \(*hedged leg*\); and \(ii\) Long OTM PE at higher Strike having higher Delta \(*primary leg*\) and Short lower Strike PE with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “When underlying is expected to breakout / take a strong momentous move in any one direction from its current level and to trend in that direction until around Expiry, then Long position on OTM CE & PE can be  initiated for the reasons explained above in case of Long Strangle Strategy\. However, in this strategy, both the naked Long positions are hedged by simultaneously initiating Short counter positions on even far OTM Strikes on both Ce & PE sides, to mitigate for any loss on the primary Long leg\(s\) if the underlying fails to breakout and take a strong momentous move in any one direction shortly, because then the rangebound underlying will eat away the premium on the Long legs and Theta will further erode their premium value\. To cater to such situation, the Short legs will also face erosion in their premium value and therefore will generate some profit which will mitigate the losses on the Long legs\(s\)\. Both CE Long and PE Long hedged legs are initiated on higher Delta i\.e\. CE Long on lower Strike and PE Long on higher Strike, than their respective hedged legs comprising of even farther OTM Strikes \(i\.e\. CE Short on higher Strike and PE Short on lower Strike\)\. Consequently, Long legs pays more Premium than the premium credit received on the Short legs\. Thus this strategy is a net premium  debit strategy, which needs to be first recovered in order for this strategy to be profitable, for which the underlying must soon take a momentous move in any one direction such that the net profit will be much higher than the aggregate net premium paid on the strategy\. If the underlying by Expiry remains within a range or momentum is slow and weak, then this strategy may suffer loss to the maximum extent of the aggregate net  premium paid on this strategy\. Both the primary and hedged leg can be initiated on the same Expiry\. This strategy is, therefore, hedged Long Strangle, and is called __Reverse Iron Condor__\.”, __<end>__

The Table below broadly outlines the Strategy that can be implemented to play out the possible Mild Bullish trend scenario\.

__<start> Mildly Bullish Trend__:

“__Trend / view on the underlying__”: “Mildly Bullish”, “__Primary Leg \(Naked F&O position\)__”: “PE Short”, “__Hedged Leg__ __\(Counter positions\)__”: “PE Long”, “__Strategy / Hedge Design:__”: “\(i\) Short PE at higher Strike with higher Delta \(*primary leg*\); and \(ii\) Long PE at lower Strike with lower Delta \(*hedged leg*\)”, “__Explanation__:”: “Mild bullish trend is planned to be played through PE Short\. A PE Long counter position is also executed to mitigate for any loss on the primary leg if the mild bullish trend reverses on the downside\. PE Short is to be initiated on higher Delta thus higher Strike PE, and PE Long is initiated on lower Delta thus lower PE Strike, so that if mild bullish trend continues then primary leg yields higher profit than the loss on the hedged leg; and if the trend reverses then the hedged leg is not too low on Delta than that of the primary leg so as to be able to reasonably mitigate the loss on the primary leg through the profit generated on the hedged leg\. Further, since higher PE Strike is the Short leg therefore Short leg  received more Premium credit than the Premium paid on the lower PE Strike Long leg, thus making it a net credit strategy\. Both the primary and hedged leg can be initiated on the same Expiry\. The net Premium credit received in this strategy needs to be protected and the net credit of premium received shall be the maximum profit in this strategy\. The Short leg should be such which must be at Far OTM Strike so that it expires as OTM on Expiry\.  This Strategy is called __Bull PE Credit Spread__”,

“__Trend / view on the underlying__”: “Mildly Bullish”, “__Primary Leg \(Naked F&O position\)__”: “Futures Long”, “__Hedged Leg__ __\(Counter positions\)__”: “CE Short”, “__Strategy / Hedge Design:__”: “\(i\) Long Futures with Delta of 1 \(*primary leg*\); and \(ii\) Short OTM Strike CE \(*hedged leg*\)”, “__Explanation__:”: “Mild bullish trend is planned to be played through Long Futures\. The primary leg is hedged with a Short CE so that if the trend reverses to a downward momentum then CE short is able to set\-off the losses on Futures position\. Further, in order to benefit from Theta the CE Short leg should be such which must be at Far OTM Strike so that it expires as OTM on Expiry\. If CE Short leg expires as OTM then the hedged leg position yields profit\. Futures have a Delta of 1, therefore, if the mild bullish trend reverses to a steep downward momentum, then the CE short leg would not be able to absorb the loss on the Futures Long leg more than the Premium credit received on the CE short leg \(the maximum profit of the hedged leg\)\. Moreover, since CE Short leg is initiated on Far OTM Strike, the Delta value of Short leg will be too less as compared to that of the Futures Long leg, therefore, the loss incurred on account of steep reversal on the downside would be phenomenally higher\. Thus, instead of Far OTM CE, near OTM CE or ATM CE even near ITM CE can be Shorted for the hedged leg\. This Strategy is called __Covered Call\.__”, __<end>__

__*About: Conventional Strategies*__

It needs to be understood that in order to design / play a particular Strategy, it is very important to have a sound understanding about the following concepts regarding FNO, broadly segregated below: 

1. The basic features about the Futures and Options, behavioural aspects of Options under different market dynamics and the understanding & significance of Long Options and Short Options positions; and
2. Factors to be considered for initiating / designing a trading position / Strategy \(*viz\., trend, Premium debit/credit, effects of Options Greeks etc\.*\) and Trade Adjustments that may be considered if the original trade position goes wrong\. 

These aforesaid aspects are extremely crucial and forms the backbone of all the F&O trades\. 

<a id="_Hlk138294106"></a>In the context of Conventional Strategies, we would be discussing here in\-depth about various important parameters of each of Strategies, viz\. __its objective, merits & demerits, Breakeven levels, Profit & loss scenario, Payoff charts, Risk & Reward, Options behaviour and inter\-play of Greeks, selection of Strikes, the logic behind the design of a Strategy and possible adjustments should the Strategy seems to fail its expectation__\.

However, before contemplating to trade in F&O, we would like to again upfront highlight as a __caution that:__ __one must avoid to trade in FNO instruments of such asset class / underlying \(*like FNO stocks*\), where there is a requirement to comply with physical delivery__\. Because if the FNO instruments of such underlying / assets \(*which is subject of physical delivery requirements*\) expires as an ITM, then even though any given Strategy may be overall profitable, but such situation may warrant the trader to unnecessarily comply with the physical delivery requirements\. Hence, if any Strategy is executed deploying FNO instruments in relation to such assets/ underlying \(*which are subject to physical delivery requirements*\), then it is advisable to not hold the trading positions in such instruments till Expiry \(or even near to Expiry\)\. Instead, it is advisable to play any trading Strategy\(ies\) on positional basis, only on Indices/ assets, where there is no requirements toward physical delivery *viz\. Nifty FNO / BankNifty FNO / FinNifty FNO etc\., *so as completely avoid unwarranted situation which may fall upon due to any factor beyond one’s control\.

Also, in relation to trade in F&O, it must be clearly understood that knowing Strategies alone is not sufficient to be profitable in a trade, as the market can be unexpectedly very volatility \(especially on Expiry Days\) and there can be numerous factors beyond the knowledge and control of a trader which may influence the trade plan or outcome of a Strategy\. Therefore, every trader must first acquire the relevant knowledge and then devote time to develop his trading skill by testing different Strategies in different market conditions, by practicing first on some virtual trading platform and then starting with real trades in just one or two Lots\. We have discussed about this aspect of learning and skill development in detail in our __Chapter: Golden Rules \(‘Dos’ & Don’ts in Trading’\)__ contained in Volume I of our Book on Basic F&O\. Please go through these trading rules carefully \!

__List of Different Conventional Strategies covered in Vol\-2 of the Book__

Having said above, we are going to now explore about following 24 different Conventional Strategies, both hedged & naked, which are commonly employed to play specific market trends:

<a id="_Hlk159406772"></a>__<start> Table:__

“__Sl\. No\.__”: “1”, “__Strategy__”: “Covered Call”, “__To Play the Trend__”: “Bullish to sideways”,

“__Sl\. No\.__”: “2”, “__Strategy__”: “Covered Put”, “__To Play the Trend__”: “Bearish to sideways”,

“__Sl\. No\.__”: “3”, “__Strategy__”: “Big Boy’s Covered Call and Poor Man’s Covered Call”, “__To Play the Trend__”: “Bullish to sideways”,

“__Sl\. No\.__”: “4”, “__Strategy__”: “Poor Man’s Covered Put”, “__To Play the Trend__”: “Bearish to sideways”,

“__Sl\. No\.__”: “5”, “__Strategy__”: “Collar Strategy for Covered Call”, “__To Play the Trend__”: “Bearish”,

“__Sl\. No\.__”: “6”, “__Strategy__”: “Collar Strategy for Covered Put”, “__To Play the Trend__”: “Bullish”,

“__Sl\. No\.__”: “7”, “__Strategy__”: “Covered Call \(*stock*\)”, “__To Play the Trend__”: “Mild Bullish to sideways”,

“__Sl\. No\.__”: “8”, “__Strategy__”: “Married Put or Protective Put \(*Stock*\)”, “__To Play the Trend__”: “Bearish”,

“__Sl\. No\.__”: “9”, “__Strategy__”: “Bull Call Debit Spread”, “__To Play the Trend__”: “Bullish”,

“__Sl\. No\.__”: “10”, “__Strategy__”: “Bear Put Debit Spread”, “__To Play the Trend__”: “Bearish”,

“__Sl\. No\.__”: “11”, “__Strategy__”: “Bull Put Credit Spread”, “__To Play the Trend__”: “Bullish to sideways”,

“__Sl\. No\.__”: “12”, “__Strategy__”: “Bear Call Credit Spread”, “__To Play the Trend__”: “Bearish to sideways”,

“__Sl\. No\.__”: “13”, “__Strategy__”: “Call Ratio Spread”, “__To Play the Trend__”: “Bullish to sideways”,

“__Sl\. No\.__”: “14”, “__Strategy__”: “Put Ratio Spread”, “__To Play the Trend__”: “Bearish to sideways”,

“__Sl\. No\.__”: “15”, “__Strategy__”: “Call Calendar Spread”, “__To Play the Trend__”: “Bullish to sideways”,

“__Sl\. No\.__”: “16”, “__Strategy__”: “Put Calendar Spread”, “__To Play the Trend__”: “Bearish to sideways”,

“__Sl\. No\.__”: “17”, “__Strategy__”: “Short Strangle \(*naked*\)”, “__To Play the Trend__”: “Neutral \(*underlying to expire within a range*\)”,

“__Sl\. No\.__”: “18”, “__Strategy__”: “Iron Condor* \(hedged Short Strangle\)*”, “__To Play the Trend__”: “Neutral \(*underlying to expire within a range*\)”,

“__Sl\. No\.__”: “19”, “__Strategy__”: “Short Straddle \(*naked*\)”, “__To Play the Trend__”: “Neutral \(*underlying to be in a tight range*\)”,

“__Sl\. No\.__”: “20”, “__Strategy__”: “Iron Fly* \(hedged Short Straddle\)*”, “__To Play the Trend__”: “Neutral \(*underlying to be in a tight range*\)”,

“__Sl\. No\.__”: “21”, “__Strategy__”: “Long Strangle \(*naked*\)”, “__To Play the Trend__”: “Neutral \(*underlying to be in move with momentum in either direction outside a wide range*\)”,

“__Sl\. No\.__”: “22”, “__Strategy__”: “Reverse Iron Condor \(*hedged Long Straddle*\)”, “__To Play the Trend__”: “Neutral \(*underlying to be in move with momentum in either direction outside a wide range*\)”,

“__Sl\. No\.__”: “23, “__Strategy__”: “Long Straddle \(*naked*\)”, “__To Play the Trend__”: “Neutral \(*underlying to be in move with momentum in either direction outside a narrow range*\)”,

“__Sl\. No\.__”: “24, “__Strategy__”: “Reverse Iron Fly \(*hedged Long Straddle*\)”, “__To Play the Trend__”: “Neutral \(*underlying to be in move with momentum in either direction outside a narrow range*\)”, __<end>__

Besides the fact that the aforesaid Strategies pertain to play out different market conditions; these Conventional Strategies is a mixed bag of Strategies, involving: naked & hedged Strategies, Premium Debit & Credit Strategies, Long Options & Short Options, Vertical & Horizontal Spreads, Calendar & Ratio Spreads etc\., thus providing analysis on Strategies of varied spectrum\. 

Further, in addition to the aforesaid 24 most popular Conventional Strategies, we have also discussed and provided a brief overview about 6 more Strategies, which are a by\-product or a combination of a few of the aforementioned Conventional Strategies\. These 6 Strategies are: 

1. __Call Ratio Backspread Strategy__
2. __Put Ratio Backspread Strategy__
3. __Call Butterfly Strategy__
4. __Put Butterfly Strategy__
5. __Call Brokenwing Butterfly Spread Strategy__
6. __Put Brokenwing Butterfly Spread Strategy__

Thus, we have discussed about 30 different Conventional Strategies, which not only pertains to different Strikes but for some Strategy even different Expiry series\. A lot of these Strategies are a mix of two or more Strategies or a reversal of some other Strategies\. It is very interesting to see the implementation of different thoughts in designing a particular Strategy and utilisation of different strategy\-mix to develop altogether a different Strategy for a different objective and risk & reward\. This understanding is extremely crucial for a trader to evolve as a pro\.

For a beginner it may appear to be a difficult task to have all these Conventional Strategies on his fingertips\. The basic design of some of these Strategies may also appear to be so close to each other that they appear get confusing at times\. While, it may appear to be little confusing initially or you may get a feeling that every Strategy you learnt is getting messed up in your head; but be assured that with time all this will surely be within your grip because it is definitely not so complex as it appears to be\.

Further, as mentioned above, for the purpose of practical trading, it is important to understand the various facets of these Strategies to get a comprehensive understanding\. The in\-depth discussions on these Strategies would instil a logical thinking to appreciate the construct of these Strategies, which are devised to play a particular market condition; and to help understand the possible ways by which a trade position may be adjusted if it appears to be not going as initially expected\. This understanding will not only help a trader to be able to dissect a Strategy, but will also help to evolve as an informed trader who would know what to deploy when and how to construct and adjust a trade as the situation merits\. Also, this analysis about each  of these Strategies can also be used as a reference, from time to time, as may be relevant in the context of planning or managing a trading position\.

Furthermore, it  must be noted that in order to be able to dissect a Strategy or to initiate/ manage a trading position, every trader must have a sound understanding about the relevant aspects, viz\.  the net premium position, the net Delta position on inception, the inter\-play of Greeks, behaviour of Options to different market scenarios, profit & loss levels, risk and reward potential etc\. A sound understanding of these concepts  helps a great deal in planning and managing a trade, and to eventually evolve as a pro\. It is, therefore, a sincere request to revisit any of the Chapters of our Book \(in Volume\-I or Volume\-II\) on any of the aforementioned aspects, if the same is not very clear to you\. We feel confident that a thorough read would help you absorb the concept and include the same in your knowledge bank, which will be a very useful arsenal for you, in the battlefield of trading\.

__Selection of Option Strike for hedged leg in Cash Covered Call__

For a strong conviction for mild bullish to sideways view, an ATM CE / Near OTM would be suitable; but where the view is little uncertain and reversal seems a good possibility then it is better to  initiate Married Put instead of Covered Call to hedge investments\.

CE Strike for the hedged leg in this strategy should be such which should have decent Premium value\. Next Month or farther Expiry CE may have higher Premium but lower Theta impact\.

Further, its Delta value should be such that it does not eat away much profit from the primary leg; and at the same time is able to cover losses reasonably that may occur on the primary leg if the trade does not go as per plan\.

Further, the CE Short should be initiated at such Strike, keeping in mind that if the underlying remains sideways then the Theta impact should yield reasonable profit in the hedged leg\. Current Month CE will have higher Theta impact\.

Basis aforesaid factors, depending on the intended holding time of the trade, a suitable CE Option Strike level of a particular Expiry series and Delta value may be selected to Short\.

__Covered Call Strategy with Stocks / Investments: Its Trade Legs and Objective__

In __Cash Covered Call Strategy,__ existing investments are hedged by Shorting Call in order to cover the downside risk; however, the same can also be achieved by buying Puts instead of Shorting Calls\. Thus, when existing investments in stocks etc\. are hedged by taking a Long position in Puts of that underlying, then such Strategy is called __Married Put__\.

__Trade Legs of Cash Covered Call Strategy__:

- Stocks bought \(*primary leg*\)
- Short CE \(*hedged leg*\)

__Objective of Cash Covered Call__: Objective is to mitigate the risk / loss that may arise if the primary leg with mild bullish view on investment gets reversed\. Then upon such reversal the loss in the primary leg will get covered to some extent \(i\.e\. *to the extent of Premium received on CE Short*\) by the hedged leg initiated with a bearish view\.

__Payoff for Cash Covered Call Strategy__

__<start>__

__<img42>__

__<end>__

__Breakeven Strike and Payoff Chart for Cash Covered Call Strategy__

__Breakeven Strike for Cash Covered Call Strategy, from Expiry perspective__:

If the underlying starts falling, then the Breakeven Price level, below which the loss will arise in this Strategy is: 

__<start> Formula__: \[Buying Price – Premium Credit received on CE Short\]\. Below this level, this Strategy would enter into unlimited loss situation\. __<end>__

__<start> Payoff for Cash Covered Call Strategy: __

__<end>__

__Profit and Loss Area in Cash Covered Call__

__Max Loss in Cash Covered Call, from Expiry perspective:__

Below the Breakeven price level, there could be unlimited loss in this Strategy if the underlying keeps slipping down below the Breakeven price level of the primary leg\.

__Max Reward in Cash Covered Call Strategy,  from Expiry perspective__:

Maximum reward would be generated in this Strategy, if the underlying by Expiry of the CE Short leg, closes at the CE Short Strike or at any higher Strike than the CE Short Strike\. 

Thus, this maximum reward situation can be targeted on this strategy when the view is mildly bullish on the underlying\.

__<end>__

__Adjustment in Cash Covered Call, by conversion to Collar__

Addition of Married Put to the Covered Call Strategy will make it a Collar Strategy\.

Married Put will be required to be added to the Covered Call, if the underlying reverses and becomes extremely bearish trending with downward momentum\. In such situation on bearish reversal, the unlimited loss situation on the Covered Call can be mitigated by adding Far OTM PEs, thereby converting Covered Call into Collar Strategy\.

Conversion of Covered Call into Collar can be adopted as an adjustment to Covered Call Strategy, when the underlying does not seem to be trending upwardly with mild bullish trend but is likely to fall downwardly with momentum exhausting the Premium Credit received on the CE Short leg and pushing the Covered Call Strategy into unlimited loss situation\. Thus, adding Long PEs will help counter the  Collar Strategy makes the overall Strategy a limited profit and limited loss Strategy\.

__Demerits and Benefits of Cash Covered Call__

__Demerits of Cash Covered Call__:

- Shorting Options require huge margin and MTM issues need to be taken care\.
- Short CE in the hedged leg can cover limited risk in the stock holding position in the primary leg, i\.e\. to the extent of Premium received in the CE Short position\.

__Benefits of Cash Covered Call:__

- CE Short gives Premium as Credit\.
- Hedged leg can also be introduced as part of Big Boy’s Covered Call Strategy to earn regular rental income therefrom\. While, the hedged leg continues to protect the downside on the already existing investments \(*such as in stocks, NiftyBees, BankNifty Bees etc\.*\), the hedged leg can help earn regular income by virtue of Theta impact on OTM CE Short leg by its Expiry\. This process of introduction of hedged leg can be done regularly to earn rental income on investments\. This Strategy is covered in detail in our Next Chapter \(Customised Strategies\)\.
- This is a very suitable Strategy for a mild bullish to rangebound underlying  \(as the CE Short hedged leg would generate profit due to Theta impact\)\.

__Breakeven Strike in Reverse Iron Condor Strategy, and its Calculation & Payoff Chart__

__Breakeven Strike of Reverse Iron Condor Strategy, from Expiry perspective__:

The CE side comprises of CE Long primary leg at higher Premium and CE Short hedged leg at lower Premium\. Thus, there is a Net Premium Debit on the CE side of Reverse Iron Condor\.

Likewise, the PE side comprises of PE Long primary leg at higher Premium and PE Short hedged leg at lower Premium\. Thus, there is a Net Premium Debit on the PE side of Reverse Iron Condor\.

The sum of the Net Premium Debit on the CE and PE Side is the aggregate Net Premium Debit paid in this Reverse Iron Condor__* *__Strategy\. Accordingly:

<__start__> 

- *the Breakeven Strike of the CE side in Reverse Iron Condor*__* *__*Strategy \(upper range\) is*: \[CE Long primary leg Strike \+ the aggregate Net Premium Debit in the Strategy\]; and
- *the Breakeven Strike of the PE side in Reverse Iron Condor Strategy \(lower range\) is*: \[PE Short primary leg Strike \- the aggregate Net Premium Debit in the Strategy\]\. <__end__>

Thus, if by Expiry of the Long Options, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. 

However, if by Expiry of these Options, the underlying fails to cross\-over either upper or lower side of the Breakeven Strikes, then the Strategy would yield loss, which may extend  upto the maximum loss level equivalent to the total Net Premium paid on the Strategy\. 

<__start__> *For example: If Nifty ATM is at 17000, then for Reverse Iron Condor: If Nifty 17500 CE is bought at Rs\. 250 per Lot & Nifty 17800 CE is sold at Rs\. 150, for the CE side of this Strategy; and Nifty 16500 PE is bought at Rs\. 200 per Lot & Nifty 16200 PE is sold at Rs\. 100 per Lot, for the PE side of this Strategy, then:*

*the Net Premium Debit paid on this Strategy will be: \[\(250\+200\) – \(150\+100\)\] = 450 – 250 = 200*

- *Breakeven Strike of this Strategy on upper range \(CE side\) will be: 17500 \+ 200 = 17700 CE*
- *Breakeven Strike of this Strategy on lower range \(PE side\) will be: 16500 \- 200 = 16300 PE*

*Thus, if by Expiry, the underlying  successfully crosses\-over the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry, the underlying fails to successfully cross\-over the relevant Breakeven Strike on either side, then the Strategy would yield loss \(which may be upto a maximum extent of the Rs\. 200 per Lot, i\.e\. the net Premium paid of this Strategy\)\.*

*Thus, in the aforementioned example: if the underlying goes higher until Expiry and successfully crosses\-over the upper Breakeven Strike i\.e\. 17700 CE and keeps trending higher, then the Strategy will be in profit; but if the underlying by Expiry fails to breach the Breakeven Strike of 17700, then this Strategy will incur loss \(which may be upto a maximum extent of Net Premium paid on this Strategy \(i\.e\. Rs\. 200 per Lot\)\)\.*

*Likewise, if the underlying goes lower until Expiry and successfully crosses\-over the lower Breakeven Strike i\.e\. 16300 PE and keeps trending lower then the Strategy will be in profit; but if the underlying by Expiry fails to breach the Breakeven Strike of 16300, then this Strategy will incur loss \(which may be upto a maximum extent of Net Premium paid on this Strategy \(i\.e\. Rs\. 200 per Lot\)\)*\. <__end__>

<__start__>

__Payoff Chart of Reverse Iron Condor__

<__img57__>

<__end__>

__Reverse Iron Condor Strategy: Its Trade Legs & Objective__

When a view is formed that the underlying would soon likely to take a directional move in any one direction, may be on account of any news, outcome, event etc\., but it is not certain in which direction that momentum movement of the underlying is likely to occur, then such view can be played out by a neutral strategy employing Long Options positions in Far OTM Strikes with the expectation that the underlying by Expiry would make its one\-sided strong momentum move\. 

Thus, when the view on the underlying is that it is expected to make one sided strong momentum move but it is not certain that in which direction the underlying would make such a move; and such situation is played out through Long positions in Naked Far OTM CE & PE Options pertaining to that Expiry series \(*by which the underlying is expected to make such one\-sided strong momentum move*\), then such a Strategy is called __Long__ __Strangle__\.

However, when the Long Strangle \(naked Strategy\) is hedged with Short Options on even Far OTM Strikes \(*than the Strikes at which Long has been or intended to be initiated as part of Long Strangle Strategy*\), then such Strategy is called __Reverse__ __Iron Condor __\(also called as, __Long Iron Condor__\)\. In Reverse Iron Condor Strategy, there is \(i\) Far OTM CE Long \(__CE primary leg__\) and even Far OTM CE Short \(__CE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series; and \(ii\) Far OTM PE Long \(__PE primary leg__\) and even Far OTM PE Short \(__PE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series\. 

In essence, Reverse Iron Condor is pairing of Bull Call Debit Spread Strategy and Bear Put Debit Spread Strategy; and in aggregate involves 4 legs\. Like in Long Strangle, in Reverse Iron Condor too, the expectation is that the underlying will soon make a sudden one sided strong momentum move, and would trend much beyond the current level either upwardly or downwardly by the Expiry of the Long Options, crossing beyond the Breakeven Strikes of the Long Options; however hedged legs are added to the both the Long legs of Long Strangle in order to ensure that if the underlying do not soon make a sudden one sided strong momentum move as expected on either direction, such that the Breakeven Strike of Reverse Iron Condor Strategy is not crossed\-over by the underlying by Expiry, then the CE hedged leg and PE hedged leg will cover up for the losses that may be incurred on the CE & PE primary legs\. Thus, Reverse Iron Condor Strategy reduces the Loss amount in Long Strangle if the Breakeven range is not breached by the underlying with good momentum\. However, in doing so, the Unlimited Profit potential in naked Long Strangle is also reduced to pre\-calculated Limited Profit in Reverse Iron Condor, if the underlying moves swiftly with strong momentum on either side\.

__Trade Legs in Reverse Iron Condor__:

- Long CE of Far OTM lower Strike with higher Premium \(*CE primary leg*\) 
- Short CE of even  Far OTM higher Strike with lower Premium \(*CE hedged leg*\)
- Long PE of higher Far OTM Strike with higher Premium \(*PE primary leg*\)  
- Short PE of even Far OTM lower Strike with lower Premium \(*PE hedged leg*\)

All the 4 legs \(*i\.e\. two Long primary legs & two Short hedged legs*\) would be of same Expiry series, with equal quantity in each of the aforesaid four legs\. 

CE Long and PE Long must be of nearly same Premium value\. Also, CE Short and PE Short must be of nearly same Premium value\. 

It is a hedged Long Strangle, making a pair of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy\.

__<start> Example of Reverse Iron Condor__:

*If Nifty ATM is at 17000, then for Reverse Iron Condor:* 

- *Buy 10 Lots Nifty 17500 CE of Current Month Expiry \(at Rs\. 150 per Lot\) *
- *Sell 10 Lots Nifty 17800 CE of Current Month Expiry \(at Rs\. 120 per Lot\)*
- *Buy 10 Lots Nifty 16500 PE of Current Month Expiry \(at Rs\. 170 per Lot\)*
- *Sell 10 Lots Nifty 16200 PE of Current Month Expiry \(at Rs\. 135 per Lot\) *__<end>__

__Objective in Reverse Iron Condor__:

Objective is to play a Neutral / uncertain strong momentum one\-sided directional move on the underlying on account of any event, news, outcomes etc\., through buying Far OTM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will soon make a sudden  strong momentum one\-sided directional move,  and would trend in that direction until the Expiry of the Long Options, just like in a naked Long Strangle Strategy\.

However, in this Strategy: in order to mitigate the risk / loss that may arise if the underlying fails to breach the Breakeven Strike on the primary legs by Expiry, a pair of Short Options are also initiated simultaneously with the primary Long legs, such that this Strategy becomes hedged Long Strangle, comprising of a pair of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy\. Therefore, if the underlying fails to breach the Breakeven Strike of the Long Options, then even Far OTM Short Options on the hedged leg would expire as an OTM too, thereby reducing the loss caused to the maximum extent of Premium paid on the Long out of the Credit or Premium received on the Short legs\.  

Thus, in effect, Reverse Iron Condor comprising of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy, converts the naked Long Strangle into a hedged Long Strangle so as to cover and limit the loss that may arise in a naked Long Strangle positions, if the underlying fails to breach the Breakeven Strike of the Long Strangle due to non\-arrival of a strong momentum trend in either direction\.

This Strategy comprising of two Long Options \(on Far OTM Strikes\) and two Short Options \(on even farther OTM Strikes\) makes this strategy a Net Debit Strategy, because both the Long Options are initiated  by paying higher Premiums, and the Short Options are initiated by collecting lesser Premiums\.

On arrival of a soon strong momentum one\-sided directional move on the underlying, either side of Far OTM Long primary leg becomes an ITM and the other side Far OTM Long position & Short position becomes an even farther OTM\. When the underlying crosses beyond the Breakeven Strike of this Strategy on either side such that the one of the Long Option side \(*i\.e\. CE side or PE side, as the case may be*\) becomes an ITM, then this Strategy generates profit; because the Long Option which becomes an ITM generates higher profit than the Net premium paid on the Strategy\. However, in this Strategy the profit potential gets limited \(due to the Short legs added to otherwise naked Long Strangle\)\.

Accordingly, this Strategy can generate limited loss to the maximum extent of the aggregate Net Premium paid on both this Strategy, but if the underlying takes a strong momentum one\-sided trending move, then this Strategy is capable of generating limited profit potential\. Both the max profit & max loss in this Strategy can be pre\-calculated from Expiry perspective\.

__Significance and Impact of Strike / Delta values in Reverse Iron Condor Strategy__

__Strike / Delta value in Reverse Iron Condor__:

The two Long legs, i\.e\. CE Long and PE Long are OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Long legs helps to ensure uniformity in the profitability irrespective in whichever direction the momentum in the underlying arrives\. Likewise, the two Short hedged legs in this Strategy, i\.e\. CE Short  and PE Short must be even Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Short legs helps to ensure uniformity in profitability in one side \(*where momentum arrives*\) and the loss incidence on the other side \(*which is not favoured by the momentum*\)\.

Thus, with approx\. equal Delta values on CE Long and PE Long legs; and equal Delta values on CE Short and PE Short legs, Delta neutrality is ensured in this Strategy to maintain  balance between the profit and loss situation amongst the two sides, i\.e\.: 

- when CE Long leg gets profitable due to rise in its LTP \(*i\.e\. when underlying rises with momentum*\), greater profitability is achieved as the CE Long Option moves up the higher Delta ladder \(as it slides deeper in the money\)\. However, with the rise in the underlying, the PE Long leg generates loss \(*as the LTP of PE would reduce*\) and the PE Long leg slides down lower Delta as it goes deeper out of the money\. But the rate at which greater profitability on CE side is generated *vis\-à\-vis* loss on the PE Long Option, gets wider and wider, as the underlying moves higher, because CE Long would move through ascending Delta values, whereas the PE Long would slide down through descending Delta values\. Further, while CE Long option generates profit as the underlying moves higher, however, the CE Short hedged leg incurs loss and accordingly net profit is generated between the CE Long & Short leg\. Similarly, as the underlying moves higher, the  PE Long option generates loss however, the PE Short hedged leg generates profit  and accordingly the loss generated by the PE Long is absorbed to some extent by the PE Short leg\. But the Delta neutrality ensured at the time of initiating the Strategy helps to generate increased profit on CE side and reduced loss on the PE side, as the underlying keeps trending higher\. 
- Likewise, when PE Long leg gets profitable due to rise in its LTP \(*i\.e\. when underlying falls with momentum*\), greater profitability is achieved as the PE Long Option moves up the higher Delta ladder \(as it slides deeper in the money\)\. However, with the fall in the underlying, the CE Long leg generates loss \(as the LTP of CE would reduce\) and the CE Long leg slides down lower Delta as it goes deeper out of the money\. But the rate at which greater profitability on PE side is generated *vis\-à\-vis* loss on the CE Long Option, gets wider and wider, as the underlying moves lower, because PE Long would move through ascending Delta value, whereas the CE Long would slide down through descending Delta value\. Further, while PE Long Option generates profit as the underlying moves lower, however, the PE Short hedged leg incurs loss and accordingly net profit is generated between the PE Long & Short leg\. Similarly, as the underlying moves lower, the  CE Long option generates loss however, the CE Short hedged leg generates profit  and accordingly the loss generated by the CE Long is absorbed to some extent by the CE Short leg\. But the Delta neutrality ensured at the time of initiating the Strategy helps to generate increased profit on PE side and reduced loss on the CE side, as the underlying keeps trending lower\.

<__start__>* For example: If Nifty ATM is at 17000, then for ensuring Delta neutrality in Reverse Iron Condor: *

- *For Long leg: If Nifty 17500 CE is bought at Rs\. 250 per Lot with Delta of 0\.45 \(single Lot basis\), then Nifty 16500 PE buy can be initiated with approx\. Rs\. 200 per Lot having similar Delta value of approx\. 0\.45 \(single Lot basis\); and*
- *For Short leg: if Nifty 17800 CE is sold at Rs\. 150 per Lot at Delta of 0\.3 \(single Lot basis\), then Nifty 16200 PE sell can be initiated at approx\. Rs\. 180 per Lot having similar Delta value of approx\. 0\.29 \(single Lot basis\)\. <*__end__*>*

__Selection of Option Strikes in Reverse Iron Condor__:

Selection of the CE & PE Long legs and CE & PE Short legs Strikes must be such OTM Strikes which have equal LTP / Delta values in order to maintain Delta neutrality at the time of initiating the Strategy\.

The Far OTM Long Strikes must be within the Most Impacted Radius Zone, wherein the positive impact of the momentum can be harnessed\.

A reasonable Strike difference must be ensured between the CE Long & PE Long Strikes\. Larger the difference between CE Long and PE Long Strike, smaller will be the premium debit incurred on the Strategy, and therefore lower Max Loss from Expiry perspective\. However, with larger Strike difference, the Breakeven required for profit from Expiry perspective would also expand, thereby requiring longer sustained momentum in order to bring this Strategy to profit \(*i\.e\. reducing the profit probability*\)\. Thus, pre\-calculated loss and BE Levels on the Strategy will help decide, the Strike at which this Strategy must be initiated\.

Basis aforesaid factors, suitable Far OTM CE & PE Option Strike levels of a particular Expiry series may be selected for this Strategy\. Since, the success of this Strategy is also mainly dependent on the low Theta decay, therefore farther Expiry series \(or larger time to Expiry Options\) would be preferable for this Strategy\.

__Options Behaviour in Reverse Iron Condor Strategy__

- In this Strategy, three factors help in generating profit: \(i\) strong momentum trending move of the underlying; and \(ii\) the momentum trend should arrive soon, otherwise Theta decay would adversely impact the probability of profit; and \(iii\) Volatility should either rise or remain constant, but should not go into steep falling state\. Therefore, profitability in this Strategy is heavily dependent on these factors\.
- Further, the selection of these CE & PE Strikes must be such OTM Strikes which are not too far and must be within the __Most Impacted Radius Zone__ where the Long Options would get positively impacted on arrival of momentum\.
- Further, as the Expiry approaches near, the Theta impact on the Far OTM Strike CE & PE would cause erosion on the Premium values of the Long Options\. However, since in this Strategy the Long leg is hedged with Short positions therefore, the Theta also impacts the Far OTM CE & PE Short legs thereby helping to absorb the loss on the Long Options leg through profit on the Short leg\. Thus, near Expiry this Strategy must be avoided unless when quick strong momentum \(or huge gapup/ gapdown\) is expected within a very short span of time \(like next day or so\) after this Strategy is initiated\.
- Rise in Volatility is favourable for this Strategy as rise in Volatility will help the Premium of the Long Options to rise \(or to not cause them fall much\)\.
- Delta neutral position is strived for in this Strategy at the time of initiating this Strategy\.

__Adjustments in Reverse Iron Condor Strategy__

__Adjustments \(if the Breakeven Strike is not breached by the underlying and Reverse Iron Condor Strategy does not go as per plan\)__:

Since, this Reverse Iron Condor__ __Strategy is a Premium Debit Strategy, therefore, the Net  Premium paid \(i\.e\. the sum of the Net Premium paid  on the CE leg and PE leg\) need to be first recovered from the profit in this Strategy, from Expiry perspective, in order for this Strategy to be overall profitable by Expiry\. 

However, when underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then the potential loss \(*limited to the maximum extent of the Net Premium paid on this Strategy*\) situation can be handled by making following adjustments: \(i\) Short both CEs & PEs; or \(ii\) Short CEs; or \(iii\) Short PEs\. These adjustments are discussed below:

1. Counter Adjustment through Short Option \(both sides\): If the underlying do not seem to be breaching the Breakeven Strike of this Reverse Iron Condor__ __Strategy and seems to remain until Expiry of the Long Options, within a range, then, both  __Far OTM CEs and PEs can be sold __\(i\.e\. additional Short CE & PE to be initiated\)\. These additional Short CEs and PEs must be even Far OTMs than the Short Options on the hedged leg, and of the same or closer Expiry series than that of the Long Options leg\. This way the Reverse Iron Condor gets converted into both side Ratio Spreads \(*with more Shorts than Longs on both CE side & PE side*\)\.

Further, these additional Short CEs & PEs can be initiated in such sufficient quantities to receive aggregate Premium Credit which is equal to or more than the Net Debit incurred on this Strategy\. With this adjustment, the Reverse Iron Condor gets converted into both side Ratio Spreads \(*with more Shorts than Longs on both CE side & PE side*\)

Idea in this adjustment is to pick suitable Far OTM CEs & PEs for Shorting, such that these Far OTM Options expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying breaks\-out and breaches the Breakeven Strike on any side, then in that situation too these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Thus, suitable number of Short Options \(additional CEs and PEs Short\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short Options position as an adjustment in comparison to the original number of Lots initiated on the Reverse Iron Condor__ __Strategy\. If the Short Options generates profit and reasonably minimizes the loss in this Strategy before Expiry,  then it would be advisable to book the profit and to exit this Reverse Iron Condor__ __Strategy\. However, selling Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Counter Adjustment through Short Option \(one side\): If there seems to be a slow trend on the downward, such that the Breakeven Strike does not seem to be breached downwardly \(i\.e\. on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(i\.e\. additional Short CEs to be initiated\)\. 

However, If there seems to be a slow uptrend, such that the Breakeven Strike does not seem to be breached upwardly \(i\.e\. on the CE side\)  in this Reverse Iron Condor__ __Strategy  and the underlying seems to be  in a mild upwardly direction, then Far OTM __PEs can be sold__ \(i\.e\. additional Short PEs to be initiated\)\. 

Idea in this adjustment is to pick up a suitable far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This Short Options position will help cover the potential loss that may be generated on this Reverse Iron Condor__ __Strategy\. Selection of a far OTM Option for this adjustment is important because even if the direction of the underlying reverses on the opposite side \(i\.e\. against the additional Short Options position\), then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If the underlying seems to be moving in one direction \(and not really hovering in a range\) but with limited momentum and does not seem to be able to breach the Breakeven Strike in that direction \(CE or PE, as the case may be\) by Expiry, then Far OTM Options of that direction \(in which the underlying has been slowly advancing\) can be Shorted\. That is: If there seems to be a <a id="_Hlk120573215"></a>limited trend with momentum in the downward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the PE side by Expiry, then additional Far OTM __PEs can be sold__ \(i\.e\. additional Short PEs to be initiated\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Likewise, If there seems to be a limited trend with momentum in the upward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the CE side by Expiry, then additional  Far OTM __CEs can be sold__ \(i\.e\. additional Short CEs to be initiated\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up suitable Far OTM Options for Shorting in the same direction in which the underlying is advancing, such that these Far OTM Short Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying gets into trending momentum in the same direction and breaches the Breakeven Strike and continues further in that direction, then too these additional Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the max loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these additional Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Strategy\. 

In this type of adjustment, Short Options positions can also be added in a pyramidal structure\. That is:

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, additional Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. *For example, when the downtrend continues in Nifty, a ITM PE at 16000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 15800 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. 
- As the uptrend continues Far OTM CEs’ Premium would rise, therefore, additional Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\. *For example, when the uptrend continues, a Far OTM CE at 17800 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 17900 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\.

This __Shorting of Options in a pyramiding manner __may ensure a broader Breakeven Strike for the Short leg \(i\.e\. larger risk area protection\) and thus greater probability of profiting due to Theta decay on these bunch of Short Options on Expiry\.  However, selling Options will require higher margin / capital and MTM requirements will also have to be met\.

__Reverse Iron Condor Strategy in Different Market Situations__

__If trade goes as per plan as trends beyond the Breakeven Strike, from Expiry perspective, in Reverse Iron Condor__:

If by Expiry of the Long Options, if the underlying starts trending strongly with momentum on one side and breaches the Breakeven Strikes of the Strategy on that particular side \(*i\.e\. either upwardly on the CE side or downwardly on the PE side*\), then this Strategy would yield profit\. The strength and length of the momentum would decide the quantum of profit in this Strategy\. 

Therefore, in case of continuous trending movement of the underlying after successfully crossing\-over the Breakeven Strike on any one side by the underlying, a limited profit situation may arise from Expiry perspective\.    

__If underlying movement fails to breach the Breakeven Strike, from Expiry perspective, in Reverse Iron Condor__:

However, if by Expiry of these Long Options, the underlying fails to cross\-over the Breakeven Strikes either upwardly on the CE side or downwardly on the PE side, then the Strategy would yield loss \(*which may extend upto a maximum extent of the Net Premium paid on the Strategy*\)\.

In such situations, when the underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then  some adjustments can be considered in order to contain the loss in this Strategy\.

<__end__>

__Loss in Reverse Iron Condor Strategy, and its Calculations__

__*Loss in Reverse Iron Condor Strategy, from Expiry perspective*:__

__Max Loss in Reverse Iron Condor__:  Since, this Strategy comprises of Long legs and Short legs on both CE side & PE side, therefore a Net Premium Debit is incurred on the overall Strategy\. This Net Premium paid on the overall Strategy is the maximum loss that may occur on the Strategy\. 

Thus, Maximum Loss in this Strategy will be limited and can be pre\-calculated\. The Maximum Loss in this Strategy is equivalent to the Net Premium paid on this Strategy, i\.e\.

__<start> Max Loss on Reverse Iron Condor __= \[*Aggregate Premium Paid on CE Long leg & PE Long Leg*\] __*minus*__ \[*Aggregate Premium Credit received on CE Short leg & PE Short Leg*\] __<end>__

__Max Loss scenario in Reverse Iron Condor:__

The situation of this Max Loss would occur if by Expiry of the Options, the underlying closes between both the Long CE Strike and PE Long Strike of this Strategy\.

__Loss zone in Reverse Iron Condor:__

If the underlying closes by Expiry within the two Breakeven Levels i\.e\. on the CE side and on the PE side, then loss would be incurred on the Reverse Iron Condor Strategy\. Therefore, the Loss Zone of this Strategy lies between the BE Level of the CE side and BE Level of the PE side\.

- *Loss Zone on the CE side, in Reverse Iron Condor*: if the underlying closes higher than the CE Long leg but below the BE Strike on the CE side, then too some loss would be incurred on the Strategy\. Thus, on the CE side, CE Long Strike to BE Strike on the CE side of the Strategy is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on CE side; and higher loss would be generated on the Strategy if the underlying closes near or lower than the CE Long Strike\.
- *Loss Zone on the PE side, in Reverse Iron Condor*: if the underlying closes lower than the PE Long leg but above the BE Strike on the PE side, then too some loss would be incurred on the Strategy\. Thus, on the PE side, PE Long Strike to BE Strike of the Strategy on the PE side is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on PE side; and higher loss would be generated on the Strategy if the underlying closes near or higher than the PE Long Strike\.

__Impact on Max Loss amount, due to Strike Difference, in Reverse Iron Condor:__

Larger the difference between CE Long and PE Long Strike, smaller will be the premium debit incurred on the Strategy, and therefore lower Max Loss from Expiry perspective\. However, with larger Strike difference, the Breakeven required for profit from Expiry perspective would also expand, thereby requiring longer sustained momentum in order to bring this Strategy to profit \(*i\.e\. reducing the profit probability*\)\. Thus, pre\-calculated loss and BE Levels on the Strategy will help decide, the Strike at which this Strategy must be initiated\.

__<start> __*For example: If Nifty ATM is at 17000, then for Reverse Iron Condor: If Nifty 17500 CE is bought at Rs\. 250 per Lot and Nifty 17800 CE is sold at Rs\. 150, for the CE side of the Strategy; and Nifty 16500 PE is bought at Rs\. 200 per Lot & Nifty 16200 PE is sold at Rs\. 100 per Lot, for the PE side of this Strategy, then:*

*In the aforesaid example: *

*If the underlying fails to successfully cross\-over the Breakeven Strike of 17700 or 16300 by Expiry, then this Strategy would yield loss\. Further, if Nifty closes by Expiry between 16500 and 17500 Strikes, then Max Loss equivalent to the Net Premium of Rs\. 200 per Lot paid on this Strategy would be incurred\. *__<end>__

<__end__>

__Profit in Reverse Iron Condor Strategy, and its Calculations__

__*Profit in Reverse Iron Condor Strategy, from Expiry perspective*: __

__Max Profit scenario in Reverse Iron Condor__: If by Expiry of the Options, the underlying successfully crosses\-over the Breakeven Strikes of the Strategy \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. More trending the underlying gets in one direction with momentum, crossing beyond the BE Strike level of the Strategy on that side, higher the profit that will be generated\. However, the Max Profit potential on this Strategy is limited \(*as against unlimited profit in naked Long Strangle, in case of continuous trending momentum on any particular side*\) and the max profit on this Strategy can be pre\-calculated\.

__Max Profit Level in Reverse Iron Condor:__

If the underlying by Expiry closes either at or beyond the Short leg of any particular side \(*i\.e\. CE Short leg on the upside and PE Short leg on the downside*\), then the Strategy would yield Max Profit, which is limited\. In this situation, both the Long leg & Short leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side of Options, both Long & Short leg becomes even farther OTM\. This situation generates the Limited Max Profit situation on the Strategy\. However, in this Strategy, even if the underlying gets trending on one side but it crosses beyond the Short leg of the Strategy on that side, then no higher profit would be generated on this Strategy from Expiry perspective other than the pre\-calculated Max Profit that can be generated on this Strategy\. Thus, this Strategy is a limited max profit Strategy; and the max profit on this Strategy can be pre\-calculated\.

__Calculation of Max Profit on in Reverse Iron Condor Strategy:__

<__start__> The Max Profit potential of this Strategy can  be calculated as:

- \[*Strike difference between Long & Short leg of CE / PE side*\]

__*minus*__

- \[*the Net Premium paid for the Strategy*\] <__end__>

Using the above formula, the Max Profit potential for each of CE side and PE side can be separately calculated\. Thus, we can determine the Max Profit potential on any particular side of this Strategy\. However, if the Strike difference between Long & Short leg is same for both CE side and PE side, then calculation of Max Profit as per aforesaid formula, would be same for both CE side and PE side\.

__Impact on Max Profit situation, due to variation in Strike Difference between CE side & PE side, in Reverse Iron Condor:__

If the Strike difference between Long leg & Short leg, on both CE side and PE side is same \(*eg: 300 point difference between CE Long & CE Short and similarly  300 point difference between PE Long & PE Short*\), then the Max Profit would be same for the CE side as well as for the PE side\. In such case, the amount so determined, is said to be the Max Profit of the Strategy\.

However, if the Strike difference between Long leg & Short leg, on CE side and PE side is different \(*eg: 300 point difference between CE Long & CE Short and 500 point difference between PE Long & PE Short*\), then the Max Loss would be different for the CE side and the PE side\. The side where the Strike difference is more, would have more Net Premium Debit and accordingly the BE Level of that side will also increase\. But with increase in BE Level, the Max Profit situation on that side would also increase\. In such case, the Max Profit of the side where Strike difference is more, would be the Max Profit of the Strategy\.

__Profit Zone in Reverse Iron Condor:__

The profitability from Expiry perspective would arise in the Strategy, if the underlying closes above the Breakeven Strike level of this Strategy on the CE side \(*that is higher Strike than the BE Level on the CE side*\); or if the underlying closes below the Breakeven Strike level of this Strategy on the PE side \(*that is lower Strike than the BE Level on the PE side*\)\. Therefore, profit would be realised on this Spread if the underlying closes by Expiry after successfully crossing\-over the BE Strike of this Strategy on either side\.

- *Profit zone on CE side, in Reverse Iron Condor: *Thus, if the underlying by Expiry crosses above the BE Strike on the CE side and closes between the BE Strike on CE side and at or higher than the CE Short Strike, then the Strategy would generate profit on the CE side\. Therefore, this is the Profit zone on the CE side\. However, if the underlying closes by Expiry at or above the CE Short Strike then Max Profit would be generated on this Strategy\. The profit in this zone would be less, if the underlying closes just above the BE Strike level on the CE side; but if the underlying closes near the CE Short Strike level, then the Strategy would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or above the CE Short Strike by Expiry*\)\.
- *Profit zone on PE side, in Reverse Iron Condor: *Similarly, if the underlying by Expiry crosses below the BE Strike on the PE side and closes between the BE Strike on PE side and at or lower than the PE Short Strike, then the Strategy would generate profit on the PE side\. Therefore, this is the Profit zone on the PE side\. However, if the underlying closes by Expiry at or below the PE Short Strike then Max Profit would be generated on this Strategy\. The profit in this zone would be less, if the underlying closes just below the BE Strike level on the PE side; but if the underlying closes near the PE Short Strike level, then the Strategy would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or below the PE Short Strike by Expiry*\)\.

__Calculation of Profit generated on Reverse Iron Condor Strategy:__

On arrival of a strong momentum one\-sided directional move on the underlying, that side of Far OTM Long primary leg becomes an ITM and the other side Far OTM Long position & Short position becomes an even farther OTM\. The Option side which is in the direction of the momentum \(*i\.e\. Long Option on the CE side or PE side, as the case may be*\) which becomes an ITM due to movement in the underlying generates profit; and the other Option side which becomes an even farther OTM Options generates loss\.

Thus, if the underlying by Expiry successfully closes beyond the BE Strike Level of either side and closes within the profit zone of that side, then the final profit on the Strategy at Expiry can  be calculated as:

- \[the final premium value of Long Option of the momentum side on Expiry \(*i\.e\. Long leg which becomes / expires as an ITM\)*\]

- \[*the Net Premium paid for the Strategy*\]

*Note: The final premium of an Option which would expire as an ITM would be equivalent to its Intrinsic Value \(which is the difference between the ATM Strike on Expiry and the Strike of the relevant Option which expired as an ITM\)\. *<__end__>

- *the Net Premium Debit paid on this Strategy will be: \[\(250\+200\) – \(150\+100\)\] = 450 – 250 = Rs\. 200 per Lot*
- *Breakeven Strike of this Strategy on upper range will be: 17500 \+ 200 = 17700 CE*
- *Breakeven Strike of this Strategy on lower range will be: 16500 \- 200 = 16300 PE*
- *Max Profit would be: \[300\-200\] = 100 per Lot, provided the underlying either closes by Expiry at or above the CE Short leg; or the underlying closes at or below the PE Short leg of this Strategy\.*

*Thus, in this Strategy, if: *

1. *Nifty crosses above the Breakeven Strike of 17700 Strike upwardly by Expiry, then 17500 CE Long leg expires as an ITM generating profit \(as CE Long leg Premium would rise\) and the PE 16500 Long expires as even farther OTM generating loss \(as PE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to upward trending move in the Nifty\. Deeper the CE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. However, the maximum profit on Expiry on CE side would be: \[17800\-17500\] – \[200\] = Rs\. 100 per Lot\. This max profit on CE side would be realized on Expiry, if the underlying trends higher and closes at or above the CE Short leg\. But if the underlying closes at 17750 on Expiry i\.e\. in the Profit Zone on the CE side, then the CE Long leg of 17500 would be an ITM with final premium value on Expiry of Rs\. 250 \(because on Expiry, the final premium value is equal to the Intrinsic Value of the ITM, which is calculated as ATM – ITM CE Strike\)\. Therefore, the final premium value of 17500 CE would be \[17750\-17500=250\]\. Thus, the final overall profit on the Strategy would be: 17500 CE final premium value – Net premium paid on the Strategy = 250 – 200 = Rs\. 50 per qty in a Lot i\.e\. 50 x 50 = Rs 2500 in a Lot\.   *
2. *Nifty crosses below the Breakeven Strike of 16300 Strike downwardly by Expiry, then 16500 PE Long leg expires as an ITM generating profit \(as PE Long leg Premium would rise\) and the CE 17500 Long expires as even farther OTM generating loss \(as CE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to downward trending move in the Nifty\. Deeper the PE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. However, the maximum profit on PE side on Expiry would be: \[16500 \- 16200\] – \[200\] = Rs\. 100 per Lot\. This max profit on PE side would be realized on Expiry, if the underlying trends lower and closes at or below the PE Short leg\. But if the underlying closes at 16250 on Expiry i\.e\. in the Profit Zone on the PE side, then the PE Long leg of 16500 would be an ITM with final premium value on Expiry of Rs\. 250 \(because on Expiry, the final premium value is equal to the Intrinsic Value of the ITM, which is calculated as ITM PE Strike – ATM\)\. Therefore, the final premium value of 16500 PE would be \[16500\-16250=250\]\. Thus, the final overall profit on the Strategy would be: 16500 PE final premium value – Net premium paid on the Strategy = 250 – 200 = Rs\. 50 per qty in a Lot i\.e\. 50 x 50 = Rs 2500 in a Lot\. *<__end__>

<__end__>

__Profit & Loss Areas on Reverse Iron Condor Strategy, and its Calculations __

__*Profit & Loss Levels on Reverse Iron Condor Strategy, from Expiry perspective*:__

__<start> BE Level on CE side, in Reverse Iron Condor__: \[CE Long Strike \+ Net Premium Debit paid on the Strategy\] __<end>__

__<start> BE Level on PE side, in Reverse Iron Condor__: \[PE Long Strike – Net Premium Debit paid on the Strategy\] __<end>__

__Min Profit Level, in Reverse Iron Condor__: If underlying closes by Expiry just above the BE Level on CE side \(*i\.e\. higher CE Strike than BE Strike*\) or if the underlying closes by Expiry just below the BE Level on PE side \(*i\.e\. lower PE Strike than BE Strike*\)\.

__Max Profit Level, in Reverse Iron Condor__: Max Profit is limited, and the same is realised on the Strategy if the underlying successfully crosses\-over the Short Strike Level on either CE side or PE Side \(*such that one side becomes an ITM*\), by Expiry\. Anywhere deeper the underlying may close beyond the Short leg, the Max Profit shall be limited to the pre\-calculated Max Profit Level on that side\.

__Profit Zone, in Reverse Iron Condor__:  If underlying closes by Expiry anywhere between the BE Strike  on the CE side and at or higher than the CE Short Strike\. Similarly, on the PE side, if the underlying closes by Expiry anywhere between the BE Strike  on the PE side and at or lower than the PE Short Strike\.

__Loss Zone, in Reverse Iron Condor__:  If underlying closes by Expiry anywhere between the BE Level on the CE side and the BE Strike on the PE side, then loss would be incurred on this Strategy\.

__Max Loss Zone, in Reverse Iron Condor__:  If underlying closes by Expiry anywhere between the CE Long Strike and the PE Long Strike, then Max Loss would be incurred on this Strategy\.

<__end__>

__Demerits and Merits of Reverse Iron Condor Strategy__

__Demerits of Reverse Iron Condor Strategy__:

- Since, in this Strategy on each CE and PE sides, there is one Long position initiated at a higher Premium; and a Short position initiated at a lower Premium\. Thus, each of the CE and PE legs have a Net Premium Debit \(*i\.e\. Premium paid on Long leg – Premium received on Short leg*\)\. This Net Debit Premium on Reverse Iron Condor Strategy is less than the aggregate Premium Debit on Long Strangle\.
- When Long Strangle is hedged and made up like Reverse Iron Condor, then the unlimited profit potential in Long Strangle, gets converted into limited profit in Reverse Iron Condor\.
- This Strategy is workable/ profitable only when there is a strong conviction that soon there will be arrival of a strong momentum one\-sided trending move of the underlying\. From Expiry perspective, for this Strategy  to be profitable it is required that the  underlying must either trend downwardly and cross below the Breakeven Strike of this Strategy on the PE side; or  the underlying must trend upwardly and cross above the Breakeven Strike of this Strategy on the CE side \(*the Breakeven Strikes in this Strategy are discussed below here*\)\. 
- However, if \(i\) the underlying move one\-sided but there is no momentum; or the underlying gets into a rangebound movement, then this Strategy would yield limited loss \(to the extent of Net Premium paid on this Strategy\) due to erosion of Time Value\.
- Thus, with the passage of time, if the underlying does not move with momentum, then both the Long legs may continue to be OTM Strikes and starts generating loss due to the rising Theta impact\. At the same time, both the Short legs will generate profit due to Theta decay in aforesaid situation\. Thus, if by Expiry of the Options, if the underlying fails to make the one\-sided momentum trending move and do not cross the Breakeven Strike of this Strategy on either side, then both the Long legs and Short legs would expire worthless as OTM, generating maximum loss to the extent of aggregate Net Premium paid on this Strategy\.
- Therefore, two factors which are most detrimental to this Strategy are: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on the primary legs\. Therefore, this Strategy is heavily dependent on strong momentum one\-sided trending move of the underlying\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy may be avoided for positional holding near Expiry\.
- When the Volatility is in a falling state, then there will be erosion caused to the Premium of the Long Options \(*or it may act as a deterrence to let the Premium of the Long Options rise*\), thereby making this Strategy not viable from profit perspective, as even though the erosion would also be caused in the Premium Credit on the Short legs but the fall in Volatility may expedite loss of Net Premium Debit made on this Strategy\.

__Benefits of Reverse Iron Condor:__

- This is a neutral Strategy i\.e\. when the view is uncertain in which direction the underlying can move with strong momentum as a result of any news, event or outcome etc\., this Strategy can be implemented\. 
- It is a hedged Strategy \(i\.e\. Reverse Iron Condor is hedged Long Strangle\)\. When Long Strangle is hedged and made up like Reverse Iron Condor, then Max Loss in naked Long Strangle gets capped to a smaller Max Loss\. Also, the Breakeven Level gets narrowed down in Reverse Iron Condor, thereby requiring relatively lesser move in the underlying to cross\-over the Breakeven for generating profit \(*hence enhancing profit probability*\)\.
- Since, it is a hedged Strategy, the capital / margin required is less and does not require capital towards any MTM requirements\.
- If the view goes as expected, then this Strategy is capable of  generating reasonable profit if the trend in one side continues until Expiry of Options\.
- Since this a hedged Strategy, therefore, if the underlying fails to breakout the Breakeven Strike by the Expiry on either side, then the hedged leg helps mitigate the loss of the Premium paid on the primary legs through the Credit of Premium received on the Short hedged legs\. Thus, this Strategy helps curtail the loss that may arise on the Long Options, due to the Short hedged legs added in this Strategy \(*which are likely to generate profit due to erosion in their Premium due to Volatility crash or Theta decay*\)\.
- Rise in Volatility is favourable for this Strategy as rise in Volatility will help the Premium of the Long Options to rise \(or to not cause them fall much\)\. If there is huge Volatility spike, then both the premium value of both CE Long and PE Long legs would rise exponentially, even if there is no significant move in the underlying\.
- Thus, rise in Volatility and one\-sided strong momentum trending move is the requirement for profitability in this Strategy\.

__Breakeven Strike in Iron Condor Strategy, its Calculation and Payoff Chart__

__Breakeven Strike in Iron Condor Strategy, from Expiry perspective__:

In Iron Condor,__ __the upper range comprises of CE Short primary leg at higher Premium and CE Long hedged leg at lower Premium\. Thus, there is a Net Premium Credit on the CE side of Iron Condor\.

Likewise, the lower range comprises of PE Short primary leg at higher Premium and PE Long hedged leg at lower Premium\. Thus, there is a Net Premium Credit on the PE side of Iron Condor\.

The sum of the Net Premium Credit on the CE and PE Side is the aggregate __Net Premium Credit received__ in this Strategy\. Accordingly:

 <__start__>

- *the Breakeven Strike of the CE side in Iron Condor Strategy \(upper range\) is*: \[CE Short primary leg \+ the aggregate Net Premium Credit in the Strategy\]; and
- *the Breakeven Strike of the PE side in Iron Condor Strategy \(lower range\) is*: \[PE Short primary leg \- the aggregate Net Premium Credit in the Strategy\] <__end__>

Thus, if by Expiry of the relevant Options, if the underlying does not breach the aforesaid Breakeven Strikes \(*either on the upper side or the lower side*\), then this Strategy would yield profit; but if by Expiry of the relevant Options, the underlying gets trending either on the upper side or lower side and goes beyond the relevant Breakeven Strike on that side, then the Strategy would yield loss\.

 In case of continuous movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, and closing downwardly below the PE Long Strike or closing above the CE Long Strike, would yield  quantified Max Loss on this Strategy \(__*Limited Loss situation*__\)\.

__<start>__* For example: If Nifty 17500 CE is sold at Rs\. 250 per Lot & Nifty 17800 CE is bought at Rs\. 150, for the CE side of this Strategy; and Nifty 16500 PE is sold at Rs\. 200 per Lot & Nifty 16200 PE is bought at Rs\. 100 per Lot,  for the PE side of this Strategy, then:*

*the Net Premium Credit received on this Strategy will be: \[\(250\+200\) – \(150\+100\)\] = 450 – 250 = 200*

*If the underlying breaches the upper Breakeven Strike i\.e\. 17700 CE and keeps trending higher, then limited loss would accrue on this Strategy on the upper side*\.

*Likewise, if the underlying breaches the lower Breakeven Strike i\.e\. 16300 PE and keeps trending lower, then limited loss would accrue on this Strategy on the down side*\. <__end__>

However, in this Iron Condor Strategy, limited loss situation would arise, if either on the upside \(*i\.e\. CE side*\) or downside \(*i\.e\. PE side*\), the underlying breaks\-out beyond the Breakeven Strike level of that particular side and closes by Expiry beyond the Long leg \(*on either side*\)\. Even if the underlying keeps trending beyond the Long Strike \(*on either side*\), the Limited Max Loss would remain the same on this Strategy\.

<__start__> __Payoff Chart of Iron Condor Strategy__:

<__img53__>

<__end__>

__Iron Condor Strategy: Its Trade Legs & Objective__

When a view is formed that irrespective of the intermittent directional movement of the underlying, eventually the underlying is expected to remain within a defined range; then such view can be played out by a neutral strategy employing Short Options positions which defines a range within which the underlying is expected to remain by Expiry of those Options\. 

Thus, when the view on the underlying is that it is expected to remain within a range upto the Expiry of relevant Options, and the same is played out by Shorting Naked Far OTM CE & PE Options pertaining to that Expiry series \(*by which the underlying is expected to remain in a range or sideways movement*\), then such a Strategy is called __Short Strangle__\.

However, when the Short Strangle \(naked Strategy\) is hedged with Long Options on even Far OTM Strikes \(*than the Strikes at which Short has been or intended to be initiated as part of Short Strangle Strategy*\), then such Strategy is called __Iron Condor__\. In Iron Condor Strategy, there is \(i\) Far OTM CE Short \(__CE primary leg__\) and even Far OTM CE Long \(__CE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series; and \(ii\) Far OTM PE Short \(__PE primary leg__\) and even Far OTM PE Long \(__PE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series\. In essence, Iron Condor is pairing of Bear Call Credit Strategy and Bull Put Credit Strategy; and in aggregate involves 4 legs\. Like in Short Strangle, in Iron Condor too, the expectation is that the underlying will remain, until the Expiry of the Options Shorted, between the Strike levels where the Shorts have been initiated; however hedged legs are added to the both the Short legs of Short Strangle in order to ensure that:

1. if the underlying happens to slip upwardly beyond the Strike at which CE Short is initiated, by Expiry of the CE Options Shorted, then the CE hedged leg will cover up for the losses \(to some extent\) that may be incurred on the CE primary leg, thereby converting the unlimited Max Loss situation of Short Strangle into Limited Max Loss in Iron Condor; and 
2. if the underlying happens to slip downwardly beyond the Strike at which PE Short is initiated, by Expiry of the PE Options Shorted, then the PE hedged leg will cover up for the losses \(to some extent\) that may be incurred on the PE primary leg, thereby converting the unlimited Max Loss situation of Short Strangle into Limited Max Loss in Iron Condor\.

Thus, Iron Condor is a Strategy which generates Limited Profit, but also has limited risk \(as it will generate Limited Max Loss, if the range is breached by the underlying\)\.

__Trade Legs in Iron Condor Strategy__:

- Short CE of lower Far OTM Strike with higher Premium \(*CE primary leg*\) 
- Long CE of higher Far OTM Strike with lower Premium \(*CE hedged leg*\); and
- Short PE of higher Far OTM Strike with higher Premium \(*PE primary leg*\)
- Long PE of lower Far OTM Strike with lower Premium \(*PE hedged leg*\)

All the 4 legs \(*i\.e\. two Short legs & two Long legs*\) would be of same Expiry series, with equal quantity in each of the aforesaid four legs\. 

The CE Short and PE Short must be of nearly same Premium value\. The CE Long and PE Long must be of nearly same Premium value\.

It is a hedged Short Strangle, making a pair of Bear CE Credit Strategy and Bull PE Credit Strategy\.

__<start> Example of Iron Condor Strategy__:

*If Nifty ATM is at 17000, then for Iron Condor:* 

- *Sell 20 Lots Nifty 17500 CE of Current Month Expiry \(at Rs\. 150 per Lot\)*
- *Buy 20 Lots Nifty 17800 CE of Current Month Expiry \(at Rs\. 65 per Lot\); and*
- *Sell 20 Lots Nifty 16500 PE of Current Month Expiry \(at Rs\. 165 per Lot\)*
- *Buy 20 Lots Nifty 16200 PE of Current Month Expiry \(at Rs\. 75 per Lot\)* __<end>__

__Objective in Iron Condor Strategy__:

Objective is to play a Neutral / Non\-directional or sideways / rangebound view, through selling Far OTM CEs and PEs \(both as the primary legs\), as the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, between the Strike levels where the Shorts have been initiated, just like in a naked Short Strangle Strategy\.

Also, in this Iron Condor Strategy: Far OTM CE Short leg defines the upper range; and Far OTM PE Short leg defines the lower range: within which the underlying is expected to remain in this Iron Condor Strategy\.  Farther the OTM Strikes from the ATM, broader the range gets \(but the Premium on OTM Strikes keeps getting lower\)\. Thus, basis technical analysis and availability of decent Premium values on Far OTM Strikes, this Iron Condor Strategy may be implemented\.

Further, in this Iron Condor Strategy: in order to mitigate the risk / loss that may arise if the primary Short legs are breached by the underlying, Long Options are also initiated simultaneously with the primary Short legs, such that this Strategy becomes hedged Short Strangle, comprising of a pair of Bear CE Credit Strategy and Bull PE Credit Strategy\. 

Thus, in effect, Iron Condor comprising of Bull PE Credit Strategy and Bear CE Credit Strategy, converts the naked Short Strangle into a hedged Short Strangle so as to cover and limit the unlimited loss that may arise in a naked Short Strangle positions, to a limited Max Loss situation, if the underlying breaches the primary Short legs \(on either side\) and gets trending in that direction\.

__Significance and Impact of Strike/ Delta values in Iron Condor Strategy__

__Strike / Delta value in Iron Condor__:

The two Short legs, i\.e\. CE Short and PE Short must be Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Short legs helps to ensure a reasonable balance between the profit & loss scenario between the two Short legs in this Strategy\. 

Likewise, the two Long legs in this Strategy, i\.e\. CE Long and PE Long must be even Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Long legs helps to ensure a reasonable balance between the profit & loss scenario between the two Long legs in this Strategy as per the movement of the underlying\.

Thus, with approx\. equal Delta values on CE Short and PE Short legs; and equal Delta values on CE Long and PE Long legs, Delta neutrality is ensured in this Strategy to cater to maintain a balance between the profit and loss situation amongst the Short legs and amongst the Long legs resulting due to the movement of the underlying, i\.e\.: 

- when CE Short leg loses due to rise in its LTP \(*i\.e\. when underlying rises*\), the PE Short leg will help counter the losses on CE Short leg by generating profit \(*as the LTP of PE would reduce*\) to almost similar amount as to the loss incurred on the CE Short leg, due to same Delta values of the CE Short and PE Short legs\. 
- at the same time in this Strategy, with the rise in the underlying, PE Long leg generates loses due to fall in its LTP, however, the CE Long leg will help counter the losses on PE Long leg by generating profit \(*as the LTP of CE would rise*\) to almost similar amount as to the loss incurred on the PE Long leg, due to same Delta values of the CE Long and PE Long legs; 
- when PE Short leg generates loss due to rise in its LTP \(*i\.e\. when underlying falls*\), the CE Short leg will help counter the losses on PE Short leg by generating profit as the LTP of CE Short leg would reduce to almost similar amount as to the loss incurred on the PE Short leg, due to same Delta values of the CE Short and PE Short legs;
- at the same time in this Strategy, with the fall in the underlying, CE Long leg generates loses due to fall in its LTP, however, the PE Long leg will help counter the losses incurred on CE Long leg, by generating profit \(*as the LTP of PE would rise*\) to almost similar amount as to the loss incurred on the CE Long leg, due to same Delta values of the CE Long and PE Long legs\.

Further, the Delta difference between the primary leg and the hedged leg of the CE side \(*and also between the primary and hedged leg for the PE side*\) will help maintain a reasonable control on the Net Premium Credit scenario in this Strategy\. Delta difference can be ensured by selecting appropriate distance between the primary leg Strike and the hedged leg Strike, separately for CE and PE side,  for this Strategy\.

Since, in this Strategy \(which is a Net Credit Strategy\), besides the rangebound movement of the underlying, Theta decay also plays an important role to ensure profit\. Therefore, Far OTM CEs are selected for this Strategy\. In order to benefit from Theta decay, the CE Short for the primary leg should be initiated at such a Strike which the underlying is expected to not  breach by Expiry\. Also, the primary leg should have sufficient Premium Credit for reasonable profit generation\. Once, primary hedge is selected then the hedged leg must be simultaneously initiated at a suitable Strike distance\.

__Selection of Option Strikes in Iron Condor__:

Selection of the CE & PE Strikes must be such OTM Strikes which are not expected to be breached by the underlying by Expiry of the Options Shorted\. Therefore, CE Short must be initiated on OTM Strike above the Resistance level and the PE Short must be initiated on OTM Strike below the Support level\.

Further, CE Short and PE Short must be initiated at such Far OTMs Strike levels which have more or less same LTP or Delta value\. Likewise, CE Long and PE Long must be initiated at such Far OTMs Strike levels which have more or less same LTP or Delta value\. This equal Delta value between both the Short legs and equal Delta value between both the Long legs, helps to ensure a reasonable balance between the profit & loss scenario between the two Short legs and between the two Long leg in this Strategy and therefore ensures Delta neutrality from the perspective of movement of the underlying, and thus a natural hedge to each other until Breakeven Strike is not breached by the underlying in either direction\.

Further, when a rangebound view on the underlying has conviction \(*i\.e\. the underlying would not breach the primary leg Short Strikes*\), then a suitable __smaller Delta / Strike difference can be maintained__ between the primary leg and the hedged leg, i\.e\. between CE Short & CE Long; and between PE Short & PE Long\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry \(i\.e\. by opting for slightly closer Far OTM Strikes for the Long leg CE & PE side, having almost same premium value\)\. This smaller gap between the Short leg & Long leg \(on each CE side & PE side\) will bring the Risk to Reward Ratio much favourable\. But the risk is that the Breakeven Strike gets shorter\. 

However, when the rangebound view on the underlying does not have conviction and there seems uncertainty about continuation of tight sideways move in the underlying, and it is not very sure in which direction the underlying may breakout, then a suitable __larger Delta/ Strike difference can be maintained__ between the primary leg and the hedged leg, i\.e\. between CE Short & CE Long; and between PE Short &  PE Long\. This larger Delta difference can be maintained by maintaining suitable larger gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry \(i\.e\. by opting for farther OTM Long Strike for CE & PE side, having almost same premium value\)\. Larger Strike difference between the primary leg and the hedged leg \(*i\.e\. between the Short leg & Long leg on each CE side & PE side*\) would ensure higher Net Premium  Credit, which would ensure a larger Breakeven area\. In such situation, Risk to Reward Ratio gets not so favourable\.

Basis aforesaid factors, suitable Far OTM CE & PE Option Strike levels of a particular Expiry series and nearly same Delta value may be selected for this Strategy\. Since, the success of this Strategy is also mainly dependent on the quick arrival of the Theta decay \(*besides rangebound movement of the underlying*\), therefore closer Expiry series are preferable for this Strategy\.

__Options Behaviour in Iron Condor Strategy__

- In this Strategy, two factors help in generating profit: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on both the Short primary leg\. Therefore, this Strategy is a high winning probability Strategy if the defined range is maintained by the underlying\.
- If the underlying remains within the defined range in this Strategy \(i\.e\. between the two Strikes Shorted in this Strategy\), then it implies that by Expiry both these Strikes expires worthless as OTM \(due to Theta impact on both primary legs and both hedged legs, being OTMs\)\. Consequently, the entire aggregate Net Premium received on  this Strategy would be the maximum profit\.
- Further, the selection of these CE & PE Strikes must be such OTM Strikes which are not expected to be breached by the underlying by Expiry of the Options Shorted\. Therefore, CE Short must be initiated on Far OTM Strike above the Resistance level and the PE Short must be initiated on Far OTM Strike below the Support level\.
- Further, as the Expiry approaches near, the Theta impact on the Far OTM Strike CE & PE starts to lose its Premium, and therefore generates profit\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy becomes suitable for deployment near Expiry if the view is aligned and favourable\.
- Thus, this Strategy \(which is hedged Short Strangles\) can be preferred over Short Strangles to play out: \(i\) when market is rangebound; \(ii\) near Expiry i\.e\. in the last week or so before Expiry, to play until Expiry day; \(iii\) a day before Expiry, to benefit from Overnight Expiry Decay; \(iv\) On Expiry day, to benefit from full Theta decay of Expiry day effect\.
- Rise in Volatility may not adversely impact this Strategy, even if rise in Volatility would be favourable to the CE Long & PE Long hedged legs and not on the CE Short & PE Short primary legs\. This is owing to the fact that if the both the primary & hedged legs of the CE and PE side positions continue to be an OTM until Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of Net Premium credit on Expiry\.
- Falling state of Volatility will also help this Strategy to realise the profit quickly, as the drop in Volatility will erode the Premium value of both the CE Short & PE Short primary legs \(as well as of the hedged legs\) and the Net Premium credit would be realised as profit sooner as Theta impact too would eventually help fasten the erosion of the Premium\.
- Delta neutral position is strived for in this Strategy\. The Delta play between the CE Short and PE Short primary legs; as well the CE Long and PE Long hedged legs is separately discussed hereinbelow\.

__Adjustments in Iron Condor Strategy__

__Adjustments \(if the Breakeven Strike is breached by the underlying and Iron Condor Strategy does not go as per plan\)__:

Since, this Iron Condor Strategy is a combination of two Credit Spread \(*i\.e\. on CE side & PE side*\) and is an aggregate Net Premium Credit strategy, therefore, the aggregate  Premium received \(*i\.e\. the sum of the Net Premium received on the CE and PE leg*\) need to be protected for profit from Expiry perspective\. 

However, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Strategy, then the potential Loss situation may arise in this Strategy, which would be limited to the extent of pre\-calculated Max Loss as already discussed above\.

Even though the potential Max Loss in this Iron Condor Strategy may be limited \(as it is a hedged strategy\), if the underlying keeps trending in one direction beyond the Breakeven Strike, but on aggregate basis when played with heavy volume, the limited Max Loss situation may yield substantial loss in absolute terms\. This loss situation that may occur in this Iron Condor Strategy can be mitigated through following adjustments: \(i\) Long Options; or \(ii\) Short CEs; or \(iii\) Short PEs\. These adjustments are discussed below:

1. Counter Adjustment through Long Option: If the underlying breaches the Breakeven Strike of this Iron Condor Strategy downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  trending downwardly with momentum, then __PEs can be bought__ \(*i\.e\. Long PE to be initiated of same Expiry series as original PE Long if the expiry is far, else of next farther Expiry series if Expiry is close*\)\. However, if the underlying breaches the Breakeven Strike of this Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be  trending upwardly with momentum, then __CEs can be bought__ \(*i\.e\. Long CE to be initiated of same Expiry series as original CE Long if the Expiry is far, else of next farther Expiry series if Expiry is close*\)\.

Buying  CEs or PEs to protect the risk in this Strategy will add up additional debit positions, therefore this Long Options position should only be prudent to initiate only if there is strong momentum in the direction where the underlying has breached the Breakeven Strike\. This Long Options position will help overcome the potential limited loss amount that may incur in this Strategy\. This adjustment though Long Options can be played by  naked CEs or PEs \(or by Bull or Bear Debit Strategy\)\. Further, Long Options should be initiated at a Strike having Delta value higher than the current Delta value of the Short leg which has been breached by the underlying \(*i\.e\. at a higher Strike than the PE sell Strike; and at a lower Strike than the CE sell Strike, as the case may be*\), so if the underlying keep trending in direction it has breached the Short leg, the relevant Long Options position initiated as an adjustment should generate more profit than the loss generated by that Short leg\. Also, depending upon the likely momentum in the underlying, suitable number of Long Options \(CEs or PEs as the case may be\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long Options position as an adjustment in comparison to the original number of Lots initiated on the Strategy\. If the Long Options generates profit or reasonably minimizes the loss in this Strategy before Expiry,  then it would be advisable to book the profit on this Long Options position and to exit this Strategy as a whole by booking minor loss or profit\.

However, since the Max Loss situation in this Strategy is anyways limited, therefore instead of initiating Long Options as mentioned above, Shorting Options \(i\.e\. Short CEs or Short PEs\) as adjustments to mitigate limited Max Loss situation in this Strategy, as discussed below, can be considered\.

1. Counter Adjustment through Short Option: If there seems to be a slow trend, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Iron Condor Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Iron Condor Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be in a mild upwardly direction, then Far OTM __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a far OTM Option for this adjustment is important because even if the direction of the underlying after once breaching the Breakeven Strike again reverses, then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If there seems to be a limited downward trend with momentum, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then additional Far OTM __PEs can be sold__ \(*i\.e\. Short PEs to be initiated of the same Expiry series as that of the original PE Short leg*\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. However, if the underlying breaches the Breakeven Strike of this Iron Condor Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be trending with momentum upwardly upto a limited extent, then additional Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated of the same Expiry series as that of the original CE Short leg*\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up a suitable much far OTM Options for Shorting in the same direction in which the underlying has breached the Breakeven Strike, such that these additional far OTM Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying after breach of Breakeven Strike continues in that direction, these additional Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these additional Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Strategy\. 

In this type of adjustment, additional Short Options positions can also be added in a pyramidal structure\. That is:

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. *For example, when the downtrend continues in Nifty, a Far OTM PE at 16000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 15800 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\.
- As the uptrend continues Far OTM CEs’ Premium would rise, therefore, Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\. *For example, when the uptrend continues in Nifty, a Far OTM CE at 18000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 18200 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\.

This __Shorting of Options in a pyramiding manner __may ensure a broader Breakeven Strike \(i\.e\. larger risk area protection\) and thus greater probability of profiting due to Theta decay on these bunch of additional Short Options on Expiry\.  However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

__Iron Condor Strategy in Different market Situations__

__If trade goes as per plan, in Iron Condor__:

The underlying remains rangebound, then both the two Short legs will generate profit due to regular expansion and contraction of Time Value / Premium of the Far OTM Options due to such up & down movement of the underlying\. However, there will also be premium loss on both the hedged Long legs of the Strategy, but, the rangebound movement will still help achieve the maximum profit to the extent of aggregate Net Premium Credit in the Strategy\.

Further, as the Expiry draws closer, the impact of Theta decay also starts to help generate profit in this Strategy, due to erosion in the Time Value / Premium of both the Short legs\. However, there will also be premium loss on both the hedged Long legs of the Strategy due to Theta impact, but the Theta decay will still help achieve the maximum profit to the extent of aggregate Net Premium Credit in the Strategy\.

Therefore, when until Expiry, the underlying remains within the range defined by two Strikes Shorted, then the CE Short and PE Short leg \(*as well as both the Long legs*\) expires worthless as OTMs generating full profit to the tune of the aggregate Net Premium Credit collected on this Strategy\.   

__If underlying movement breaches the range but not the Breakeven Strike, in Iron Condor Strategy__:

But if the underlying breaches either of the Strikes at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy may yield some profit, however, such profit will be lesser than the aggregate Net  Premium Credit collected on this Strategy\. The profit generated on Expiry, in this situation when the underlying closes within the Profit Zone, shall be as per calculations already discussed above\.

__If trade does not go as per plan and the Breakeven Strike is breached by the underlying, in Iron Condor Strategy__:

If the underlying breaks the range defined  by Shorting relevant Options, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding loss\. However, the loss in this Strategy will be limited because the Long position initiated on that side as the hedged leg will help curtail the loss arising from the Short leg whose side the Breakeven Strike has been breached by the underlying\. The Loss however  on Expiry will be limited and can be calculated on Expiry, as per the calculations already discussed above\.

In such situations, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Strategy, then  some adjustments can be considered in order to mitigate the loss in this Strategy\.

__Payoff Chart of Iron Condor Strategy__

<__end__>

__Loss in Iron Condor Strategy and its Calculations__

__Loss in Iron Condor Strategy:__

Maximum loss in Iron Condor Strategy occurs when the underlying breaks the range defined  by Shorting relevant Options, on either side, and starts trending after crossing beyond the Breakeven Strike of that side and eventually closes by Expiry either: \(i\) at or higher than the CE Long leg of the Strategy; or \(ii\) at or lower than the PE Long Strike of the Strategy\. 

In this situation, both the Short & Long leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side of Options, both Long & Short leg becomes even farther OTM\. This situation generates the Limited Max Loss situation on the Strategy\.

__Calculation of Max Loss in Iron Condor:__

The Max Loss on Iron Condor Strategy will be limited and can be pre\-calculated\. Maximum Loss in this Strategy is calculated as:

__<start> __*Max Loss for CE side, in Iron Condor*: is calculated as: 

- \[*Strike difference between CE Long and CE Short*\] 

__*   minus*__

- \[*aggregate of Net Premium Credit received on CE side & PE side on this Strategy*\] __<end>__

__<start> __*Max Loss for PE side, in Iron Condor*: is calculated as: 

- \[S*trike difference between PE Short Strike and PE Long Strike*\]  

__Impact on Max Loss situation, due to variation in Strike Difference between CE side & PE side, in Iron Condor:__

If the Strike difference between Short leg & Long leg, on both CE side and PE side is same \(*eg: 300 point difference between CE Short & CE Long and 300 point difference between PE Short & PE Long*\), then the Max Loss would be same for the CE side as well as for the PE side\. In such case, the amount so determined, is said to be the Max Loss of the Strategy\.

However, if the Strike difference between Short leg & Long leg, on CE side and PE side is different \(*eg: 300 point difference between CE Short & CE Long and 500 point difference between PE Short & PE Long*\), then the Max Loss would be different for the CE side and the PE side\. The side where the Strike difference is more, would have more Net Premium Credit and accordingly the BE Level of that side will also increase\. But with increase in BE Level, the Max Loss situation on that side would also increase\. In such case, the Max Loss of the side where Strike difference is more, would be the Max Loss of the Strategy\.

__Level of starting loss in Iron Condor Strategy and Loss Zone in Iron Condor Strategy__:

If the underlying breaks\-out and starts trending after crossing beyond the Breakeven Strike of either side, then this Strategy will start yielding loss\. Thus, breaching the BE Level on either side, is the Level from which loss would start on the Strategy\.

- *Loss Zone on the CE side, in Iron Condor:* If the underlying, gets bullish and breaches the Breakeven Strike on the CE side of the Strategy and closes higher than the BE Strike on the CE side, then this Strategy would yield loss on the upside\. Higher the underlying would close by Expiry after breaching the BE Strike on the CE side, higher will be the loss\. But if the underlying closes by Expiry, at or beyond the CE Long leg \(on the higher strike side\) then the Limited Max Loss situation would accrue on this Strategy \(*i\.e\. applicable Max Loss on CE side, as per Max Loss calculations given above*\)\.

Thus, the Loss zone on the CE side, is the BE Strike on the CE side till CE Long Strike and higher\. If the underlying closes by Expiry within this Loss Zone, but towards the BE Strike on the CE side then the loss on the Strategy will be lower; but if the underlying closes towards the CE Long Strike within the zone, then the loss on the Strategy would be relatively more\. In this Loss zone, the CE Short leg becomes an ITM, whereas the CE Long leg remains an OTM\. 

- *Loss Zone on the PE side, in Iron Condor*: If the underlying, gets bearish and breaches the Breakeven Strike on the PE side of the Strategy and closes lower than the BE Strike on the PE side, then this Strategy would yield loss on the downside\. Lower the underlying would close by Expiry after breaching the BE Strike on the PE side, higher will be the loss\. But if the underlying closes by Expiry, at or beyond \(on the lower strike side\) the PE Long leg then the Limited Max Loss situation would accrue on this Strategy \(*i\.e\. applicable Max Loss on PE side, as per Max Loss calculations given above*\)\.

Thus, the Loss zone on the PE side, is the BE Strike on the PE side till PE Long Strike and lower\. If the underlying closes by Expiry within this Loss Zone, but towards the BE Strike on the PE side then the loss on the Strategy will be lower; but if the underlying closes towards the PE Long Strike within the zone, then the loss on the Strategy would be relatively more\. In this Loss zone, the PE Short leg becomes an ITM, whereas the PE Long leg remains an OTM\.

__Calculation of final loss amount on the Strategy within the Loss Zone, in Iron Condor__:

If the underlying closes by Expiry within the Loss Zone \(*either on CE side or PE Side*\), then the Loss on Expiry will be calculated as:

- \[the final premium value of Short Option of the momentum side on Expiry \(*i\.e\. Short leg which becomes / expires as an ITM\)*\] 

__*minus*__* *

- \[the Net Premium Credit collected on the overall Strategy\]

*Note*:* The final LTP \(i\.e\. Premium value\) of the Option, if it expires as an ITM, would be equal to the Intrinsic Value \(i\.e\. the difference between the relevant ITM Strike and ATM Strike on Expiry\)  *<__end__>

<__start__> *For example: If Nifty 17500 CE is sold at Rs\. 250 per Lot & Nifty 17800 CE is bought at Rs\. 150, for the CE side of this Strategy; and Nifty 16500 PE is sold at Rs\. 200 per Lot & Nifty 16200 PE is bought at Rs\. 100 per Lot,  for the PE side of this Strategy, then: *

- *the Net Premium Credit received on this Strategy will be: \[\(250\+200\) – \(150\+100\)\] = 450 – 250 = 200\.*
- *BE Strike on CE side = 17500\+200=17700 CE*
- *BE Strike on PE side = 16500\-200 = 16300 PE*

*Max Loss on the CE side \(i\.e\. if the underlying breaches the Breakeven Strike of 17700 CE, will be: \[17800\-17500\] – \[200\] = 300\-200 = 100 per qty i\.e\. 100 x 50 = Rs 5000 per Lot\. This Max Loss situation on the upside will arise if the underlying closes by Expiry at or higher than the CE Long Strike of 17800\. *

*Max Loss on the PE side \(i\.e\. if the underlying breaches the Breakeven Strike of 16300 PE, will be:  \[16500\- 16200\] – \[200\] = 300\-200 = Rs\. 100 per qty i\.e\. 100 x 50 = Rs\. 5000 per Lot\. This Max Loss situation on the downside will arise if the underlying closes by Expiry at or lower than the PE Long Strike of 16200\.*

*Here, because the Strike difference on both CE side and PE side \(between the Short leg & Long leg\) is the same \(i\.e\. 300 on both side\), therefore, the Max Loss on both CE side & PE side is same \(i\.e\. Rs\. 5000\)*

*However, if by Expiry, Nifty rises above and closes at 17750 Strike \(as ATM\), i\.e\., within the Loss Zone on the CE side, then CE Short leg of 17500 will be an ITM with final LTP of about Rs\. 250 \(because on Expiry, final LTP of this CE strike will be equal to its Intrinsic Value, which is calculated as ATM Strike – CE ITM Strike = 17750 – 17500 = 250\)\.*

* Thus, the Loss incurred in this Strategy will be: 250 – 200 = Rs\. 50 per qty in a Lot, i\.e\. 50 x 50 = Rs\. 2500 per Lot\. *<__end__>

<a id="_Hlk160341138"></a>

<__end__>

__Profit in Iron Condor Strategy and its Calculations__

__Max Profit scenario & amount, in Iron Condor__: By Expiry of the relevant Options, if the underlying remains within the Strikes at which Shorts have been initiated, then the entire Net Premium Credit collected is the Max Profit in this Strategy\. 

__Profit zone, in Iron Condor__: In the event the underlying moves beyond the Strike at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy would yield some profit\. Therefore, the overall profit zone on the Strategy ranges from BE Strike on the CE side to BE Strike on the PE side\. If the underlying closes anywhere within this zone by Expiry, then the Strategy will generate profit\.

- *On the CE side*: if the underlying closes, between the CE Short Strike and the BE level of the Strategy on the CE side range, then some profit would be generated by the Strategy\. This is the Profit zone on the CE side\. If the underlying closes by Expiry near the CE Short Strike within this zone, then profit will be relatively more; than if the underlying closes near the BE Strike range on the CE side within this zone\. Therefore, the profit zone on the CE side is: when the underlying closes  by Expiry between the CE Short Strike and the BE Strike level on the CE side\.
- *On the PE side:* if the underlying closes, between the PE Short Strike and the BE level of the Strategy on the PE side profit zone, then some profit would be generated by the Strategy\. If the underlying closes by Expiry near the PE Short Strike within the profit zone, then profit will be relatively more; than if the underlying closes within the profit zone, near the BE Strike on the PE side\. Therefore, the profit zone on the PE side is: when the underlying closes  by Expiry between the PE Short Strike and the BE Strike level on PE side\.

__Calculation of final profit in Iron Condor Strategy__: 

If the underlying breaches the Strike at which Shorts have been initiated \(*on either side*\), but do not cross the Breakeven Strike of that side and closes within the profit zone \(of that side\) by Expiry, then too this Strategy would yield some profit\. This profit  in such situation will be calculated as:

- \[aggregate Premium Credit collected on the Strategy\]

- \[final LTP value, on Expiry, of the Short Option leg, which expires as an ITM\]\.

*Note: The final LTP \(i\.e\. Premium value\) of the Option, if it expires as an ITM, would be equal to the Intrinsic Value \(i\.e\. the difference between the relevant ITM Strike and ATM Strike on Expiry\)\. *<__end__>

*Thus, if the underlying by Expiry of the Options Shorted, remains within the defined Strike range in this Strategy and does not breach the Strikes at which Short have been initiated, then the entire Rs\. 200 per Lot aggregate Net Premium Credit received on this Strategy shall be the Max Profit in this Strategy\.*

*However, if Nifty moves higher than the 17500 CE Strike, but does not breach the Breakeven Strike of 17700 CE on the upper side and expire at 17600 ATM \(which implies that 17500 CE became an ITM; and 17800 CE and both PE legs expire as OTMs and thus become zero\), then the Profit in this Strategy will be  the final LTP of the 17500 CE Short leg \(say Rs\. 100\) minus Rs\. 200 \(aggregate Premium Credit received on this Strategy\) = Rs\. 100 per qty in the Lot\.* * Thus, overall profit on this Strategy got reduced \(from total premium credit of Rs\. 200 to Rs\. 100\) as the Strike at which Short was initiated was breached by Expiry \(but loss in this Strategy did not occur because the Breakeven Strike was not breached by Expiry\)\. *<__end__>

__Impact on profit situation, due to Strike Difference between CE Short & PE Short, in Iron Condor:__

Larger the difference between the Far OTM CE Short Strike and Far OTM PE Short Strike, smaller will be the Net Premium Credit received, hence smaller profit margin from the Strategy\. However, larger Strike difference between the CE Short & PE Short legs, enlarges the Breakeven Strike on both CE side & PE side\. Therefore, the profit range gets even wider with larger Strike difference, which helps increasing the profit probability\. 

The ratio between the Max Loss and the Max Reward gives the Risk & Reward ratio for this Strategy\.

<__end__>

__Profit & Loss Areas in Iron Condor Strategy, and its Calculations__

__*Profit & Loss Levels in Iron Condor Strategy, from Expiry perspective*:__

__<start> BE Level on the upside \(CE side\) in Iron Condor__: \[CE Short Strike \+ Net Premium Credit collected on both CE & PE sides\] __<end>__

__<start> BE Level on the downside \(PE side\) in Iron Condor__: \[PE Short Strike – Net Premium Credit collected on both CE & PE sides\] __<end>__

__Min Profit Level in Iron Condor__: If underlying closes by Expiry just above the BE Level on the PE side \(*that is higher Strike than BE Strike Level on PE side*\)  or if the underlying closes just below the BE Level on the CE side \(*that is lower Strike than BE Strike Level on CE side*\)\. Profit in such situation can be calculated as already explained above\.

__Max Profit Level in Iron Condor__: If underlying closes by Expiry at or anywhere between the CE Short Strike and PE Short Strike\. 

__Profit Zone in Iron Condor__:  If underlying closes by Expiry between the BE Level on PE side and BE Level on CE side\. In this profit zone the following situation may arise:

- *If underlying closes by Expiry at or anywhere between the CE Short Strike and PE Short Strike*: Max profit on the Strategy would be generated \(*calculated as aforesaid*\)\.
- *If underlying closes between the PE Short Strike and BE Level on the PE side:* Then some profit would be generated on the overall Strategy\. In such case higher profit would be generated on the Strategy if the underlying closes by Expiry near the PE Short Strike; and the profit would be less if the underlying closes towards the BE Level on the PE side\. Profit in such situation can be calculated as already explained above\.
- *If underlying closes between the CE Short Strike and BE Level on the CE side:* Then some profit would be generated on the overall Strategy\. In such case higher profit would be generated on the Strategy if the underlying closes by Expiry near the CE Short Strike; and the profit would be less if the underlying closes towards the BE Level on the CE side\. Profit in such situation can be calculated as already explained above\.

__Loss Starting Level, in Iron Condor__: If underlying closes by Expiry below the BE Level on the PE side \(*that is lower Strike than BE Strike Level on PE side*\) or above the BE Level on the CE side \(*that is higher Strike than BE Strike Level on CE side*\)\.

__Max Loss situation, in Iron Condor__: If the underlying closes by Expiry below the PE Long Strike on the PE side or above the CE Long Strike on the CE side, then the Max Loss may arise on this Strategy\.

__Loss Zone in Iron Condor__:  If underlying closes by Expiry below the BE Level on PE side and above the BE Level on the CE side\. In this loss zone the following situation may arise:

- *If underlying closes by Expiry at or anywhere below the PE Long Strike*: Max loss on the Strategy would be generated \(*calculated as aforesaid*\)\.
- *If underlying closes below the BE Level on the PE side and above the PE Long Strike:* Then some loss would be generated on the overall Strategy\. In such case lower would be the loss generated on the Strategy if the underlying closes by Expiry near the BE Level on the PE side; and the loss would be relatively more if the underlying closes towards the PE Long Strike\. Loss in such situation can be calculated as already explained above\.
- *If underlying closes by Expiry at or anywhere above the CE Long Strike*: Max loss on the Strategy would be generated \(*calculated as aforesaid*\)\.
- *If underlying closes above the BE Level on the CE side and below the CE Long Strike:* Then some loss would be generated on the overall Strategy\. In such case lower would be the loss generated on the Strategy, if the underlying closes by Expiry near the BE Level on the CE side; and the loss would be relatively more if the underlying closes towards the CE Long Strike\. Loss in such situation can be calculated as already explained above\.

<__end__>

__Demerits & Merits of Iron Condor Strategy__

__Demerits of Iron Condor Strategy__:

- Since, in this Strategy on each CE and PE sides, there is one Short position initiated at a higher Premium; and a Long position initiated at a lower Premium\. Thus, each of the CE and PE legs have a Net Premium Credit \(*i\.e\. Premium credit received on Short leg – Premium paid on Long leg*\)\. This Net Credit Premium on Iron Condor Strategy is less than the aggregate Premium Credit on Short Strangle \(*initiated on same Short Strikes, as that of in Iron Condor*\)\. Therefore, the quantum of profit is less in Iron Condor than in Short Strangle if the underlying remains on Expiry within the range defined by the Short legs \(initiated on the same Strikes in Iron Condor and Short Strangle\)\.
- Since, in this Strategy, the Net Credit Premium is less than the aggregate Premium Credit collected in Short Strangle, therefore, the Breakeven Strike \(upto which profitability is likely\) in this Strategy   gets reduced as compared to that in Short Strangle \(*even when Shorts are initiated at the same Strikes in Iron Condor and Short Strangle*\)\. 
- This Strategy has limited profit potential\.
- If there is a Volatility spike, then both the Short legs, will get adversely impacted but the Long leg would get favourably impacted, as there will addition of Time Value in the premium of both the Short & Long Options\. This Volatility spike may exhibit virtual loss on the Strategy \(*even if there is not much movement in the underlying in any particular direction*\)\.

__Benefits of Iron Condor:__

- It is a hedged Strategy \(*i\.e\. Iron Condor is hedged Short Strangle*\)\. The unlimited Max Loss in naked Short Strangle gets capped to a pre\-defined limited Max Loss in Iron Condor\. 
- This Strategy is suitable for a rangebound / sideways view\. A rangebound movement of the underlying within the range defined by Shorting Far OTM Strike CEs and PEs, generates profit in both the Far OTM Short legs due to erosion of Time Value owing to such movement in the underlying\. This Strategy is suitable when the range of the expected movement in the underlying is wider; and for narrow range Short Straddle / Iron Fly Strategy may be considered\. 
- Since, it is a hedged Strategy, the capital / margin required is less as compared to Short Strangle and the need for any MTM requirements would also be relatively less\.
- Since, less capital is required to implement this Strategy as compared to Short Strangle, more quantity/ Lots can be initiated in this Strategy for same amount of capital as compared to the Short Strangle\.
- While this Strategy has 2 Short Options \(as primary legs\) and 2 Long Options \(as hedged legs\), this Strategy is a Net Premium Credit Strategy as the Shorts are initiated at higher Premium than the Longs on the respective CE / PE sides between their primary and hedged legs\.
- Since this a hedged Strategy, therefore, any breakout by the underlying before Expiry on either side of the defined range is covered by the Long Options hedged leg on that side\. Thus, this Strategy helps curtail the unlimited loss situation that may arise in Short Strangle, owing to the Long Options positions added in this Strategy \(*provided such Long Options do not loose their Premium significantly due to Volatility crash or Theta decay*\)\.
- This Strategy is suitable for a rangebound / sideways view\. A rangebound movement of the underlying within the range defined by Shorting Far OTM Strike CEs and PEs, generates limited profit in both the Far OTM Short legs due to erosion of Time Value owing to such movement in the underlying\.
- Further, with the passage of time, if the underlying remains within the range as expected, then both the Short legs continues to be OTM Strikes and starts getting profitable due to the rising Theta impact\. If by Expiry of the Options Shorted, if the underlying remains within the defined range in this Strategy then both the Short & Long legs on either sides would expire worthless as OTM, generating entire Net Premium Credit collected on this Strategy as profit\.
- Thus, like in Short Strangle, in this Strategy too, two factors help in generating profit: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on the primary leg\. Therefore, this Strategy is a high winning probability Strategy if the defined range is maintained by the underlying\.
- Volatility crash is favourable on the Strategy, as the reduction in volatility causes erosion in the Time Value of both the primary leg \(inspite of erosion even on the hedged leg\), which ultimately yield profit on the Strategy\.
- However, Volatility spike will cause addition of Time Value in the premium of both the Long & Short legs \(*even if there is not much movement in the underlying in any particular direction*\), thus exhibiting some virtual loss on the Strategy\. But so long the Breakeven Strike is not breached on either side, then inspite of increase in premium value and virtual loss on the Strategy due to volatility spike, there will not be an actual loss scenario on the Strategy\.
- The Net Credit Premium \(received on both CE & PE side\), increases the loss area in this Strategy by defining the Breakeven Strike\. However, as compared to Short Strangle, the loss area or the Breakeven Strike on either side \(*upto which profitability in the Strategy is ensured*\) in this Strategy is lesser than in Short Strangle due to lesser Net Premium Credit collected in this Strategy \(*as against aggregate Premium credit collected in Short Strangle*\)\. Thus, from Expiry perspective, the  underlying must not go down and close below the Breakeven Strike on the PE side; and on the upper side the  underlying must not go up and close above the Breakeven Strike on the CE side Strike \(*the Breakeven Strikes in this Strategy are discussed below here*\)\.
- This is a limited loss Strategy\.

__Breakeven Strike of Short Straddle Strategy, its Calculation and Payoff Chart__

__*Breakeven Strike of Short Straddle Strategy, from Expiry perspective*__:

This Strategy comprises of naked ATM CE Short; and a naked ATM PE Short \(or Shorts initiated at same CE & PE Strike near ATM\)\. This is an aggregate Credit Strategy as the Premium at which both Shorts are initiated, on aggregate basis is the total Premium Credit received\.

The CE Short leg determines the upper range; and the PE Short leg determines the lower range in this Strategy\. The Breakeven on the upper side \(i\.e\. CE side\) and lower side \(i\.e\. PE side\), is determined as follows:

- *The Breakeven Strike on the CE side \(upper side\) in Short Straddle is*: The CE Strike \(*at which Short is initiated*\) \+ aggregate Premium Credit received on both CE & PE Shorts; and
- *The Breakeven Strike on the PE side \(lower side\) in Short Straddle is*: The PE Strike \(*at which Short is initiated*\) \- aggregate Premium Credit received on both CE & PE Shorts\. <__end__>

Thus, if by Expiry of the relevant Options which have been Shorted, if the underlying does not breach the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry of the relevant Options, the underlying breaches either upper or lower side and goes beyond the relevant Breakeven Strike then the Strategy would yield loss\. In case of continuous movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, an unlimited loss situation would arise\. 

<__start__> *For example: If Nifty ATM is at 17000, then for Short Straddle:* *If* *Nifty 17000 PE is sold at Rs\. 100 per Lot & Nifty 17000 CE is sold at Rs\. 150 per Lot, then the BE Strike of this Strategy will be:*

- *On CE side: 17000 \+ \(100\+150\) = 17250 CE Strike; and*
- *On PE side: 17000 \- \(100\+150\) = 16750 PE Strike*

*Thus, while this Strategy might yield total aggregate Premium of Rs\. 250 per Lot as full profit if the underlying remains at 17000 on Expiry\. *

*However, if Nifty crosses 17000 Strike upwardly then this Strategy would not yield loss so long the Breakeven Strike of 17250 is not breached upwardly by Nifty till Expiry of Options Shorted\. Likewise, if Nifty crosses 17000 Strike downwardly then this Strategy would not yield loss so long the Breakeven Strike of 16750 is not breached downwardly by Nifty till Expiry of Options Shorted*\. <__end__>

Therefore, in this Strategy, unlimited loss situation would arise, if either on the upside \(i\.e\. CE side\) or downside \(i\.e\. PE side\), the underlying breaks\-out and closes by Expiry beyond the Breakeven Strike level of that particular side\. 

__Payoff Chart for Short Straddle__

<__img54__>

<__end__>

__Short Straddle Strategy: Its Trade Legs & Objective__

When a view is formed that irrespective of the intermittent small  directional movement of the underlying, eventually the underlying is expected to remain within a very tight defined range from its present price level; then such view can be played out by a neutral strategy employing Short Options positions at ATM CE & PE Strikes \(or near ATM CE & PE same Strikes\) which defines a very tight range within which the underlying is expected to remain by Expiry of those Options\. 

Thus, when the view on the underlying is that it is expected to remain within a tight/ narrow range upto the Expiry of relevant Options, and the same is played out by Shorting Naked ATM CE & PE Options \(or near ATM CE & PE same Strikes\) pertaining to that Expiry series \(*by which the underlying is expected to remain in a range or sideways movement*\), then such a Strategy is called __Short Straddle__\. 

In Short Straddle Strategy, naked ATM CE & PE Options \(or near ATM CE & PE same Strikes\)  are sold in equal quantity, on the same underlying pertaining to same Expiry series\. In this Strategy, the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, within a very tight range from the present level \(i\.e\. maximum within the Breakeven Strikes\)\. Short Straddle involves naked Short positions on CE & PE Options \(involving two legs only\)\. Also, Short Straddle is a Strategy which generates Limited Profit, but can also generate Unlimited Loss if the tight range is breached by the underlying\.

However, when the Short Straddle \(naked Strategy\) is hedged with Long Options on OTM CE & OTM PE Options \(of Strikes having nearly same Delta values\), then such Strategy is called __Iron Fly or Iron Butterfly Strategy \(also referred to as Short Iron Fly or Short Iron Butterfly\)__\.

__Trade Legs in Short Straddle__:

- Short CE ATM Strike \(*primary CE leg*\); and
- Short PE ATM Strike \(*primary PE leg*\)

Both Short legs would be of same Expiry series, and in equal number of Lots in both primary legs\.

__<start> Example of Short Straddle__:

*If Nifty ATM is at 17000, then for Short Straddle:*

-  *Sell 10 Lot Nifty 17000 CE of Next Week Expiry \(at Rs\. 250 per Lot\); and *
- *Sell* 10 Lot *Nifty 17000 PE of Next Week Expiry \(at Rs\. 275 per Lot\) *__<end>__

__Objective in Short Straddle__:

Objective is to play a Neutral / Non\-directional or sideways / rangebound view, through selling naked ATM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, within a tight range from the current price levels of the underlying and thus the Options Shorted would expire within their Breakeven Strike range\.

Since, maximum Time Value in absolute number is at ATM Strikes and also Theta is maximum at ATM Strikes, therefore if the technical view is that there will not be much directional move of the underlying until the expiry of the Options Shorted/  intended to be Shorted, then this Strategy may be implemented to harness profit from the aggregate Premium Credit collected on this Strategy by Shorting ATM Options due to tight rangebound move in the underlying coupled with Theta impact of Expiry\.

It is a Credit Strategy, as both the Short legs get the credit of the Premium at which ATM Strike Options are sold\. Accordingly, this Strategy generates limited profit to which may extend upto the maximum extent of Premium collected on both the Short legs\. 

However, if the underlying breaches the Breakeven Strike on either side \(*CE side or PE side*\), then this Strategy would get exposed to unlimited Loss potential\. In  such a situation, the deeper the trend continues, more would be the Loss generated on this Strategy\.

__Significance & Impact of Strike / Delta values in Short Straddle__

__Strike / Delta value in Short Straddle__:

Since, both the Short legs are on the same Strike, their Delta values help maintain a balance between the profit & loss scenario between the two Short legs\. In this Strategy, ATM CE & PE are Shorted \(which have nearly same Delta value equal to 0\.5 per Lot basis\), therefore, in this Strategy, with the movement of the underlying within the narrow range, the Delta values on CE Short and PE Short legs acts natural hedge to each other, in the following manner: 

- when CE Short leg loses due to rise in its LTP \(i\.e\. when underlying rises and CE Short Strike becomes an ITM\), the PE Short leg will help counter the losses on CE leg by generating profit as the LTP of PE would reduce \(as the PE Short Strike becomes an OTM, when underlying rises\); and
- when PE Short leg generates loss due to rise in its LTP \(i\.e\. when underlying falls and PE Short Strike becomes an ITM\), the CE Short leg will help counter the losses on PE leg by generating profit as the LTP of CE would reduce \(as the CE Short Strike becomes an OTM, when underlying falls\)\.

Thus, such fluctuations of CE Short and the PE Short leg, from near ITM to OTM, acts as a natural hedge to the other leg in more or less same Delta ratio \(*which Delta ratio keeps inter\-changing between the CE Short and PE Short leg, as they switch from OTM to ITM*\), so long the Breakeven Strike is not breached by the underlying on either side\. Once the Breakeven Strike is breached by the underlying on either side, then the unlimited loss situation arises depending how long the underlying trends beyond Breakeven Even Strike until Expiry of the Options Shorted\.

__Selection of Option Strikes in Short Straddle__:

This Strategy is dependent of higher Time value and maximum Theta impact, thus it usually comprises of naked ATM CE Short; and  naked ATM PE Short legs\. However, this Strategy can also be implemented by initiating naked Shorts at same Strike CE & PE near ATM\.

Since, the success of this Strategy is also mainly dependent on the quick arrival of the Theta decay \(besides narrow rangebound movement of the underlying\), therefore closer Expiry series are preferable for this Strategy\.

__Options Behaviour in Short Straddle Strategy__

- In this Strategy, two factors help in generating profit: \(i\) tight rangebound move in the underlying; and \(ii\) Theta impact on the primary legs\. Therefore, this Strategy is a highly profitable Strategy if the narrow range is maintained by the underlying\.
- If the underlying remains within the narrow  range in this Strategy \(*i\.e\. between the Breakeven Strikes in this Strategy*\), then it implies that by Expiry, either: \(i\) both these Strikes expires worthless as OTM / ATM \(due to Theta impact on both primary leg being OTMs\)\. Consequently, the entire aggregate Premium received on Shorting both CE & PE Strikes would be the maximum profit if underlying closes on Expiry at the Strike on which both Short legs have been initiated; or \(ii\) one primary leg would expire worthless as an OTM and another as a near ITM, in which case lesser profit \(than the Maximum Profit\) is generated on this Strategy\. 
- Further, as the Expiry approaches near, the Theta impact on the ATM Strike CE & PE starts causing them to loose their Premium, and therefore generates profit\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy becomes suitable for deployment near Expiry if the narrow rangebound view on the underlying is aligned and favourable\. 
- Thus, Short Straddles can be initiated when market is in a very narrow rangebound limits, especially: \(i\) near Expiry i\.e\. in the last week or so before Expiry, to play until Expiry day; or \(ii\) a day before Expiry, to benefit from Overnight Expiry Decay; or \(iii\) On Expiry day, to benefit from full Theta decay of Expiry day effect\.    
- Rise in Volatility may not adversely impact this Strategy, because even if rise in Volatility would be unfavourable to both the Short legs before the Expiry \(as their Premium would rise or will not fall as otherwise expected\), the Premium value of Options Shorted would reduce near Expiry due to Theta impact\. This is owing to the fact that if the Short  legs are ATM / OTM on Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of aggregate Premium credit on Expiry\.
- Falling state of Volatility will also help this Strategy to realise the profit quickly, as the drop in Volatility will erode the Premium value of both the Short legs and the aggregate Premium credit would be realised as profit sooner as Theta impact too would fasten the erosion of the Premium\.

__Adjustments in Short Straddle Strategy__

__Adjustments \(if the Breakeven Strike is breached by the underlying and Short Straddle Strategy does not go as per plan\)__:

Since, this Short Straddle Strategy is a Premium Credit strategy, therefore, the aggregate  Premium Credit received \(*i\.e\. the sum of the Premium Credit received on the CE Short and PE Short leg*\) need to be protected for profit from Expiry perspective\. 

However, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Short Straddle Strategy, then the potential unlimited loss situation may arise in this Short Straddle Strategy\.

 The potential loss in this Strategy may be unlimited if the underlying keeps trending in one direction beyond the Breakeven Strike\. This unlimited loss situation that may occur in this Short Straddle Strategy can be mitigated through following adjustments: \(i\) Conversion to Iron Fly \(*i\.e\. hedging Short Straddle*\); or \(ii\) Long Options; or \(iii\) Short CEs; or \(iv\) Short PEs\. These adjustments are discussed below:

1. Conversion to Iron Fly: If the original view that the underlying would remain and close by Expiry within the tight range \(*at best within the Breakeven Strike range of the Short Straddle*\) appears to get uncertain, then immediately the naked Short Straddle must be converted to Iron Fly Strategy by initiating OTM Long CEs    and OTM Long PEs \(*of equal quantity as that of Short legs, and of same Expiry series as that of the Short Options*\)\. This hedging of Short Straddle through Iron Fly will mitigate the potential risk of unlimited loss on Short Straddle into a pre\-calculated Limited Loss situation\. You may refer to the details of Iron Fly given on the other side of this Table for better understanding\.
2. Counter Adjustment through Long Option: If the underlying breaches the Breakeven Strike of this Strategy downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Short Straddle Strategy  and the underlying seems to be  trending downwardly with momentum, then __PEs can be bought__ \(*i\.e\. Long PE to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Short Straddle Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be  trending upwardly with momentum, then __CEs can be bought__ \(*i\.e\. Long CE to be initiated*\)\.

Buying  CEs or PEs to protect the risk in this Strategy will add up debit position, therefore this Long Options position should only be prudent to initiate only if there is strong momentum in the direction where the underlying has breached the Breakeven Strike\. This Long Options position will help overcome the potential unlimited loss amount that may incur in this Strategy\. This adjustment through Long Options can be played by  naked CEs or PEs \(or by Bull or Bear Debit Strategy\)\. Further, Long Options should be initiated at a Strike having Delta value higher than the current Delta value of the Short leg which has been breached by the underlying \(i\.e\. at a higher Strike than the PE sell Strike; and at a lower Strike than the CE sell Strike, as the case may be\), so if the underlying keep trending in direction it has breached the Short leg, the relevant Long Options position initiated as an adjustment should generate more profit than the loss generated by that Short leg\. Adding naked Longs of higher Delta value in same quantity as on the Short leg, would convert that side into a Debit Vertical Spread\. Also, depending upon the likely momentum in the underlying, suitable number of Long Options \(CEs or PEs as the case may be\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Short Straddle Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long Options position as an adjustment in comparison to the original number of Lots initiated on the Short Straddle Strategy\. If the Long Options generates profit or reasonably minimizes the loss in this Short Straddle Strategy before Expiry,  then it would be advisable to book the profit on this Long Options position and to exit this Strategy as a whole by booking minor loss or profit\.

1. Counter Adjustment through Short Option: If there seems to be a slow trend, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Short Straddle Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be in a mild upwardly direction, then __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying after once breaching the Breakeven Strike again reverses, then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If there seems to be a limited  trend but with momentum, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then additional Far OTM __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. However, if the underlying breaches the Breakeven Strike of this Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be trending upwardly with momentum but to a limited extent, then additional Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up a suitable much far OTM Options for Shorting in the same direction in which the underlying has breached the Breakeven Strike, such that these additional Far OTM Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying after breach of Breakeven Strike continues in that direction, these additional Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these additional Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Short Straddle Strategy\. 

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. *For example, when the downtrend continues in Nifty, a Far OTM PE at 16000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 15800 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. 

__Short Straddle Strategy in Different Market Situations__

__If trade goes as per plan, in Short Straddle__:

The underlying remains within the narrow rangebound, then both the two Short legs will generate profit due to regular expansion and contraction of Time Value / Premium of the ATM Options due to such up & down movement of the underlying\.

Further, as the Expiry draws closer, the impact of Theta decay also starts to help generate profit in this Strategy, due to erosion in the Time Value / Premium of both the Short legs\. 

Therefore, when until Expiry, the underlying remains within the tight range and the underlying closes on Expiry at the Strike on which the CE Short and PE Short legs have been initiated, then the both the Short leg Strikes would expire worthless as ATMs/ OTMs generating full profit to the tune of the aggregate Premium collected on this Strategy\.   

__If underlying movement breaches the Short Strike but not the Breakeven Strike, in Short Straddle__:

But if the underlying breaches either of the Strikes at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy would yield some profit\. 

In such event too, some profit will be generated by this Strategy, however, such profit will be lesser than the aggregate Premium collected on this Strategy by Shorting CEs & PEs\. The limited profit however can be calculated on Expiry, as per the calculations discussed above\.

__If trade does not go as per plan and the Breakeven Strike is breached by the underlying, in Short Straddle__:

Since, this Strategy comprises of naked Short legs, therefore if the underlying breaks the Breakeven Strike, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding unlimited loss as the underlying keep trending in that direction and expires outside the Breakeven Strike\. The unlimited Loss however can be calculated on Expiry, as per the calculations discussed above\.

In such situations, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Strategy, then  some adjustments can be considered in order to contain the loss in this Strategy\.

__Payoff Chart for Short Straddle Strategy:__

<__end__>

__Loss in Short Straddle Strategy, and its Calculations__

__*Loss in Short Straddle Strategy, from Expiry perspective*:__

Since, this Strategy comprises of naked Short legs, therefore if the underlying breaks the Breakeven Strike range defined  by Shorting relevant Options, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding unlimited loss as the underlying keep trending in that direction and closes by Expiry outside the Breakeven Strike\.

In this situation, the Short leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side Short Option leg becomes even farther OTM\. This situation generates the Unlimited Max Loss situation on the Strategy\.

__Level of starting unlimited loss on the upside \(i\.e\. CE side\), in Short Straddle__: 

If the underlying, gets bullish and breaches the Breakeven Strike on the CE side of the Strategy and closes higher than the BE Strike on the CE side, then this Strategy would yield loss on the upside\. Higher the underlying would close by Expiry after breaching the BE Strike on the CE side, higher will be the loss\. The loss situation is unlimited, if the underlying keeps trending higher by Expiry\. This is because the CE Short Strike becomes an ITM \(*while the CE Long Strike becomes an even farther OTM*\)\.

__Level of starting unlimited loss on the downside \(i\.e\. PE side\), in Short Straddle__: 

If the underlying, gets bearish and breaches the Breakeven Strike on the PE side of the Strategy and closes lower than the BE Strike on the PE side, then this Strategy would yield loss on the downside\. Lower the underlying would close by Expiry after breaching the BE Strike on the PE side, higher will be the loss\. The loss situation is unlimited, if the underlying keeps trending lower by Expiry\. This is because the PE Short Strike becomes an ITM \(*while the PE Long Strike becomes an even farther OTM*\)\.

__Calculation of final loss amount on Short Straddle Strategy__:

If the underlying closes by Expiry, after breaching the Breakeven Strike on either side, then the Loss accrued on the Strategy on Expiry can be calculated as:

- \[the final premium value of Short Option of the momentum side on Expiry \(*i\.e\. Short leg which becomes / expires as an ITM\)*\]

- the aggregate Premium Credit collected by Shorting both CE & PE Options\. 

More the underlying closes beyond the BE Strike on either side, higher will be the loss generated by the Short leg of that side Option\. 

*Note: The final LTP \(i\.e\. Premium value\) of the Option, if it expires as an ITM, would be equal to the Intrinsic Value \(i\.e\. the difference between the relevant ITM Strike and ATM Strike on Expiry\) *<__end__>

<__start__> *For example: If Nifty ATM is at 17000, then for Short Straddle:* 

*If* *Nifty 17000 PE is sold at Rs\. 100 per Lot & Nifty 17000 CE is sold at Rs\. 150 per Lot, then the BE Strike of this Strategy will be \(basis the total Premium Credit of Rs 250 per Lot collected on the Strategy\):*

- *BE on CE side: 17250 CE Strike; and *
- *BE on PE side: 16750 PE Strike\.*

*Therefore, if by Expiry Nifty falls below 16750 and Expiry is at 16500 \(as ATM\), then PE Short leg of 17000 will be an ITM with final LTP of about Rs\. 500 \(because on Expiry, final LTP of this PE strike will be equal to its Intrinsic Value, which is calculated as PE ITM Strike – ATM Strike = 17000 – 16500 = 500\)\. *

*Thus, the Loss incurred in this strategy will be: 500 – 250 = Rs\. 250 per qty in a Lot, i\.e\. 250 x 50 = Rs\. 12,500 per Lot\. *<__end__>

<__end__>

__Profit in Short Straddle Strategy, and its Calculations__

__*Profit in the Short Straddle Strategy, from Expiry perspective*: __

__Max Profit scenario in Short Straddle Strategy__: By Expiry of the relevant Options which have been Shorted, if the underlying closes at the same Strike \(on which Shorts have been initiated\), then the entire Premium Credit collected on the Strategy, shall be the Max Profit in this Strategy\.

__Max Profit Level in Short Straddle Strategy__:

Thus, Max Profit level: Is the Strike at which Shorts have been initiated\. If underlying closes by Expiry at this Strike, then Max Reward is generated by the Strategy\.

__Profit zone in Short Straddle Strategy__:

In the event the underlying moves beyond the Strike at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy would yield some profit\. Therefore, the overall profit zone on the Strategy ranges from BE Strike on the CE side to BE Strike on the PE side\. If the underlying closes anywhere within this zone by Expiry, then the Strategy will generate profit\. 

- *On the CE side*: if the underlying closes, between the CE Short Strike and the BE level of the Strategy on the CE side range, then some profit would be generated by the Strategy\. If the underlying closes by Expiry near the CE Short Strike within this zone, then profit will be relatively more; than if the underlying closes near the BE Strike range on the CE side within this zone\. Therefore, the profit zone on the CE side is: when the underlying closes  by Expiry between the CE Short Strike and the BE Strike level on the CE side\.
- *On the PE side:* if the underlying closes, between the PE Short Strike and the BE level of the Strategy on the PE side profit  zone, then some profit would be generated by the Strategy\. If the underlying closes by Expiry near the PE Short Strike within the profit zone, then profit will be relatively more; than if the underlying closes within the profit zone, near the BE Strike on the PE side\. Therefore, the profit zone on the PE side is: when the underlying closes  by Expiry between the PE Short Strike and the BE Strike level on PE side\.

__Calculation of final profit on Short Straddle Strategy__: 

If the underlying goes beyond the Strike at which Shorts have been initiated, but do not cross the Breakeven Strike of that side and closes within the profit zone \(of that side\) by Expiry, then too this Strategy would yield some profit\. This profit  in such situation will be calculated as: 

- \[aggregate Premium Credit collected on the Strategy\] 

- \[final LTP value, on Expiry, of the Option, which expires as an ITM\] 

*Note: The final LTP \(i\.e\. Premium value\) of the Option, if it expires as an ITM, would be equal to the Intrinsic Value \(i\.e\. the difference between the relevant ITM Strike and ATM Strike on Expiry\)\. <*__end__*>*

*<*__start__*> For example: If Nifty ATM is at 17000, then for Short Straddle:* *If* *Nifty 17000 PE is sold at Rs\. 100 per Lot & Nifty 17000 CE is sold at Rs\. 150 per Lot, then the BE Strike of this Strategy will be:*

- *On CE side: 17250 CE Strike; and *
- *On PE side: 16750 PE Strike\.*

*Thus, if the underlying by Expiry of the Options Shorted, closes at the same Strike on which the two Short legs are initiated and consequently both the Short legs expire as an OTM/ ATM, then the entire Rs\. 250 aggregate Premium shall be the Max Profit in this Strategy\.*

*However, if Nifty moves higher than the 17000 CE Strike, but does not breach the Breakeven Strike of 17250 on the upper side and expire at 17200 ATM, then the Max Profit in this Strategy will be  the final LTP of the 17000 CE Short leg \(which would be an ITM having higher Premium by Expiry, say Rs\. 200\) minus Rs\. 250 \(aggregate Premium Credit received on this Strategy\) = Rs\. 50 per Lot\.* * *

*Thus, overall profit on this Strategy got reduced \(from a total Premium Credit of Rs\. 250 on the overall Strategy, to Rs\. 50 only\) as the Strike at which Short was initiated was breached by Expiry \(but loss in this Strategy did not occur because the Breakeven Strike of 17250 CE was not breached by Expiry\)\.* *<*__end__*>*

<__end__>

__Profit & Loss Areas on the Short Straddle Strategy__

__*Profit & Loss Levels on Short Straddle Strategy, from Expiry perspective*:__

__<start> BE Level on the upside \(CE side\)__: \[CE Short Strike \+ Total Premium Credit collected on both CE Short & PE Short leg\] __<end>__

__<start> BE Level on the downside \(PE side\)__: \[PE Short Strike \- Total Premium Credit collected on both CE Short & PE Short leg\] __<end>__

__Min Profit Level__: If underlying closes by Expiry just above the BE Level on the PE side \(*that is higher Strike than BE Strike Level on PE side*\) or if the underlying closes just below the BE Level on the CE side \(*that is lower Strike than BE Strike Level on CE side*\)\.

__Max Profit Level__: If underlying closes by Expiry at the same Strike on which CE Short & PE Short  positions were initiated  in this Strategy\.

__Profit Zone__:  If underlying closes by Expiry between the BE Level on PE side and BE Level on CE side\. In this profit zone the following situation may arise:

- *If underlying closes by Expiry at the Strike on which CE Short and PE Short are initiated*: Max profit on the Strategy would be generated \(*as calculated aforesaid*\)\.

__Loss Starting Level__: If underlying closes by Expiry below the BE Level on the PE side \(*that is lower Strike than BE Strike Level on PE side*\) or above the BE Level on the CE side \(*that is higher Strike than BE Strike Level on CE side*\)\.

__Max Loss situation__: If the underlying closes by Expiry below the BE Level on the PE side or if the underlying closes above the BE Level on the CE Strike, then the Max Loss situation may arise on this Strategy, in the following situation: 

- *Max Loss on the PE side: *In case the underlying keeps falling below the BE Level on the PE side, then unlimited loss situation would arise on the lower side\. Lower the underlying would close below the BE Level of the PE side, higher will be the loss on the overall Strategy\. Loss on Expiry, in such situation can be calculated as already explained above\.
- *Max Loss on the CE side: *In case the underlying keeps rising above the BE Level on the CE side, then unlimited loss situation would arise on the upside\. Higher the underlying would close above the BE Level of the CE side, higher will be the loss on the overall Strategy\. Loss on Expiry, in such situation can be calculated as already explained above\.

<__end__>

__Demerits & Merits of Short Straddle__

__Demerits of Short Straddle__:

- It comprises of naked Short positions\.
- Since this Strategy is implemented  by Shorting ATM CEs and PEs \(or near ATM same Strike CEs & PEs\), it requires  more capital/ margin and also sufficient capital for MTM adjustments also need to be ensured\.
- This Strategy generates limited profit to the maximum extent of Premium collected on both the Short legs\. Profit is generated on this Strategy only if the underlying remains within the tight range from the current price levels of the underlying \(and the Options Shorted would expire within their Breakeven Strike range\)\.
- If the underlying breaks out and breaches the range beyond the Breakeven Strike of the Shorted Option, on either side, then this Strategy may yield unlimited loss\. Thus, this Strategy is the kind with limited profit and unlimited loss\.
- During low Volatility period and close to Expiry period, sufficient Premium may not be available in ATM CEs and PEs, making this Strategy not viable from of profit amount perspective\.
- If there is a Volatility spike, then both the Short legs, will get adversely impacted as there will addition of Time Value in the premium of both the Options \(*even if there is not much movement in the underlying in any particular direction*\)\. This volatility spike may exhibit virtual loss on the Strategy\.

__Benefits of Short Straddle:__

-  This Strategy is suitable for a very tight rangebound / sideways view\. A very narrow rangebound movement of the underlying within the tight range from the current price levels of the underlying \(*i\.e\. within the Breakeven Strike range of this Strategy*\), generates profit in both the ATM Short legs due to erosion of time value owing to such movement in the underlying\.
- With the passage of time, if the underlying remains within the narrow range as expected, then both the Short legs continues to be ATM Strikes or one near OTM & another near ITM, consequently generating profit in this Strategy, due to the rising Theta impact\. If by Expiry of the Options Shorted, if the underlying remains within the tight range in this Strategy and the Options Shorted would expire within their Breakeven Strike range, then both the Shorted legs would expire worthless as ATM \(or one of them would become OTM and expire worthless and another as near ITM yet having less Premium left due to Theta effect on Expiry\), generating profit on this Strategy or a lesser profit\.
- In this Strategy, two factors help in generating profit: \(i\) very tight rangebound move in the underlying; and \(ii\) Theta impact on the primary legs\. Therefore, this Strategy  can yield decent profit if the tight range is maintained by the underlying\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy becomes suitable for deployment near Expiry if the view is aligned and favourable\.  
- It is a Credit Strategy\. Since both Short legs comprises of selling ATM Strikes, the Premium on both Short legs is the amount of aggregate Premium collected\. Accordingly, in this Strategy, the Credit of Premium need to be protected for profit in this Strategy\.
- The aggregate Credit Premium collected on both Short legs, increases the loss area in this Strategy by defining the Breakeven Strike\. Thus, from Expiry perspective, the  underlying must not go down and cross below the Breakeven Strike of PE Short Strike and on the upper side the  underlying must not go up and cross above the Breakeven Strike of CE Short Strike \(*the Breakeven Strikes in this Strategy are discussed below*\)\.
- Volatility crash is favourable on the Strategy, as the reduction in volatility causes erosion in the Time Value of both the primary Short legs, which yield profit on the Strategy\.
- However, Volatility spike will cause addition of Time Value in the premium of both the Options \(even if there is not much movement in the underlying in any particular direction\), thus exhibiting virtual loss on the Strategy\. But so long the Breakeven Strike is not breached on either side by Expiry, then inspite of increase in premium value and virtual loss on the Strategy due to volatility spike, there will not be an actual loss scenario on the Strategy\.

__Breakeven Strike in Bull CE Debit Spread, its Calculation and Payoff Chart__

__Breakeven Strike in Bull CE Debit Spread, from Expiry perspective:__

Net Premium paid on the Strategy \(*i\.e\. the difference between the premium paid on the primary leg and the premium credit received on the hedged leg\)*, must be crossed upwardly by the underlying above the Strike at which CE Long primary leg is initiated, by Expiry, in order that this Spread be profitable by Expiry\. Thus, we need to determine the Breakeven Strike level above which the underlying must close by Expiry, in order to bring the Strategy into profit\.

__Breakeven \(BE\) Strike, in Bull CE Debit Spread__: 

BE level is the level which the underlying must close above by Expiry, so as to yield profit on the Strategy\. This BE level is determined by adding the Net Premium debit incurred on the Strategy, to the CE Long leg\.

 i\.e\., __<start> Formula__: __BE Strike for this Strategy = CE Long Strike \+ Net Premium <end>__

__<start> __*For example, if Nifty 17600 CE is bought at Rs\. 200 premium per Lot and Nifty 17800 CE is sold at Rs\. 150 premium per lot, then BE Strike will be 17600\+\(200\-150\) = 17650 CE Strike, to be profitable from Expiry perspective\. That is by Expiry, Nifty must go up beyond 17650 Strike \(in which case 17600 CE primary leg becomes an ITM\)\. *

*Higher the underlying closes by Expiry, above the aforesaid BE level, higher will be the profit generated on this Spread \(until the Max Profit level is reached\)*\. __<end>__

__Impact on BE level in Bull CE Debit Spread, due to Strike Difference:__

Larger the difference between CE Long and CE Short Strike, larger will be the net premium debit, and accordingly larger will be the Breakeven required for profit on the Strategy, from Expiry perspective\.

Also, the Breakeven Strike gets larger if a CE Spread is initiated on a farther Expiry series than closer Expiry series, on same Strikes of CEs \(*eg: both primary & hedged leg CEs are initiated on Next Month Expiry series than Current Month Expiry series*\)\. This is because the net premium debit paid on the Spread increases as we go on farther Expiry series, even though the primary & hedged leg CE Strikes are kept same\.

__<start> Payoff Chart for Bull CE Spread: __

__<img44>__

__<end>__

__Bull__ __Call Spread Strategy or Call Debit Strategy: Its Trade Legs and Objective__

Bullish view can be played through Long Options with hedged positions\. 

When the view on the underlying is bullish, we can play the uptrend by being Long on CE Options \(i\.e\. buy CE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bearish view by Shorting Call Options \(i\.e\. sell CE Options\), of the same number of Lots as in the primary leg \(i\.e\. in the ratio of 1:1 in terms of Lots/ quantity\), on the same underlying with same Expiry series \(the __hedged leg__\)\. This hedged position/ strategy where a bullish primary leg initiated with Long CE positions with higher Premium is hedged with a Call Short position with lower Premium, on the same underlying and of same Expiry series – it is called a __Bull__ __Call Spread Strategy or Call Debit Strategy__\. It is a Vertical Spread \(i\.e\. involving two same side Options of same Expiry series on different Strikes\)\.

This Strategy has limited profit potential and pre\-defined max loss\.

__Trade Legs in Bull Call Debit Spread__:

- Long CE of lower Strike with higher Premium \(*primary leg*\)
- Short CE of higher Strike with lower Premium \(*hedged leg*\)

Equal number of Lots in primary and hedged leg; and both legs on same Expiry series\.

__<start> Example of Bull Call Debit Spread__:

- *Buy 2 Lots Nifty 17600 CE of Current Month Expiry series \(at Rs\. 75 per Lot\)*
- *Sell 2 Lots Nifty 17800 CE of Current Month Expiry series \(at Rs\. 50 per Lot\)* __<end>__

__Objective of Bull Call Debit Spread__:

Objective is to play bullish view through buying CEs \(as the primary leg\); and to mitigate the risk / loss that may arise on the primary leg upon reversal of the trend towards bearish side with a CE Short position \(on the hedged leg\)\. 

If the bullish view continues, overall the Strategy would generate a pre\-defined max profit; and if there is reversal of the trend, the loss on the Strategy would also be limited and pre\-defined \(i\.e\. *to the extent of Net Premium debit incurred on the overall Strategy*\)\.

Thus, there is a limited profit potential on this Strategy if the bullish view continues, but at the same time a limited max loss scenario on the Strategy \(*if the bullish view goes wrong*\)\.

__Adjustments in Bull CE Spread Strategy __

__\(i\.e\. if bullish view and the Bull Call Spread Strategy does not go as per plan\)__

Since, Bull Call Spread Strategy is a Debit spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on primary leg and the Premium credit collected in the hedged leg*\) need to be first recovered for this Spread to generate profit from Expiry perspective; and accordingly the underlying must cross\-over the BE Strike level upwardly on sustained basis\. 

However, if the bullish trend reverses towards downward direction, then the Net Premium paid on the overall Spread, will be the final amount of Max Loss that may be incurred on this Strategy by Expiry\. Thus, upon reversal, this Net Premium amount need to be covered up by making suitable adjustments\. 

The following adjustments can be considered to cover up for the potential Max Loss that may occur in this Strategy to the tune of Net Premium: \(i\) Conversion of Bull CE Spread into Call Ratio Spread  \(through Short CE\); or \(ii\) Long PE; or \(iii\) Short PE\. These adjustments are discussed below:

1. Counter Adjustment through Short Option \(Conversion to Call Ratio Spread\): In case of a downtrend, __farther OTM CEs can be sold__ \(additional Short CEs\)\. Idea in this adjustment is to pick up a suitable Far OTM CE for Shorting, such that this Far OTM CE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional CE Short can be initiated on such Premium so as to cover for the Net Premium amount on the original Strategy\. Selection of a Far OTM CE for this adjustment is important because even if the downtrend again reverses on the bullish side, this additional CE must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the Net Premium Debit in the original Strategy and the likely downtrend and the Premium available on Far OTM CEs \(*of same Strike as that of hedged leg or even higher Far OTM Strike*\), suitable number of Short CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short CE in comparison to the original number of Lots initiated on the Strategy, so as to bring the original Bull CE Strategy on to an overall negative Delta position to play the bearish reversal\. In this situation there will be more CE Short than CE Long and therefore the original Bull CE Spread gets converted into Call Ratio Spread \(*this Ratio Spread is separately discussed in this Chapter*\)\. These additional CE Short should be initiated at such Far OTM CE, which may be the same Strike at which hedged leg was originally initiated or at even higher Far OTM Strike, depending on the Premium available\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.
2. Counter Adjustment through Long Option: If there seems to be a trending downtrend with momentum, then a __PE can be bought__ \(Long PE\)\. Buying a PE to protect the downside risk in this Strategy will add up another debit position, therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. This Long PE will help overcome the loss of Net Premium amount in this Strategy upon reversal\. If this PE generates profit to the tune of Net Premium then it would be advisable to book the profit on this Long PE position\. The reversal on downside can be played by a naked PE or a Bear PE Spread Strategy\. Further, Long PE should be initiated at a Strike having Delta value higher than the current Delta value of the Long CE primary leg \(*i\.e\. at a higher Strike than the CE buy Strike*\), so that in case of reversal on downtrend, Long PE should generate more profit than the loss generated by the Long CE\. Also, depending upon the Net Premium Debit in the original Strategy and the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long PE in comparison to the original number of Lots initiated on the Strategy, so as to bring the original Bull CE Strategy on to an overall negative Delta position to play the bearish reversal\. 

1. Adjustment through Pyramiding: If the downtrend is expected to be trending but limited, then __even__ __Farther OTM PEs can be sold__ \(PE Short\) below the major support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the Net Premium paid on this Strategy\. Selection of a Far OTM PE for this adjustment is important because even if the downtrend continues, this additional PE must be such which can be expected to be not breached by the underlying by Expiry and to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the Net Premium Debit in the original Strategy and the likely downtrend and the Premium available on Far OTM PEs \(of even lower Far OTM Strike below Support area\), suitable number of Short PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy, by the profit yielded by these Short PEs due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short PE in comparison to the original number of Lots initiated on the Strategy\. PE Short positions \(of same Expiry series as that of the hedged leg\) can also be added in a pyramidal structure\. As the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. 

__<start>* Example:*__* when the downtrend continues in Nifty, a Far OTM PE at 16500 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 16400 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. __<end> __This __Shorting of PEs in a pyramiding manner __may ensure a lower Breakeven strike and thus greater probability of profiting due to Theta decay on these bunch of Short PEs on Expiry\.   However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Options Behaviour in a Bull Call Debit Spread Strategy__

- It is pertinent to note that by Expiry, if the primary leg becomes an ITM \(then its final LTP if higher than at which it was bought, will yield profit\), and the hedged leg if expires as an OTM then the entire Premium at which CE was Shorted for the hedged leg will also be a profit in this Strategy\. However, if closer to Expiry both primary and hedged leg are OTMs and the Strategy is in profit, then the profit must be booked before Expiry because otherwise the profit in the primary leg would become zero \(due to Theta impact on primary leg and hedged leg, both being OTMs\)\.
- Therefore, it is very important to keep track of the Breakeven Strike and to examine if the underlying would sustain above the BE Strike of the Strategy or not by Expiry\. If not, then the profits if generated on the Spread must be booked before Expiry\.
- Rise in Volatility may not adversely impact this Strategy, as rise in Volatility would be favourable to the CE Long primary leg; and if the CE Short hedged leg continues to be an OTM until Expiry then even if rising Volatility increases the Premium value of the hedged leg, then also it would eventually become zero and yield profit if the hedged leg CE Short position happens to be an OTM on Expiry\. Therefore, at any time before Expiry, if rising state of Volatility adds impetus to profitability in this Strategy, then the profit must be booked before the favourable impact of Volatility is lost\.
- Falling state of Volatility may not be favourable to this Strategy, as the drop in Volatility will erode the Premium value of both the primary leg and the hedged leg and the Net Premium paid may get difficult to be realised in order to get profitable in this Strategy\. Moreover, if the impact of falling Volatility lasts longer then the erosion of Premium due to Volatility crash would get coupled with the Theta impact, making all the more difficult to realise and cross\-over the Net Premium paid in order to get profitable in this Strategy\. Only strong favourable bullish momentum can help overcome the adverse impact of Volatility crash and Theta decay\. A sideways movement in the underlying will further aggravate the chances of profitability in this Strategy\.
- Delta play between the primary leg and the hedged leg is separately discussed\.

__Risk & Reward in Bull CE Spread Strategy__

- The ratio between the Max Loss and the Max Reward gives the Risk & Reward ratio for this Strategy\.
- A CE Spread initiated on ITM CEs \(*for both primary & hedged leg*\), has a large net premium debit in absolute terms, and therefore, the Max Loss is quite high in an ITM Spread, as compared to an OTM CE Spread \(*with both primary & hedged leg initiated on OTM CEs*\)\.
- Also, since, Max Reward in this Spread is calculated as the difference between the: \[Strike Difference and the Net premium paid on the Strategy\], therefore, an ITM CE Spread \(*initiated on ITM CEs for both primary & hedged leg*\), has lesser Max Reward than an OTM CE Spread \(*with both primary & hedged leg initiated on OTM CEs*\), with same Strike width between the CE Long & CE Short leg\.
- This is because,  a CE Spread initiated on ITM CEs \(*for both primary & hedged leg*\), has a large net premium debit in absolute terms than a CE Spread initiated on OTM CEs \(*for both primary & hedged leg*\)\.
- Accordingly, the Risk\-to\-Reward Ratio in a CE Spread, is favourable in an OTM CE Spread than an ITM CE Spread\. In case Volatility is too high \(like India VIX is above 25 or 30 level\), then an ITM\-ATM CE Spread may be considered; else during other times OTM\-OTM CE Spread must be considered\.
- Further, wider the Strike difference between the Long CE leg and CE Short leg, more favourable the Risk\-to\-Reward gets \(*due to net premium debit getting lower*\), however, it must be borne in mind that from Expiry perspective, the underlying must close above the Breakeven Strike of the Strategy and to be able to reap Max Reward on the Strategy the underlying must go much higher above the Breakeven Strike of the Strategy i\.e\. upto the Max Reward level of the Strategy, calculated as the difference between the: \[Strike Difference and the Net premium paid on the Strategy\]\.
- Therefore, ideally, if there is a clear view of more than 1% to 1\.5% quick move in the underlying, then a CE Spread with little wider Strike Difference, in Near OTM CEs, on a closer Expiry series may be considered\. However, if the upmove in the underlying is expected after sometime \(or over longer time\), then such position on CE Spread may be created on a farther Expiry series \(*like Next Month Expiry series etc\.*\)\.

__Impact on Bull Call Spread Strategy, in Different Market Situations__

1. __If trade goes as per plan, in Bull Call Spread Strategy__:

- The underlying remains bullish, and the CE Long primary leg will generate profit\. But as the underlying moves higher, the hedged CE Short leg will generate loss \(*because the LTP of CE Short leg will rise due to underlying going upward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\. 
- But as the underlying keeps going higher quickly with strong momentum, there may come a time when the Strategy will cross the Max Reward level\. Then beyond such level, if the underlying keeps trending further upwardly, then once Max Reward level is achieved by the Strategy then no further profit can be expected on the Strategy\. Hence, in such situation, the Max profit on the Strategy must be immediately booked\.

1. __If underlying movement is slow /  sideways, during Bull Call Spread Strategy__: If the movement of the underlying becomes slow / sluggish in its upward movement or if the underlying keeps fluctuating in  a range, then the Theta impact would cause erosion in the Premium value of both CE Long and CE Short leg\. Thus, time decay may result in some loss situation in this Strategy with long holding period\. Therefore, if it appears that by Expiry, the BE Strike level would not be crossed upwardly by the underlying on sustained basis, then Max Loss would occur on the Strategy\. In such situation, suitable adjustments \(*as discussed below*\) may be considered to mitigate the Max Loss situation on the Strategy by Expiry\.   
2. __If trend reverses on the bearish side, and trade does not go as per plan in Bull Call Spread Strategy__:

- If the underlying gets in a downtrend, then the primary leg of CE Long will generate limited loss to the extent of Premium paid\. But with the underlying falling down, the hedged CE Short leg will generate limited profit to the extent of Premium received on the Short position\. Thus, the CE Short hedged leg will protect the loss in CE Long primary leg to the extent of Premium collected on the CE Short hedged leg\. If the underlying keeps falling even further then the Net Premium \(*i\.e\. the Premium paid on the primary leg and the Premium collected on CE Short leg*\) will be the total Max Loss till Expiry\. 
- This final loss to the extent of Net Premium debit on the Strategy, in the event of reversal of uptrend in downward direction, can be contained by making certain adjustments\.

__Significance and impact of Strike Selection in Bull CE Spread Strategy__

__Impact of Strike / Delta value in Bull CE Spread Strategy:__

- The Delta difference between the primary leg and the hedged leg will help maintain a reasonable control on profit & loss scenario in this Strategy\. Delta difference can be ensured by selecting appropriate distance CE Strikes for this Strategy\.
- It must be borne in mind that larger the Strike difference between CE Long & CE Short, the max profit on the Strategy increases and the risk & reward is more favourable; but the Breakeven Strike gets even larger in order to reap profit on the Strategy \(*thus, more bullish move is required in the underlying*\)\.
- Therefore, for a strong conviction bullish view, an OTM CE of lower Strike having higher Delta value can be bought as the primary leg; but a Far OTM CE of higher Strike having lower Delta value can be sold as the hedged leg\. When bullish view has conviction, then a suitable __larger Delta difference can be maintained__ between the primary leg and the hedged leg, i\.e\. higher Delta value on primary leg would yield more profit on bullish uptrend and a lower Delta on hedged leg would yield less loss\. This larger Delta difference can be maintained by maintaining suitable larger gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry\. Because there is conviction on the bullish view, the wider Breakeven \(due to larger Strike difference\) should not be an hinderance to reap profit on the Strategy, and a much favourable Risk\-to\-Reward can be targeted\.
- However, when bullish view does not have conviction and there seems uncertainty about continuation of bullish trend, then a suitable __smaller Delta difference can be maintained__ between the primary leg and the hedged leg, i\.e\. the primary leg would yield more loss \(due to its higher Delta value\) on reversal of uptrend and the hedged leg because of having not too low Delta value than that of the primary leg would yield decent profit on reversal of uptrend\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry\. Due to smaller Strike difference, the Breakeven for generating profit would also be smaller thus if the uptrend remains intact, then a slight uptrend move in the underlying crossing above the smaller BE Level, would  make the Strategy profitable\.

__Selection of Option Strikes in Bull Call Spread__:

- Basis aforesaid factors, depending on the intended holding time of the trade, a suitable CE Option Strike levels of a particular Expiry series and Delta value may be selected\.
- For higher Risk and Reward and less margin for this Strategy: OTM CE Long and Far OTM CE Short in Current Expiry series can be considered\. Further, it may be considered in OTM\-OTM CE Spread, that the CE Long primary leg is such Far OTM Strike, which is slightly below some major Resistance level \(*as per Technical Analysis / Chart reading*\) and the CE Short hedged leg is higher than the said major Resistance level on the upside\. This way it can be attempted to ensure that if the bullish trend sustains as expected then the primary leg would generate profit due to the upmove in the underlying; but also if the underlying by Expiry closes near the said major Resistance level, then even the CE Short leg would generate profit to the extent of the premium credit collected on the hedged leg \(as it would expire worthless as OTM\)\. Thus, the Strategy in such situation would generate the max profit \(*as per calculations discussed above*\)\. In such situation, it must be ensured that the CE Long primary leg does not expire as ATM / OTM; and therefore, profit generated on the primary leg must be booked, if the underlying appears to reverse from near the Resistance level\.
- Also, the Max Loss and Max Reward in the Strategy must be calculated, as per the calculations explained above, before initiating this CE Spread Strategy, so as to determine a balanced Strike selection for playing this Spread\.

__Payoff Chart for Bull CE Spread__

__<end>__

__Loss in Bull CE Debit Spread and its Calculation__

__Maximum Loss in Bull CE Debit Spread, from Expiry perspective:__

Net Premium debit incurred on the overall Strategy \(*i\.e\. the difference between the premium paid on the primary leg and the premium credit collected on the hedged leg*\), is the maximum loss that may be incurred in this Strategy, i\.e\. 

__<start> Formula: Max Loss on CE Spread = Premium Paid on Long leg – Premium Credit Received on Short Leg <end>__

__<start> *Example*__*: if Nifty 17600 CE is bought at Rs\. 200 premium per Lot and Nifty 17800 CE is sold at Rs\. 150 premium per Lot, then Max Loss will be Rs 200 – Rs\. 150 per lot = Rs\. 50 per Lot from Expiry perspective\.* __<end>__

__Impact on Max Loss amount, in Bull CE Debit Spread, due to Strike Difference: __Larger the difference between CE Long and CE Short Strike, larger will be the net premium debit, and accordingly larger will be the Breakeven required for profit from Expiry perspective; which will eventually lead to higher Max Loss on the Strategy\. Thus, pre\-calculated loss on the Strategy will help decide, the Strike at which Long & Short leg must be initiated\. 

__Loss Level in Bull CE Debit Spread: __The CE Spread will yield profit only if the underlying closes above the BE Strike by Expiry, as discussed above, else the Strategy would yield loss\. Therefore, if the underlying fails to cross the BE Strike upwardly and closes below the BE level by Expiry, then this Strategy would yield loss on the Spread\.

__Max Loss Level in Bull CE Debit Spread__: If the underlying fails to cross the BE Strike upwardly and closes below the CE Long Strike by Expiry, then this Strategy would yield Max Loss, to the extent of Net Premium debit paid on this Spread\.

__Loss Zone in the CE Debit Spread__: 

- The profitability from Expiry perspective would arise in the Strategy, if the underlying crosses and closes above the Breakeven Strike level\. Lower the underlying would close below the BE strike level, more loss would be generated on this Spread\. However, once the underlying crosses the CE Long Strike downwardly by Expiry, then the Max Loss Level is achieved on the Strategy\. Thereafter, any further fall in the underlying below the CE Long Strike, would not yield any further loss than the Max Loss determined on this Spread \(*as per aforesaid calculations*\)\. 
- Thus, the BE Strike level and the CE Long Strike is the loss zone from Expiry perspective of this Spread\. If the underlying closes by Expiry, closer to the BE Strike, then less loss would be incurred on the Spread; but if the underlying closes by Expiry near the CE Long Strike then more loss would be generated on this Spread \(*subject to Max Loss, when the underlying closes by Expiry, at or anywhere lower than the CE Long Strike*\)\.
- Thus, __if expected closing of the underlying by Expiry, seems to be below the  BE level, then it is a Max Loss situation on the Strategy__\.

__<end>__

__Profit in Bull CE Debit Strategy and its Calculation__

__Calculation of Maximum Reward in Bull CE Debit Strategy: __

Max reward is calculated as:

__<start> Formula: __\[*difference between the primary leg Strike and the hedged leg Strike*\] \- \[*Net Premium paid on the Strategy i\.e\. difference between the Premium paid on the primary leg and the Premium credit received on the hedged leg*\] __<end>__

__<start> *Example:*__* if Nifty 17600 CE is bought at Rs\. 200 premium per Lot and Nifty 17800 CE is sold at Rs\. 150 premium per Lot, then Max Reward will be: *

*\[17800 –17600\] – \[200–150\] = \[200–50\] = Rs\. 150 per qty\.*

*1 Lot Nifty has 50 qty, therefore in above example max reward would be Rs\. 150 x 50 = 7500 per Lot\. *__<end>__

Aforesaid, Max Reward for CE Spread can also be calculated as:

__<start> __the difference between: \(i\) \[Breakeven Strike of CE Buy \(primary leg\) = CE Strike \+ Premium paid\]; and \(ii\) \[Breakeven Strike of CE Sell \(hedged leg\) = CE Strike \+ Premium received\]\. __<end>__

__Max Profit Level in Bull CE Debit Spread Strategy:__ The Max Profit \(*as calculated above*\) would be generated on this Spread, if the underlying moves up and crosses the Breakeven level and finally closes by Expiry, at the CE Short Strike or anywhere higher than the CE Short Strike\.

__Profit Zone on the Bull CE Debit Spread__:

- The profitability from Expiry perspective would arise in the Strategy, if the underlying crosses and closes above the Breakeven Strike level\. Higher the underlying would trend towards the CE Short Strike level, more and more profit would be generated on the Spread\. However, once the underlying crosses the CE Short Strike upwardly, then the Max Profit Level is achieved on the Strategy\. Thereafter, any further rise in the underlying, would not yield any further higher profit than the Max Profit determined on this Spread \(*as per aforesaid calculations*\)\. 
- Thus, the Profit Zone on this Spread, from Expiry perspective, can be said to be the starting upwardly from the BE Strike level of the Spread upto the CE Short Strike level\. If the underlying closes by Expiry, closer towards the CE Short Strike in this profit zone, then higher profit would be generated, but if the underlying closes towards the BE Strike of this Strategy within the zone, then relatively less profit would be generated on the Spread

__<end>__

__Profit & Loss Areas in Bull CE Debit Spread Strategy__

__Profit & Loss Levels in Bull CE Debit Spread Strategy, from Expiry perspective:__

1. __BE Level__: \[CE Long Strike \+ Net Premium Debit paid on the Spread\]
2. __Min Profit Level__: If underlying closes by Expiry above the BE Level 
3. __Max Profit Level__: If underlying closes by Expiry at or anywhere higher than the CE Short Strike
4. __Profit Zone__:  If underlying closes by Expiry anywhere higher than the BE Level\. If underlying closes at or higher than CE Short Strike, then Max Profit is generated; and if underlying closes towards the BE Level then less profit generated on the Spread\.
5. __Loss Starting Level__: If underlying closes by Expiry below the BE Level\.
6. __Max Loss Level__: If underlying closes by Expiry, at or below the CE Long Strike, then Max Loss \(*i\.e\. to the extent of Net Premium debit paid on the Spread*\) would be generated on the Spread\. 
7. __Loss Zone__:  If underlying closes by Expiry anywhere lower than the BE Level\. If underlying closes at or lower than CE Long Strike, then Max Loss is generated; and if underlying closes towards the BE Level then less profit generated on the Spread\.

__<end>__

__Demerits and Merits in Bull Call Debit Spread Strategy__

__Demerits in Bull Call Debit Spread__:

- This Spread strategy will be suitable for a momentum bullish view\. A rangebound or slow uptrend may cause loss in the primary leg due to Theta impact \(loss in primary leg would be more than the profit in the hedged leg due to Theta decay\)\.
- If the holding period is long, then Synthetic Futures \(i\.e\. ITM CE with almost 100% Intrinsic Value\) can be considered for playing the expected bullish move, with less time decay\. However, Synthetic Futures \(i\.e\. deep ITM CE\) may not be liquid especially in case of Stock Options\.
- If the holding period is long, then this Spread must be initiated on Next Month / Far Month CE Options, especially if this Spread is being initiated after 15th of a given Current Month with a holding time of 7 days or more\. However, Far Month Expiry may have liquidity issues, therefore Next Month Expiry series may be preferred, in such case\. Also, Next Month & Far Month Expiry series would require relatively more capital \(than the Spread on Current Month Expiry series\) as CEs of the same Strike would be on higher premium value on farther Expiry series\.
- It is a net Premium debit Strategy\. Since primary leg comprises of buying lower Strike CE, Premium at which Long is initiated is the amount of Premium paid\. The hedged leg comprises of selling higher Strike CE, therefore the Premium at which CE is sold is the amount of Premium received\. Since, primary leg comprises of lower CE Strike and hedged leg of higher CE Strike, the primary leg will have more Premium than the hedged leg\. Thus, in this Strategy, Long is initiated at higher Premium and Short at lower Premium, thus making it a Debit Strategy\. Accordingly, in this Strategy the Net Debit of Premium need to be recovered in order to come in profit in this Strategy, from Expiry perspective\. Thus, from Expiry perspective, the bullish move in the underlying must cross above the Breakeven Strike of this Strategy \(*discussed below here*\)\.
- Fall in Volatility \(*eg: India VIX is making lower lows*\), is harmful for the Strategy, as it would become difficult to breakeven the Net Premium debit incurred on this Strategy \(*as falling volatility would cause erosion in the premium value of all Options*\) even if underlying makes an upmove\. Strong volatility crash may dilute the favourable Delta impact of the upmove in the underlying\.

__Note__: Since, this Strategy is a Net Premium Debit Strategy, the cost of the Strategy may sometimes be not so palatable\. In such cases, especially when the view is not very bullish, the cost of a Bull Call Spread  can be further reduced by adding another Far OTM Short CE leg in order to collect some more Premium Credit for the Strategy\. This addition of another CE Short leg to Bull Call Spread, converts it to a Bull Call Ladder Spread Strategy\. Here, the additional Short Call leg must be at such Far OTM Strike which is reasonably above some major Resistance level \(*i\.e\. upto where the underlying is not expected to trend upwardly & close, by Expiry*\), thereby realising the extra Premium Credit collected on these additional Short leg, as profit\.

__Benefits of Bull Call Spread:__

- This Strategy requires low margin / capital\. 
- This is a very suitable Strategy for a bullish trend\.
- The risk upon reversal or otherwise is limited to the extent of Net Premium paid, i\.e\. Max Loss is limited\.
- Rise in Volatility \(*eg: India VIX is making higher highs*\), is suitable for the Strategy\.

__Breakeven Strike in Bear PE Debit Spread Strategy, its Calculation and Payoff Chart__

__Breakeven Strike in Bear PE Debit Spread Strategy, from Expiry perspective: __Net Premium paid on the Strategy \(*i\.e\. the difference between the premium paid on the primary leg and the premium credit received on the hedged leg\)*, must be crossed downwardly by the underlying below the Strike at which PE Long primary leg is initiated, by Expiry, in order that this Spread be profitable by Expiry\. Thus, we need to determine the Breakeven Strike level below which the underlying must close by Expiry, in order to bring the Strategy into profit\.

__Breakeven \(BE\) Strike in Bear PE Debit Spread for profit__: BE level is the level which the underlying must close below by Expiry, so as to yield profit on the Strategy\. This BE level is determined by deducting the Net Premium debit incurred on the Strategy, from the PE Long leg\.

i\.e\., __<start> Formula__: __BE Strike for this Strategy  = PE Long Strike \- Net Premium <end>__

__<start> *Example:*__* if Nifty 17500 PE is bought at Rs\. 250 premium per Lot and Nifty 17300 PE is sold at Rs\. 180 premium per lot, then BE Strike will be 17500\-\(250\-180\) = 17430 PE Strike, to be profitable from Expiry perspective\. That is by Expiry, Nifty must go down below 17430 \(in which case 17500 PE primary leg becomes an ITM\)\. *

*Lower the underlying closes by Expiry, below the aforesaid BE level, higher will be the profit generated on this Spread \(until the Max Profit level is reached\)*\.__ <end>__

__Impact on BE level, in Bear PE Debit Spread, due to Strike Difference:__

- Larger the difference between PE Long and PE Short Strike, larger will be the net premium debit, and accordingly larger will be the Breakeven required for profit on the Strategy, from Expiry perspective\.
- Also, the Breakeven Strike gets larger if a PE Spread is initiated on a farther Expiry series than closer Expiry series, on same Strikes of PEs \(*eg: both primary & hedged leg PEs are initiated on Next Week Expiry series than Current Week Expiry series*\)\. This is because the net premium debit paid on the Spread increases as we go on farther Expiry series, even though the primary & hedged leg PE Strikes are kept same\.

__<start> Payoff Chart for Bear PE Spread: __

__<img45>__

__<end>__

__Bear Put Spread Strategy or Put Debit Strategy: Its Trade Legs & Objective__

Bearish view can be played through Long Options with hedged positions\. 

When the view on the underlying is bearish, we can play the downtrend by being Long on Put Options \(i\.e\. buy PE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bullish view by Shorting Put Options \(i\.e\. sell PE Options\), of the same number of Lots as in the primary leg \(i\.e\. in the ratio of 1:1 in terms of Lots/ quantity\), on the same underlying with same Expiry series \(the __hedged leg__\)\. This hedged position/ strategy where a bearish primary leg initiated with Long PE positions having higher Premium, is hedged with a Put Short position having lower Premium, on the same underlying and of same Expiry series – it is called a __Bear Put Spread Strategy or Put Debit Strategy__\. It is a Vertical Spread \(i\.e\. involving two same side Options of same Expiry series on different Strikes\)\.

__Trade Legs in Bear PE Debit Spread__:

- Long PE of higher Strike with higher Premium \(*primary leg*\)
- Short PE of lower Strike with lower Premium \(*hedged leg*\)

__<start> Example in Bear PE Debit Spread__:

- *Buy 3 Lots Nifty 17500 PE of Current Week Expiry series \(at Rs\. 95 per Lot\) *
- *Sell 3 Lots Nifty 17300 PE of Current Week Expiry series \(at Rs\. 60 per Lot\)* __<end>__

__Objective in Bear PE Debit Spread__:

- Objective is to play bearish view through buying PEs \(as the primary leg\); and to mitigate the risk / loss that may arise on the primary leg upon reversal of the trend towards bullish side with a PE Short position \(on the hedged leg\)\. 
- If the bearish view continues, overall the Strategy would generate a pre\-defined max profit; and if there is reversal of the trend, the loss on the Strategy would also be limited and pre\-defined \(i\.e\. *to the extent of Net Premium debit incurred on the overall Strategy*\)\.
- Thus, there is a limited profit potential on this Strategy if the bearish view continues, but at the same time a limited max loss scenario on the Strategy \(*if the bearish view goes wrong*\)\.

__Adjustments in Bear PE Debit Spread Strategy__

__\(i\.e\., if bearish view and this Strategy does not go as per plan\)__

Since, Bear PE Spread Strategy is a Debit spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on primary leg and the Premium credit collected in the hedged leg*\) need to be first recovered for this Spread to generate profit from Expiry perspective; and accordingly the underlying must cross\-over the BE Strike level downwardly on sustained basis\.

However, if the bearish trend reverses in the upward direction, then the Net Premium paid on the overall Spread, will be the final amount of Max Loss that may be incurred on this Strategy by Expiry\. Thus, upon reversal, this Net Premium amount need to be covered up by making suitable adjustments\. 

The following adjustments can be considered to cover up for the potential Max Loss that may occur in this Strategy to the tune of Net Premium: \(i\) Conversion of Bear PE Spread into Put Ratio Spread  \(through Short PE\); or \(ii\)  Long CE; or \(iii\) Short CE\. These adjustments are discussed below:

1. Counter Adjustment through Short Option \(Conversion to Put Ratio Spread\): In case of an uptrend, __farther OTM PEs can be sold__ \(additional Short PEs\)\. Idea in this adjustment is to pick up a suitable Far OTM PE for Shorting, such that this Far OTM PE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional PE Short can be initiated on such Premium so as to cover for the Net Premium amount on the original Strategy\. Selection of a Far OTM PE for this adjustment is important because even if the uptrend again reverses on the bearish side, this additional PE must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the Net Premium Debit in the original Strategy and the likely uptrend and the Premium available on Far OTM PEs \(*of same Strike as that of hedged leg or even lower Far OTM Strike*\), suitable number of Short PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short PE in comparison to the original number of Lots initiated on the Strategy, so as to bring the original Bear PE Strategy on to an overall positive Delta position to play the bullish reversal\. In this situation there will be more PE Short than PE Long and therefore the original Bear PE Spread gets converted into Put Ratio Spread\. These additional PE Short should be initiated at such Far OTM PE, which may be the same Strike at which hedged leg was originally initiated or at even lower Far OTM Strike, depending on the Premium available\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.
2. Counter Adjustment through Long Option: If there seems to be a trending uptrend with momentum, then a __CE can be bought__ \(Long CE\)\. Buying a CE to protect the upside risk in this Strategy will add up another debit position, therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. This Long CE will help overcome the loss of Net Premium amount in this Strategy upon reversal\. If this CE generates profit to the tune of Net Premium then it would be advisable to book the profit on this Long CE position\. The reversal on upside can be played by a naked CE or a Bull CE Spread Strategy\. Further, Long CE should be initiated at a Strike having Delta value higher than the current Delta value of the Long PE primary leg, so that in case of reversal towards uptrend, Long CE should generate more profit than the loss generated by the Long PE\. Also, depending upon the Net Premium Debit in the original Strategy and the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long CE in comparison to the original number of Lots initiated on the Strategy, so as to bring the original Bear PE Strategy on to an overall positive Delta position to play the bullish reversal\.
3. Adjustment through Pyramiding: If the uptrend is expected to be trending but limited, then __even__ __Farther OTM CEs can be sold__ \(CE Short\) above the major resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the Net Premium paid on this Strategy\. Selection of a Far OTM CE for this adjustment is important because even if the uptrend continues, this additional CE must be such which can be expected to be not breached by the underlying by Expiry and to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the Net Premium Debit in the original Strategy and the likely uptrend and the Premium available on Far OTM CEs \(*of even higher Far OTM Strike above Resistance area*\), suitable number of Short CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy, by the profit yielded by these Short CEs due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short CE in comparison to the original number of Lots initiated on the Strategy\. CE Short positions \(*of same Expiry series as that of the hedged leg*\) can also be added in a pyramidal structure\. As the uptrend continues Far OTM CEs’ Premium would rise, therefore, Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\. 

__<start> *Example:*__* when the uptrend continues in Nifty, a Far OTM CE at 18000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 18500 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\. __<end> __This __Shorting of CEs in a pyramiding manner __may ensure a higher Breakeven strike and thus greater probability of profiting due to Theta decay on these bunch of Short CEs on Expiry\. However, selling additional CEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Options Behaviour in Bear PE Debit Spread Strategy__

- It is pertinent to note that by Expiry, if the primary leg becomes an ITM \(then its final LTP if higher than at which it was bought, will yield profit\), and the hedged leg if expires as an OTM then the entire Premium at which PE was Shorted for the hedged leg will also be a profit in this Strategy\. However, if closer to Expiry both primary and hedged leg are OTMs and the Strategy is in profit, then the profit must be booked before Expiry because otherwise the profit in the primary leg would become zero \(due to Theta impact on primary leg and hedged leg, both being OTMs\)\.
- Therefore, it is very important to keep track of the Breakeven Strike and to examine if the underlying would sustain below the BE Strike of the Strategy or not by Expiry\. If not, then the profits if generated on the Spread must be booked before Expiry\.
- Rise in Volatility may not adversely impact this Strategy, as rise in Volatility would be favourable to the PE Long primary leg; and if the PE Short hedged leg continues to be an OTM until Expiry then even if rising Volatility increases the Premium value of the hedged leg, then also it would eventually become zero and yield profit if the hedged leg PE Short position happens to be an OTM on Expiry\. Therefore, at any time before Expiry, if rising state of Volatility adds impetus to profitability in this Strategy, then the profit must be booked before the favourable impact of Volatility is lost\.
- Falling state of Volatility may not be favourable to this Strategy, as the drop in Volatility will erode the Premium value of both the primary leg and the hedged leg and the Net Premium paid may get difficult to be realised in order to get profitable in this Strategy\. Moreover, if the impact of falling Volatility lasts longer then the erosion of Premium due to Volatility crash would get coupled with the Theta impact, making all the more difficult to realise and cross\-over the Net Premium paid in order to get profitable in this Strategy\. Only strong favourable bearish momentum can help overcome the adverse impact of Volatility crash and Theta decay\. A sideways movement in the underlying will further aggravate the chances of profitability in this Strategy\.

__Risk & Reward in Bear PE Debit Spread Strategy__

- A PE Spread initiated on ITM PEs \(*for both primary & hedged leg*\), has a large net premium debit in absolute terms, and therefore, the Max Loss is quite high in an ITM Spread, as compared to an OTM PE Spread \(*with both primary & hedged leg initiated on OTM PEs*\)\.
- Also, since, Max Reward in this Spread is calculated as the difference between the: \[Strike Difference and the Net premium paid on the Strategy\], therefore, an ITM PE Spread \(*initiated on ITM PEs for both primary & hedged leg*\), has lesser Max Reward than an OTM PE Spread \(*with both primary & hedged leg initiated on OTM PEs*\), with same Strike width between the PE Long & PE Short leg\. This is because,  a PE Spread initiated on ITM PEs \(*for both primary & hedged leg*\), has a large net premium debit in absolute terms than a PE Spread initiated on OTM PEs \(*for both primary & hedged leg*\)\.
- Accordingly, the Risk\-to\-Reward Ratio in a PE Spread, is favourable in an OTM PE Spread than an ITM PE Spread\. In case Volatility is too high \(like India VIX is above 25 or 30 level\), then an ITM\-ATM PE Spread may be considered; else during other times OTM\-OTM PE Spread must be considered\.
- Further, wider the Strike difference between the Long PE leg and PE Short leg, more favourable the Risk\-to\-Reward gets \(*due to net premium debit getting lower*\), however, it must be borne in mind that from Expiry perspective, the underlying must close below the Breakeven Strike of the Strategy and to be able to reap Max Reward on the Strategy the underlying must go much lower below the Breakeven Strike of the Strategy i\.e\. upto the Max Reward level of the Strategy, calculated as the difference between the: \[Strike Difference and the Net premium paid on the Strategy\]\.
- Therefore, ideally, if there is a clear view of more than 1% to 1\.5% quick fall in the underlying, then a PE Spread with little wider Strike Difference, in Near OTM PEs, on a closer Expiry series may be considered\. However, if the fall in the underlying is expected after sometime \(or over longer time\), then such position on PE Spread may be created on a farther Expiry series \(*like Next Month Expiry series etc\.*\)\.

__Bear PE Spread Strategy in different Market Situations__

1. __If trade goes as per plan, in Bear PE Spread Strategy__:

- The underlying remains bearish, and the PE Long primary leg will generate profit\. But as the underlying moves lower, the hedged PE Short leg will generate loss \(*because the LTP of PE Short leg will rise due to underlying going downward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\.
- But as the underlying keeps going lower quickly with strong momentum, there may come a time when the Strategy will cross the Max Reward level\. Then beyond such level, if the underlying keeps trending further downwardly, then once Max Reward level is achieved by the Strategy then no further profit can be expected on the Strategy\. Hence, in such situation, the Max profit on the Strategy must be immediately booked\.

1. __If underlying movement is slow /  sideways, during Bear PE Spread Strategy__: If the movement of the underlying becomes slow / sluggish in its downward movement or if the underlying keeps fluctuating in  a range, then the Theta impact would cause erosion in the Premium value of both PE Long and PE Short leg\. Thus, time decay may result in some loss situation in this Strategy with long holding period\. Therefore, if it appears that by Expiry, the BE Strike level would not be crossed downwardly by the underlying on sustained basis, then Max Loss would occur on the Strategy\. In such situation, suitable adjustments \(*as discussed below*\) may be considered to mitigate the Max Loss situation on the Strategy by Expiry\.
2. __If trend reverses on the bullish side, and trade does not go as per plan in Bear PE Spread Strategy__:

- If the underlying gets in an uptrend, then the primary leg of PE Long will generate limited loss to the extent of Premium paid\. But with the underlying rising up, the hedged PE Short leg will generate limited profit to the extent of Premium received on the Short position\. Thus, the PE Short hedged leg will protect the loss in PE Long primary leg to the extent of Premium collected on the PE Short hedged leg\. If the underlying keeps rising even further then the Net Premium \(*i\.e\. the Premium paid on the primary leg and the Premium collected on PE Short leg*\) will be the total Max Loss till Expiry\. 
- This final loss to the extent of Net Premium debit on the Strategy, in the event of reversal of downtrend in upward direction, can be contained by making certain adjustments\.

__Significance & Impact of Strike Selection / Delta values, in Bear PE Debit Spread Strategy__

__Impact of Strike / Delta value in Bear PE Debit Spread__:

- The Delta difference between the primary leg and the hedged leg will help maintain a reasonable control on profit & loss scenario in this Strategy\. Delta difference can be ensured by selecting appropriate distance PE Strikes for this Strategy\.
- It must be borne in mind that larger the Strike difference between PE Long & PE Short, the max profit on the Strategy increases and the risk & reward is more favourable; but the Breakeven Strike gets even larger in order to reap profit on the Strategy \(*thus, more bearish move is required in the underlying*\)\.
- Therefore, for a strong conviction bearish view, an OTM PE of higher Strike having higher Delta value can be bought as the primary leg; but a Far OTM PE of lower Strike having lower Delta value can be sold as the hedged leg\. When bearish view has conviction, then a suitable __larger Delta difference can be maintained__ between the primary leg and the hedged leg, i\.e\. higher Delta value on primary leg would yield more profit on bearish downtrend and a lower Delta on hedged leg would yield less loss\. This larger Delta difference can be maintained by maintaining suitable larger gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry\. Because there is conviction on the bearish view, the wider Breakeven \(due to larger Strike difference\) should not be an hinderance to reap profit on the Strategy, and a much favourable Risk\-to\-Reward can be targeted\.
- However, when bearish view does not have conviction and there seems uncertainty about continuation of bearish trend, then a suitable __smaller Delta difference can be maintained__ between the primary leg and the hedged leg, i\.e\. the primary leg would yield more loss \(due to its higher Delta value\) on reversal of bearish trend and the hedged leg because of having not too low Delta value than that of the primary leg would yield decent profit on reversal of downtrend\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry\. Due to smaller Strike difference, the Breakeven for generating profit would also be smaller thus if the downtrend remains intact, then a slight downtrend move in the underlying crossing the smaller BE Level, would  make the Strategy profitable\.

__Selection of Option Strikes for Bear PE Spread Strategy__:

- Basis aforesaid factors, depending on the intended holding time of the trade, a suitable PE Option Strike levels of a particular Expiry series and Delta value may be selected\.
- For higher Risk and Reward and less margin for this Strategy: OTM PE Long and Far OTM PE Short in Current Expiry series can be considered\. Further, it may be considered in OTM\-OTM PE Spread, that the PE Long primary leg is such Far OTM Strike, which is slightly above some major Support level \(*as per Technical Analysis / Chart reading*\) and the PE Short hedged leg is lower than the said major Support level on the downside\. This way it can be attempted to ensure that if the bearish trend sustains as expected then the primary leg would generate profit due to the downmove in the underlying; but also if the underlying by Expiry closes near the said major Support level, then even the PE Short leg would generate profit to the extent of the premium credit collected on the hedged leg \(as it would expire worthless as OTM\)\. Thus, the Strategy in such situation would generate the max profit \(*as per calculations discussed above*\)\. In such situation, it must be ensured that the PE Long primary leg does not expire as ATM / OTM; and therefore, profit generated on the primary leg must be booked, if the underlying appears to reverse from near the Support level\.
- Further, the Max Loss and Max Reward in the Strategy must be calculated, as per the calculations explained above, before initiating this PE Spread Strategy, so as to determine a balanced Strike selection for playing this Spread\.

__Payoff Chart for Bear PE Spread__

__<start> __

__<end>__

__Loss in Bear PE Debit Spread Strategy and its Calculation__

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__Maximum Loss in Bear PE Debit Spread Strategy, from Expiry perspective: __Net Premium debit incurred on the overall Strategy \(*i\.e\. the difference between the premium paid on the primary leg and the premium credit collected on the hedged leg*\), is the maximum loss that may be incurred in this Strategy, i\.e\. 

__<start> Formula: Max Loss on PE Spread = Premium Paid – Premium Credit Received on Short Leg <end>__

__<start> *Example:*__* if Nifty 17500 PE is bought at Rs\. 250 premium per Lot and Nifty 17300 PE is sold at Rs\. 180 premium per Lot, then Max Loss will be Rs 250 – Rs\. 180 per lot = Rs\. 70 per Lot from Expiry perspective\.* __<end>__

__Impact on Max Loss amount, in Bear PE Debit Spread, due to Strike Difference: __Larger the difference between PE Long and PE Short Strike, larger will be the net premium debit, and accordingly larger will be the Breakeven required for profit from Expiry perspective; which will eventually lead to higher Max Loss on the Strategy\. Thus, pre\-calculated loss on the Strategy will help decide, the Strike at which Long & Short leg must be initiated\. 

__Loss Level in Bear PE Debit Spread: __The PE Spread will yield profit only if the underlying closes below the BE Strike by Expiry, as discussed above, else the Strategy would yield loss\. Therefore, if the underlying fails to cross the BE Strike downwardly and closes above the BE level by Expiry, then this Strategy would yield loss on the Spread\.

__Max Loss Level in Bear PE Debit Spread__: If the underlying fails to cross the BE Strike downwardly and closes above the PE Long Strike by Expiry, then this Strategy would yield Max Loss, to the extent of Net Premium debit paid on this Spread\.

__Loss Zone on the Bear PE Debit Spread__:

- The profitability from Expiry perspective would arise in the Strategy, if the underlying crosses and closes below the Breakeven Strike level\. Higher  the underlying would close above the BE strike level, more loss would be generated on this Spread\. However, once the underlying crosses the PE Long Strike upwardly by Expiry, then the Max Loss Level is achieved on the Strategy\. Thereafter, any further rise in the underlying above the PE Long Strike, would not yield any further loss than the Max Loss determined on this Spread \(*as per aforesaid calculations*\)\. 
- Thus, the BE Strike level and the PE Long Strike is the loss zone from Expiry perspective of this Spread\. If the underlying closes by Expiry, closer to the BE Strike, then less loss would be incurred on the Spread; but if the underlying closes by Expiry near the PE Long Strike then more loss would be generated on this Spread \(*subject to Max Loss, when the underlying closes by Expiry, at or anywhere higher than the PE Long Strike*\)\.
- Thus, __if expected closing of the underlying by Expiry, seems to be above the  BE level, then it is a Max Loss situation on the Strategy__\.

__<end>__

__Profit in Bear PE Debit Spread Strategy and its Calculation__

__Maximum Reward in Bear PE Debit Spread Strategy: __

__<start> Formula__: \[*difference between the primary leg Strike and the hedged leg Strike*\] \- \[*Net Premium paid on the Strategy i\.e\. difference between the Premium paid on the primary leg and the Premium credit received on the hedged leg*\] __<end>__

__<start> *Example:*__* if Nifty 17500 PE is bought at Rs\. 250 premium per Lot and Nifty 17300 PE is sold at Rs\. 180 premium per Lot, then Max Reward will be:*

*\[17500–17300\] – \[250–180\] = \[200–70\] = Rs\. 130 per qty\.*

*1 Lot Nifty has 50 qty, therefore in above example max reward would be Rs\. 130 x 50 = 6500 per Lot\. *__<end>__

Max Reward for PE Spread can also be calculated as the difference between the Breakeven Strike of primary leg and hedged leg, i\.e\. 

__<start> Formula__: the difference between \(i\) \[Breakeven Strike of PE Buy \(primary leg\) = PE Strike \- Premium paid\]; and \(ii\) \[Breakeven Strike of PE Sell \(hedged leg\) = PE Strike \- Premium received\] __<end>__

__Max Profit Level in Bear PE Spread:__ The Max Profit \(*as calculated above*\) would be generated on this Spread, if the underlying falls and crosses below the Breakeven level and finally closes by Expiry, at PE Short Strike or anywhere lower than the PE Short Strike\.

__Profit Zone on the Bear PE Debit Spread__:

- The profitability from Expiry perspective would arise in the Strategy, if the underlying crosses and closes below the Breakeven Strike level\. Lower the underlying would trend towards the PE Short Strike level, more and more profit would be generated on the Spread\. However, once the underlying crosses the PE Short Strike downwardly, then the Max Profit Level is achieved on the Strategy\. Thereafter, any further fall in the underlying, would not yield any further higher profit than the Max Profit determined on this Spread \(*as per aforesaid calculations*\)\. 
- Thus, the Profit Zone on this Spread, from Expiry perspective, can be said to be the starting from below the BE Strike level of the Spread upto the PE Short Strike level\. If the underlying closes by Expiry, closer towards the PE Short Strike in this profit zone, then higher profit would be generated, but if the underlying closes towards the BE Strike of this Strategy within the zone, then relatively less profit would be generated on the Spread\.

__<end>__

__Profit & Loss Areas on Bear PE Debit Spread Strategy__

__Profit & Loss Levels on Bear PE Debit Spread Strategy, from Expiry perspective:__

1. __BE Level__: \[PE Long Strike \- Net Premium Debit paid on the Spread\]
2. __Min Profit Level__: If underlying closes by Expiry below the BE Level
3. __Max Profit Level__: If underlying closes by Expiry at or anywhere lower than the PE Short Strike
4. __Profit Zone__:  If underlying closes by Expiry anywhere lower than the BE Level\. If underlying closes at or lower than PE Short Strike, then Max Profit is generated; and if underlying closes towards the BE Level then less profit generated on the Spread\.
5. __Loss Starting Level__: If underlying closes by Expiry above the BE Level\.
6. __Max Loss Level__: If underlying closes by Expiry, at or higher than the PE Long Strike, then Max Loss \(*i\.e\. to the extent of Net Premium debit paid on the Spread*\) would be generated on the Spread\. 
7. __Loss Zone__: If underlying closes by Expiry anywhere higher than the BE Level\. If underlying closes at or higher than PE Long Strike, then Max Loss is generated; and if underlying closes towards the BE Level then less loss generated on the Spread\.

__<end>__

__Demerits and Merits in Bear PE Debit Spread Strategy__

__Demerits in Bear PE Debit Spread__:

- This Spread strategy will be suitable for a momentum bearish view\. A rangebound or slow downtrend may cause loss in the primary leg due to Theta impact \(loss in primary leg would be more than the profit in the hedged leg due to Theta decay\)\.
- If the holding period is long, then Synthetic Futures \(i\.e\. ITM PE with almost 100% Intrinsic Value\) for playing the expected bearish move, with less time decay\. However, Synthetic Futures \(i\.e\. deep ITM PE\) may not be liquid especially in case of Stock Options\.
- If the holding period is long, then this Spread must be initiated on Next Month / Far Month PE Options, especially if this Spread is being initiated after 15th of a given Current Month with a holding time of 7 days or more\. However, Far Month Expiry may have liquidity issues, therefore Next Month Expiry series may be preferred, in such case\. Also, Next Month & Far Month Expiry series would require relatively more capital \(than the Spread on Current Month Expiry series\) as PEs of the same Strike would be on higher premium value on farther Expiry series\.
- It is a net Premium debit strategy\. Since primary leg comprises of buying higher Strike PE, Premium at which Long is initiated is the amount of Premium paid\. The hedged leg comprises of selling lower Strike PE, therefore the Premium at which PE is sold is the amount of Premium received\. Since, primary leg comprises of higher PE Strike and hedged leg of lower PE Strike, the primary leg will have more Premium than the hedged leg\. Thus, in this strategy, Long is initiated at higher Premium and Short at lower Premium, thus making it a Debit Strategy\. Accordingly, in this Strategy the Net Debit of Premium need to be recovered in order to come in profit in this Strategy, from Expiry perspective\.
- Thus, from Expiry perspective, the bearish move in the underlying must cross below the Breakeven Strike of this Strategy \(*discussed below here*\)\.
- Fall in Volatility \(*eg: India VIX is making lower lows*\), is harmful for the Strategy, as it would become difficult to breakeven the Net Premium debit incurred on this Strategy \(*as falling volatility would cause erosion in the premium value of all Options*\) even if underlying makes bearish move\. Strong volatility crash may dilute the favourable Delta impact of a slow fall in the underlying\.

__Note__: Since, this Strategy is a Net Premium Debit Strategy, the cost of the Strategy may sometimes be not so palatable\. In such cases, especially when the view is not very bearish, the cost of a Bear Put Spread  can be further reduced by adding another Far OTM Short PE leg in order to collect some more Premium Credit for the Strategy\. This addition of another PE Short leg to Bear Put Spread, converts it to a __Bear Put Ladder Spread Strategy__\. Here, the additional Short Put leg must be at such Far OTM Strike which is reasonably below some major Support level \(*i\.e\. upto where the underlying is not expected to trend downwardly & close, by Expiry*\), thereby realising the extra Premium Credit collected on these additional Short leg, as profit\.

__Benefits of Bear Put Spread Strategy:__

- This is a very suitable Strategy for a bearish trend\.

__Breakeven Strike in Long Strangle  Strategy, its Calculation & Payoff Chart__

__*Breakeven Strike in Long Strangle  Strategy, from Expiry perspective*__:

This Strategy comprises of naked CE Long at Far OTM Strike; and a naked PE long at Far OTM Strike\. This is an aggregate Debit Strategy as the Premium at which both Longs are initiated, on aggregate basis is the total Premium paid on this Long Strangle Strategy\.

The aggregate Premium paid on this Long Strangle Strategy determines the Breakeven Strike range which need to be crossed over by the underlying on either side in order to make this Strategy profitable\. The Breakeven Strike range on the upper side and the lower side are calculated as follows in this Long Strangle Strategy:

- *The Breakeven Strike on the CE side \(upper side\) in Long Strangle is*: \[The CE Strike \(*at which Long is initiated*\) \+ aggregate Premium paid on both CE & PE Longs\]; and
- *The Breakeven Strike on the PE side \(lower side\) in Long Strangle is*: \[The PE Strike \(*at which Long is initiated*\) \- aggregate Premium paid on both CE & PE Longs\] <__end__>

Thus, if by Expiry of the Long Options, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(*either on the upper side or the lower side*\), then this Long Strangle Strategy would yield profit\. Further, in case of continuous trending movement of the underlying after successfully crosses\-over the Breakeven Strike on either side by the underlying, an unlimited profit situation would arise\.

However, if by Expiry of these Long Options, the underlying fails to cross\-over either upper or lower side of the Breakeven Strikes, then the Long Strangle Strategy would yield loss, which may extend  upto the maximum loss level equivalent to the aggregate Premium paid on the Long Strangle Strategy\. 

 <__start__> *For example: If Nifty ATM is at 17000, then for Long Strangle:* *If* *Nifty 16500 PE is bought at Rs\. 100 per Lot & Nifty 17500 CE is bought at Rs\. 50 per Lot, then the aggregate Premium paid on this Strategy would be Rs\. 100 \+ Rs 50 = Rs\. 150 per Lot\. *

*Thus, the BE Strike of this Long Strangle Strategy will be:*

- *On CE side: 17500 \+ \(100\+50\) = 17650 CE Strike; and*
- *On PE side: 16500 \- \(100\+50\) = 16350 PE Strike*

*Thus, if by Expiry, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry, the underlying fails to successfully cross\-over the relevant Breakeven Strike on either side, then the Long Strangle Strategy would yield loss \(which may extend to the maximum extent of Rs\. 150 per Lot, i\.e\. the total Premium paid on this Long Strangle Strategy\)\.*

*Thus, in the aforementioned example: if the underlying goes higher until Expiry and successfully crosses\-over the upper Breakeven Strike i\.e\. 17650 CE and keeps trending higher, then the Long Strangle Strategy will be in profit; but if the underlying by Expiry fails to cross\-over the Breakeven Strike of 17650, then this Strategy will incur loss \(which may extend to the maximum extent of total Premium paid on this Strategy \(i\.e\. Rs\. 150 per Lot\)\)*\.

*Likewise, if the underlying goes lower until Expiry and successfully crosses\-over the lower Breakeven Strike i\.e\. 16350 PE and keeps trending lower then the Strategy will be in profit; but if the underlying by Expiry fails to successfully cross\-over the Breakeven Strike of 16350, then this Long Strangle Strategy will incur loss \(which may extend to the maximum extent of total Premium paid on this Long Strangle Strategy \(i\.e\. Rs\. 150 per Lot\)\)*\. <__end__>

__Payoff Chart of Long Strangle__

__<img56>__

<__end__>

__Long Strangle Strategy: Its Trade Legs & Objective__

When a view is formed that the underlying would soon likely to take a directional move in any one direction, may be on account of any news, outcome, event etc\., but it is not certain in which direction that momentum movement of the underlying is likely to occur, then such view can be played out by a neutral strategy employing Long Options positions in Far OTM Strikes with the expectation that the underlying by Expiry would make its one sided strong momentum move\. 

Thus, when the view on the underlying is that it is expected to make one sided strong momentum move but it is not certain that in which direction the underlying would make such a move; and such situation is played out through Long positions in Naked Far OTM CE & PE Options pertaining to that Expiry series \(*by which the underlying is expected to make such one sided strong momentum move*\), then such a Strategy is called __Long__ __Strangle__\. In Long Strangle Strategy, Far OTM CE & Far OTM PE are bought in equal quantity, on the same underlying pertaining to same Expiry series\. In this Strategy, the expectation is that the underlying will soon make a sudden one\-sided strong momentum move, and would trend much beyond the current level either upwardly or downwardly by the Expiry of the Long Options, crossing beyond the Breakeven Strikes of the Long Options\. Long Strangle involves naked Long  positions on Far OTM CE & PE Options \(involving two legs only\)\. This Strategy has Unlimited Profit potential if the underlying moves swiftly with strong momentum on either side; but it may also generate pre\-calculated Limited Max Loss if the Breakeven range is not breached by the underlying with good momentum\.

However, when the Long Strangle \(naked Strategy\) is hedged with Short Options on even Far OTM Strikes \(*than the Strikes at which Long has been or intended to be initiated as part of Long Strangle Strategy*\), then such Strategy is called __Reverse__ __Iron Condor __\(also called as, __Long Iron Condor__\)\.

__Trade Legs in Long Strangle__:

- Long CE of Far OTM Strike \(*primary CE *leg\); and
- Long PE of Far OTM Strike \(primary PE leg\)

Equal number of Lots in both primary legs; and both Long legs must be of same Expiry series\.

Further, CE Long and PE Long must be of nearly same Premium value\.

__<start> Example of Long Strangle__:

*If Nifty ATM is at 17000, then for Long Strangle:* 

- *Buy 2 Lots Nifty 17500 CE of Next Month Expiry \(at Rs\. 200 per Lot\); and *
- *Buy 2 Lots Nifty 16500 PE of Next Month Expiry \(at Rs\. 220 per Lot\)* __<end>__

__Objective in Long Strangle__:

Objective is to play a Neutral / uncertain strong momentum one\-sided directional move on the underlying on account of any event, news, outcomes etc\., through buying Far OTM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will soon make a sudden  strong momentum one\-sided directional move,  and would trend in that direction until the Expiry of the Long Options\.

It is an aggregate Debit Strategy, as both the Long legs are initiated by paying the Premium\.

On arrival of a soon strong momentum one\-sided directional move on the underlying, either of the Far OTM Long primary leg becomes an ITM and the other Far OTM Long position becomes an even farther OTM\. The Long position leg which becomes an ITM crosses beyond the Breakeven Strike of this Strategy and generates profit; and the other Long position leg which becomes an even farther OTM Options generates loss\. 

Further, due to the sudden strong momentum trending move of the underlying one of the Long Options position  can generate unlimited profit, whereas the other Long Options position which becomes an even farther OTM can only yield loss limited to the extent of the premium paid on buying this Long Option\. Thus, the net profit between the two Long Options, is the profit generated in this Strategy\.

Accordingly, this Strategy can generate limited loss to the maximum extent of the aggregate Premium paid on both the Long legs, but if the underlying takes a strong momentum one\-sided trending move, then this Strategy is capable of generating unlimited profit\.

__Significance of Strike / Delta values in Long Strangle Strategy__

__Strike / Delta value in Long Strangle__:

The two Long legs, i\.e\. CE Long and PE Long must be Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Long legs helps to ensure a reasonable balance between the profit & loss scenario between the two Long legs in this Strategy, until the momentum arrives\. This is because, if there is uncertainty with regard to which direction the underlying is going to push forward its strong momentum move, then it is better to initiate both Long primary legs with equal Delta values, thereby maintaining Delta neutrality at the time of initiating the Strategy\.

However, if basis our I we have a bias towards a particular direction in which the underlying may likely move, then we can initiate that side Long leg \(CE or PE, as the case may be\) with slightly higher Delta value than the other leg\. This will help to achieve greater profit on the side with higher Delta, and lesser loss on the side with lesser Delta, if the underlying makes a move in the direction we expected it to go\. Higher Delta Option, will be relatively a Near OTM Strike, then the other side Option \(*which will be relatively Far OTM*\)\.

*<*__start__*> For example: If Nifty ATM is at 17000, and our view is strong bullish move expected on Nifty, then we can initiate Long Strangle with:*

- *higher Delta value of 0\.45 on CE Long \(eg:* *Nifty 17200 CE bought at Rs\. 200 per Lot\); and *
- *lower Delta value of  0\.35 on PE Long \(eg: Nifty 16500 PE is bought at Rs\. 100 per Lot\)\.*

*Thus, in the aforesaid example: once the Breakeven Strike of 17500 is successfully crossed\-over by the underlying on the CE side, then the unlimited profit situation arises depending how long the underlying trends beyond Breakeven Strike until Expiry of the Options*\. *Nifty CE 17200 rises more due to higher Delta value with the upward momentum and becomes an ITM, generating more profit; while PE 16500 falls relatively less due to being at lower Delta, thereby the Strategy overall generates profit\. <*__end__*>*

__Selection of Option Strikes in Long Strangle__:

Selection of the CE & PE Strikes must be such OTM Strikes which have equal LTP / Delta values in order to maintain Delta neutrality at the time of initiating the Strategy, if the view is neutral and non\-biased\. 

However, if the view is biased on one particular side, then that side Option can be initiated at a higher Delta than the other\.

The Far OTM Strikes must be within the Most Impacted Radius Zone, wherein the positive impact of the momentum can be harnessed\.

__Options Behaviour in Long Strangle Strategy:__

- Further, the selection of these CE & PE Strikes must be such OTM Strikes which are not too Far and must be within the __Most Impacted Radius Zone__ where the Long Options would get positively impacted on arrival of momentum\.
- Further, as the Expiry approaches near, the Theta impact on the Far OTM Strike CE & PE would cause erosion on the Premium values of the Long Options\. Thus, near Expiry this Strategy must be avoided unless when quick strong momentum is expected within a short holding period after this Strategy is initiated\.

__Adjustments in Long Strangle Strategy__

__Adjustments \(if the Breakeven Strike is not breached by the underlying and Long Strangle Strategy does not go as per plan\)__:

Since, this Long Strangle Strategy is a Premium Debit Strategy, therefore, the aggregate  Premium paid \(*i\.e\. the sum of the Premium paid  on the CE Long and PE Long leg*\) need to be first recovered from the profit in this Strategy, from Expiry perspective, in order for this Long Strangle Strategy to be overall profitable by Expiry\. 

However, when underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then the potential loss \(*limited to the maximum extent of the aggregate Premium paid on this Long Strangle Strategy*\) situation can be handled by making following adjustments: \(i\) Converting naked Long Strangle into Reverse Iron Condor \(*i\.e hedged Long Strangle*\); or \(ii\) Short both CEs & PEs; or \(iii\) Short CEs; or \(iv\) Short PEs\. These adjustments are discussed below:

1. Conversion to Reverse Iron Condor: If the original view that the underlying would breakout beyond the Breakeven Strike of the Strategy on either side, appears to get uncertain, then immediately the naked Long Strangle must be converted to Reverse Iron Condor Strategy by initiating even Far OTM Short CEs  and Short PEs \(*of equal quantity as that of  Long legs, and of same Expiry series as that of the Long Options*\)\. This hedging of Long Strangle through Reverse Iron Condor will mitigate the potential risk of loss on the Long Strangle into a pre\-calculated even much Limited Loss situation\. You may refer to the details of Reverse Iron Condor given on the other side of this Table for better understanding\.

Counter Adjustment through Short Option \(both sides\): If the underlying do not seem to be breaching the Breakeven Strike of this Strategy and seems to remain until Expiry of the Long Options, within a range, then, both  __Far OTM CEs and PEs can be sold __\(Short CE & PE to be initiated\)\. These Short CEs and PEs must be even Far OTMs than the Long Options initiated as the primary leg, and of the same or closer Expiry series than that of the Long Options leg\. 

Further, these Short CEs & PEs can be initiated on such sufficient quantities to receive aggregate Premium Credit which is equal to or more than the aggregate Debit incurred on this Strategy through Long Options leg\. This way the Long Strangle gets converted into Reverse Iron Condor or both side Ratio Spreads \(*with more Shorts than Longs on both CE side & PE side*\)\.

Idea in this adjustment is to pick up a suitable Far OTM CEs & PEs for Shorting, such that these Far OTM Options expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying breaks\-out and breaches the Breakeven Strike on any side, then in that situation too these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Thus, suitable number of Short Options \(CEs and PEs Short\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short Options position as an adjustment in comparison to the original number of Lots initiated on the Strategy\. If the Short Options generates profit and reasonably minimizes the loss in this Strategy before Expiry,  then it would be advisable to book the profit and to exit this Strategy\. However, selling Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Counter Adjustment through Short Option \(one side\): If there seems to be a slow trend on the downward, such that the Breakeven Strike does not seem to be breached downwardly \(i\.e\. on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(Short CEs to be initiated\)\. 

However, If there seems to be a slow uptrend, such that the Breakeven Strike does not seem to be breached upwardly \(i\.e\. on the CE side\)  in this Strategy  and the underlying seems to be  in a mild upwardly direction, then Far OTM __PEs can be sold__ \(Short PEs to be initiated\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This Short Options position will help cover the potential loss that may be generated on this Long Strangle Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying reverses on the opposite side \(i\.e\. against the Short Options position\), then these Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If the underlying seems to be moving in one direction \(and not really hovering in a range\) but with limited momentum and does not seem to be able to breach the Breakeven Strike in that direction \(CE or PE, as the case may be\) by Expiry, then Far OTM Options of that direction \(in which the underlying has been slowly advancing\) can be Shorted\. That is: If there seems to be a limited trend with momentum in the downward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the PE side by Expiry, then Far OTM __PEs can be sold__ \(Short PEs to be initiated\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Likewise, If there seems to be a limited trend with momentum in the upward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the CE side by Expiry, then Far OTM __CEs can be sold__ \(Short CEs to be initiated\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up suitable Far OTM Options for Shorting in the same direction in which the underlying is advancing, such that these Far OTM Short Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying gets into trending momentum in the same direction and breaches the Breakeven Strike and continues further in that direction, then too these Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the max loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Long Strangle Strategy\. 

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium Is\. *For example, when the downtrend continues in Nifty, a Far OTM PE at 16000 Ig Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 15800 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. 
- As the uptrend continues Far OTM CEs’ Premium would rise, therefore, Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining premium values\. *For example, when the uptrend continues in Nifty, a Far OTM CEI7800 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 17900 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\.

__Long Strangle Strategy in Different Market Situations__

__If trade goes as per plan as trends beyond the Breakeven Strike, from Expiry perspective, in Long Strangle__:

Therefore, in case of continuous trending movement of the underlying after successfully crossing\-over the Breakeven Strike on any one side by the underlying, an unlimited profit situation may arise from Expiry perspective\.    

__If underlying movement fails to breach the Breakeven Strike, from Expiry perspective, in Long Strangle__:

However, if by Expiry of these Long Options, the underlying fails to cross\-over the Breakeven Strikes either upwardly on the CE side or downwardly on the PE side, then the Long Strangle__ __Strategy would yield loss \(*which may extend upto a maximum extent of the aggregate Premium paid on the Strategy*\)\.

In such situations, when the underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then  some adjustments can be considered in order to contain the loss in this Long Strangle__ __Strategy\.

<__end__>

__Loss in Long Strangle Strategy, and its Calculations__

__*Loss in Long Strangle Strategy, from Expiry perspective*:__

__Max Loss__: Since, this Long Strangle Strategy comprises of naked Long legs, for which the Premiums are paid, therefore, the aggregate Premium paid for both the Long legs in this Strategy is the maximum loss that may occur\. 

Thus, Maximum Loss in this Long Strangle Strategy will be limited and can be pre\-calculated\. The Maximum Loss in this Strategy is equivalent to the Total Premium paid on this Long Strangle Strategy, i\.e\.

__<start> Max Loss on Long Strangle __= \[*Premium Paid on CE Long leg* \+ *Premium Paid on PE Long Leg*\] __<end>__

__Max Loss scenario in Long Strangle:__

The situation of this Max Loss would occur if by Expiry of the Long Options, the underlying closes between both the Long CE Strike and PE Long Strike of this Long Strangle Strategy\.

__Loss zone in Long Strangle:__

If the underlying closes by Expiry within the two Breakeven Levels i\.e\. on the CE side and on the PE side, then loss would be incurred on the Strategy\. Therefore, the Loss Zone of this Long Strangle Strategy lies between the BE Level of the CE side and BE Level of the PE side\.

- *Loss Zone on the CE side*__ __*in Long Strangle*: if the underlying closes higher than the CE Long leg but below the BE Strike on the CE side, then too some loss would be incurred on the Long Strangle Strategy\. Thus, on the CE side, CE Long Strike to BE Strike on the CE side of the Long Strangle Strategy is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on CE side; and higher loss would be generated on the Long Strangle Strategy if the underlying closes near or lower than the CE Long Strike\.
- *Loss Zone on the PE side in Long Strangle*: if the underlying closes lower than the PE Long leg but above the BE Strike on the PE side, then too some loss would be incurred on the Long Strangle Strategy\. Thus, on the PE side, PE Long Strike to BE Strike of the Strategy on the PE side is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on PE side; and higher loss would be generated on the Long Strangle Strategy if the underlying closes near or higher than the PE Long Strike\.

__Impact on Max Loss amount, due to Strike Difference, in Long Strangle:__

Larger the difference between CE Long and PE Long Strike, smaller will be the premium debit incurred on the Strategy, and therefore lower Max Loss from Expiry perspective\. However, with larger Strike difference, the Breakeven required for profit from Expiry perspective would also expand, thereby requiring longer sustained momentum in order to bring this Strategy to profit \(*i\.e\. reducing the profit probability*\)\. Thus, pre\-calculated loss and BE Levels on the Long Strangle Strategy will help decide, the Strike at which this Strategy must be initiated\. 

<__start__>*For example: If Nifty ATM is at 17000, then for Long Strangle:* *If* *Nifty 16500 PE is bought at Rs\. 100 per Lot & Nifty 17500 CE is bought at Rs\. 50 per Lot, then the aggregate premium paid on this Strategy is Rs\. 150 per Lot\.*

*Thus, in this Strategy, if: \(a\) the Nifty fails to cross\-over above the Breakeven strike of 17650 upwardly by the Expiry; and \(b\) the underlying fails to cross\-over below the Breakeven strike of 16350 downwardly by the Expiry, then this Strategy  would yield loss\. Further, if Nifty closes by Expiry between 16500 and 17500 Strikes, then Max Loss equivalent to total aggregate Premium of Rs\. 150 per Lot would be incurred on the Strategy\. *__<end>__

<__end__>

__Profit in Long Strangle Strategy, and its Calculations__

__*Profit in Long Strangle Strategy from Expiry perspective*: __

__Max Profit scenario in Long Strangle__: If by Expiry of the Long Options, the underlying successfully crosses\-over the Breakeven Strikes of the Strategy \(*either on  the upper side or the lower side*\), then this Strategy would yield profit\. More trending the underlying gets in one direction with momentum, crossing beyond the BE Strike level of the Strategy on that side, higher the profit that will be generated\. Thus, the Max Profit potential on this Strategy is unlimited, provided the strong momentum makes either CE side Long Strike or PE side Long Strike a deep ITM\.

Thus, in case of continuous trending movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, an unlimited profit situation would arise from Expiry perspective\. This situation implies that the Long leg Strike on the side of the momentum, ends up being an ITM on Expiry \(*and the other side Long Option expires worthless as an OTM*\)\.

__Calculation of final Profit generated on in Long Strangle Strategy:__

If the underlying closes by Expiry, after breaching the Breakeven Strike on either side, then the final Profit accrued on the Long Strangle__ __Strategy on Expiry can be calculated as:

- \[*the aggregate Premium paid for the Strategy*\]

<__start__> *For example: If Nifty ATM is at 17000, then for Long Strangle:* *If* *Nifty 16500 PE is bought at Rs\. 100 per Lot & Nifty 17500 CE is bought at Rs\. 50 per Lot, then the BE Strike of this Long Strangle*__* *__*Strategy will be:*

1. *Nifty crosses above the Breakeven Strike of 17650 Strike upwardly by Expiry, then 17500 CE Long leg expires as an ITM generating profit \(as CE Long leg Premium would rise\) and the PE 16500 Long expires as even farther OTM generating loss \(as PE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to upward trending move in the Nifty\. The more deeper the CE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. The maximum profit on Expiry would be the difference between: \[the final LTP of the CE Long position\] and \[the aggregate Premium paid on the Strategy\]; or*
2. * Nifty crosses below the Breakeven Strike of 16350 Strike downwardly by Expiry, then 16500 PE Long leg expires as an ITM generating profit \(as PE Long leg Premium would rise\) and the CE 17500 Long expires as even farther OTM generating loss \(as CE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to downward trending move in the Nifty\. Deeper the PE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. The maximum profit on Expiry would be the difference between: \[the final LTP of the PE Long position\] and \[the aggregate Premium paid on the Strategy\]\. *<__end__>

__Profit Level in Long Strangle:__

Profit would accrue on this Long Strangle__ __Strategy, from Expiry perspective, if underlying closes after successfully crossing\-over the Breakeven Strike of either side, such that the Long Option of atleast one side expires as an ITM\.

__Impact on profitability, due to Strike Difference, in Long Strangle:__

Larger the difference between CE Long and PE Long Strike, smaller will be the premium debit incurred on the Strategy, and therefore lower Max Loss from Expiry perspective\. However, with larger Strike difference, the Breakeven required for profit from Expiry perspective would also expand, thereby requiring longer sustained momentum in order to bring this Strategy to profit \(*i\.e\. reducing the profit probability*\)\. Thus, pre\-calculated loss and BE Levels on the in Long Strangle__ __Strategy will help decide, the Strike at which this Long Strangle__ __Strategy must be initiated\.

<__end__>

__Profit & Loss Areas on the Long Strangle Strategy, and its Calculations__

__*Profit & Loss Levels on Long Strangle Strategy, from Expiry perspective*:__

__<start> BE Level on CE side in Long Strangle__: \[CE Long Strike \+ Total Premium Debit paid on the Strategy\] __<end>__

__<start> BE Level on PE side in Long Strangle__: \[PE Long Strike \- Total Premium Debit paid on the Strategy\] __<end>__

__Min Profit Level in Long Strangle__: If underlying closes by Expiry just above the BE Level on CE side \(*i\.e\. higher CE Strike than BE Strike*\) or if the underlying closes by Expiry just below the BE Level on PE side \(*i\.e\. lower PE Strike than BE Strike*\)\.

__Max Profit Level in Long Strangle__: Max Profit is unlimited if the underlying successfully crosses\-over the BE Strike Level on either CE side or PE Side \(*such that one side Strike becomes an ITM*\)\. Max profit situation arises as the underlying closes by Expiry anywhere higher than the BE Strike Level on the CE side; or anywhere lower than the BE Strike Level on the PE side\. Deeper the CE Long or PE Long becomes an ITM, higher will be the profit generated on this Strategy\.  

__Loss Zone in Long Strangle__:  If underlying closes by Expiry anywhere between the BE Level on the CE side and the BE Strike on the PE side, then loss would be incurred on this Strategy\.

__Max Loss Zone in Long Strangle__:  If underlying closes by Expiry anywhere between the CE Long Strike and the PE Long Strike, then Max Loss would be incurred on this Strategy\.

<__end__>

__Demerits & Merits of Long Strangle Strategy__

__Demerits of Long Strangle__:

- It comprises of naked Long positions\.
- This Strategy is workable/ profitable only when there is a strong conviction that soon there will be arrival of a strong momentum one\-sided trending move of the underlying\. However, even if the underlying move one\-sided but there is no momentum or if the underlying gets into a rangebound movement, then this Strategy would yield loss due to erosion of Time Value\.
- Thus, with the passage of time, if the underlying does not move with momentum, then both the Long legs may continue to be OTM Strikes and starts generating loss due to the rising Theta impact\. If by Expiry of the Long Options, if the underlying fails to make the one\-sided momentum trending move and do not cross the Breakeven Strike of this Strategy on either side, then both the Long legs would expire worthless as OTM, generating entire aggregate Premium paid on this Strategy as loss\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy may be avoided for positional holding near Expiry\.  
- It is an aggregate Debit Strategy\. Since both Long legs comprises of buying Far OTM Strikes, the Premium on both Long legs is the amount of aggregate Premium paid for this Strategy\. Accordingly, from Expiry perspective, the aggregate Premium paid need to be first covered up as profit in this Strategy, to become overall profitable in this Strategy\.
- The aggregate of the Premium paid on both Long legs, increases the Breakeven Strike to be crossed\-over to make this Strategy profitable from Expiry perspective\. Thus, from Expiry perspective, it is required that the  underlying must either trend downwardly and cross below the Breakeven Strike of this Strategy on the PE Long side; or  the underlying must trend upwardly and cross above the Breakeven Strike of this Strategy on the CE Long side, for this Strategy to generate profit \(*the Breakeven Strikes in this Strategy are discussed below here*\)\.
- When the Volatility is in a falling state, then there will be erosion caused to the Premium of the Long Options \(*or it may act as a deterrence to let the Premium of the Long Options rise*\), thereby making this Strategy not viable from profit perspective\.

__Benefits of Long Strangle:__

- Since this Strategy is implemented  through buying Far OTM CEs and PEs \(Long Options\), it requires  less capital/ margin and does not need any further capital towards MTM adjustments\.
- If the view goes as expected, then this Strategy is capable of  generating unlimited profit if the trend in one side continues until Expiry of Options, but if the view fails then it can cause a limited loss to the maximum extent of aggregate Premium paid on both the Long legs\. Thus, this Strategy is the kind with unlimited profit and limited loss\.

__Breakeven Strike in Long Straddle Strategy, its Calculation & Payoff Chart__

__Breakeven Strike of Long Straddle Strategy, from Expiry perspective__:

This Strategy comprises of naked CE Long at ATM Strike; and a naked PE long at ATM Strike\. This is an aggregate Debit Strategy as the Premium at which both Longs are initiated, on aggregate basis is the total Premium paid on this Strategy\.

The aggregate Premium paid on this Strategy determines the Breakeven Strike range which need to be crossed over by the underlying on either side in order to make this Strategy profitable\. The Breakeven Strike range on the upper side and the lower side are calculated as follows in this Strategy:

- *the Breakeven Strike on the CE side \(upper side\) in Long Straddle is*: \[The CE Strike \(*at which Long is initiated*\) \+ aggregate Premium paid on both CE & PE Long\]; and
- *the Breakeven Strike on the PE side \(lower side\) in Long Straddle is*: \[The PE Strike \(*at which Long is initiated*\) \- aggregate Premium paid on both CE & PE Long\]\. <__end__>

Thus, if by Expiry of the Long Options, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. Further, in case of continuous trending movement of the underlying after successfully crossing\-over the Breakeven Strike on either side by the underlying \(*or a huge gapup or gapdown, which crosses\-over the Breakeven Strike*\), a huge /  unlimited profit situation might arise\.

However, if by Expiry of these Long Options, the underlying fails to cross\-over either upper or lower side of the Breakeven Strikes, then the Strategy would yield loss \(*which may extend to the maximum extent of the aggrI Premium paid on the Strategy*\)\. 

<__start__> *Example: If Nifty ATM is at 17000, then for Long Straddle:* *If* *Nifty 17000 PE is bought at Rs\. 300 per Lot & Nifty 17000 CE is bought at Rs\. 350 per Lot, then the aggregate Premium paid on this Strategy would be Rs\. 300 \+ Rs 350 = Rs\. 650 per Lot\. *

*Thus, the BE Strike of this Strategy will be:*

- *On CE side: 17000 \+ \(300\+350\) = 17650 CE Strike; and*
- *On PE side: 17000 \- \(300\+350\) = 16350 PE Strike*

*Thus, if by Expiry, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry, the underlying fails to successfully cross\-over the relevant Breakeven Strike on either side, then the Strategy would yield loss \(which may extend to the maximum extent of Rs\. 650 per Lot, i\.e\. the total Premium paid on this Strategy\)*\.

*Thus, in the aforementioned example: if the underlying goes higher until Expiry and successfully crosses\-over the upper Breakeven Strike i\.e\. 17650 CE and keeps trending higher, then the Strategy will be in profit; but if the underlying by Expiry fails to cross\-over the Breakeven Strike of 17650, then this Strategy will incur loss \(which may extend to the maximum extent of total Premium paid on this Strategy \(i\.e\. Rs\. 650 per Lot\)\)*\.

*Likewise, if the underlying goes lower until Expiry and successfully crosses\-over the lower Breakeven Strike i\.e\. 16350 PE and keeps trending lower, then the Strategy will be in profit; but if the underlying by Expiry fails to successfully cross\-over the Breakeven Strike of 16350, then this Strategy will incur loss \(which may extend to the maximum extent of total Premium paid on this Strategy \(i\.e\. Rs\. 650 per Lot\)\)*\. <__end__>

__Payoff of Long Straddle Strategy__

<__img58__>

<__end__>

__Long__ __Straddle Strategy: Its Trade Legs & Objective__

When a view is formed that the underlying would soon likely to take a directional move in any one direction, may be on account of any news, outcome, event etc\., but it is not certain in which direction that momentum movement of the underlying is likely to occur, then such view can be played out by a neutral strategy employing Long Options positions at ATM Strikes with the expectation that the underlying would in response to any expected, news, outcome etc would very soon take one sided strong momentum move\. 

Thus, when the view on the underlying is that it is expected to make one sided strong momentum move very soon, but it is not certain that in which direction the underlying would make such a move; and such situation is played out through Long positions in Naked ATM CE & PE Options, then such a Strategy is called __Long__ __Straddle__\. In Long Straddle Strategy, ATM CE & ATM PE are bought in equal quantity, on the same underlying pertaining to same Expiry series\. In this Strategy, the expectation is that the underlying will soon make a sudden one\-sided strong momentum move, and would trend much beyond the current level either upwardly or downwardly very shortly, crossing beyond the Breakeven Strikes of the Long Options \(on either side\)\. Long Straddle involves naked Long  positions on ATM CE & PE Options \(involving two legs only\)\. This Strategy has Unlimited Profit potential if the underlying moves swiftly with strong momentum on either side; but it may also generate pre\-calculated Limited Max Loss if the Breakeven range is not breached by the underlying with good momentum\.

However, when the Long Straddle \(naked Strategy\) is hedged with Short Options on OTM Strikes \(on both CE & PE side\), then such Strategy is called __Reverse__ __Iron Fly or Reverse Iron Butterfly \(also referred to as Long Iron Fly or Long Iron Butterfly\)__\.

__Trade Legs in Long Straddle__:

- Long ATM CE Strike \(*primary CE *leg\); and
- Long ATM PE Strike \(primary PE leg\)

__<start> Example of Long Straddle:__ 

*If Nifty ATM is at 17000, then for Long Straddle:*

- *Buy 5 Lots Nifty 17000 CE of Next Week Expiry; and *
- *Buy 5 Lots Nifty 17000 PE of Next Week Expiry *__<end>__

__Objective in Long Straddle Strategy__:

Objective is to play a Neutral / uncertain strong momentum one\-sided directional move on the underlying on account of any event, news, outcomes etc\., likely to occur very shortly, through buying ATM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will soon make a sudden  strong momentum one\-sided directional move \(*or a huge gapup or gapdown*\)\.

On arrival of a soon strong momentum one\-sided directional move on the underlying \(or a huge gapup or gapdown\), either of the ATM Long primary leg becomes an ITM and the other ATM Long primary leg becomes a Far OTM\. The Long position leg which becomes an ITM crosses beyond the Breakeven Strike of this Strategy and generates profit; and the other Long position leg which becomes a Far OTM generates loss\. 

Further, due to the sudden strong momentum trending move of the underlying \(or a huge gapup or gapdown\), one of the Long Options position  can generate huge profit, whereas the other Long Options position which becomes a Far OTM can only yield loss limited to the extent of the premium paid on buying this Long Option\. Thus, the net profit between the two Long Options, is the profit generated in this Strategy\.

Accordingly, this Strategy can generate limited loss to the maximum extent of the aggregate Premium paid on both the Long legs, but if the underlying takes a strong momentum one\-sided trending move \(or a huge gapup or gapdown\), then this Strategy is capable of generating huge profit\.

__Adjustments in Long Straddle Strategy__

__Adjustments \(if the Breakeven Strike is not breached by the underlying and Long Straddle Strategy does not go as per plan\)__:

Since, this Long Straddle Strategy is an aggregate Premium Debit strategy, therefore, the aggregate  Premium paid \(i\.e\. the sum of the Premium paid  on the CE Long and PE Long leg\) need to be first recovered from the profit in this Strategy, from Expiry perspective, in order for this Long Straddle Strategy to be overall profitable by Expiry\. 

However, when underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then the potential loss \(limited to the maximum extent of the aggregate Premium paid on this Long Straddle Strategy\) situation can be handled by making following adjustments: \(i\) Converting Long Straddle into Reverse Iron Fly \(*i\.e hedged Long Straddle*\); or \(ii\) Short both CEs & PEs; or \(iii\) Short CEs; or \(iv\) Short PEs\. These adjustments are discussed below:

1. Conversion to Reverse Iron Fly: If the original view that the underlying would breakout beyond the Breakeven Strike of the Long Straddle Strategy on either side, appears to get uncertain, then immediately the naked Long Straddle must be converted to Reverse Iron Fly Strategy by initiating OTM Short CEs and Short PEs \(*of equal quantity as that of  Long legs, and of same Expiry series as that of the Long Options*\)\. This hedging of Long Straddle through conversion into Reverse Iron Fly will mitigate the potential risk of loss on the Long Straddle into a pre\-calculated even much Limited Loss situation\. You may refer to the details of Reverse Iron Fly given on the other side of this Table for better understanding\.
2. Counter Adjustment through Short Option \(both sides\): If the underlying do not seem to be breaching the Breakeven Strike of this Strategy and seems to remain until Expiry of the Long Options, within a range, then, both  __Far OTM CEs and PEs can be sold __\(Short CE & PE to be initiated\)\. These Short CEs and PEs must be Far OTMs, and of the same or closer Expiry series than that of the Long Options leg\. 

Further, these Short CEs & PEs can be initiated on equal quantities but in such sufficient quantities to receive aggregate Credit which is equal to or more than the aggregate Debit incurred on this Strategy through Long Options leg\. This way the Long Straddle gets converted into Reverse Iron Fly or both side Ratio Spreads \(*with more Shorts than Longs on both CE side & PE side*\)\.

1. Counter Adjustment through Short Option \(one side\): If there seems to be a slow trend on the downward, such that the Breakeven Strike does not seem to be breached downwardly \(i\.e\. on the PE side\)  in this Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(Short CEs to be initiated\)\. However, if there seems to be a slow uptrend, such that the Breakeven Strike does not seem to be breached upwardly \(i\.e\. on the CE side\)  in this Strategy  and the underlying seems to be  in a mild upwardly direction, then Far OTM __PEs can be sold__ \(Short PEs to be initiated\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying reverses on the opposite side \(i\.e\. against the Short Options position\), then these Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If the underlying seems to be moving in one direction \(and not really hovering in a range\) but with limited momentum and does not seem to be able to breach the Breakeven Strike in that direction \(CE or PE, as the case may be\) by Expiry, then Far OTM Options of that direction \(in which the underlying has been trending\) can be Shorted\. That is: If there seems to be a limited trend with momentum in the downward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the PE side by Expiry, then Far OTM __PEs can be sold__ \(Short PEs to be initiated\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Likewise, if there seems to be a limited trend with momentum in the upward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the CE side by Expiry, then Far OTM __CEs can be sold__ \(Short CEs to be initiated\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up suitable Far OTM Options for Shorting in the same direction in which the underlying is advancing, such that these Far OTM Short Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying gets into trending momentum in the same direction and breaches the Breakeven Strike and continues further in that direction, then too these Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the max loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Strategy\. 

- As the uptrend continues Far OTM CEs’ Premium would rise, therefore, Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\. *For example, when the uptrend continues in Nifty, a Far OTM CE at 17800 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 17900 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\.

__Significance & Impact of Strike / Delta values in Long Straddle__

__Strike / Delta value in Long Straddle Strategy__:

The two Long legs, i\.e\. CE Long and PE Long are ATMs, and consequently have same Delta value of 0\.5 \(on single Lot basis\)\. This equal Delta value Long legs helps to ensure uniformity in the profitability irrespective in whichever direction the momentum in the underlying arrives\. This is because, if there is uncertainty with regard to which direction the underlying is going to push forward its strong momentum move, then it is better to initiate both Long primary legs with equal Delta values, thereby maintaining Delta neutrality at the time of initiating the Strategy \(*which is ensured by initiating the Long legs at ATMs*\)\.

__Selection of Option Strikes in Long Straddle Strategy__:

In this Strategy, ATM CE & PE Strikes \(*which have equal Delta values*\) are used for initiating Long Options for both the primary legs\. This is done  in order to maintain Delta neutrality at the time of initiating the Strategy, if the view is neutral and uncertain,  but expecting huge gapup/ gapdown \(or very strong trending momentum in a very short span of time\)\. 

However, depending on the expected time within which strong one\-sided momentum is expected to arrive, choice of closer or farther Expiry series for initiating Long Options must be considered\. If holding time is very less, then current Expiry series can be considered; but if holding time is more than 10\-15 days or so then it is better to not loose Premium on account of Theta and therefore farther Expiry series ATM Options may be employed for this Strategy\. 

Basis aforesaid factors, suitable ATM CE & PE Option Strike levels of a particular Expiry series may be selected for this Strategy\. Since, the success of this Strategy is also mainly dependent on the low Theta decay, therefore farther Expiry series \(or larger time to Expiry Options\) would be preferable for this Strategy\.

__Options Behaviour in Long Straddle Strategy__

- In this Strategy, three factors help in generating profit: \(i\) strong momentum trending move of the underlying  \(or huge gapup / gapdown\); and \(ii\) the momentum trend should arrive soon\), otherwise Theta decay would adversely impact the probability of profit; and \(iii\) Volatility should either rise or remain constant, but should not go into steep falling state\. Therefore, profitability in this Strategy is heavily dependent on these factors\.
- Further, since the CE & PE Strikes are ATM, it results in higher Premium being paid; and consequently this Strategy in order to generate profit, need very strong momentum to arrive soon such that the underlying crosses\-over the Breakeven Strike\.
- Further, as the Expiry approaches near, the Theta impact on the ATM Strike CE & PE is highest \(*if the underlying becomes sideways and both the primary Long legs remains an ATM*\), would cause erosion on the Premium values of the Long Options\. Thus, near Expiry this Strategy must be avoided unless when quick strong momentum \(or huge gapup/ gapdown\) is expected within a very short span of time \(like next day or so\) after this Strategy is initiated\.

__Long Straddle Strategy in Different Market Situations__

__If trade goes as per plan as trends beyond the Breakeven Strike, from Expiry perspective, in Long Straddle Strategy__:

If the underlying starts trending strongly with momentum on one side \(*or if takes a huge gapup / gapdown*\) and successfully breaches the Breakeven Strikes of the Strategy on that particular side \(*i\.e\. either upwardly on the CE side or downwardly on the PE side*\), then this Strategy would yield profit\. The strength and length of the momentum would decide the quantum of profit in this Strategy\. 

Therefore, in case of continuous trending movement of the underlying \(or due to huge gapup/ gapdown\) after breaching of the Breakeven Strike on any one side by the underlying, a huge / unlimited profit situation may arise from Expiry perspective\.    

__If underlying’s movement fails to breach the Breakeven Strike, from Expiry perspective, in Long Straddle Strategy__:

However, if by Expiry of these Long Options, the underlying fails to cross\-over the Breakeven Strikes either upwardly on the CE side or downwardly on the PE side, then the Strategy would yield loss\(*which may extend upto a maximum extent of the Total Premium paid on the Strategy*\)\.

__Long Strap Strategy: __

If the view on the underlying is biased on the bullish side, then even an additional Long CE leg can also be introduced along with Long Straddle\. Consequently, there will be 2 Long CEs against 1 Long PE, all at ATM Strike\. This structure is called a __Long Strap__\. The view here is that if the bullish momentum arrives, then the 2 Long CEs would generate much higher profit than  the loss on the PE Long leg\. And if the bearish momentum arrives, then the PE Long would be able to generate sufficient profit which must be able to cover the cost of the entire Strategy\. 

The cost of the Long Strap Strategy is the total premium debit incurred on the Strategy to initiated 2 Long CEs and a Long PE\. From Expiry perspective in order to be profitable, in the Long Strap the momentum on the underlying must be strong enough to close beyond the BE Strike on either side\. The BE Strike on either side, in Long Strap Strategy, will be:

-  *BE Strike for CE side*: CE Strike \+ total Premium paid on the Strategy
- *BE Strike for PE side*: PE Strike \+ total Premium paid on the Strategy 

<__end__>

Thus, the profit potential on either side is unlimited, if the underlying moves with strong momentum on either side; however, if the underlying closes by Expiry between the BE Strikes on CE side & PE side, the max loss to the extent of  total Premium paid on the Long Strap would be incurred\.

<__end__>

__Loss in Long Straddle Strategy, and its Calculations__

__*Loss in Long Straddle Strategy, from Expiry perspective*:__ 

__Max Loss in Long Straddle:__ Since, this Strategy comprises of naked Long legs, for which the Premiums are paid, therefore, the aggregate Premium paid for both the Long legs in this Strategy is the maximum loss that may occur\. Thus, Maximum Loss in this Strategy will be limited and can be pre\-calculated\. The Maximum Loss in this Strategy is equivalent to the Total Premium paid on this Strategy, i\.e\.

__<start> Max Loss on Long Straddle __= \[*Premium Paid on CE Long leg* \+ *Premium Paid on PE Long Leg*\] __<end>__

__Max Loss scenario in Long Straddle:__

The situation of this Max Loss would occur if by Expiry of the Long Options, the underlying closes at the Strike on which Long legs have been initiated\.

__Loss zone in Long Straddle:__

If the underlying closes by Expiry within the two Breakeven Levels i\.e\. on the CE side and on the PE side, then loss would be incurred on the Strategy\. Therefore, the Loss Zone of this Strategy lies between the BE Level of the CE side and BE Level of the PE side\.

- *Loss Zone on the CE side in Long Straddle*: if the underlying closes higher than the CE Long leg but below the BE Strike on the CE side, then loss would be incurred on the Strategy\. Thus, on the CE side, CE Long Strike to BE Strike on the CE side of the Strategy is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on CE side; and higher loss would be generated on the Strategy if the underlying closes near or at the CE Long Strike\.
- *Loss zone on the PE side in Long Straddle*: if the underlying closes lower than the PE Long leg but above the BE Strike on the PE side, then some loss would be incurred on the Strategy\. Thus, on the PE side, PE Long Strike to BE Strike of the Strategy on the PE side is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on PE side; and higher loss would be generated in the Strategy if the underlying closes near or at the PE Long Strike\.

__<start> __*For example: If Nifty ATM is at 17000, then for Long Straddle:* *If* *Nifty 17000 PE is bought at Rs\. 300 per Lot & Nifty 17000 CE is bought at Rs\. 350 per Lot, then the aggregate Premium paid on this Strategy would be Rs\. 300 \+ 350 = Rs\. 650 per Lot\. *

*Thus, the BE Strike of this Strategy wilI be:*

*Thus, in this Strategy, if: \(a\) the Nifty fails to cross\-over above the Breakeven strike of 17650 upwardly by the Expiry; or  \(b\)If the underlying fails to cross\-over below the Breakeven strike of 16350 downwardly by the Expiry, then this Strategy  would yield loss\. Further, if Nifty closes by Expiry at 17000 Strike \(i\.e\. the Strike at which Long legs have been initiated\), then Max Loss equivalent to total aggregate Premium of Rs\. 650 per Lot would be incurred on this Strategy\. *__<end>__

<__end__>

__Profit in Long Straddle Strategy, and its Calculations__

__*Profit in Long Straddle Strategy, from Expiry perspective*: __

__Max Profit in Long Straddle:__ If by Expiry of the Long Options, if the underlying successfully crosses\-over the Breakeven Strikes of the Strategy \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. More trending the underlying gets in one direction with momentum, crossing beyond the BE Strike level of the Strategy on that side, higher the profit that will be generated\. Thus, the Max Profit potential on this Strategy is unlimited, provided the strong momentum makes either CE side Long Strike or PE side Long Strike a deep ITM\.

Thus, in case of huge gapup / gapdown or a continuous trending movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, a huge / unlimited profit situation might arise from Expiry perspective\. This situation implies that the Long leg Strike on the side of the momentum, ends up being an ITM on Expiry \(*and the other side Long Option expires worthless as an OTM*\)\. 

__Calculation of final Profit generated on the in Long Straddle Strategy:__

If the underlying closes by Expiry, after breaching the Breakeven Strike on either side, then the final Profit accrued on the Strategy on Expiry can be calculated as: 

<__start__> *For example: If Nifty ATM is at 17000, then for Long Straddle:* *If* *Nifty 17000 PE is bought at Rs\. 300 per Lot & Nifty 17000 CE is bought at Rs\. 350 per Lot, then the aggregate Premium paid on this Strategy would be Rs\. 300 \+ Rs 350 = Rs\. 650 per Lot\. *

*Also, the BE Strike of this Strategy Ibe: on CE side, 17650 CE Strike; and on PE side, 16350\.*

1. *Nifty crosses above the Breakeven Strike of 17650 Strike upwardly by Expiry, and at Expiry Nifty is at 18000; then 17000 CE Long leg expires as a deep ITM generating profit \(as CE Long leg Premium would rise\) and the PE 17000 Long expires as far OTM generating loss \(as PE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to upward trending move in the Nifty\. Deeper the CE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. The maximum profit on Expiry would be the difference between: \[the final LTP of the CE Long position\] and \[the aggregate Premium paid on the Strategy\]; or*
2. *Nifty crosses below the Breakeven Strike of 16350 Strike downwardly by Expiry, and at Expiry if Nifty closes at 16000; then 17000 PE Long leg expires as a deep ITM generating profit \(as PE Long Premium would rise\) and the CE 17000 Long expires as far OTM generating loss \(as CE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to downward trending move in the Nifty\. Deeper the PE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. The maximum profit on Expiry would be the difference between: \[the final LTP of the PE Long position\] and \[the aggregate Premium paid on the Strategy\]\. *<__end__>

__Profit Level in Long Straddle Strategy:__

Profit would accrue on this Strategy, from Expiry perspective, if underlying closes after successfully crossing\-over the Breakeven Strike of either side, such that the Long Option of atleast one side expires as an ITM\.

<__end__>

__Profit & Loss Areas on Long Straddle Strategy, and its Calculations__

__*Profit & Loss Levels on Long Straddle Strategy, from Expiry perspective*:__

__<start> BE Level on CE side in Long Straddle__: \[CE Long Strike \+ Total Premium Debit paid on the Strategy\] __<end>__

__<start> BE Level on PE side in Long Straddle__: \[PE Long Strike \- Total Premium Debit paid on the Strategy\] __<end>__

__Min Profit Level in Long Straddle__: If underlying closes by Expiry just above the BE Level on CE side \(*i\.e\. higher CE Strike than BE Strike*\) or if the underlying closes by Expiry just below the BE Level on PE side \(*i\.e\. lower PE Strike than BE Strike*\)\.

__Max Profit Level in Long Straddle__: Max Profit is unlimited if the underlying successfully crosses\-over the BE Strike Level on either CE side or PE Side \(*such that one side Strike becomes an ITM*\)\. Max profit situation arises as the underlying closes by Expiry anywhere higher than the BE Strike Level on the CE side; or anywhere lower than the BE Strike Level on the PE side\. Deeper the CE Long or PE Long becomes an ITM, higher will be the profit generated on this Strategy\. 

__Loss Zone in Long Straddle__:  If the underlying closes by Expiry anywhere between the BE Level on the CE side and the BE Strike on the PE side, then loss would be incurred on this Strategy\.

__Max Loss Zone in Long Straddle__:  If underlying closes by Expiry at the Strike on which CE Long and PE Long legs have been initiated, then Max Loss would be incurred on this Strategy\.

<__end__>

__Demerits & Merits of Long Straddle__

__Demerits of Long Straddle Strategy__:

- This Strategy is workable/ profitable only when there is a strong conviction that soon there will be arrival of a strong momentum one\-sided trending move of the underlying \(or a huge gapup or gapdown\)\. However, if \(i\) the underlying moves one\-sided but there is no momentum; or the underlying gets into a rangebound movement, then this Strategy would yield loss due to erosion of Time Value on both primary legs\.
- This Strategy requires more Premium to be paid, as against the Long Strangle \(or even Reverse Iron Fly\)\. 
- Thus, if the underlying does not soon move with strong momentum \(or fails to make a huge gapup or gapdown\), then both the Long legs may continue to be ATM Strikes \(*or one primary leg may be a near ITM and another near OTM*\), which situation would generate loss in this Strategy\. Further, as the time passes and Expiry approaches near, and the underlying fails to make the one\-sided momentum trending move and do not cross the Breakeven Strike of this Strategy on either side, then the impact of Theta and failure to cross\-over the Breakeven Strike both would cause loss of the entire aggregate Premium paid on this Strategy\.
- Therefore, two factors which are most detrimental to this Strategy are: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on the primary legs\. Therefore, this Strategy is heavily dependent on soon arrival of strong momentum one\-sided trending move of the underlying \(or a huge gapup or gapdown\)\.
- It is an aggregate Debit Strategy\. Since both Long legs comprises of buying the ATM Strikes, the Premium on both Long legs is the amount of aggregate Premium paid for this Strategy\. Accordingly, from Expiry perspective, the aggregate Premium paid need to be first covered up as profit in this Strategy, to become overall profitable in this Strategy\.
- The aggregate of the Premium paid on both Long legs defines a higher  Breakeven Strike to be crossed\-over to make this Strategy profitable from Expiry perspective\. Thus, from Expiry perspective, it is required that the  underlying must either trend downwardly and cross below the Breakeven Strike of this Strategy on the PE Long side \(*or take a huge gapdown*\); or  the underlying must trend upwardly and cross above the Breakeven Strike of this Strategy on the CE Long side \(*or take a huge gapup*\)\.
- When the Volatility is in a falling state, then there will be erosion caused to the Premium of the Long Options \(or it may act as a deterrence to let the Premium of the Long Options rise\), thereby making this Strategy not viable from profit perspective\.

__Benefits of Long Straddle Strategy:__

- This is a neutral Strategy i\.e\. when the view is uncertain in which direction the underlying can move with strong momentum \(*or might take a huge gapup or gapdown*\) as a result of any news, event or outcome etc\., this Strategy can be implemented\. This is mainly targeted for a very quick arrival of momentum or gapup / gapdown within a very short span of time\.
- Since this Strategy is implemented  through buying ATM CEs and PEs \(Long Options\), it requires  less capital/ margin and does not need any further capital towards MTM adjustments\.
- If the view goes as expected, then this Strategy is capable of  generating huge profit if the trend in one side continues \(or if the there is a huge gapup or gapdown\), but if the view fails then it can cause a limited loss to the maximum extent of aggregate Premium paid on both the Long legs\. Thus, this Strategy is the kind with unlimited profit and limited loss\.
- Thus, rise in Volatility and one\-sided strong momentum trending move \(or likely huge gapup or gapdown\) is the requirement for profitability in this Strategy\. Further, if there is huge Volatility spike, then the premium value of both CE Long and PE Long legs would rise exponentially, even if there is no significant move in the underlying\.

__Snapshot on all the Most Popular Conventional Strategies and their Trade legs__

For a beginner it may appear to be a difficult task to have all most\-popular Conventional Strategies on the fingertips\. The basic design of some of these Strategies may also appear to be so close to each other that they appear get confusing at times\. While, it may appear to be little confusing initially or you may get a feeling that every Strategy you learnt is getting messed up in your head; but be assured that with time all this will surely be within your grip because it is definitely not so complex as it appears to be\. 

In an attempt to simplify learning about these confusing\-looking aspects about Options, we have tried to bring all the hedged Strategies discussed under Conventional Strategies at one place by plotting it on a boiler\-plate Options Chain, to help you to better place these Strategies in your memory bank by just looking / remembering the following Table\.

<__start__> In the Table below, we have provided Options Chain of two different Expiry series\. On the left hand side, we have an Option Chain of a closer Expiry series and on the right hand side we have a Options Chain of a relatively farther Expiry series\. In these Options Chain, we have plotted different types of CE & PE Options \(i\.e\. ITM, ATM & OTM\), by using alphabetical codes in bold and capitalized:

<__img60__><a id="_Hlk159400011"></a>

Now, just for the sake of quick recollection of all the popular Conventional hedged Strategies, with their relevant trade legs, we have used the codes depicted in the above Table, to showcase different option types which are employed in creation of trading positions for different Conventional Strategies\. The following Table gives a summary pointer of the trade legs for each of the Conventional Strategies, as a quick reference point:

 <__img61__>

<__img62__>

<__img63__>

These tables will help you to clearly and quickly figure out the relevance of different Strategies and their applicability to play a particular trend in the underlying and to be able to place the relevant trade legs which comprises that Strategy\. <__end__>

__Breakeven Strike of Put Ratio Spread Strategy, its Calculation and Payoff Chart__

__Breakeven Strike of Put Ratio Spread Strategy, from Expiry perspective:__

The Breakeven Strike \(BE\) in case of a PE Ratio Spread, need to be understood as explained below:

1. The __PE Short leg’s BE Strike is PE Short Strike \- premium credit received on PE Short leg__\. This  means that when the underlying crosses downwardly below this BE Strike level and closes by Expiry lower than the said BE level, then the PE Short leg from Expiry perspective would yield loss on the PE Short leg\.
2. But from a PE Ratio perspective, since we also have a PE Long position on the primary leg, therefore, if PE Short leg reaches its BE strike level on the downside, then the PE Long leg would be generating profit \(*because it is on higher Delta than the Short leg*\)\. This profit generated on the PE Long leg due to downside move in the underlying, would further add up to the BE level on the PE Short leg\. Thus, in order to define the BE level on overall basis on the PE Ratio Spread Strategy, we need to calculate the tentative net profit that would be generated on the PE Long leg if the underlying reaches downwardly upto the BE level of the PE Short leg\. This __net profit on the PE Long is determined as per calculation given below:__

__<start> \[Strike difference between PE Long & Short leg\] *minus *\[Net premium debit, per single Lot basis between PE Long & Short leg\] <end>__

Accordingly, the __BE Strike on the PE Ratio Spread,__ would be \(i\) *minus* \(ii\) above, i\.e: 

__<start>  \[BE of PE Short leg\] \- \[\(Strike difference\-Net Premium Debit per Lot basis\)\]__\.  __<end>__

This implies that if the underlying by Expiry closes below this BE Strike level on the downside, then the PE Ratio Spread would generate loss\. Lower the underlying would move below this BE level, the PE Ratio Spread would enter unlimited loss area\. 

__<start> __*For example, if: *

- *1 Lot Nifty 17500 PE is bought at Rs\. 250 premium \(primary leg\); and *
- *2 Lots Nifty 17300 PE is sold at Rs\. 150 premium per Lot \(hedged leg\)*

*then, the BE Strike of this PE Ratio Spread Strategy will be: \[17300\-150\] \- \[200\-100\] = 17150\-100 = 17,050 PE Strike *

*Thus, by Expiry, Nifty must not go down below the BE Strike of the overall PE Ratio Spread, which is 17050 PE Strike\. And if Nifty expires above the PE Short Strike of 17300, then the primary leg may be in profit and the entire aggregate Premium of Rs\. 300 received on the PE Short hedged leg will be the profit in this Strategy\. However, it must be borne in mind that if the PE buy primary leg is not an ITM on or near Expiry, then it is better to book profit on the PE buy leg before its Premium becomes zero due to Theta effect on Expiry\. *__<end>__

__<start> Payoff for Put Ratio Spread Strategy__

__<img49>__

__<end>__

__Put Ratio Spread Strategy: Its Trade Legs and Objective__

When the view on the underlying is mildly bearish, we can play the down move in the underlying, by being Long on PE Options \(i\.e\. buy PE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bullish view by Shorting Far OTM Put Options \(i\.e\. sell PE Options\) on the same underlying with same Expiry series \(the __hedged leg__\), like it is done in a Bear Put Spread Strategy\. However, the hedged leg in this Strategy, will have more quantity / Lots than the primary leg\. For example, the primary leg may have 1 Long PE and the hedged leg may have 2 or 3 Short PEs\. Thus, the ratio of Lots between the primary leg and the hedged leg may be 1: 2 or 1:3 or 2:3 and so on\. 

In this Strategy: 

- the mild bearish move is played using the Long PE in the primary leg, which will yield profit due to the downward move in the underlying; and
- the hedged leg has more quantity of PE Shorts initiated at such lower Far OTM Strike, which is expected to be not breached by the underlying by Expiry \(i\.e\. below the Support area\), so that on Expiry these PE Short positions on the hedged leg will expire worthless as an OTM thereby yielding profit due to Theta play; and
- usually it is ensured that the Premium credit received on aggregate basis on the PE Short leg is higher than the Premium paid on the PE Long primary leg\. Thus, essentially this Strategy is a Credit Spread from net Premium perspective\.

This Strategy where a bearish primary leg initiated with Long PE positions at higher Strike with higher Premium; and this primary leg is hedged with Far OTM Put Short positions at lower Strike with lower Premium with more quantity \(*all Shorts on the same Strike*\) than the PEs in the primary leg, on the same underlying and of same Expiry series – it is called a __Put__ __Ratio Spread Strategy__\. It is a vertical Credit Spread\. However, if the view is bearish, then instead of Put Ratio Credit Spread, a trader must consider __Put__ __Ratio Backspread Strategy__\.

__Trade Legs in Put Ratio Spread__:

Hedged leg initiated at Far OTM PE Strike \(below Support area\) with more Lots than in the primary leg\. All PE Shorts may or may not be on the same Strike*\.* Also, both primary and hedged legs pertain to same Expiry series\.

Further, aggregate Premium Credit collected on PE Short leg is ensured to be higher than the Premium paid for the PE Long leg\. This will make the Strategy as a Credit Spread from net Premium perspective, on the Strategy\.

__<start> Example of Put Ratio Spread__:

 *Buy 1 Lot Nifty 17800 PE of Current Week Expiry \(at Rs\. 180 per Lot\); and*

- *Sell 2 Lot Nifty 17300 PE of Current Week Expiry \(at Rs\. 100 per Lot\)*

*Both legs of Current Week Expiry series \(expecting Support as per technical analysis to be at 17200\)*

*Further, aggregate Premium Credit of PE Short leg is Rs\. 200, whereas total Premium Paid for PE Long leg is only Rs\. 180\. Thus, net Premium Credit of Rs\. 20 on the Strategy \(i\.e\. 200\-180=20\)\.* __<end>__

__Objective in Put Ratio Spread__:

Objective is to play mild bearish view through buying PEs \(as the primary leg\)\. Further, relatively more quantities are initiated as Short at Far OTM PE Strike below Support level, in order to gain from time decay on Expiry \(as these OTM PE Short positions will become zero if expire as OTM\)\.

Further, same number of PEs in the primary and hedged leg will act as Bear Put Spread\. However, extra PE Short as part of the hedged leg will suitably cover the risk of reversal in the upward direction\. The extra PE Short position makes this Strategy a Net Premium Credit strategy, hence upon reversal in the upward direction this Strategy would yield profit to the maximum extent of Net Premium Credit on the Strategy\.

This Strategy would generate limited profit on the upside or if the Breakeven Strike of this Strategy is not breached by the underlying on the downside by Expiry\. However, if the BE strike of this Strategy is breached by the underlying on the downside by Expiry, then this Strategy would generate unlimited loss \(*i\.e\. lower the underlying closes by Expiry, after breaching the BE Strike of the Strategy on the downside, higher would be the loss generated*\)\. Thus, this Strategy bears limited profit and unlimited loss potential\.

__Put Ratio Spread Strategy,  in different Market Situations__

__If trade goes as per plan, in Put Ratio Spread__:

If the underlying remains bearish, then the PE Long primary leg will generate profit\. 

But as the underlying moves lower, the hedged PE Short leg will generate loss \(*because the LTP of PE Short leg will rise due to underlying going downward*\)\. However, the selection of this PE Short Strike must be such that the underlying will not breach this Strike downwardly by Expiry and will therefore expire worthless as an OTM on Expiry \(even though it was exhibiting loss due to bearish move of the underlying, prior to Expiry\)\.

Thus, if the limited bearish move  goes as per plan then the PE buy primary leg would generate profit due to bearish move\. Further, if the PE buy does not become an ITM on Expiry then the profit on this PE buy leg must be booked before Expiry \(because if the PE buy leg is an OTM then its Premium will become zero on Expiry\)\. However, if the PE buy leg becomes an ITM on Expiry, then its final LTP will determine the profit on the PE buy primary leg \(*i\.e\. if the final LTP is higher than its buying price*\)\.

So far as the PE Short hedged leg is concerned, if the underlying does not breach the Breakeven Strike profit is generated on the hedged leg\.

Thus, on such limited bearish move, both the primary leg and the hedged leg generates profit, and the max profit \(*which can be pre\-calculated, as explained above*\) would be generated on this Strategy if the underlying closes by Expiry just near the PE Short leg on the downside\.  

__If movement of the underlying is slow /  sideways, during Put Ratio Spread__:

However, if the movement of the underlying becomes slow / sluggish in its downward movement or if the underlying keeps fluctuating in  a range, then the Theta impact may cause erosion in the Premium value of both PE Long and PE Short leg\. However, since this Strategy is a Net Premium Credit strategy \(*owing to the fact that there are  more PE Shorts than PE Long and Short Strike is farther OTM than the Long Strike*\), the Net Premium Credited would be the maximum profit in such situation by Expiry if the underlying closes by Expiry above the PE Long leg \(*in which situation both Long & Short Strike PEs would expire as OTM*\)\. However, if the underlying closes by Expiry below the PE Long leg but higher than the PE Short leg, then some higher profit would be generated on this Strategy \(*as PE Long Strike in such situation would expire as an ITM*\)\.

__If trade reverses for an uptrend, in Put Ratio Spread__:

If the underlying reverses in an uptrend instead of a limited bearish downward move as anticipated, then this Strategy will automatically cover the bullish move from any loss, because there are already more PE Shorts than PE Long and the Strategy is a Net Credit Strategy\. Therefore, upon reversal on the upside, the Net Premium Credit in this Strategy will be the maximum profit from Expiry perspective and will not require any adjustments to be made to the existing Strategy\. 

__If trade does not go as per plan, in Put Ratio Spread__:

However, if the underlying moves lower than the Breakeven Strike of the PE Short leg then the Strategy may generate loss \(*after setting\-off the profit generated on the PE buy primary leg*\)\. In such scenario, certain adjustments may be required to be made\.

__Options Behaviour and Strike Selection in Put Ratio Spread__

__Options Behaviour in Put Ratio Spread:__

Idea is to play limited bearish move through initiating PE buy as the primary leg; and to hedge this primary leg with same quantity Far OTM PE Short \(as typically done in Bear PE Debit spread Strategy\), thus yielding profit on the PE buy leg if it expires as an ITM on Expiry\. However, if near to Expiry, the PE buy is in profit due to the bearish move of the underlying but does not seem to expire as an ITM on Expiry then it is better to book profit on the PE buy leg and to hold the PE Short positions until Expiry to let them expire as OTM on Expiry \(*provided the trading account has enough margin to support the naked PE Short positions, after PE Long is squared\-off for booking profit*\)\. 

Further , in this Strategy, since Short leg has more Premium Credit than the Premium paid on PE Long leg therefore, the Strategy is basically a Net Credit Strategy from Premium perspective\. Thus, if the underlying closes by Expiry above the PE Long leg then both PE Long leg and PE Short leg expires as an OTM, thereby generating Min Profit equivalent to the Net Premium Credit collected on the Strategy\. Thus, there is no upside risk in this Net Credit Ratio Spread\.

In this Strategy, selection of PE Short Strike for the hedged leg is very important, as it must be such where the underlying is not expected to reach on the downside by Expiry \(thus, the PE Short must be above below the Support level\)\. 

Additionally, in this Strategy, more quantity of PE Shorts \(which are below the Support level\) are added which are much farther OTM PEs as compared to PEs on the Long leg \(*which are usually selected as ITMs or Near OTMs*\)\. Thus, the impact of Theta is more on the Short legs than the Long leg, which helps generate net profit on the Strategy even if the underlying keeps hovering within a range\.

However, if the underlying gets super bearish, so as to breach the Breakeven Strike and trend lower, then since there are more PE Short positions than PE Long positions, therefore, the Strategy may start exhibiting virtual loss, which may convert to actual loss situation  if the underlying closes by Expiry lower than the BE Strike of the Strategy\. Thus, there is an unlimited downside risk in this Strategy, beyond the BE Strike\.

__Selection of Option Strikes, in Put Ratio Spread__:

Depending upon the limited bearish move, suitable Delta value higher PE \(ITM or near OTM\) can be bought for the primary leg which is slightly above than the major Support level\.

For the hedged leg, lower Far OTM PEs with suitable Premium amount can be Shorted, such that a Net Premium Credit can be ensured on the Strategy\. Further, such Far OTM PEs must be below such Support level, which the underlying should not breach on Expiry and consequently entire credit of Premium on the hedged leg is earned on Expiry due to Theta impact\.

Basis aforesaid factors, suitable PE Option Strike levels of a particular Expiry series may be selected\.

__Adjustments in Put Ratio Spread__

__\(if limited bearish view and this Strategy does not go as per plan\)__

If the underlying moves lower than the Breakeven Strike on the PE side, then the Put Ratio Spread Strategy enters towards an unlimited loss scenario, because, then it implies that both PE buy and PE Short leg have become an ITM\. In such a scenario, the Long PE will cover the losses arising on the PE Short leg to some extent as the underlying moves lower, but that will not be sufficient to cover the losses that will be incurred on the PE Short leg as there are more PE Shorts than PE buy in this Strategy\. Thus, from Expiry perspective the loss incurred on the PE Short leg on Expiry minus the profit on the PE buy leg, would be the actual loss on Expiry \(*calculated basis their final LTP on Expiry*\)\. In this situation, certain adjustments can be made in order to curtail the potential loss scenario in this Strategy\. 

The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy: \(i\) Long PEs; or \(ii\) Short CEs\. These adjustments are discussed below\.

1. Counter Adjustment through Long Option: If there seems to be a trending downtrend with momentum, then __PEs can be bought__ \(Long PE\)\. Buying PEs to protect the downside risk in this Strategy will add up another debit position, therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. This Long PE will help overcome the loss accruing on this Strategy arising due to more PE Shorts\. However, Long PEs should be initiated at Strike having Delta value higher than the current Delta value of the Short PE hedged leg \(*i\.e\. at a higher Strike than the PE sell Strike*\), so that in case of continuation of strong downtrend, these fresh Long PEs should generate more profit than the loss generated by the Short PEs hedged leg\. Also, depending upon the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy i\.e\. by ensuring that the net Delta position gets sufficiently net negative on the overall Strategy to benefit from the bearish move in the underlying\. Atleast fresh Long PEs equal to extra Lot on PE Short leg must be added\. These fresh Long PEs at higher Delta would turn the PE Ratio into a Bear PE Spread\. If the Long PEs generates profit covering up the loss generated by the PE Short leg,  then it would be advisable to immediately book the profit on the Strategy\.
2. Counter Adjustment through Short Option: If the downtrend is expected to be continued but not with very strong momentum \(and may be expected to even reverse upwardly\), then __Far OTM CEs can be sold__ \(CE Short\) above the major Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of an uptrend move\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the loss generated on the original Strategy, if the underlying expires below the Strike at which PE Short is initiated in the hedged leg\. Further, depending upon the potential loss that may be incurred in the original Strategy if the underlying expires below the Breakeven Strike of the Strategy, suitable number of Far OTM CEs \(of higher Far OTM Strike above Resistance area\) can be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short CEs due to time decay on Expiry\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Short CE in comparison to the original number of extra Lots in the PE Short hedged leg initiated on the original Strategy i\.e\. by ensuring that the net Delta position gets sufficiently net negative on the overall Strategy to benefit from the bearish move in the underlying\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.

__Payoff for Put Ratio Spread Strategy__

__<end>__

__Loss in Put Ratio Spread Strategy, and its Calculations__

__Loss in Put Ratio Spread Strategy, from Expiry perspective:__

Since, there are more Shorts than Long, therefore, this PE Ratio Spread will have more premium credits than premium debit\. This implies that the overall Delta position on the overall PE Ratio Spread would be positive\. Therefore, if the trend becomes extreme bearish such that the underlying keeps trending lower crossing below the BE Strike of the overall PE Ratio Spread \(*thereby implying that both PE buy and PE sell Strikes have become ITM*\), then the PE Long will generate profit but this profit will be much less than the loss generated on PE Short leg \(which will generate unlimited loss scenario\) if the trend remains bearish making lower lows\. Lower the underlying moves and closes below the Breakeven Strike, higher will be the loss generated on this Strategy\. Thus, this Strategy has potential of generating unlimited loss situation

__Loss Level in Put Ratio Spread__:

If the underlying by Expiry closes anywhere below the Breakeven Strike of this Strategy, then this Strategy would generate loss\.

__Calculation of Final Loss, Put Ratio Spread, on Expiry__:

Therefore, from Expiry perspective, the difference between final Premium of PE Short leg and the final Premium of PE buy leg on Expiry will determine the actual quantum of loss in this Strategy\. The max loss would enter unlimited territory if the underlying keeps trending lower breaching the Breakeven Strike of this PE Ratio Spread\.

__<start> Payoff for Put Ratio Spread__

__<end>__

__Profit in Put Ratio Spread Strategy, and its Calculations__

__Minimum Profit in Put Ratio Spread__:

Since, there are more Shorts than Long, therefore, this PE Ratio Spread will have more premium credits than premium debit, hence, this Strategy is a Net Premium Credit Strategy\. Therefore, if the underlying by Expiry closes anywhere above the PE Long Strike, then the Net Premium  Credit \(*i\.e\. total premium credit collected on Short leg – premium debit paid on the Long leg*\) collected on the Strategy will be the limited profit yield on the Strategy\.

Thus, the minimum  profit yield in a Put Ratio Credit Spread, can be pre\-determined by calculating the Net Premium  Credit on the Strategy\.

__Maximum Profit Level in Put Ratio Spread__: 

If the underlying by Expiry closes at the PE Short Strike, then Maximum profit yield would be realised on this Strategy, which can be pre\-determined at calculated as explained below\.

__Calculation of Maximum Profit in Put Ratio Spread:__

Max profit on this Strategy can be calculated as:

__<start>__ \[*max profit on the equal qty of Bear PE Spread*\] \+ \[*aggregate Premium Credit Received on extra PE Short*\]

*Note:* *Max Profit in Bear PE Spread is calculated for each quantity as: \[difference between Long & Short Strike\] \- Net Premium debit paid on the Spread\. *__*<*end*>*__

__<start>__ *For example, if: *

- *2 Lot Nifty 17300 PE is sold at Rs\. 150 premium per Lot \(hedged leg\)*

*then, the Max Reward will be: *

1. *Max reward on 1 Lot Bear PE Spread = *__*\[\(17500–17300\) – \(250–150\)\]*__* x 50 = Rs\. 5000; and*
2. *Max reward on extra 1 Lot PE Short = *__*\[150\]*__* x 50 = Rs\. 7500\.*

*Thus, total max reward on above PE Ratio Spread is \(a\) \+ \(b\) = Rs\. 12500 *__<end>__

However, if the same Put Ratio Spread would be initiated with higher quantity, then the Max Profit as per aforesaid formula would be as calculated below:

__<start>__ *Suppose: *

- *5 Lot Nifty 17500 PE is bought at Rs\. 250 premium \(primary leg\); and *
- *10 Lot Nifty 17300 PE is sold at Rs\. 150 premium per Lot \(hedged leg\)*

1. *Max reward on 1 Lot Bear PE Spread = *__*\[\(17500–17300\) – \(250–150\)\]*__* x 50 = Rs\. 5000\. Therefore, for 5 Lots on Long leg, max profit would be = Rs\. 25,000; and*
2. *Max reward on extra 1 Lot PE Short = *__*\[150\]*__* x 50 = Rs\. 7500\. Therefore, for extra 5 Lots on Short leg, max profit would be = Rs\. 37,500\.*

*Thus, total max reward on above PE Ratio Spread is \(a\) \+ \(b\) = Rs\. 62,500 *__<end>__

This max profit on PE Ratio Spread would be generated if the underlying moves lower and closes right at the PE Short Strike\. In such situation, the PE Long leg would get benefitted from the downmove in the underlying and due to Expiry happening at the PE Short leg, the PE Long would be an ITM \(*thus its profit would be protected*\) and PE Short would expire worthless as an ATM / near OTM \(*thus generating full premium credit on PE Short leg as profit*\)\. Thus, max profit on this Strategy is limited\.

__Profit Level on overall Put Ratio Spread Strategy__:

If the underlying by Expiry closes anywhere above the Breakeven Strike of the Strategy, then this Strategy would yield some profit\.

__Profit Zone\(s\) in Put Ratio Spread Strategy:__

There are following three profit zones in this Strategy from Expiry perspective:

1. If the underlying by Expiry closes above__* *__the PE Long leg, then Min profit to the extent of Net Premium Credit would be generated on this Strategy\. Thus, in this profit zone, only Min profit amount would be generated on this Strategy\.
2. If the underlying by Expiry closes between  the PE Long Strike and PE Short Strike\. Lower the underlying closes  towards PE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at the PE Short Strike on Expiry, then max profit will be realised on this Strategy \(*as per calculations explained above*\)\. Thus, in this profit zone, profit on this Strategy would be between Min profit to Max profit amount\.
3. If the underlying by Expiry closes between  the PE Short Strike and Breakeven Strike of the Strategy\. Lower the underlying closes  towards Breakeven Strike, lower will be the profit generated within this zone\. Thus, in this profit zone, profit on this Strategy would be between Max profit amount to zero profit\. However, if the underlying closes below the Breakeven Strike on Expiry, then max loss situation arise on this Strategy \(*as already explained above*\)\.

__<end>__

__Profit & Loss Areas in Put Ratio Spread Strategy__

__Profit & Loss Levels in Put Ratio Spread Strategy, from Expiry perspective__:

- __BE Level__: \[*BE of PE Short leg*\] – \[\(*Strike difference* – *Net Premium Debit*\)\]
- __Min Profit Level__: If the underlying closes anywhere above PE Long Strike\.
- __Min Profit Amount__: Is equal to Net Premium Credit collected on the Strategy\.
- __Max Profit Level__: If the underlying closes at PE Short Strike\.
- __Max Profit Amount__: Limited amount of Max profit can be generated on the Strategy \(*as per calculations given above*\)\.
- __Profit Zone__: If the underlying closes anywhere above the Breakeven Strike of the Strategy\.
- __Loss Level__: If the underlying closes anywhere below the Breakeven Strike of the Strategy\.
- __Max Loss Amount__: Max loss can be unlimited on this Strategy as the underlying keeps trending lower than the Breakeven Strike of this Strategy\.

__<end>__

__Demerits and Merits of Put Ratio Spread Strategy __

__Demerits of Put Ratio Spread Strategy__:

- If VIX is low, there may not be reasonable Premium to create Shorts thereon for the hedged leg\. Such situations will require more Shorts to be initiated in order to have a reasonable aggregate Premium value to target from Theta decay perspective\.
- Since, there are more Shorts than Long, therefore there will be a higher margin /capital requirement and also MTM requirements will also have to be adhered\. 
- This Spread strategy will be suitable for a mild bearish view which must not breach the identified Support level by Expiry\. Strong momentum bearish trend may cause this Strategy to suffer unlimited loss \(because PE Shorts are more than the Long PEs\)\. Thus, this Strategy has a downside risk of unlimited loss\.
- It is a Strategy with limited profit potential and unlimited loss potential\.
- Thus, from Expiry perspective, the bearish move in the underlying must not cross below the Breakeven Strike of this Strategy\.

__Benefits of Put Ratio Spread Strategy:__

- This is a very suitable Strategy for a mild bearish to sideways trend of the underlying, as the primary leg will yield profit on down move of the underlying and the hedged leg too will yield profit due to Theta decay on Expiry in case of both mild bearish to sideways movement of the underlying\.
- Moreover, usually this Strategy is a Net Credit Strategy i\.e\. while Short per Lot is initiated at a lower Premium bearing Far OTM PE Strike but the collective Premium received in the hedged leg by Shorting PEs is higher than the Premium paid on the Long PE initiated as the primary leg\. Therefore, from Expiry perspective, this Net Credit Premium need to be protected to become profitable \(by selection of Far OTM PE Strike for the hedged leg below Support level\)\.
- Thus, if the underlying by Expiry closes anywhere above the Breakeven Strike, this Strategy will yield some limited Profit\. 
- This Strategy being a Net premium Credit Strategy owing to more number of PE Shorts, therefore this situation fully takes care of the reversal of trend in the opposite direction i\.e reversal on upward direction, without the need of any adjustments\. From Expiry perspective, reversal in upward direction would yield profit, without making any adjustments, to the extent of Net Premium received on the Strategy\.

__Put Ratio Backspread Strategy:__

If the view on the underlying is bearish, then a trader must consider __Put Ratio Backspread Strategy__,__ __instead of Put Ratio Credit Spread\. 

In Put Ratio Backspread, bearish expectation on the underlying is played by having more Long PEs than PE Short, typically in the ratio of 2:1, 3:2, or 3:1 etc\. This may comprise of 2 OTM PE Long primary leg and 1 ITM PE Short as hedged leg on same Expiry series; or 2 ITM PE Long and 1 OTM PE Short, etc\. Thus, Put Ratio Backspread is a Net Premium Debit Strategy \(i\.e\. with more Premium paid for the PE Long than Premium Credit collected on the PE Short leg, due to different quantity initiated on Long leg and Short leg\)\. 

In this Strategy, the downside profit potential is unlimited and the upside risk is limited to the maximum extent of the Net Premium Debit incurred on the Strategy\. It is a Vega positive Strategy

__Breakeven Strike of Call Ratio Spread Strategy, its Calculation and Payoff Chart__

__Breakeven Strike of CE Ratio Spread, from Expiry perspective:__

The Breakeven Strike \(BE\) in case of a CE Ratio Spread, need to be understood as explained below:

1. The __CE Short leg’s BE Strike is CE Short Strike \+ premium credit received on CE Short leg__\. This means that when the underlying crosses upwardly beyond this BE Strike level and closes by Expiry higher than the said BE level, then the CE Short leg from Expiry perspective would yield loss on the CE Short leg\.
2. But from a CE Ratio perspective, since we also have a CE Long position on the primary leg, therefore, if CE Short leg reaches its BE strike level on the upside, then the CE Long leg would be generating profit \(*because it is on higher Delta than the Short leg*\)\. This profit generated on the CE Long leg due to upside move in the underlying, would further add up to the BE level on the CE Short leg\. Thus, in order to define the BE level on overall basis on the CE Ratio Spread Strategy, we need to calculate the tentative net profit that would be generated on the CE Long leg if the underlying reaches upwardly upto the BE level of the CE Short leg\. This __net profit on the CE Long is determined as per calculation given below:__

__<start> \[Strike difference between CE Long & Short leg\] *minus *\[Net premium debit, per single Lot basis between CE Long & Short leg\] <end>__

Accordingly, the __BE Strike on the CE Ratio Spread,__ would be the sum of \(i\) & \(ii\) above, i\.e: 

__<start> \[BE of CE Short leg\] \+ \[\(Strike difference \- Net Premium Debit per Lot basis\)\]__\. __<end>__

This implies that if the underlying by Expiry closes above this BE Strike level on the upside, then the CE Ratio Spread would generate loss\. Higher the underlying would move above this BE level, the CE Ratio Spread would enter unlimited loss area\. 

__<start>__* For example, if: *

- *1 Lot Nifty 17600 CE is bought at premium of Rs\. 200 per Lot \(primary leg\); and*
- *2 Lot Nifty 17800 CE is sold at premium of Rs\. 150 per Lot \(hedged leg\)*

*then, the BE Strike of this CE Ratio Spread Strategy will be: \[17800\+150\] \+ \[200\-50\] = 17950\+150 = 18,100 CE Strike*

*Thus, by Expiry, Nifty must not close above the BE Strike of the overall CE Ratio Spread, which is 18100 CE Strike\. And if Nifty expires below the CE Short Strike of 17800, then the primary leg may be in profit and the entire aggregate Premium of Rs\. 300 received on the hedged leg will be the profit in this Strategy\. However, it must be borne in mind that if the CE buy primary leg is not an ITM on or near Expiry, then it is better to book profit on the CE buy leg before its Premium becomes zero due to Theta effect on Expiry\. *__<end>__

__<start> Payoff for Call Ratio Spread__

__<img48>__

__<end>__

__Call Ratio Spread Strategy: Its Trade legs & Objective__

When the view on the underlying is mildly bullish, we can play the upmove by being Long on CE Options \(i\.e\. buy CE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bearish view by Shorting Far OTM Call Options \(i\.e\. sell CE Options\) on the same underlying with same Expiry series \(the __hedged leg__\), like it is done in a Bull Call Spread Strategy\. However, the hedged leg in this Strategy, will have more quantity / Lots than the primary leg\. For example, the primary leg may have 1 Long CE and the hedged leg may have 2 or 3 Short CEs\. Thus, the ratio of Lots between the primary leg and the hedged leg may be 1: 2 or 1:3 or 2:3 and so on\. 

- the mild bullish move is played using the Long CE in the primary leg, which will yield profit due to the upmove in the underlying; 
- the hedged leg has more quantity of CE Shorts initiated at such higher Far OTM Strike, which is expected to be not breached by the underlying by Expiry \(i\.e\. above the Resistance area\), so that on Expiry these CE Short positions on the hedged leg will expire worthless as an OTM thereby yielding profit due to Theta play; and
- usually it is ensured that the Premium credit received on aggregate basis on the CE Short leg is higher than the Premium paid on the CE Long primary leg\. Thus, essentially this Strategy is a Credit Spread from net Premium perspective\.

This Strategy where a bullish primary leg initiated with Long CE positions at lower Strike with higher Premium; and this primary leg is hedged with Far OTM Call Short positions at higher Strike with lower Premium with more quantity \(*all Shorts on the same Strike*\) than the CEs in the primary leg, on the same underlying and of same Expiry series, it is called a __Call Ratio Spread Strategy__\.  It is a vertical Credit Spread\.

However, if the view is bullish, then instead of Call Ratio Credit Spread, a trader must consider __Call Ratio Backspread Strategy__\. 

__Trade Legs in Call Ratio Spread__:

Hedged leg initiated at Far OTM CE Strike \(above Resistance area\) with more Lots than in the primary leg\. All CE Shorts may or may not be on the same Strike*\.* Also, both primary and hedged legs pertain to same Expiry series\.

Further, aggregate Premium Credit collected on CE Short leg is ensured to be higher than the Premium paid for the CE Long leg\. This will make the Strategy as a Credit Spread from net Premium perspective, on the Strategy\.

__<start>  Example of Call Ratio Spread__:

- *Buy 1 Lot Nifty 17000 CE of Current Month Expiry \(at Rs\. 200 per Lot\); and*
- *Sell 2 Lot Nifty 17600 CE of Current Month Expiry \(at Rs\. 120 per Lot\)*

* *

*Both legs of Current Month Expiry series \(expecting Resistance as per technical analysis to be at 17500\)\.*

*Further, aggregate Premium Credit of CE Short leg is Rs\. 240, whereas total Premium Paid for CE Long leg is only Rs\. 200\. Thus, net Premium Credit of Rs\. 40 on the Strategy \(i\.e\. 240\-200=40\)\. *__<end>__

__Objective in Call Ratio Spread__:

Objective is to play mild bullish view through buying CEs \(as the primary leg\)\. Further, relatively more quantities are initiated as Short at Far OTM CE Strike above Resistance level, in order to gain from time decay on Expiry \(as these OTM CE Short positions will become zero if expire as OTM\)\. 

Further, same number of CEs in the primary and hedged leg will act as Bull Call Spread\. However, extra CE Short as part of the hedged leg will suitably cover the downside risk of reversal in the downward direction\. The extra CE Short position makes this Strategy a Net Premium Credit strategy, hence upon reversal in the downward direction this Strategy would yield profit to the maximum extent of Net Premium Credit on the Strategy\. 

This Strategy would generate limited profit on the downside or if the Breakeven Strike of this Strategy is not breached by the underlying on the upside by Expiry\. However, if the BE strike of this Strategy is breached by the underlying on the upside by Expiry, then this Strategy would generate unlimited loss \(*i\.e\. higher the underlying closes by Expiry, after breaching the BE Strike of the Strategy on the upside, higher would be the loss generated*\)\. Thus, this Strategy bears limited profit and unlimited loss potential\.

__Call Ratio Spread, in Different Market Conditions__

__If trade goes as per plan, Call Ratio Spread__:

If the underlying remains bullish, then the CE Long primary leg will generate profit\. 

But as the underlying moves higher, the hedged CE Short leg will generate loss \(*because the LTP of CE Short leg will rise due to underlying going upward*\)\. However, the selection of this CE Short Strike must be such that the underlying will not breach this Strike upwardly by Expiry and will therefore expire worthless as an OTM on Expiry \(even though it was exhibiting loss due to bullish move of the underlying, prior to Expiry\)\.

Thus, if the limited bullish move  goes as per plan then the CE buy primary leg would generate profit due to bullish move\. Further, if the CE buy does not become an ITM on Expiry then the profit on this CE buy leg must be booked before Expiry \(because if the CE buy leg is an OTM then its Premium will become zero on Expiry\)\. However, if the CE buy leg becomes an ITM on Expiry, then its final LTP will determine the profit on the CE buy primary leg \(*i\.e\. if the final LTP is higher than its buying price*\)\.

So far as the CE Short hedged leg is concerned, if the underlying does not breach the Breakeven Strike then profit is generated on the hedged leg\.

Thus, on such limited bullish move, both the primary leg and the hedged leg generates profit, and the max profit \(*which can be pre\-calculated, as explained above*\) would be generated on this Strategy if the underlying closes by Expiry just near the CE Short leg on the upside\.

__If movement of the underlying is slow /  sideways, during Call Ratio Spread__:

However, if the movement of the underlying becomes slow / sluggish in its upward movement or if the underlying keeps fluctuating in  a range, then the Theta impact may cause erosion in the Premium value of both CE Long and CE Short leg\. However, since this Strategy is a Net Premium Credit strategy \(*owing to the fact that there are  more CE Shorts than CE Long and Short Strike is farther OTM than the Long Strike*\), the Net Premium Credited would be the maximum profit in such situation by Expiry if the underlying closes by Expiry below the CE Long leg \(*in which situation both Long & Short Strike CEs would expire as OTM*\)\. However, if the underlying closes by Expiry above the CE Long leg but lower than the CE Short leg, then some higher profit would be generated on this Strategy \(*as CE Long Strike in such situation would expire as an ITM*\)\.

__If trade reverses for a downtrend, in Call Ratio Spread__:

If the underlying reverses in a downtrend instead of a limited bullish upmove as anticipated, then this Strategy will automatically cover the bearish move from any loss, because there are already more CE Shorts than CE Long and the Strategy is a Net Credit Strategy\. Therefore, upon reversal on the downtrend, the Net Premium Credit in this Strategy will be the maximum profit from Expiry perspective and will not require any adjustments to be made to the existing Strategy\. 

__If trade does not go as per plan, in Call Ratio Spread__:

However, if the underlying moves higher than the Breakeven Strike of the CE Short leg then the Strategy may generate loss \(*after setting\-off the profit generated on the CE buy primary leg*\)\. In such scenario, certain adjustments may be required to be made\.

__Options Behaviour in Call Ratio Spread and Strike Selection__

__Options behaviour in CE Ratio Spread__:

Idea is to play limited bullish move through initiating CE buy as the primary leg; and to hedge this primary leg with same quantity Far OTM CE Short \(as typically done in Bull CE Debit spread Strategy\), thus yielding profit on the CE buy leg if it expires as an ITM on Expiry\. However, if near to Expiry, the CE buy is in profit due to the bullish move of the underlying but does not seem to expire as an ITM on Expiry then it is better to book profit on the CE buy leg and to hold the CE Short positions until Expiry to let them expire as OTM on Expiry \(*provided the trading account has enough margin to support the naked CE Short positions, after CE Long is squared\-off for booking profit*\)\.

Further , in this Strategy, since Short leg has more Premium Credit than the Premium paid on CE Long leg therefore, the Strategy is basically a Net Credit Strategy from Premium perspective\. Thus, if the underlying closes by Expiry below the CE Long leg then both CE Long leg and CE Short leg expires as an OTM, thereby generating Min Profit equivalent to the Net Premium Credit collected on the Strategy\. Thus, there is no downside risk in this Net Credit Ratio Spread\.

In this Strategy, selection of CE Short Strike for the hedged leg is very important, as it must be such where the underlying is not expected to reach on the upside by Expiry \(thus, the CE Short must be above the Resistance level\)\.

Additionally, in this Strategy, more quantity of CE Shorts \(which are higher than the Resistance level\) are  added which are much farther OTM CEs as compared to CEs on the Long leg \(*which are usually selected as ITMs or Near OTMs*\)\. Thus, the impact of Theta is more on the Short legs than the Long leg, which helps generate net profit on the Strategy even if the underlying keeps hovering within a range\.

However, if the underlying gets super bullish, so as to breach the Breakeven Strike and trend higher, then since there are more CE Short positions than CE Long positions, therefore, the Strategy may start exhibiting virtual loss, which may convert to actual loss situation  if the underlying closes by Expiry higher than the BE Strike of the Strategy\. Thus, there is an unlimited upside risk in this Strategy, beyond the BE Strike\.

__Selection of Option Strikes, in Call Ratio Spread Strategy__:

Depending upon the limited bullish move, suitable Delta value lower Strike CE \(ITM or near OTM\) can be bought for the primary leg, which is slightly below the major Resistance level\.

For the hedged leg, higher Strike Far OTM CEs with suitable Premium amount can be Shorted, such that a Net Premium Credit can be ensured on the Strategy\. Further, such Far OTM CEs must be above such Resistance level, which the underlying should not breach on Expiry and consequently entire credit of Premium on the hedged leg is earned on Expiry due to Theta impact\.

Basis aforesaid factors, suitable CE Option Strike levels of a particular Expiry series may be selected\.

__Adjustments in Call Ratio Spread Strategy__

__\(if limited bullish view and this Strategy does not go as per plan\)__

If the underlying moves higher than the Breakeven Strike on the CE side, then the Call Ratio Spread Strategy enters towards an unlimited loss scenario, because, then it implies that both CE buy and CE Short leg have become an ITM\. In such a scenario, the Long CE will cover the losses arising on the CE Short leg to some extent as the underlying moves higher, but that will not be sufficient to cover the losses that will be incurred on the CE Short leg as there are more CE Shorts than CE buy in this Strategy\. Thus, from Expiry perspective the loss incurred on the CE Short leg on Expiry minus the profit on the CE buy leg, would be the actual loss on Expiry \(*calculated basis their final LTP on Expiry*\)\. In this situation, certain adjustments can be made in order to curtail the potential loss scenario in this Strategy\. 

The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy: \(i\) Long CEs; or \(ii\) Short PEs\. These adjustments are discussed below\.

1. Counter Adjustment through Long Option: If there seems to be a trending uptrend with momentum, then __CEs can be bought__ \(Long CE\)\. Buying CEs to protect the upside risk in this Strategy will add up another debit position, therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. This Long CE will help overcome the loss accruing on this Strategy arising due to more CE Shorts\. However, Long CEs should be initiated at Strike having Delta value higher than the current Delta value of the Short CE hedged leg \(*i\.e\. at a lower Strike than the CE sell Strike*\), so that in case of continuation of strong uptrend, these fresh Long CEs should generate more profit than the loss generated by the Short CEs hedged leg\. Also, depending upon the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy i\.e\. by ensuring that the net Delta position gets sufficiently net positive on the overall Strategy to benefit from the bullish move in the underlying\. Atleast fresh Long CEs equal to extra Lot on CE Short leg must be added\. These fresh Long CEs at higher Delta would turn the CE Ratio into a Bull CE Spread\. If the Long CEs generates profit covering up the loss generated by the CE Short leg,  then it would be advisable to immediately book the profit on the Strategy\.
2. Counter Adjustment through Short Option: If the uptrend is expected to be continue but not with very strong momentum \(and may be expected to even reverse downwardly\), then __Far OTM PEs can be sold__ \(PE Short\) below the major Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a downtrend move\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this far OTM PEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the loss generated on the original Strategy, if the underlying expires above the Strike at which CE Short is initiated in the hedged leg\. Further, depending upon the potential loss that may be incurred in the original Strategy if the underlying expires above the Breakeven Strike of the Strategy, suitable number of Far OTM PEs \(of lower Far OTM Strike below Support area\) can be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short PEs due to time decay on Expiry\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Short PE in comparison to the original number of extra Lots in the CE Short hedged leg initiated on the original Strategy i\.e\. by ensuring that the net Delta position gets sufficiently net positive on the overall Strategy to benefit from the bullish move in the underlying\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Payoff for Call Ratio Spread__

__<end>__

__Loss in Call Ratio Spread Strategy, and its Calculations__

__Loss in Call Ratio Spread Strategy, from Expiry perspective:__

Since, there are more Shorts than Long, therefore, this CE Ratio Spread will have more premium credits than premium debit\. This implies that the overall Delta position on the overall CE Ratio Spread would be negative\. Therefore, if the trend becomes extreme bullish such that the underlying keeps trending higher crossing above the BE Strike of the overall CE Ratio Spread \(*thereby implying that both CE buy and CE sell Strikes have become ITM*\), then the CE Long will generate profit but this profit will be much less than the loss generated on CE Short leg \(which will generate unlimited loss scenario\) if the trend remains bullish making higher moves\. Higher the underlying moves and closes above the Breakeven Strike, higher will be the loss generated on this Strategy\. Thus, this Strategy has potential of generating unlimited loss situation\.

__Loss Level in Call Ratio Spread__:

If the underlying by Expiry closes anywhere above the Breakeven Strike of this Strategy, then this Strategy would generate loss\.

__Calculation of Final Loss in Call Ratio Spread on Expiry__:__ __

Therefore, from Expiry perspective, the difference between final Premium of CE Short leg and the final Premium of CE buy leg on Expiry will determine the actual quantum of loss in this Strategy\. The max loss would enter unlimited territory if the underlying keeps trending higher breaching the Breakeven Strike of this CE Ratio Spread\.

__<end>__

__Profit in Call Ratio Spread Strategy, and its Calculations__

__Minimum Profit in Call Ratio Spread__:

Since, there are more Shorts than Long, therefore, this CE Ratio Spread will have more premium credits than premium debit, hence, this Strategy is a Net Premium Credit Strategy\. Therefore, if the underlying by Expiry closes anywhere below the CE Long Strike, then the Net Premium  Credit \(*i\.e\. total premium credit collected on Short leg – premium debit paid on the Long leg*\) collected on the Strategy will be the limited profit yield on the Strategy\.

Thus, the minimum  profit yield in a Call Ratio Credit Spread, can be pre\-determined by calculating the Net Premium  Credit on the Strategy\.

__Maximum Profit Level in Call Ratio Spread__: 

If the underlying by Expiry closes at the CE Short Strike, then Maximum profit yield would be realised on this Strategy, which can be pre\-determined at calculated as explained below\.

__Calculation of Maximum Profit in Call Ratio Spread:__

__<start> __\[*max profit on the equal qty of Bull CE Spread*\] \+ \[*aggregate Premium Credit Received on extra CE Short*\] 

*Note*: *Max Profit in Bull CE Spread is calculated for each quantity as: \[difference between Long & Short Strike \- Net Premium debit paid on the Spread\]* __<end>__

*then, the Max Reward will be:*

1. *Max reward on 1 Lot Bull CE Spread = *__*\[\(17800–17600\) – \(200\-150\)\]*__* x 50 = Rs\. 7500; and*
2. *Max reward on extra 1 Lot CE Short = *__*\[150*__*\] x 50 = Rs\. 7500\.*

*Thus, total max reward on above CE Ratio Spread is \(a\) \+ \(b\) = Rs\. 15000\. *__<end>__

However, if the same Call Ratio Spread would be initiated with higher quantity, then the Max Profit as per aforesaid formula would be as calculated below\.

__<start> __*Suppose: *

- *5 Lot Nifty 17600 CE is bought at premium of Rs\. 200 per Lot \(primary leg\); and*
- *10 Lot Nifty 17800 CE is sold at premium of Rs\. 150 per Lot \(hedged leg\)*

* *

1. *Max reward on 1 Lot Bull CE Spread = *__*\[\(17800–17600\) – \(200\-150\)\]*__* x 50 = Rs\. 7500\. Therefore, for 5 Lots on Long leg, max profit would be = Rs\. 37,500; and*
2. *Max reward on extra 1 Lot CE Short = *__*\[150*__*\] x 50 = Rs\. 7500\. Therefore, for extra 5 Lots on Short leg, max profit would be = Rs\. 37,500*

*Thus, total max reward on above CE Ratio Spread is \(a\) \+ \(b\) = Rs\. 75,000\. *__<end>__

This max profit on CE Ratio Spread would be generated if the underlying moves higher and closes right at the CE Short Strike\. In such situation, the CE Long leg would get benefitted from the upmove in the underlying and due to Expiry happening at the CE Short leg, the CE Long would be an ITM \(*thus its profit would be protected*\) and CE Short would expire worthless as an ATM / near OTM \(*thus generating full premium credit on CE Short leg as profit*\)\. Thus, max profit on this Strategy is limited\.

__Profit Level on overall Call Ratio Spread Strategy__:

If the underlying by Expiry closes anywhere below the Breakeven Strike of the Strategy, then this Strategy would yield some profit\.

__Profit Zone\(s\) in Call Ratio Spread Strategy:__

1. If the underlying by Expiry closes below the CE Long leg, then Min profit to the extent of Net Premium Credit would be generated on this Strategy\. Thus, in this profit zone, only Min profit amount would be generated on this Strategy\.
2. If the underlying by Expiry closes between  the CE Long Strike and CE Short Strike\. Higher the underlying closes  towards CE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at the CE Short Strike on Expiry, then max profit will be realised on this Strategy \(*as per calculations explained above*\)\. Thus, in this profit zone, profit on this Strategy would be between Min profit to Max profit amount\.
3. If the underlying by Expiry closes between  the CE Short Strike and Breakeven Strike of the Strategy\. Higher the underlying closes  towards Breakeven Strike, lower will be the profit generated within this zone\. Thus, in this profit zone, profit on this Strategy would be between Max profit amount to zero profit\. However, if the underlying closes above the Breakeven Strike on Expiry, then max loss situation arise on this Strategy \(*as already explained above*\)\. 

__<end>__

__Profit & Loss Areas in Call Ratio Spread Strategy__

__Profit & Loss Levels in Call Ratio Spread Strategy, from Expiry perspective__:

- __BE Level__: \[*BE of CE Short leg*\] \+ \[\(*Strike difference* \- *Net Premium Debit*\)\]
- __Min Profit Level__: If the underlying closes anywhere below CE Long Strike\.
- __Max Profit Level__: If the underlying closes at CE Short Strike\.
- __Profit Zone__: If the underlying closes anywhere below the Breakeven Strike of the Strategy\.
- __Loss Level__: If the underlying closes anywhere above the Breakeven Strike of the Strategy\.
- __Max Loss Amount__: Max loss can be unlimited on this Strategy as the underlying keeps trending higher than the Breakeven Strike of this Strategy\.

__<end>__

__Demerits and Merits of Call Ratio Spread Strategy__

__Demerits of Call Ratio Spread Strategy__:

- This Spread strategy will be suitable for a mild bullish view which must not breach the identified Resistance level by Expiry\. Strong momentum bullish uptrend may cause this Strategy to suffer unlimited loss \(because CE Shorts are more than the Long CEs\)\. Thus, this Strategy has an upside risk of unlimited loss\.
- Thus, from Expiry perspective, the bullish move in the underlying must not cross above the Breakeven Strike of this Strategy \(*discussed below here*\)\.

__Benefits of Call Ratio Spread:__

- This is a very suitable Strategy for a mild bullish to sideways trend of the underlying, as the primary leg will yield profit on upmove and the hedged leg too will yield profit due to Theta decay on Expiry in case of both mild bullish to sideways movement of the underlying\.
- Moreover, usually this Strategy is a Net Credit Strategy i\.e\. while Short per Lot is initiated at a lower Premium bearing Far OTM CE Strike but the collective Premium received in the hedged leg by Shorting CEs is higher than the Premium paid on the Long CE initiated as the primary leg\. Therefore, from Expiry perspective, this Net Credit Premium need to be protected to become profitable \(by selection of Far OTM CE Strike for the hedged leg above Resistance level\)\.
- Thus, if the underlying by Expiry closes anywhere below the Breakeven Strike, this Strategy will yield some limited Profit\. 
- This Strategy being a Net premium Credit Strategy owing to more number of CE Shorts, therefore this situation fully takes care of the reversal of trend in the opposite direction i\.e reversal on downward direction, without the need of any adjustments\. From Expiry perspective, reversal in downward direction would yield profit, without making any adjustments, to the extent of Net Premium received on the Strategy\.

__Call Ratio Backspread Strategy:__

if the view is bullish, then a trader must consider __Call Ratio Backspread Strategy __\(instead of Call Ratio Credit Spread\)\.

In Call Ratio Backspread, bullish expectation on the underlying is played by having more Long CEs than CE Short, typically in the ratio of 2:1, 3:2, or 3:1 etc\. 

This may comprise of 2 OTM CE Long primary leg and 1 ITM CE Short as hedged leg on same Expiry series; or 2 ITM CE Long and 1 OTM CE Short\. Thus, Call Ratio Backspread is a Net Premium Debit Strategy \(i\.e\. with more Premium paid for the CE Long than Premium Credit collected on the Short leg, due to different quantity initiated on Long leg and Short leg\)\. 

In this Strategy, the upside profit potential is unlimited and the downside risk is limited to the maximum extent of the Net Premium Debit incurred on the Strategy\. It is a Vega positive Strategy\.

__Breakeven Strike in Short Strangle Strategy, its Calculation and Payoff Chart__

__Breakeven Strike in Short Strangle Strategy, from Expiry perspective__:

This Short Strangle__ __Strategy comprises of naked CE Short at Far OTM Strike; and a naked PE Short at Far OTM Strike\. 

This is a Credit Strategy as the Premium at which both Shorts are initiated, on aggregate basis is the __Total Premium Credit received__\.

- __<start> __*The Breakeven Strike on the CE side \(upper side\) is*: \[The CE Strike \(*at which Short is initiated*\) \+ aggregate Premium credit received on both CE & PE Shorts\]; and
- __<start> __*The Breakeven Strike on the PE side \(lower side\) is*: \[The PE Strike \(*at which Short is initiated*\) \- aggregate Premium credit received on both CE & PE Shorts\] __<end>__

Thus, if by Expiry of the relevant Options which have been Shorted, if the underlying does not breach the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry of the relevant Options, the underlying breaches either upper or lower side and goes beyond the relevant Breakeven Strike, then the Strategy would yield loss\. In case of continuous movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, an unlimited loss situation would arise \(__*Unlimited Loss situation*__\)\. 

 <__start__>* For example: If Nifty ATM is at 17000, then for Short Strangle:* *If* *Nifty 16500 PE is sold at Rs\. 100 per Lot & Nifty 17500 CE is sold at Rs\. 50 per Lot, then the BE Strike of this Strategy will be:*

*On CE side: 17500 \+ \(100\+50\) = 17650 CE Strike; and*

*On PE side: 16500 \- \(100\+50\) = 16350 PE Strike*

*Thus, while this Strategy would yield total aggregate Premium of Rs\. 150 per Lot as full profit if the underlying remains within the 16500 to 17500 range \(i\.e\. the Strikes at which Shorts have been initiated\)\. However, if Nifty crosses 17500 Strike upwardly then this Strategy would not yield loss so long the Breakeven Strike of 17650 is not breached upwardly by Nifty till Expiry\. *

*Likewise, if Nifty crosses 16500 Strike downwardly then this Strategy would not yield loss so long the Breakeven Strike of 16350 is not breached downwardly by Nifty till Expiry*\. <__end__>

However, in this Strategy, unlimited loss situation would arise, if either on the upside \(i\.e\. CE side\) or downside \(i\.e\. PE side\), the underlying breaks\-out beyond the Breakeven Strike level of that particular side and closes by Expiry beyond the BE Level\. Deeper the underlying keeps trending beyond the BE Level \(*either on CE side or PE side*\), higher would the Loss that would be generated on this Strategy\.

__Payoff Chart for Short Strangle__

<__img52__>

<__end__>

__Short Strangle Strategy: Its Trade Legs & Objective__

When a view is formed that irrespective of the intermittent directional movement of the underlying, eventually the underlying is expected to remain within a defined range; then such view can be played out by a neutral strategy employing Short Options positions which defines a range within which the underlying is expected to remain by Expiry of those Options\.

Thus, when the view on the underlying is that it is expected to remain within a range upto the Expiry of relevant Options, and the same is played out by Shorting Naked Far OTM CE & PE Options pertaining to that Expiry series \(*by which the underlying is expected to remain in a range or sideways movement*\), then such a Strategy is called __Short Strangle__\. 

In Short Strangle Strategy, Far OTM CE & Far OTM PE are sold in equal quantity, on the same underlying, pertaining to same Expiry series\. In this Strategy, the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, between the Strike levels where the Shorts have been initiated\. Short Strangle involves naked Short positions on CE & PE Options \(involving two legs only\)\. This Strategy generates Limited Profit, but may also generate Unlimited Loss if the range is breached by the underlying\.

__Trade Legs in Short Strangle__:

- Short CE of Far OTM Strike \(*primary CE leg*\); and
- Short PE of Far OTM Strike \(*primary PE leg*\)

Equal number of Lots in both primary legs; and both Short legs must be of same Expiry series\.

Further, CE Short and PE Short must be of nearly same Premium value\.

__<start>Example of Short Strangle__:

*If Nifty ATM is at 17000, then for Short Strangle:* 

- *Sell 3 Lots Nifty 17500 CE of Current Week Expiry \(at Rs\. 155 per Lot\); and *
- *Sell* 3 Lots *Nifty 16500 PE of Current Week Expiry \(at Rs\. 135 per Lot\) *<__end__>

__Objective in Short Strangle__:

Objective is to play a Neutral / Non\-directional or sideways / rangebound view, through selling Far OTM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, between the Strike levels where the Shorts have been initiated\.

Far OTM CE Short leg defines the upper range; and Far OTM PE Short leg defines the lower range: within which the underlying is expected to remain in this Strategy\.  Farther the OTM strikes from the ATM, broader the range gets \(but the Premium on OTM Strikes keeps getting lower\)\. Thus, basis technical analysis and availability of decent Premium values on Far OTM Strikes, this Strategy may be implemented\.

It is a Net Credit Strategy, as both the Short legs get the credit of the Premium at which far OTM Strike Options are sold\. Accordingly, this Strategy generates limited profit to the maximum extent of Premium collected on both the Short legs, if the underlying remains within the range defined by Shorting the two Options by Expiry of those Options\.

__Significance and Impact of Strike / Delta values in Short Strangle Strategy__

__Strike / Delta value, in Short Strangle Strategy__:

The two Short legs, i\.e\. CE Short and PE Short must be Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Short legs helps to ensure a reasonable balance between the profit & loss scenario between the two Short legs in this Strategy\. With approx\. equal Delta values on CE Short and PE Short legs: 

- when CE Short leg loses due to rise in its LTP \(*i\.e\. when underlying rises*\), the PE Short leg will help counter the losses on CE leg by generating profit as the LTP of PE would reduce; and
- when PE Short leg generates loss due to rise in its LTP \(*i\.e\. when underlying falls*\), the CE Short leg will help counter the losses on PE leg by generating profit as the LTP of CE would reduce\.

Thus, the CE Short and the PE Short leg also acts as a natural hedge to the other leg, to the extent of the Breakeven Strike\. Once the Breakeven Strike is breached by the underlying on either side, then the unlimited loss situation arises depending how long the underlying trends beyond Breakeven Even Strike until Expiry of the Options Shorted\.

__Selection of Option Strikes, in Short Strangle Strategy__:

Further, CE Short and PE Short must be initiated at such Far OTMs Strike levels which have more or less same LTP or Delta value\. This equal Delta value Short legs helps to ensure a reasonable balance between the profit & loss scenario between the two Short legs in this Strategy, and thus a natural hedge to each other until Breakeven Strike is not breached by the underlying in either direction\.

Basis aforesaid factors, suitable Far OTM CE & PE Option Strike levels of a particular Expiry series and nearly same Delta value may be selected for this Short StrangleStrategy\. Since, the success of this Strategy is also mainly dependent on the quick arrival of the Theta decay \(*besides rangebound movement of the underlying*\), therefore closer Expiry series are preferable for this Short Strangle Strategy\.

__Options Behaviour in Short Strangle Strategy__

- In this Strategy, two factors help in generating profit: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on the primary leg\. Therefore, this Strategy is a high winning probability Strategy if the defined range is maintained by the underlying\.
- If the underlying remains within the defined range in this Strategy \(*i\.e\. between the two Strikes Shorted in this Strategy*\), then it implies that by Expiry both these Strikes expires worthless as OTM \(*due to Theta impact on both primary leg being OTMs*\)\. Consequently, the entire aggregate Premium received on Shorting both CE & PE Strikes would be the maximum profit\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy becomes suitable for deployment near Expiry if the view is aligned and favourable\. 
- Thus, Short Strangles can be initiated \(i\) when market is rangebound; \(ii\) near Expiry i\.e\. in the last week or so before Expiry, to play until Expiry day; \(iii\) a day before Expiry, to benefit from Overnight Expiry Decay; \(iv\) On Expiry day, to benefit from full Theta decay of Expiry day effect\.    
- Rise in Volatility may not adversely impact this Strategy eventually by Expiry, even if rise in Volatility would be unfavourable to both the Short legs before the Expiry \(*as their Premium would rise or atleast will not fall as otherwise expected*\)\. This is owing to the fact that if the both the legs continue to be an OTM until Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of aggregate Premium credit on Expiry\.
- Falling state of Volatility will also help this Strategy to realise the profit quickly, as the drop in Volatility will erode the Premium value of both the Short legs and the aggregate Premium Credit would be realised as profit sooner as Theta impact too would eventually help fasten the erosion of the Premium\.
- Delta play between the two Short legs is separately discussed hereinbelow\.

__Adjustments in Short Strangle Strategy__

__Adjustments \(if the Breakeven Strike is breached by the underlying and in Short Strangle Strategy does not go as per plan\)__:

Since, this Short Strangle__ __Strategy is a Premium Credit strategy, therefore, the aggregate  Premium received \(i\.e\. the sum of the Premium received on the CE Short and PE Short leg\) need to be protected for profit from Expiry perspective\. 

However, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Short Strangle__ __Strategy, then the potential unlimited loss situation may arise in this Strategy\.

 The potential loss in this Short Strangle__ __Strategy may be unlimited if the underlying keeps trending in one direction beyond the Breakeven Strike\. This unlimited loss situation that may occur in this Short Strangle__ __Strategy can be mitigated through following adjustments: \(i\) Converting naked Short Strangle to Iron Condor; or \(ii\) Long Options; or \(iii\) Short CEs; or \(iv\) Short PEs\. These adjustments are discussed below:

1. Conversion to Iron Condor: If the original view that the underlying would remain and close by Expiry within the range \(*at best within the Breakeven Strike range of the Short Strangle*\) appears to get uncertain, then immediately the naked Short Strangle must be converted to Iron Condor Strategy by initiating even Far OTM Long CEs    and Long PEs \(*of equal quantity as that of Short legs, and of same Expiry series as that of the Short Options*\)\. This hedging of Short Strangle through Iron Condor will mitigate the potential risk of unlimited loss on Short Strangle into a pre\-calculated Limited Loss situation\. You may refer to the details of Iron Condor given on the other side of this Table for better understanding\.
2. Counter Adjustment through Long Option: If the underlying breaches the Breakeven Strike of this Short Strangle__ __Strategy downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  trending downwardly with momentum, then __PEs can be bought__ \(*i\.e\. Long PEs to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Short Strangle__ __Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be  trending upwardly with momentum, then __CEs can be bought__ \(*i\.e\. Long CEs to be initiated*\)\.

Buying  CEs or PEs to protect the risk in this Short Strangle__ __Strategy will add up debit position, therefore this Long Options position should only be prudent to initiate only if there is strong momentum in the direction where the underlying has breached the Breakeven Strike\. This Long Options position will help overcome the potential unlimited loss amount that may incur in this Strategy\. This adjustment through Long Options can be played by  naked CEs or PEs \(or by Bull or Bear Debit Strategy\)\. Further, Long Options should be initiated at a Strike having Delta value higher than the current Delta value of the Short leg which has been breached by the underlying \(*i\.e\. at a higher Strike than the PE sell Strike; and at a lower Strike than the CE sell Strike, as the case may be*\), so if the underlying keep trending in direction it has breached the Short leg, the relevant Long Options position initiated as an adjustment should generate more profit than the loss generated by that Short leg\. Adding naked Longs of higher Delta value in same quantity as on the Short leg, would convert that side into a Debit Vertical Spread\.  Also, depending upon the likely momentum in the underlying, suitable number of Long Options \(CEs or PEs as the case may be\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long Options position as an adjustment in comparison to the original number of Lots initiated on the Strategy\. If the Long Options generates profit or reasonably minimizes the loss in this Strategy before Expiry,  then it would be advisable to book the profit on this Long Options position and to exit this Strategy as a whole by booking minor loss or profit\.

1. Counter Adjustment through Short Option: If there seems to be a slow trend, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Short Strangle__ __Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Short Strangle__ __Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be in a mild upwardly direction, then __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Short Strangle__ __Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying after once breaching the Breakeven Strike again reverses, then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Short Strangle__ __Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If there seems to be a limited downward trend with momentum, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Short Strangle Strategy  and the underlying seems to be  in a mild downwardly direction, then additional Far OTM __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. However, if the underlying breaches the Breakeven Strike of this Short Strangle__ __Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be trending with momentum upwardly upto a limited extent, then additional Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

Idea in this adjustment is to pick up a suitable much Far OTM Options for Shorting in the same direction in which the underlying has breached the Breakeven Strike, such that these additional far OTM Options \(initiated as part of adjustments\) expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. These additional Short Options position will help cover the potential loss that may be generated on this Short Strangle__ __Strategy\. Selection of Far OTM Options for this adjustment is important because even if the trend of the underlying after breach of Breakeven Strike continues in that direction, these additional Short Options position must be at such Strike which can be expected to be not breached by the underlying by Expiry and to expire as OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on relevant Far OTM Options \(*i\.e\. in case of PE Shorts, below the Support area; and in case of CE Shorts, above the Resistance area*\), suitable number of Options can be considered to be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these additional Short Options due to time decay on Expiry\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short for this adjustment, in comparison to the original number of Lots initiated on the Short Strangle__ __Strategy\. 

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. *For example, when the downtrend continues in Nifty, a Far OTM PE at 16500 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 16400 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. 

__Short Strangle in Different Market Situations__

__If trade goes as per plan, in Short Strangle Strategy__:

The underlying remains rangebound, then both the two Short legs will generate profit due to regular expansion and contraction of Time Value / Premium of the Far OTM Options due to such up & down movement of the underlying\.

Further, as the Expiry draws closer, the impact of Theta decay also starts to help generate profit in this Short Strangle Strategy, due to erosion in the Time Value / Premium of both the Short legs\. 

Therefore, when until Expiry, the underlying remains within the range defined by two Strikes Shorted, then the CE Short and PE Short leg expires worthless as OTMs generating full profit to the tune of the aggregate Premium Credit collected on this Short Strangle Strategy\.   

__If underlying movement breaches the range but not the Breakeven Strike, in Short Strangle Strategy__:

But if the underlying breaches either of the Strikes at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Short Strangle Strategy would yield some profit, however, such profit will be lesser than the aggregate Premium Credit collected on this Short Strangle Strategy by Shorting CEs & PEs\. The profit generated on Expiry, in this situation when the underlying closes within the Profit Zone, shall be as per calculations already discussed\.

__If trade does not go as per plan and the Breakeven Strike is breached by the underlying, in Short Strangle Strategy__:

Since, this Short Strangle Strategy comprises of naked Short legs, therefore, if the underlying breaks the range defined  by Shorting relevant Options, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding unlimited loss as the underlying keep trending in that direction and expires outside the Breakeven Strike\. <a id="_Hlk137134177"></a>The unlimited Loss however can be calculated on Expiry, as per the calculations already discussed\.

In such situations, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Short Strangle Strategy, then  some adjustments can be considered in order to contain the loss in this Short Strangle Strategy\.

__Payoff Chart for Short Strangle Strategy__

<__end__>

__Loss in Short Strangle Strategy, and its Calculations__

Since, this Short Strangle Strategy comprises of naked Short legs, therefore __if the underlying breaks the range defined  by Shorting relevant Options, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding unlimited loss__ as the underlying keep trending in that direction and expires outside the Breakeven Strike\.

In this situation, the Short leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side of Short Option leg becomes even farther OTM\. This situation generates the Unlimited Max Loss situation on the Strategy\.

__Level of starting unlimited loss on the upside \(i\.e\. CE side\) in Short Strangle__: 

__Level of starting unlimited loss on the downside \(i\.e\. PE side\) in Short Strangle__: 

__Impact on loss situation, due to Strike Difference, in Short Strangle Strategy:__

Larger the difference between the Far OTM CE Short Strike and Far OTM PE Short Strike, smaller will be the Total Premium Credit received, hence smaller profit margin from the Strategy\. However, larger Strike difference between the CE Short & PE Short legs, enlarges the Breakeven Strike on both CE side & PE side\. Therefore, the profit range gets even wider with larger strike difference, which helps curtailing the loss probability\. 

__Calculation of final loss amount on Short Strangle Strategy__:

- \[the aggregate Premium Credit collected by Shorting both CE & PE Options for the Strategy\] 

<__start__> *For example: If Nifty ATM is at 17000, then for Short Strangle:* *If* *Nifty 16500 PE is sold at Rs\. 100 per Lot & Nifty 17500 CE is sold at Rs\. 50 per Lot, then the BE Strike of this Strategy will be:*

*On CE side: 17650 CE Strike; and *

*On PE side: 16350 PE Strike\.*

*Therefore, if by Expiry Nifty falls below 16350 and Expiry is at 15850 \(as ATM\), then PE Short leg of 16500 will be an ITM with final LTP of about Rs\. 650 \(because on Expiry, final LTP of this PE strike will be equal to its Intrinsic Value, which is calculated as PE ITM Strike – ATM Strike = 16500 – 15850 = 650\)\.*

*Thus, the Loss incurred in this Strategy will be: 650 – 150 = Rs\. 350 per qty in a Lot, i\.e\. 350 x 50 = Rs\. 17,500 per Lot\.* <__end__>

<__end__>

__Profit in Short Strangle Strategy, and its Calculations__

__Max Profit scenario & amount, in Short Strangle__: By Expiry of the relevant Options, if the underlying closes at between the Short CE Strike & Short PE Strike, then the entire Premium collected is the Max Profit in this Strategy\. 

__Profit zone in Short Strangle__: In the event the underlying moves beyond the Strike at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy would yield some profit\. Therefore, the overall profit zone on the Strategy ranges from BE Strike on the CE side to BE Strike on the PE side\. If the underlying closes anywhere within this zone by Expiry, then the Strategy will generate profit\.

__Calculation of final profit on Short Strangle Strategy__: 

If the underlying breaches the Strike at which Shorts have been initiated but do not cross the Breakeven Strike of that side and closes within the profit zone \(of that side\) by Expiry, then too this Strategy would yield some profit\. This profit  in such situation will be calculated as:

- \[final LTP value, on Expiry, of the Short Option, which expires as an ITM\]\. 

*Note*: *The final LTP \(i\.e\. Premium value\) of the Option, if it expires as an ITM, would be equal to the Intrinsic Value \(i\.e\. the difference between the relevant ITM Strike and ATM Strike on Expiry\)\.* <__end__>

*Thus, if the underlying by Expiry of the Options Shorted, remains within the defined Strike range in this Strategy and does not breach the Strikes at which Short have been initiated, then the entire Rs\. 150 aggregate Premium shall be the Max Profit in this Strategy\.*

*However, if Nifty moves higher than the 17500 CE Strike, but does not breach the Breakeven Strike of 17650 on the upper side and expire at 17600 Strike as ATM, then the Max Profit in this Strategy will be  the final LTP of the 17500 CE Short leg \(say Rs\. 100\) minus Rs\. 150 \(aggregate Premium Credit received on this Strategy\) = Rs\. 50 per qty in the Lot\.* * Thus, overall profit on this Strategy got reduced \(from total premium credit of Rs\. 150 to Rs\. 50\) as the Strike at which Short was initiated was breached by Expiry \(but loss in this Strategy did not occur because the Breakeven Strike was not breached by Expiry\)\. *<__end__>

__Impact on profit situation, due to Strike Difference, in Short Strangle:__

Larger the difference between the Far OTM CE Short Strike and Far OTM PE Short Strike, smaller will be the net premium credit received, hence smaller profit margin from the Strategy\. However, larger Strike difference between the CE Short & PE Short legs, enlarges the Breakeven Strike on both CE side & PE side\. Therefore, the profit range gets even wider with larger Strike difference, which helps increasing the profit probability\.

<__end__>

__Profit & Loss Areas in Short Strangle Strategy, and its Calculations__

__ __

__*Profit & Loss Levels in Short Strangle Strategy, from Expiry perspective*:__

__<start> BE Level on the upside \(CE side\), in Short Strangle__: \[CE Short Strike \+ Total Premium Credit collected on both CE Short & PE Short leg\] __<end>__

__<start> BE Level on the downside \(PE side\), in Short Strangle__: \[PE Short Strike \- Total Premium Credit collected on both CE Short & PE Short leg\] __<end>__

__Min Profit Level in Short Strangle__: If underlying closes by Expiry just above the BE Level \(*that is higher Strike than BE Strike Level on PE side*\) on the PE side or if the underlying closes just below the BE Level on the CE side \(*that is lower Strike than BE Strike Level on CE side*\)\. Profit in such situation can be calculated as already explained above\.

__Max Profit Level in Short Strangle__: If underlying closes by Expiry at or anywhere between the CE Short Strike and PE Short Strike\. 

__Profit Zone in Short Strangle__:  If underlying closes by Expiry between the BE Level on PE side and BE Level on CE side\. In this profit zone the following situation may arise:

__Loss Starting Level in Short Strangle__: If underlying closes by Expiry below the BE Level on the PE side \(*that is lower Strike than BE Strike Level on PE side*\) or above the BE Level on the CE side \(*that is higher Strike than BE Strike Level on CE side*\)\.

__Max Loss situation in Short Strangle__: If the underlying closes by Expiry below the BE Level on the PE side or above the BE Level on the CE side, then the Max Loss may arise on this Strategy, in the following situation:

<__end__>

__Demerits & Merits of Short Strangle Strategy__

__Demerits of Short Strangle__:

- Since this Strategy is implemented  by Shorting Far OTM CEs and PEs, it requires  more capital/ margin and also sufficient capital for MTM adjustments also need to be ensured\.
- This Strategy generates limited profit to the maximum extent of If there is a Volatility spike, then both the Short legs, will get adversely impacted but the Long leg would get favourably impacted, as there will addition of Time Value in the premium of both the Short & Long Options\. This Volatility spike may exhibit virtual loss on the Strategy \(*even if there is not much movement in the underlying in any particular direction*\)Premium collected on both the Short legs, if the underlying remains within the range defined by Shorting the two Options by Expiry of those Options\.
- The underlying as expected must remain within the range defined in this Strategy by Shorting Options at the relevant Strike, by Expiry of the Options Shorted\. If the underlying breaks out and breaches the range beyond the Breakeven Strike of the Shorted Option, then this Strategy may yield unlimited loss\. Thus, this Strategy is the kind with limited profit and unlimited loss\.
- During low Volatility period, sufficient Premium may not be available in Far OTM CEs and PEs, making this Strategy not viable from quantum of profit perspective\.
- If there is a Volatility spike, then both the Short legs, will get adversely impacted as there will be addition of Time Value in the premium of both the Options \(even if there is not much movement in the underlying in any particular direction\)\. This volatility spike may exhibit virtual loss on the Strategy\.

__Benefits of Short Strangle:__

- This Strategy is suitable for a rangebound / sideways view\. A rangebound movement of the underlying within the range defined by Shorting Far OTM Strike CEs and PEs, generates profit in both the Far OTM Short legs due to erosion of time value owing to such movement in the underlying\. This Strategy is suitable when the range of the expected movement in the underlying is wider; and for narrow range Short Straddle Strategy may be considered\.
- With the passage of time, if the underlying remains within the range as expected, then both the Short legs continues to be OTM Strikes and starts getting profitable due to the rising Theta impact\. If by Expiry of the Options Shorted, if the underlying remains within the defined range in this Strategy then both the Shorted legs would expire worthless as OTM, generating entire aggregate Premium collected on this Strategy as profit\.
- It is a Credit Strategy\. Since both Short legs comprises of selling Far OTM Strikes, the Premium on both Short legs is the amount of aggregate Premium collected\. Accordingly, in this Strategy, the aggregate Credit of Premium need to be protected for profit in this Strategy\.
- The aggregate Credit Premium collected on both Short legs, increases the loss area in this Strategy by defining the Breakeven Strike\. Thus, from Expiry perspective, the  underlying must not go down and cross below the Breakeven Strike of PE Short Strike and on the upper side the  underlying must not go up and cross above the Breakeven Strike of CE Short Strike \(*the Breakeven Strikes in this Strategy are discussed below here*\)\.
- However, Volatility spike will cause addition of Time Value in the premium of both the Options \(even if there is not much movement in the underlying in any particular direction\), thus exhibiting virtual loss on the Strategy\. But so long the Breakeven Strike is not breached on either side, then inspite of increase in premium value and virtual loss on the Strategy due to volatility spike, there will not be an actual loss scenario on the Strategy\.

__Breakeven Strike in Bull PE Credit Spread Strategy, and its Calculation & Payoff Chart__

__Breakeven Strike in Bull PE Credit Spread Strategy, from Expiry perspective__:

- Net Premium Credit received on the overall Strategy \(*i\.e\. the difference between the premium credit collected on the primary leg and the premium debit paid on the hedged leg*\) subtracted from the primary leg PE Short Strike, defines the Breakeven Strike in this Strategy\. 
- The underlying must not downwardly cross the Breakeven Strike, from Expiry perspective in order that this Spread be profitable by Expiry\. Thus, we need to determine the Breakeven Strike level below which the underlying must not close by Expiry, in order to bring the Strategy into profit\.

__Breakeven \(BE\) Strike in Bull PE Credit Spread Strategy__: BE level in this Spread is the level which the underlying must not close below by Expiry, so as to yield profit on the Strategy\. This BE level is determined by subtracting the Net Premium credit collected on the overall Strategy, from the PE Short primary leg\. i\.e\., 

__<start> Formula__: \[__BE Strike for this Strategy =__ __PE Short Strike \- Net Premium Credit collected on the Spread\] <end>__

__<start> *Example*__*: If *

- *Nifty 17400 PE is Shorted at premium of Rs\. 300 per Lot; and*
- *Nifty 17100 PE is Long at premium of Rs\. 100 per Lot*

* then the BE Strike of this Strategy will be: 17400 – \(300\-100\) = 17200 PE Strike\. *

*This Breakeven Strike of 17200 PE must not be breached downwardly by the underlying, in order that this Strategy be profitable from Expiry perspective\. Thus, by Expiry, Nifty must not go down below 17200 Strike; and if Nifty expires above the PE Short Strike of 17400, then the entire Net Premium of Rs\. 200 per Lot will be the profit in this Strategy\. *__<end>__

__Impact on BE level of Bull PE Credit Spread, due to Strike Difference:__

- __Larger the difference between PE Short and PE Long Strike, larger will be the net premium credit collected on the Spread, and accordingly larger will be the Breakeven level for the loss to occur__ on the Strategy on the downside, from Expiry perspective\.
- Also, the Breakeven Strike gets larger if a PE Credit Spread is initiated on a farther Expiry series than closer Expiry series, on same Strikes of PEs \(*eg: both primary & hedged leg PEs are initiated on Next Month Expiry series than Current Month Expiry series*\)\. This is because the net premium credit collected on the Spread increases as we go on farther Expiry series, even though the primary & hedged leg PE Strikes are kept same\.

__<start> Payoff Chart for Bull PE Credit Spread: __

__<img46>__

__<end>__

__Bull__ __Put Spread Strategy \(or Bull__ __Put Credit Spread Strategy or Put Credit Strategy\): Its Trade Legs & Objective__

When the view on the underlying is bullish to sideways, we can play such view by being Short on Put Options \(i\.e\. sell PE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bearish view by buying Put Options \(i\.e\. buy PE Options\), of the same number of Lots as in the primary leg \(i\.e\. in the ratio of 1:1 in terms of Lots/ quantity\), on the same underlying with same Expiry series \(the __hedged leg__\)\. This hedged position/ strategy where a bullish primary leg initiated with Short PE positions with higher Premium, is hedged with a PE Long position with lesser Premium than the primary leg, on the same underlying and of same Expiry series, it is called a __Bull__ __Put Spread Strategy or Put Credit Strategy__\. It is a Vertical Spread \(i\.e\. involving two same side Options of same Expiry series on different Strikes\)\.

__Trade Legs in Bull PE Credit Spread__:

- Short PE of higher Strike with higher Premium \(*primary leg*\)
- Long PE of lower Strike with lower Premium \(*hedged leg*\)

Equal number of Lots in primary and hedged leg; and both legs must be of same Expiry series\.

__<start> Example of Bull PE Credit Spread__:

- *Sell* *5 Lots* *Nifty 17400 PE of Current Month Expiry \(at Rs\. 50 per Lot\) *
- *Buy 5 Lots* *Nifty 17100 PE of Current Month Expiry \(at Rs\. 25 per Lot\)*

__<end>__

__Objective in Bull PE Credit Spread__:

- Objective is to play bullish\-to\-sideways view through selling PEs \(as the primary leg\)\. Further, in order to mitigate the risk / loss that may arise if the primary leg with bullish\-to\-sideways view gets reversed for downtrend, a hedged leg by buying PE \(*at a lower Strike than PE Short*\) with bearish view is also initiated simultaneously with the primary leg\. 
- Thus, in this Strategy, bullish view generates a limited profit on the primary leg to the maximum extent of the Net Premium credit collected on the Strategy \(*i\.e\. premium credit collected on primary leg – premium debit incurred on the hedged leg*\)\. 
- However, in case of a downward reversal, the unlimited loss that may occur in the primary leg \(*PE sell will start giving unlimited loss if underlying reverses for a downtrend*\) would be covered by the hedged leg \(i\.e\. PE Long\) initiated with a bearish view\. Thus, the risk upon reversal is also limited in this Strategy\.
- Therefore, this Strategy is suitable for a rangebound\-to\-bullish view in the underlying, and generates a limited profit if the trend goes right; and a limited max loss if the trend reverses on the downward\.

__Significance and Impact of Strike Selection / Delta values in Bull PE Credit Spread Strategy__

__Impact of Strike / Delta value in Bull PE Credit Spread__:

- Since, in this Strategy \(which is a Net Credit Strategy\), besides the direction of the underlying, Theta decay also plays an important role to ensure profit\. Therefore, Far OTM PEs are selected for this Strategy\. In order to benefit from Theta decay, the PE Short for the primary leg should be initiated at such a Strike which the underlying is expected to not  breach by Expiry\. Also, the primary leg should have sufficient Premium to be credited\. Once, primary hedge is selected then the hedged leg must be simultaneously initiated at a suitable Strike distance\.
- When bullish to sideways view has conviction, then a suitable __smaller Delta difference can be maintained__ between the primary leg and the hedged leg, as the Risk\-to\-Reward Ratio is more favourable\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg\. Also, in case of a strong conviction\-based view, a near OTM can also be selected for initiating the PE Short primary leg \(*instead of a much farther OTM Strike for the primary leg*\)\.
- However, when bullish to sideways view does not have conviction and there seems uncertainty about continuation of bullish trend to sideways move of the underlying, then a suitable __larger Delta difference can be maintained__ between the primary leg and the hedged leg, as such Strike difference helps to expand the Breakeven Strike of the Strategy\. This widening of the Breakeven area due to larger Strike difference between the primary leg and hedged leg helps to enhance the profit probability and also enhances the max profit potential on the Strategy \(*due to increase in Net Premium Credit received on the Strategy due to larger Strike difference*\)\. However, while larger Breakeven is gained and overall profit potential enhanced due to larger Strike difference, such Strike selection also enhances the Max Loss situation\. Thus, larger Strike difference results in  overall Risk\-to\-Reward Ratio on the Strategy, not so favourable\. Also, in case of a not very strong conviction\-based view, Far OTMs must be selected for initiating the PE Short primary leg \(*instead of a Near OTM Strike for the primary leg*\)\.

__Selection of Option Strikes in Bull PE Credit Spread__:

- Basis aforesaid factors, depending on the intended holding time of the trade, a suitable Far OTM PE Option Strike levels of a particular Expiry series and Delta value may be selected\.
- If Far OTM PE for Shorting as the primary leg has sufficient Premium in the current Expiry series, then it is always advisable to go for closer Expiry series, as it will have higher Theta value to benefit from quick time decay\. However, if the sufficient Premium is not available in current Expiry series then subsequent Expiry series may be considered, but the holding time will be higher to benefit from Theta \(in which case it is important to assess that by increasing the holding time, the underlying should not appear to be bearish enough to breach the Far OTM PE Strike level at which Short is intended\)\.
- Further, it must be ensured here that the PE Short primary leg is such Far OTM Strike, which is below some major Support level \(*as per Technical Analysis / Chart reading*\), such that by Expiry the underlying does not breach the said major Support level on the downside, thereby causing the PE Short Strike expire worthless as OTM and thus realising the max profit equivalent to the Net Premium Credit collected on this Strategy\.
- Further, if the view is backed by strong conviction, then relatively Near OTMs can be opted for the primary Short leg \(*instead of a Far OTM*\)\. Further, in such case, smaller Strike difference can be maintained between the primary leg and Short leg\. 
- However, when bullish to sideways view does not have conviction and there seems uncertainty about continuation of bullish trend to sideways move of the underlying, then Far OTM must be selected for the primary Short leg; and further larger Strike difference may be maintained between the primary leg and the Short leg in order to have a wider Breakeven area\.

__Options behaviour in Bull PE Credit Spread Strategy__

- It is pertinent to note that this Strategy is a Net Premium Credit strategy\. Thus, by Expiry, if both the primary leg and hedged leg are OTMs then the Net Credit will be the Max Profit in this Strategy \(due to Theta impact on primary leg and hedged leg, both being OTMs\)\.
- Rise in Volatility may not adversely impact this Strategy, even if rise in Volatility would be favourable to the PE Long hedged leg and not on the PE Short primary leg\. This is owing to the fact that if the both the legs continue to be an OTM until Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of Net Premium credit on Expiry\.
- Falling state of Volatility will also help this Strategy to realise the profit quickly, as the drop in Volatility will erode the Premium value of both the primary leg and the hedged leg and the Net Premium credit would be realised as profit sooner as Theta impact too would fasten the erosion of the Premium\.
- Delta play between the primary leg and the hedged leg is separately discussed hereinbelow\.

__Adjustments in Bull PE Credit Spread Strategy__

__\(if bullish to sideways view and this Strategy does not go as per plan\)__

- Since, Bull PE Credit Spread Strategy is a Credit Spread, therefore, the Net Premium received \(*i\.e\. the difference between the Premium received on the primary leg and the Premium paid in the hedged leg*\) need to be protected for profit from Expiry perspective\. 
- Further, if the bullish to sideways trend reverses in the downward direction, then the Strategy may potentially yield the Max Loss \(*calculated as already explained above\) *by Expiry, if the Breakeven Strike of the Strategy is breached on the downside\. Thus, upon reversal, this potential Max Loss amount need to be covered up by making suitable adjustments\. 
- The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy \(*which may extend to the maximum extent of Max Loss*\): \(i\) Long PEs; or \(ii\) Short CEs; or \(iii\) Short PEs\. These adjustments are discussed below:

1. Counter Adjustment through Long Option: If there seems to be a trending downtrend with momentum, then a __PE can be bought__ \(Long PE\)\. Buying an additional PE to protect the downside risk in this Strategy will add up another debit position \(in addition to the debit position in the hedged leg\), therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. This Long PE will help overcome the Max Loss amount that may incur in this Strategy upon reversal\. The reversal on downside can be played by a naked PE or a Bear PE Spread Strategy\. Further, Long PE should be initiated at a Strike having Delta value higher than the current Delta value of the Short PE primary leg \(i\.e\. at a higher Strike than the PE sell Strike\), so that in case of reversal on downtrend, Long PE should generate more profit than the loss generated by the Short PE primary leg\. Also, depending upon the Max Loss in the original Strategy and the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long PE in comparison to the original number of Lots initiated on the Strategy\. It must be ensured that addition of these Long PEs, turn the net Delta position on this Strategy to negative Delta, in order to reap advantage of the bearish move in the underlying on the overall Strategy\.  If the Long PEs generates profit to the tune of pre\-calculated Max Loss amount in this Strategy,  then it would be advisable to book the profit on this Long PE position\. 
2. Counter Adjustment through Short Option: If there seems to be a slow downtrend, then __Far OTM CEs can be sold__ \(Short CE\) to play the downtrend\. Idea in this adjustment is to pick up a suitable Far OTM CE for Shorting, such that this Far OTM CE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the pre\-calculated Max Loss that may be generated on this Strategy\. Selection of a Far OTM CE for this adjustment is important because even if the downtrend again reverses on the bullish side, this additional CE must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential Max Loss in the original Strategy and the likely downtrend and the Premium available on Far OTM CEs, suitable number of Short CEs can be considered to be added as an adjustment to absorb or outweigh the Max Loss in the Strategy \(*i\.e\. total premium credit collected on these CE Shorts must be equivalent to the Max Loss, in Rupees term*\)\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short CE in comparison to the original number of Lots initiated on the Strategy\. These additional CE Short should be initiated at such Far OTM CEs, which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.
3. Adjustment through Pyramiding: If the downtrend is expected to be trending but limited, then __even__ __Farther OTM PEs can be sold__ \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Idea in this adjustment is to pick up a suitable Far OTM PEs for Shorting, such that this Far OTM PE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the pre\-calculated Max Loss that may be generated on this Strategy\. Selection of a Far OTM PE for this adjustment is important because even if the downtrend continues, this additional PE must be such which can be expected to be not breached by the underlying by Expiry and to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential pre\-calculated Max Loss in the original Strategy and the likely downtrend and the Premium available on Far OTM PEs \(of even lower Far OTM Strike below Support area\), suitable number of Short PEs can be considered to be added as an adjustment to absorb or outweigh the potential Max Loss in the Strategy, by the profit yielded by these Short PEs due to time decay on Expiry \(*i\.e\. total premium credit collected on these PE Shorts must be equivalent to the Max Loss on the original Strategy, in Rupees term*\)\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short PE in comparison to the original number of Lots initiated on the Strategy\. PE Short positions \(of same Expiry series as that of the primary leg\) can also be added in a pyramidal structure\. As the downtrend continues Far OTM PEs’ Premium would rise, therefore, Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. 

__<start> *Example*__*: when the downtrend continues in Nifty, a Far OTM PE at 16500 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 16400 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. __<end>__

This __Shorting of PEs in a pyramiding manner __may ensure a lower Breakeven strike and thus greater probability of profiting due to Theta decay on these bunch of Short PEs on Expiry\.  However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Bull PE Credit Spread Strategy, in different market Situations__

1. __If trade goes as per plan, in Bull PE Credit Spread__:

- The underlying remains limited bullish to sideways, then the PE Short primary leg will generate profit\. But as the underlying moves higher, the hedged PE Long leg will generate loss \(*because the LTP of PE will fall due to underlying going upward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit, to the maximum extent of Net Premium Credit on the Strategy\.
- But as the underlying keeps going higher quickly with strong momentum, there may come a time when the Premium on the PE short leg would exhaust completely \(and so much so the Net Premium credit\)\. Then at such time the maximum reward has been achieved and therefore both the legs of this Strategy must be square\-off and profit must be booked, because the limited profit potential on the Strategy has been reaped\.

1. __If underlying movement is slow /  sideways, during Bull PE Credit Spread__: However, if the movement of the underlying becomes slow / sluggish in its upward movement or if the underlying keeps fluctuating in  a range, then the Theta impact would cause erosion in the Premium value of both PE Short \(primary leg\) and PE Long \(hedged leg\)\. However, since the primary leg has more Premium than the hedged leg, hence the decay of the Net Premium Credit due to rangebound movement / Theta impact will result in profit in this Strategy\.
2. __If trade does not go as per plan, in Bull PE Credit Spread__:

- Upon reversal of the trend towards a downtrend, PE Sell primary leg would start generating losses, which gets covered up by the hedged leg\. Thus, in case of a fall in the underlying, breaching the Breakeven Strike of the Strategy on the downside, Max Loss situation may arise in the Strategy \(which is calculated as the difference between the Breakeven Strikes of the primary leg and the hedged leg\)\. 
- However, some adjustments can be considered in order to contain / mitigate the Max Loss situation in this Strategy\.

__Payoff Chart for Bull PE Credit Spread Strategy__

__<end>__

__Loss in Bull PE Credit Spread Strategy and its Calculation__

__Maximum Loss in Bull PE Credit Spread Strategy, from Expiry perspective:__

Max Loss can also be calculated as the:

__<start> Formula:__ 

- \[*difference between the primary leg Strike and the hedged leg Strike*\] 

__minus__ 

- \[*Net Credit of the Premium received on the Spread* *i\.e\. difference between the Premium collected on the primary leg and the Premium paid on the hedged leg*\]\. __<end>__

OR

Max Loss can also be calculated as:

__<start> Formula__: the difference between the Breakeven Strike of primary leg and hedged leg, i\.e\. the difference between: 

1. \[Breakeven Strike of PE Short \(primary leg\) = PE Strike \- Premium collected\]; and 
2. \[Breakeven Strike of PE buy \(hedged leg\) = PE Strike \- Premium paid\]\. __<end>__

__<start> *Example*__*, if: *

- *Nifty 17100 PE is Long at premium of Rs\. 100 per Lot *

*then Max Loss will be: \[17400\-17100\] – \[300\-100\] = \[300 \- 200\] =  Rs\. 100 per qty, *

*i\.e\. Rs\. 100 x 50 = Rs\. 5000 per Lot of Nifty is the Max Loss on the aforesaid Credit Spread\.* __<end>__

__Impact on Max Loss amount, due to Strike Difference, in Bull PE Credit Spread: __Larger the difference between PE Short and PE Long Strike, larger will be the net premium credit collected on the Spread, and accordingly larger will be the Breakeven below which the loss would occur from Expiry perspective\. However,__ larger difference between the primary leg and hedged leg increases the Max Loss on the Strategy__\. Thus, pre\-calculated Max Loss on the Strategy will help decide, the Strike at which PE Short & PE Long leg must be initiated\. 

__Loss Zone in Bull PE Credit Spread:__

- This PE Spread will yield profit only if the underlying closes above the BE Strike by Expiry, as discussed above, else the Strategy would yield loss\. 
- Therefore, __if the underlying falls down and crosses the BE Strike downwardly and closes below the BE level of this Spread by Expiry, then this Strategy would yield loss__\. Lower the underlying closes by Expiry below the BE level of this Spread, higher the loss this Spread would generate\. But the Max Loss on this Spread is limited \(*which can be determined as per the calculations mentioned above*\) which is generated when the underlying closes below the PE Long Strike, by Expiry\.
- Thus, if the underlying crosses below the BE Strike of this Spread on closing basis by Expiry, then the Spread would generate loss\. This loss would be less, if the underlying closes just below the BE Strike level of the Spread; but if the underlying closes near the PE Long Strike level, then the Spread would generate higher loss \(*which may extend upto Max Loss, if the underlying closes below the PE Long Strike*\)\. 

__Max Loss Level in Bull PE Credit Spread: __The Max Loss is generated by this Spread if the underlying falls down crossing below the BE level of this Spread and further crosses and closes below the PE Long Strike by Expiry\. Thus, the __Max Loss level is achieved on this Spread when the underlying crosses and closes anywhere below the PE Long Strike by Expiry__\. It does not matter how much more the underlying falls below the PE Long Strike by Expiry, because the Max Loss would be fixed and limited, if by Expiry the underlying closes anywhere below the PE Long Strike\.

- If the underlying by Expiry closes below the Breakeven Strike, then this Spread would suffer loss\. Max Loss level is when the underlying closes at or below the PE Long Strike\. Therefore, loss zone of this Spread would be between the BE Strike and PE Long Strike\. If underlying closes by Expiry within this zone towards the PE Long Strike then more loss would be generated on this Spread; but if the underlying closes towards the BE Strike then less loss would be incurred on this Spread\. 
- Thus, __if expected closing of the underlying by Expiry, seems to be below the  BE level of this Spread, then it indicates that the Strategy would yield loss__ \(*which may get extended to the Max Loss situation on the Strategy if the underlying further falls down and closes below the PE Long Strike by Expiry*\)\.

__<end>__

__Profit in Bull PE Credit Spread Strategy and its Calculation__

__Calculation of Maximum Reward in Bull PE Credit Spread Strategy: __

Net Premium Credit received on the overall Strategy \(*i\.e\. the difference between the premium credit collected on the primary leg and the premium debit paid on the hedged leg*\), is the Maximum Profit / Reward in this Strategy\.

__<start>*Example*__*: if: *

*then Max Profit will be: Rs\. 300 – Rs\. 100 = Rs\. 200 per qty *

*i\.e\. Rs 200 x 50 = Rs\. 10,000 per Lot of Nifty *__<end>__

__Max Profit Level, in Bull PE Credit Spread:__

- The Max Profit \(*as calculated above*\) would be generated on this Spread, if the underlying closes at or anywhere higher than the PE Short Strike\. Consequently, in aforesaid situation, PE Short expires as an ATM / OTM and the PE Long leg expires as an OTM\. Thus, the Net Premium Credit collected on this Spread will be realized on Expiry as the Max Profit\.  
- Thus, __in order to realize the Max Profit potential on this Spread, the underlying must close by Expiry at or anywhere above the PE Short Strike__ of this Spread\. Any further rise in the underlying, after crossing the PE Short Strike upwardly, would not yield any further higher profit than the Max Profit determined on this Spread \(*as per aforesaid calculations*\)\.

__Profit Zone on Bull PE Credit Spread__:

- The profitability from Expiry perspective would arise in the Strategy, if the underlying closes above the Breakeven Strike level of this Spread \(*because below this BE level, the loss situation will arise on this Spread*\)\. Therefore, profit would be realised on this Spread if the underlying closes by Expiry anywhere between the BE Strike level of this Spread and the PE Short Strike\. This is the profit zone for this Spread\.
- Thus, if the underlying closes by Expiry above the BE Strike of this Spread, then the Spread would generate profit\. This profit would be less, if the underlying closes just above the BE Strike level of the Spread; but if the underlying closes near the PE Short Strike level, then the Spread would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or above the PE Short Strike by Expiry*\)\.

__<end>__

__Profit & Loss Areas on Bull PE Credit Spread Strategy__

__Profit & Loss Levels on Bull PE Credit Spread Strategy, from Expiry perspective:__

1. __BE Level__: \[PE Short Strike – Net Premium Credit collected on the Spread\]
2. __Min Profit Level__: If underlying closes by Expiry just above the BE Level
3. __Max Profit Level__: If underlying closes by Expiry at or anywhere higher than the PE Short Strike
4. __Profit Zone__:  If underlying closes by Expiry between the BE Level and the PE Short Strike\. Closer to PE Short Strike, higher profit is generated; and if underlying closes towards the BE Level then less profit generated on the Spread\.
5. __Loss Starting Level__: If underlying closes by Expiry below the BE Level
6. __Max Loss Level__: If underlying closes by Expiry at or anywhere lower than the PE Long Strike\.
7. __Loss Zone__:  If underlying closes by Expiry between the BE Level and the PE Long Strike\. Closer to PE Long Strike, higher loss is generated; and if underlying closes towards the BE Level then less loss generated on the Spread\.

__<end>__

__Demerits & Merits in Bull PE Credit Spread Strategy__

__Demerits in Bull PE Credit Spread__:

- Since this Strategy is implemented using Far OTM PE \(in order to gain Theta benefit on the primary leg\), sometime during low Volatility period, sufficient Premium may not be available in Far OTM PEs\.
- This Strategy can yield profit on the upside to the extent of Net Premium credit collected on the Strategy \(*premium credit on primary leg – premium debit on hedged leg*\)\. Therefore, after max profit level is achieved in this Strategy, then in order to play further bullish move in the underlying, fresh bullish positions will have to be initiated\.  Thus, the profit in this Strategy is limited, i\.e\. the Max Reward is limited\.

__Benefits of Bull Put Credit Spread:__

- This Spread strategy will be suitable for a bullish to sideways view\. A rangebound or slow uptrend generates profit in the primary leg due to erosion of time value owing to such movement in the underlying coupled with Theta impact\.
- In this Strategy, two factors help in generating profit: \(i\) bullish to sideways move in the underlying; and \(ii\) Theta impact on the primary leg\. Therefore, this Strategy is mainly created in Far OTM PE Options\. 
- It is a Net Premium Credit Strategy\. Since primary leg comprises of selling higher Strike PE, the Premium on PE Short is the amount of Premium collected\. The hedged leg comprises of buying lower Strike PE, therefore the Premium at which PE is bought  is the amount of Premium paid\. Since, primary leg comprises of higher Strike PE and hedged leg of lower Strike PE, the primary leg will have more Premium than the hedged leg\. Thus, in this Strategy, Short is initiated at higher Premium and Long at lower Premium, thus making it a Credit Strategy\. Accordingly, in this Strategy, the Net Credit of Premium need to be protected for profit in this Strategy\.
- The Net Credit Premium, increases the loss area in this Strategy by defining the Breakeven Strike\. Thus, from Expiry perspective, if the bullish to sideways move in the underlying reverses, then the loss would occur on this Strategy when the underlying closes below the Breakeven Strike of this Strategy by Expiry \(*discussed below here*\)\.
- The risk upon reversal towards a downtrend, is limited in this Strategy, i\.e\. the Max Loss is limited\.

__Breakeven Strike in Bear Call Credit Spread, its Calculation and Payoff Chart__

__Breakeven Strike in Bear Call Credit Spread, from Expiry perspective__:

- Net Premium Credit received on the overall Strategy \(*i\.e\. the difference between the premium credit collected on the primary leg and the premium debit paid on the hedged leg*\) added to the primary leg CE Short Strike, defines the Breakeven Strike in this Strategy
- The underlying must not upwardly cross the Breakeven Strike, from Expiry perspective in order that this Spread be profitable by Expiry\. Thus, we need to determine the Breakeven Strike level above which the underlying must not close by Expiry, in order to bring the Strategy into profit\.

__Breakeven \(BE\) Strike for determining Loss level, in Bear Call Credit Spread__: BE level in this Spread is the level which the underlying must not close above by Expiry, so as to yield profit on the Strategy\. This BE level is determined by adding the Net Premium credit collected on the overall Strategy, to the CE Short primary leg\. i\.e\., 

__<start> Formula__: __BE Strike for this Strategy = CE Short Strike \+ Net Premium Credit collected on the Spread <end>__

__<start> *Example*__*: If*

- *Nifty 17200 CE is Shorted at premium of Rs\. 250 per Lot; and*
- *Nifty 17500 CE is Long at premium of Rs\. 150*

*then the BE Strike of this Strategy will be: 17200 \+ \(250 \- 150\) = 17300 CE Strike\. *

*This Breakeven Strike of 17300 CE must not be breached upwardly by the underlying, in order that this Strategy be profitable from Expiry perspective\. Thus, by Expiry, Nifty must not go up above 17300 Strike; and if Nifty expires below the CE Short Strike of 17200, then the entire Net Premium of Rs\. 100 per Lot will be the profit in this Strategy\. *__<end>__

__Impact on BE level due to Strike Difference, in Bear Call Credit Spread:__

- __Larger the difference between CE Short and CE Long Strike, larger will be the net premium credit collected on the Spread, and accordingly larger will be the Breakeven level for the loss to occur__ on the Strategy on the upside, from Expiry perspective\.
- Also, the Breakeven Strike gets larger if a CE Credit Spread is initiated on a farther Expiry series than closer Expiry series, on same Strikes of CEs \(*eg: both primary & hedged leg CEs are initiated on Next Month Expiry series than Current Month Expiry series*\)\. This is because the net premium credit collected on the Spread increases as we go on farther Expiry series, even though the primary & hedged leg CE Strikes are kept same\.

__<start> Payoff Chart for Bear CE Credit Spread: __

__<img47>__

__<end>__

__Bear Call Spread Strategy \(or Call Credit Strategy or Bear Call Credit Spread Strategy\): Its Trade Legs and Objective__

Bearish view can be played through Short Options with hedged positions\. 

When the view on the underlying is bearish to sideways, we can play such view by being Short on Call Options \(i\.e\. sell CE Options\) as our main position \(the __primary leg__\)\. This primary leg can be hedged by introducing a hedged leg with a bullish view by buying Call Options \(i\.e\. buy CE Options\), of the same number of Lots as in the primary leg \(i\.e\. in the ratio of 1:1 in terms of Lots/ quantity\), on the same underlying with same Expiry series \(the __hedged leg__\)\. This hedged position/ strategy where a bearish primary leg initiated with Short CE positions having higher Premium,  is hedged with a Call Long position having lesser Premium, on the same underlying and of same Expiry series, it is called a __Bear Call Spread Strategy or Call Credit Strategy__\. It is a Vertical Spread \(i\.e\. involving two same side Options of same Expiry series on different Strikes\)\.

__Trade Legs of Bear CE Credit Spread__:

- Short CE of lower Strike with higher Premium \(*primary leg*\)
- Long CE of higher Strike with lower Premium \(*hedged leg*\)

__<start> Example of Bear Call Spread__:

- *Sell 2 Lots Nifty 17200 CE of Current Week Expiry \(at Rs\. 75 per Lot\)*
- *Buy 2 Lots Nifty 17500 CE of Current Week Expiry \(at Rs\. 50 per Lot\)* __<end>__

__Objective of Bear CE Credit Spread__:

- Objective is to play bearish\-to\-sideways view through selling CEs \(as the primary leg\)\. Further, in order to mitigate the risk / loss that may arise if the primary leg with bearish\-to\-sideways view gets reversed for an uptrend, a hedged leg by buying CE \(*at a higher Strike than CE Short*\) with bullish view is also initiated simultaneously with the primary leg\. 
- Thus, in this Strategy, bearish view generates a limited profit on the primary leg to the maximum extent of the Net Premium credit collected on the Strategy \(*i\.e\. premium credit collected on primary leg – premium debit incurred on the hedged leg*\)\. 
- However, in case of an upward reversal, the unlimited loss that may occur in the primary leg \(*CE sell will start giving unlimited loss if underlying reverses for an uptrend*\) would be covered by the hedged leg \(i\.e\. CE Long\) initiated with a bullish view\. Thus, the risk upon reversal is also limited in this Strategy\.
- Therefore, this Strategy is suitable for a rangebound\-to\-bearish view in the underlying, and generates a limited profit if the trend goes right; and a limited max loss if the trend reverses on the upward\.

__Significance and Impact of Strike / Delta value in Bear CE Credit Spread Strategy__

__Impact of Strike / Delta value in Bear CE Credit Spread__:

- Since, in this Strategy \(which is a Net Credit Strategy\), besides the direction of the underlying, Theta decay also plays an important role to ensure profit\. Therefore, Far OTM CEs are selected for this Strategy\. In order to benefit from Theta decay, the CE Short for the primary leg should be initiated at such a Strike which the underlying is expected to not  breach by Expiry\. Also, the primary leg should have sufficient Premium to be credited\. Once, primary hedge is selected then the hedged leg must be simultaneously initiated at a suitable Strike distance\.
- When bearish to sideways view has conviction, then a suitable __smaller Delta difference can be maintained__ between the primary leg and the hedged leg, as the Risk\-to\-Reward Ratio is more favourable\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg\. Also, in case of a strong conviction based view, a near OTM can also be selected for initiating the CE Short primary leg \(*instead of a much farther OTM Strike for the primary leg*\)\.
- However, when bearish to sideways view does not have conviction and there seems uncertainty about continuation of bearish trend to sideways move of the underlying, then a suitable __larger Delta difference can be maintained__ between the primary leg and the hedged leg, as such Strike difference helps to expand the Breakeven Strike of the Strategy\. This widening of the Breakeven area due to larger Strike difference between the primary leg and hedged leg helps to enhance the profit probability and also enhances the max profit potential on the Strategy \(*due to increase in Net Premium Credit received on the Strategy due to larger Strike difference*\)\. However, while larger Breakeven is gained and overall profit potential enhanced due to larger Strike difference, such Strike selection also enhances the Max Loss situation\. Thus, larger Strike difference results in  overall Risk\-to\-Reward Ratio on the Strategy, not so favourable\. Also, in case of a not very strong conviction based view, Far OTMs must be selected for initiating the CE Short primary leg \(*instead of a Near OTM Strike for the primary leg*\)\.

__Selection of Option Strikes in Bear CE Credit Spread Strategy__:

- Basis aforesaid factors, depending on the intended holding time of the trade, a suitable Far OTM CE Option Strike levels of a particular Expiry series and Delta value may be selected\.
- If Far OTM CE for Shorting as the primary leg has sufficient Premium in the current Expiry series, then it is always advisable to go for closer Expiry series, as it will have higher Theta value to benefit from quick time decay\. However, if the sufficient Premium is not available in current Expiry series then subsequent Expiry series may be considered, but the holding time will be higher to benefit from Theta \(in which case it is important to assess that by increasing the holding time, the underlying should not appear to be bullish enough to breach the Far OTM CE Strike level at which Short is intended\)\.
- Further, it must be ensured here that the CE Short primary leg is such Far OTM Strike, which is above some major Resistance level \(*as per Technical Analysis / Chart reading*\), such that by Expiry the underlying does not breach the said major Resistance level on the upside, thereby causing the CE Short Strike expire worthless as OTM and thus realising the max profit equivalent to the Net Premium Credit collected on this Strategy\.
- Further, if the view is backed by strong conviction, then relatively Near OTMs can be opted for the primary Short leg \(*instead of a Far OTM*\)\. Further, in such case, smaller Strike difference can be maintained between the primary leg and Short leg\.
- However, when bearish to sideways view does not have conviction and there seems uncertainty about continuation of bearish trend to sideways move of the underlying, then Far OTM must be selected for the primary Short leg; and further larger Strike difference may be maintained between the primary leg and the Short leg in order to have a wider Breakeven area\.

__Options behaviour in Bear CE Credit Spread__

- Rise in Volatility may not adversely impact this Strategy, even if rise in Volatility would be favourable to the CE Long hedged leg and not on the CE Short primary leg\. This is owing to the fact that if the both the legs continue to be an OTM until Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of Net Premium credit on Expiry\.

__Adjustments in Bear CE Spread Strategy__

__\(if bearish view and Bear CE Spread Strategy does not go as per plan\)__

Since, this Strategy is a Credit Spread, therefore, the Net Premium received \(*i\.e\. the difference between the Premium received on the primary leg and the Premium paid in the hedged leg*\) need to be protected for profit from Expiry perspective\. 

Further, if the bearish to sideways trend reverses in the upward direction, then the Strategy may potentially yield the Max Loss \(*calculated as already explained above*\) by Expiry, if the Breakeven Strike of the Strategy is breached on the upside\. Thus, upon reversal, this potential Max Loss amount need to be covered up by making suitable adjustments\. 

The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy \(*which may extend to the maximum extent of Max Loss*\): \(i\) Long CEs; or \(ii\) Short PEs; or \(iii\) Short CEs\. These adjustments are discussed below:

1. Counter Adjustment through Long Option: If there seems to be a trending uptrend with momentum, then a __CE can be bought__ \(Long CE\)\. Buying an additional CE to protect the upside risk in this Strategy will add up another debit position \(in addition to the debit position in the hedged leg\), therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. This Long CE will help overcome the Max Loss amount that may incur in this Strategy upon reversal\. The reversal on upside can be played by a naked CE or a Bull CE Spread Strategy\. Further, Long CE should be initiated at a Strike having Delta value higher than the current Delta value of the Short CE primary leg \(i\.e\. at a lower Strike than the CE sell Strike\), so that in case of reversal on uptrend, Long CE should generate more profit than the loss generated by the Short CE primary leg\. Also, depending upon the Max Loss in the original Strategy and the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long CE in comparison to the original number of Lots initiated on the Strategy\. It must be ensured that addition of these Long CEs, turn the net Delta position on this Strategy to positive Delta, in order to reap advantage of the bullish move in the underlying on the overall Strategy\. If the Long CEs generates profit to the tune of pre\-calculated Max Loss amount in this Strategy,  then it would be advisable to book the profit on this Long CE position\. 
2. Counter Adjustment through Short Option: If there seems to be a slow uptrend, then __Far OTM PEs can be sold__ \(Short PE\) to play the uptrend\. Idea in this adjustment is to pick up a suitable Far OTM PE for Shorting, such that this far OTM PE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the pre\-calculated Max Loss that may be generated on this Strategy\. Selection of a far OTM PE for this adjustment is important because even if the uptrend again reverses on the bearish side, this additional PE must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential Max Loss in the original Strategy and the likely uptrend and the Premium available on Far OTM PEs, suitable number of Short PEs can be considered to be added as an adjustment to absorb or outweigh the Max Loss in the Strategy \(*i\.e\. total premium credit collected on these PE Shorts must be equivalent to the Max Loss, in Rupees term*\)\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short PE in comparison to the original number of Lots initiated on the Strategy\. These additional PE Short should be initiated at such Far OTM PEs, which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.
3. Adjustment through Pyramiding: If the uptrend is expected to be trending but limited, then __even__ __Farther OTM CEs can be sold__ \(CE Short\) above the Resistance  area of the underlying, which is expected not to be breached by the underlying by Expiry\. Idea in this adjustment is to pick up a suitable Far OTM CEs for Shorting, such that this Far OTM CE expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the pre\-calculated Max Loss that may be generated on this Strategy\. Selection of a Far OTM CE for this adjustment is important because even if the uptrend continues, this additional CE must be such which can be expected to be not breached by the underlying by Expiry and to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential pre\-calculated Max Loss in the original Strategy and the likely uptrend and the Premium available on Far OTM CEs \(of even higher Far OTM Strike above Resistance area\), suitable number of Short CEs can be considered to be added as an adjustment to absorb or outweigh the potential Max Loss in the Strategy, by the profit yielded by these Short CEs due to time decay on Expiry  \(*i\.e\. total premium credit collected on these CE Shorts must be equivalent to the Max Loss on the original Strategy, in Rupees term*\)\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short CE in comparison to the original number of Lots initiated on the Strategy\. CE Short positions \(of same Expiry series as that of the primary leg\) can also be added in a pyramidal structure\. As the uptrend continues Far OTM CEs’ Premium would rise, therefore, Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\.

__<start>  *Example:*__* when the uptrend continues in Nifty, a Far OTM CE at 18000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 18500 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\. __<end>__

This __Shorting of CEs in a pyramiding manner __may ensure a higher Breakeven strike and thus greater probability of profiting due to Theta decay on these bunch of Short CEs on Expiry\.   However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.

__Bear CE Credit Spread Strategy, in different Market Situations__

__If trade goes as per plan, in Bear CE Credit Spread__:

- The underlying remains limited bearish to sideways, then the CE Short primary leg will generate profit\. But as the underlying moves lower, the hedged CE Long leg will generate loss \(*because the LTP of CE will fall due to underlying going downward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit, to the maximum extent of Net Premium Credit on the Strategy\.
- But as the underlying keeps going lower quickly with strong momentum, there may come a time when the Premium on the CE short leg would exhaust completely \(and so much so the Net Premium credit\)\. Then at such time the maximum reward has been achieved and therefore both the legs of this Strategy must be square\-off and profit must be booked, because the limited profit potential on the Strategy has been reaped\. 

__If underlying movement is slow /  sideways, during Bear CE Credit Spread__: However, if the movement of the underlying becomes slow / sluggish in its downward movement or if the underlying keeps fluctuating in  a range, then the Theta impact would cause erosion in the Premium value of both CE Short \(primary leg\) and CE Long \(hedged leg\)\. However, since the primary leg has more Premium than the hedged leg, hence the decay of the Net Premium Credit due to rangebound movement / Theta impact will result in profit in this Strategy\.

__If trade does not go as per plan, in Bear CE Credit Spread__:

- Upon reversal of the trend towards uptrend, CE Sell primary leg would start generating losses, which gets covered up by the hedged leg\. Thus, in case of an upward move in the underlying, breaching the Breakeven Strike of the Strategy on the upside, Max Loss situation may arise in the Strategy \(*which is calculated as the difference between the Breakeven Strikes of the primary leg and the hedged leg*\)\. 

__Payoff Chart for Bear CE Credit Spread Strategy__

__<end>__

__Loss in Bear CE Credit Spread Strategy and its Calculations__

__Maximum Loss in Bear CE Credit Spread Strategy, from Expiry perspective:__

Max Loss can also be calculated as the: 

__<start> Formula: __\[*difference between the primary leg Strike and the hedged leg Strike*\] \- \[*Net Credit of the Premium received on the Spread* *i\.e\. difference between the Premium collected on the primary leg and the Premium paid on the hedged leg*\]\. __<end>__

- *Nifty 17500 CE is Long at premium of Rs\. 150, *

*then Max Loss will be: \[17500\-17200\] – \[250\-150\] = \[300 \- 100\] = *

*Rs\. 200 per qty, *

*i\.e\. Rs\. 200 x 50 = Rs\. 10,000 per Lot of Nifty is the Max Loss on the aforesaid Credit Spread\. *__<end>__

OR

Max Loss can also be calculated as the difference between the Breakeven Strike of primary leg and hedged leg, i\.e\. 

__<start> __the difference between: 

1. \[Breakeven Strike of CE Short \(primary leg\) = CE Strike \+ Premium collected\]; and 
2. \[Breakeven Strike of CE buy \(hedged leg\) = CE Strike \+ Premium paid\] __<end>__

__Impact on Max Loss amount, due to Strike Difference, in Bear CE Credit Spread: __Larger the difference between CE Short and CE Long Strike, larger will be the net premium credit collected on the Spread, and accordingly larger will be the Breakeven above which the loss would occur from Expiry perspective\. However,__ larger difference between the primary leg and hedged leg increases the Max Loss on the Strategy__\. Thus, pre\-calculated Max Loss on the Strategy will help decide, the Strike at which CE Short & CE Long leg must be initiated\.

__Loss Zone in Bear CE Credit Spread:__

- This CE Spread will yield profit only if the underlying closes below the BE Strike by Expiry, as discussed above, else the Strategy would yield loss\. 
- Therefore, __if the underlying rises higher and crosses the BE Strike upwardly and closes above the BE level of this Spread by Expiry, then this Strategy would yield loss__\. Higher the underlying closes by Expiry above the BE level of this Spread, higher the loss this Spread would generate\. But the Max Loss on this Spread is limited \(*which can be determined as per the calculations mentioned above*\) which is generated when the underlying closes above the CE Long Strike, by Expiry\.
- Thus, if the underlying crosses above the BE Strike of this Spread on closing basis by Expiry, then the Spread would generate loss\. This loss would be less, if the underlying closes by Expiry just above the BE Strike level of the Spread; but if the underlying closes by Expiry near the CE Long Strike level, then the Spread would generate higher loss \(*which may extend upto Max Loss, if the underlying closes above the CE Long Strike*\)\. 

__Max Loss Level in Bear CE Credit Spread: __The Max Loss is generated by this Spread if the underlying rises higher crossing above the BE level of this Spread and further crosses and closes above the CE Long Strike by Expiry\. Thus, the __Max Loss level is achieved on this Spread when the underlying crosses and closes anywhere above the CE Long Strike by Expiry__\. It does not matter how much more the underlying trends higher than the CE Long Strike by Expiry, because the Max Loss would be fixed and limited, if by Expiry the underlying closes anywhere above the CE Long Strike\.

- If the underlying by Expiry closes above the Breakeven Strike, then this Spread would suffer loss\. Max Loss level is when the underlying closes at or above the CE Long Strike\. Therefore, loss zone of this Spread would be between the BE Strike and CE Long Strike\. If underlying closes by Expiry within this zone towards the CE Long Strike then more loss would be generated on this Spread; but if the underlying closes towards the BE Strike then less loss would be incurred on this Spread\.
- Thus, __if expected closing of the underlying by Expiry, seems to be above the  BE level of this Spread, then it indicates that the Strategy would yield loss__ \(*which may get extended to the Max Loss situation on the Strategy if the underlying keep rising higher and closes above the CE Long Strike by Expiry*\)\.

__<end>__

__Profit in Bear CE Credit Spread Strategy and its Calculations__

__Maximum Reward in Bear CE Credit Spread Strategy: __

__<start> *Example:*__* if: *

- *Nifty 17500 CE is Long at premium of Rs\. 150 *

*then Max Profit will be: Rs\. 250 – Rs\. 150 = Rs\. 100 per qty *

*i\.e\. Rs 100 x 50 = Rs\. 5,000 per Lot of Nifty *__<end>__

__Max Profit Level in Bear CE Credit Spread:__

- The Max Profit \(*as calculated above*\) would be generated on this Spread, if the underlying closes at or anywhere lower than the CE Short Strike\. Consequently, in aforesaid situation, CE Short expires as an ATM/OTM and the CE Long leg expires as an OTM\. Thus, the Net Premium Credit collected on this Spread will be realized on Expiry as the Max Profit\.  
- Thus, __in order to realize the Max Profit potential on this Spread, the underlying must close by Expiry at or anywhere below the CE Short Strike__ of this Spread\. Any fall in the underlying, after crossing the CE Short Strike downwardly, would not yield any further higher profit than the Max Profit determined on this Spread \(*as per aforesaid calculations*\)

__Profit Zone in Bear CE Credit Spread__:

- The profitability from Expiry perspective would arise in the Strategy, if the underlying closes below the Breakeven Strike level of this Spread \(*because above this BE level, the loss situation will arise on this Spread*\)\. Therefore, profit would be realised on this Spread if the underlying closes by Expiry anywhere between the BE Strike level of this Spread and the CE Short Strike\. This is the profit zone for this Spread\.
- Thus, if the underlying closes by Expiry below the BE Strike of this Spread, then the Spread would generate profit\. This profit would be less, if the underlying closes just below the BE Strike level of the Spread; but if the underlying closes near the CE Short Strike level, then the Spread would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or below the CE Short Strike by Expiry*\)\.

__<end>__

__Profit & Loss Areas in Bear CE Credit Spread Strategy__

__Profit & Loss Levels in Bear CE Credit Spread Strategy, from Expiry perspective:__

1. __BE Level__: \[CE Short Strike \+ Net Premium Credit collected on the Spread\]
2. __Min Profit Level__: If underlying closes by Expiry just below the BE Level
3. __Max Profit Level__: If underlying closes by Expiry at or anywhere lower than the CE Short Strike
4. __Profit Zone__:  If underlying closes by Expiry between the BE Level and the CE Short Strike\. Closer to CE Short Strike, higher profit is generated; and if underlying closes towards the BE Level then less profit generated on the Spread\.
5. __Loss Starting Level__: If underlying closes by Expiry above the BE Level
6. __Max Loss Level__: If underlying closes by Expiry at or anywhere higher than the CE Long Strike\.
7. __Loss Zone__:  If underlying closes by Expiry between the BE Level and the CE Long Strike\. Closer to CE Long Strike, higher loss is generated; and if underlying closes towards the BE Level then less loss generated on the Spread\.

__<end>__

__Demerits and Merits of Bear CE Credit Spread Strategy__

__Demerits of Bear CE Credit Spread__:

- Since this Strategy is implemented using Far OTM CE \(in order to gain Theta benefit on the primary leg\), sometime during low  period, sufficient Premium may not be available in Far OTM CEs\.
- This Strategy can yield profit on the downside to the extent of Net Premium credit collected on the Strategy \(*premium credit on primary leg – premium debit on hedged leg*\)\. Therefore, after max profit level is achieved in this Strategy, then in order to play further bearish move in the underlying, fresh bearish positions will have to be initiated\.  Thus, the profit in this Strategy is limited, i\.e\. the Max Reward is limited\.

__Benefits of Bear Call Credit Spread:__

- This Spread strategy will be suitable for a bearish to sideways view\. A rangebound or slow downtrend generates profit in the primary leg due to erosion of time value owing to such movement in the underlying coupled with Theta impact\. 
- In this Strategy, two factors help in generating profit: \(i\) bearish to sideways move in the underlying; and \(ii\) Theta impact on the primary leg\. Therefore, this Strategy is mainly created in Far OTM CE Options\. 
- It is a Net Premium Credit Strategy\. Since primary leg comprises of selling lower Strike CE, the Premium on CE Short is the amount of Premium collected\. The hedged leg comprises of buying higher Strike CE, therefore the Premium at which CE is bought  is the amount of Premium paid\. Since, primary leg comprises of lower Strike CE and hedged leg of higher Strike CE, the primary leg will have more Premium than the hedged leg\. Thus, in this Strategy, Short is initiated at higher Premium and Long at lower Premium, thus making it a Credit Strategy\. Accordingly, in this Strategy, the Net Credit of Premium need to be protected for profit in this Strategy\.
- The Net Credit Premium, increases the loss area in this Strategy by defining the Breakeven Strike\. Thus, from Expiry perspective, if the bearish to sideways move in the underlying reverses, then the loss would occur on this Strategy when the underlying closes above the Breakeven Strike of this Strategy by Expiry \(*discussed below here*\)\.
- The risk upon reversal towards an uptrend, is limited in this Strategy, i\.e\. the Max Loss is limited\.

__Breakeven Strike of Iron Fly Strategy, its Calculation & Payoff Chart__

__*Breakeven Strike of Iron Fly Strategy, from Expiry perspective*__:

In Iron Fly Strategy, the CE side \(upper side\) comprises of CE Short primary leg at higher Premium and CE Long hedged leg at lower Premium\. Thus, there is a Net Premium Credit on the CE side of Iron Fly\.

Likewise, the PE side \(lower side\) comprises of PE Short primary leg at higher Premium and PE Long hedged leg at lower Premium\. Thus, there is a Net Premium Credit on the PE side of Iron Fly\.

The sum of the Net Premium Credit on the CE and PE Side is the aggregate Net Premium Credit received in this Strategy\. Accordingly:

- *the Breakeven Strike of the CE side in Iron Fly Strategy \(upper range\) is*: CE Short primary leg \+ the aggregate Net Premium Credit in the Strategy; and
- *the Breakeven Strike of the PE side in Iron Fly Strategy \(lower range\) is*: PE Short primary leg \- the aggregate Net Premium Credit in the Strategy\. <__end__>

In case of continuous movement of the underlying after breaching of the Breakeven Strike on either side by the underlying, and closing downwardly below the PE Long Strike or closing above the CE Long Strike, would yield  quantified Max Loss on this Strategy \(__*Limited Loss situation*__\)\.

<__start__> *For example: If Nifty 17000 CE is sold at Rs\. 250 per Lot & Nifty 17300 CE is bought at Rs\. 150, for the CE side of this Strategy; and *

*Nifty 17000 PE is sold at Rs\. 200 per Lot & Nifty 16700 PE is bought at Rs\. 100 per Lot,  for the PE side of this Strategy, then:*

- *Breakeven Strike of this Strategy on upper range \(CE side\) will be: 17000 \+ 200 = 17200 CE*
- *Breakeven Strike of this Strategy on lower range \(PE side\) will be: 17000 \- 200 = 16800 PE *

*Thus, in the aforementioned example: if the underlying breaches the upper Breakeven Strike i\.e\. 17200 CE and keeps trending higher then the loss caused on account of 17000 CE Short primary leg would get mitigated to some extent by the 17300 CE Long hedged leg\. However, if the uptrend continues and the underlying closes by Expiry beyond the CE Long leg, then only limited max Loss on the CE side would accrue on the Strategy\. Thus, this Strategy helps avoiding an unlimited loss situation, in the event of a continuous uptrend*\.

*Likewise, if the underlying breaches the lower Breakeven Strike i\.e\. 16800 PE and keeps trending lower, then the loss caused on account of 17000 PE Short primary leg would get mitigated to some extent by the 16700 PE Long hedged leg\. However, if the downtrend continues and the underlying closes by Expiry beyond the PE Long leg, then only limited max Loss on the PE side would accrue on the Strategy\. Thus, this Strategy helps avoiding an unlimited loss situation, in the event of a continuous downtrend*\. <__end__>

__Payoff Chart for Iron Fly__

<__img55__>

<__end__>

__Iron Fly Strategy \(or Iron Butterfly Strategy\): Its Trade Legs & Objective__

Thus, when the view on the underlying is that it is expected to remain within a tight/ narrow range upto the Expiry of relevant Options, and the same is played out by Shorting Naked ATM CE & PE Options \(or near ATM CE & PE same Strikes\) pertaining to that Expiry series \(*by which the underlying is expected to remain in a range or sideways movement*\), then such a Strategy is called __Short Straddle__\.

However, when the Short Straddle \(naked Strategy\) is hedged with Long Options on OTM CE & OTM PE Options \(of Strikes having nearly same Delta values\), then such Strategy is called __Iron Fly or Iron Butterfly Strategy \(also referred to as Short Iron Fly or Short Iron Butterfly\)__\. Usually, when the OTM Long legs of both CE & PE sides are closer to the ATM in this Strategy, then it is referred to as Iron Fly; and when the Longs legs of both CE & PE sides are little farther away from the ATM in this Strategy, then it is referred to as Iron Butterfly Strategy\.

In Iron Fly Strategy, there is \(i\) ATM CE Short \(__CE primary leg__\) and OTM CE Long \(__CE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series; and \(ii\) ATM PE Short \(__PE primary leg__\) and OTM PE Long \(__PE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series\. In essence, Iron Fly \(like Iron Condor\) is pairing of Bear Call Credit Spread Strategy and Bull Put Credit Spread Strategy \(*which are having Short legs on a common Strike*\); and in aggregate involves 4 legs\. Like in Short Straddle, in Iron Fly too, the expectation is that the underlying will remain, until the Expiry of the Options Shorted, within a tight range from the current price level of the underlying \(i\.e\. within the Breakeven Strike levels of the Strategy\); however hedged legs are added to the both the Short legs of Short Straddle in order to ensure that: 

1. if the underlying happens to slip upwardly beyond the Strike at which CE Short is initiated, by Expiry of the CE Options Shorted, then the CE hedged leg will cover up for the losses that may be incurred on the CE primary leg, thereby converting the unlimited Max Loss situation of Short Straddle into Limited Max Loss in IronFly; and 
2. if the underlying happens to slip downwardly beyond the Strike at which PE Short is initiated, by Expiry of the PE Options Shorted, then the PE hedged leg will cover up for the losses that may be incurred on the PE primary leg, thereby converting the unlimited Max Loss situation of Short Straddle into Limited Max Loss in IronFly\.

Thus, Iron Fly is a Strategy which generates Limited Profit, but also has limited risk \(as it will generate Limited Max Loss, if the range is breached by the underlying\)\.

__Trade Legs in Iron Fly Strategy__:

- Short CE ATM Strike \(*CE primary leg*\) 
- Long CE of OTM Strike \(*CE hedged leg*\); and
- Short PE ATM \(*PE primary leg*\) 
- Long PE of OTM Strike \(*PE hedged leg*\)

All the 4 legs \(*i\.e\. two Short legs & two Long legs*\) would be of same Expiry series, with equal quantity in each of the aforesaid four legs\. The Long Options for the hedged leg would be of nearly same Premium value\.

It is a hedged Short Straddle, making a pair of Bear CE Credit Strategy and Bull PE Credit Strategy\.

__<start> Example of Iron Fly Strategy__:

*If Nifty ATM is at 17000, then for Iron Fly:*

- *Sell 5 Lot Nifty 17000 CE of Current Month Expiry series \(at Rs\. 250 per Lot\)*
- *Buy 5 Lot Nifty 17300 CE of Current Month Expiry series \(at Rs\. 100 per Lot\); and*
- *Sell* *5 Lot* *Nifty 17000 PE of Current Month Expiry series \(at Rs\. 275 per Lot\)*
- *Buy 5 Lot Nifty 16700 PE of Current Month Expiry series \(at Rs\. 110 per Lot\)* __<end>__

__Objective in Iron Fly Strategy__:

Objective is to play a Neutral / Non\-directional or sideways / rangebound view, through selling naked ATM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will remain,  until the Expiry of the Options Shorted, within a tight range from the current price levels of the underlying and thus the Options Shorted would expire within the Breakeven Strike range of this Strategy\.

Since, maximum Time Value in absolute number is at ATM Strikes and also Theta is maximum at ATM Strikes, therefore if the technical view is that there will not be much directional move of the underlying until the Expiry of the Options Shorted/  intended to be Shorted, then this Strategy may be implemented to harness profit from the aggregate Premium Credit collected on this Strategy by Shorting ATM Options due to tight rangebound move in the underlying coupled with Theta impact of Expiry\.

It is a Net Premium Credit Strategy, as both the Short legs get the credit of the Premium at which ATM Strike Options are sold; and both the Long hedged legs incur lower Premium debit on the Strategy\. Accordingly, this Strategy generates limited profit to which may extend upto the maximum extent of Net Premium Credit collected on the Strategy\. 

Further, in this Strategy: in order to mitigate the risk / loss that may arise if the primary legs are breached by the underlying, equal number of OTM Long Options are also initiated simultaneously with the primary Short legs, such that this Strategy becomes hedged Short Straddle, comprising of a pair of Bear CE Credit Strategy and Bull PE Credit Strategy \(*which are having Short legs on a common Strike*\)\. 

Thus, in effect, Iron Fly comprising of Bull PE Credit Strategy and Bear CE Credit Strategy, which converts the naked Short Straddle into a hedged Short Straddle so as to cover and limit the unlimited loss that may arise in a naked Short Straddle position, to a limited Max Loss situation, if the underlying breaches the  range defined by the primary leg \(on either side\) and gets trending in that direction\.

__Significance & Impact of Strike / Delta values in Iron Fly Strategy__

__Strike / Delta value in Iron Fly Strategy__:

Thus, such fluctuations of CE Short and the PE Short leg, from near ITM to OTM, acts as a natural hedge to the other leg in more or less same Delta ratio \(*which Delta ratio keeps inter\-changing between the CE Short and PE Short leg, as they switch from OTM to ITM*\), so long the Breakeven Strike is not breached by the underlying on either side\.

Also, the two Long legs in this Strategy, i\.e\. CE Long and PE Long which are initiated on Far OTMs, can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Long legs helps to ensure a reasonable balance between the profit & loss scenario between the two Long legs in this Strategy as per the movement of the underlying\.

Thus, with approx\. equal Delta values on CE Long and PE Long legs, Delta neutrality is ensured in this Strategy to cater to maintain a balance between the profit and loss situation amongst the Long legs resulting due to the movement of the underlying, i\.e\.: 

- with the rise in the underlying, PE Long leg generates loses due to fall in its LTP, however, the CE Long leg will help counter the losses on PE Long leg by generating profit \(as the LTP of CE would rise\) to almost similar amount as to the loss incurred on the PE Long leg, due to same Delta values of the CE Long and PE Long legs; 
- with the fall in the underlying, CE Long leg generates loses due to fall in its LTP, however, the PE Long leg will help counter the losses incurred on CE Long leg, by generating profit \(as the LTP of PE would rise\) to almost similar amount as to the loss incurred on the CE Long leg, due to same Delta values of the CE Long and PE Long legs\.

Further, the Delta difference between the primary leg and the hedged leg of the CE side \(and also between the primary and hedged leg for the PE side\) will help maintain a reasonable control on the Net Premium Credit scenario in this Strategy\. Delta difference can be ensured by selecting appropriate distance Far OTMs for the hedged leg Strike, separately for CE and PE side,  for this Strategy\.

__Selection of Option Strikes in Iron Fly Strategy__:

This Strategy is dependent of higher Time value and maximum Theta impact, thus it usually comprises of naked ATM CE Short; and  naked ATM PE Short legs, for the primary leg\. However, the primary leg in this this Strategy can also be implemented by initiating naked Shorts at same Strike CE & PE near ATM\.

Since, the Short primary leg is initiated at the ATM Strike, the Delta neutrality is maintained in the Short legs of this Strategy\.

Further, CE Long and PE Long must be initiated at such OTM Strike levels which have more or less same LTP or Delta value\. This equal Delta value between both the Long legs, helps to ensure a reasonable balance between the profit & loss scenario between the two Long leg in this Strategy and therefore ensures Delta neutrality \(and approx\. same Theta decay\) from the perspective of movement of the underlying and approach of Expiry, and thus a natural hedge to each other until Breakeven Strike is not breached by the underlying in either direction\.

Further, when a tight rangebound view on the underlying has conviction \(*i\.e\. the underlying would not breach the primary leg ATM Short Strikes*\), then a suitable __smaller Delta / Strike difference can be maintained__ between the primary leg and the hedged leg, i\.e\. between CE Short & CE Long; and between PE Short & PE Long\. This smaller Delta difference can be ensured by maintaining suitable smaller gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry \(i\.e\. by opting for Near OTM Long Strikes for CE & PE side, having almost same premium value\)\. This smaller gap will bring the Risk to Reward Ratio much favourable\. But the risk is that the Breakeven Strike gets shorter\. 

However, when tight rangebound view on the underlying does not have conviction and there seems uncertainty about continuation of tight sideways move in the underlying, and it is not very sure in which direction the underlying may breakout, then a suitable __larger Delta/ Strike difference can be maintained__ between the primary leg and the hedged leg, i\.e\. between CE Short & CE Long; and between PE Short &  PE Long\. This larger Delta difference can be maintained by maintaining suitable larger gap between the Strikes at which primary leg and the hedged leg are initiated of the same Expiry \(i\.e\. by opting for farther OTM Long Strike for CE & PE side, having almost same premium value\)\. Larger Strike difference between the primary leg and the hedged leg would ensure higher Net Premium  Credit, therefore offers a larger Breakeven area\. In such situation, Risk to Reward Ratio is not so favourable\.

Basis aforesaid factors, suitable Far OTM CE & PE Option Strike for the hedged leg with nearly same Delta & Theta value may be selected for this Strategy \(besides ATMs for the Short legs\)\. Since, the success of this Strategy is also mainly dependent on the quick arrival of the Theta decay \(besides narrow rangebound movement of the underlying\), therefore closer Expiry series are preferable for this Strategy\.

__Options Behaviour in Iron Fly Strategy__

- If the underlying remains within the narrow  range in this Strategy \(*i\.e\. between the Breakeven Strikes in this Strategy*\), then it implies that by Expiry, either: \(i\) both these Strikes expires worthless as OTM / ATM \(due to Theta impact on both primary leg being OTM/ ATM\)\. Consequently, the entire Net  Premium received on Shorting both CE & PE Strikes would be the maximum profit if underlying closes on Expiry at the Strike on which both Short legs have been initiated; or \(ii\) one primary leg would expire worthless as an OTM and another as a near ITM, in which case lesser profit \(than the Maximum Profit\) is generated on this Strategy\.
- Due to the increasing Theta impact with the approach of Options Expiry, this Strategy becomes suitable for deployment near Expiry if the narrow rangebound view on the underlying is aligned and favourable\.
- Thus, this Strategy \(which is hedged Short Straddle\) can be preferred over Short Straddle to play out when market is in a very narrow rangebound limits, especially: \(i\) near Expiry i\.e\. in the last week or so before Expiry, to play until Expiry day; or \(ii\) a day before Expiry, to benefit from Overnight Expiry Decay; or \(iii\) On Expiry day, to benefit from full Theta decay of Expiry day effect\.
- Rise in Volatility may not adversely impact this Strategy, even if rise in Volatility would be favourable to the CE Long & PE Long hedged legs and not on the CE Short & PE Short primary legs\. This is owing to the fact that if the both the primary & hedged legs of the CE and PE side positions continue to be an ATM/ OTM until Expiry then even if rising Volatility increases their Premium value, then also it would eventually become zero and yield profit to the extent of Net Premium credit on Expiry\.
- Falling state of Volatility will also help this Strategy to realise the profit quickly, as the drop in Volatility will erode the Premium value of both the CE Short & PE Short primary legs \(as well as of the hedged legs\) and the Net Premium credit would be realised as profit sooner as Theta impact too would fasten the erosion of the Premium\.
- The Delta play amongst the primary legs, as well as amongst the hedged legs, is separately discussed hereinbelow\.

__Adjustments in Iron Fly Strategy__

__Adjustments \(if the Breakeven Strike is breached by the underlying and Iron Fly Strategy does not go as per plan\)__:

Since, this Iron Fly__ __ Strategy is a combination of two Credit Spread and is an aggregate Net Premium Credit strategy, therefore, the aggregate  Premium Credit received \(*i\.e\. the sum of the Net Premium Credit received on the CE and PE leg*\) need to be protected for profit from Expiry perspective\. 

However, when the underlying breaks the range in either side and gets trending beyond the Breakeven Strike of this Strategy, then the potential Loss situation may arise in this Iron Fly__ __ Strategy, which would be limited to the extent of pre\-calculated Max Loss as already discussed\.

Even though the potential Max Loss in this Iron Fly__ __ Strategy may be limited \(as it is a hedged strategy\), if the underlying keeps trending in one direction beyond the Breakeven Strike, but on aggregate basis when played with heavy volume, the limited Max Loss situation may yield substantial loss in absolute terms\. 

This loss situation that may occur in this Iron Fly__ __ Strategy can be mitigated through following adjustments: \(i\) Long Options; or \(ii\) Short CEs; or \(iii\) Short PEs\. These adjustments are discussed below:

1. Counter Adjustment through Long Option: If the underlying breaches the Breakeven Strike of this Iron Fly__ __ Strategy downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Strategy  and the underlying seems to be  trending downwardly with momentum, then __PEs can be bought__ \(*i\.e\. Long PE to be initiated of same Expiry series as original PE Long if the expiry is far, else of next farther Expiry series if Expiry is close*\)\. However, if the underlying breaches the Breakeven Strike of this Iron Fly__ __ Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Iron Fly__ __ Strategy and the underlying seems to be  trending upwardly with momentum, then __CEs can be bought__ \(*i\.e\. Long CE to be initiated of same Expiry series as original CE Long if the expiry is far, else of next farther Expiry series if Expiry is close*\)\.

Buying  CEs or PEs to protect the risk in this Iron Fly__ __ Strategy will add up additional debit positions, therefore this Long Options position should only be prudent to initiate only if there is strong momentum in the direction where the underlying has breached the Breakeven Strike\. This Long Options position will help overcome the potential limited loss amount that may incur in this Strategy\. This adjustment through Long Options can be played by  naked CEs or PEs \(or by Bull or Bear Debit Strategy\)\. Further, Long Options should be initiated at a Strike having Delta value higher than the current Delta value of the Short leg which has been breached by the underlying \(i\.e\. at a higher Strike than the PE sell Strike; and at a lower Strike than the CE sell Strike, as the case may be\), so if the underlying keep trending in direction it has breached the Short leg, the relevant Long Options position initiated as an adjustment should generate more profit than the loss generated by that Short leg\. Also, depending upon the likely momentum in the underlying, suitable number of Long Options \(CEs or PEs as the case may be\) need to be considered to be added as an adjustment to absorb or outweigh the loss in Iron Fly__ __ Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Long Options position as an adjustment in comparison to the original number of Lots initiated on the Iron Fly__ __ Strategy\. If the Long Options generates profit or reasonably minimizes the loss in this Iron Fly__ __ Strategy before Expiry,  then it would be advisable to book the profit on this Long Options position and to exit this Strategy as a whole by booking minor loss or profit\.

However, since the Max Loss situation in this Iron Fly__ __ Strategy is anyways limited, therefore instead of initiating Long Options as mentioned above, Shorting Options \(i\.e\. Short CEs or Short PEs\) as adjustments to mitigate limited Max Loss situation in this Iron Fly__ __ Strategy, as discussed below, can be considered\.

1. Counter Adjustment through Short Option: If there seems to be a slow trend, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Iron Fly__ __ Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(*i\.e\. Short CEs to be initiated*\)\. However, if the underlying breaches the Breakeven Strike of this Iron Fly__ __ Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be in a mild upwardly direction, then Far OTM __PEs can be sold__ \(*i\.e\. Short PEs to be initiated*\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying after once breaching the Breakeven Strike again reverses, then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Iron Fly__ __ Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Iron Fly__ __  Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment through Pyramiding: If there seems to be a limited  trend but with momentum, after breaching the Breakeven Strike downwardly i\.e\. breaking the lower range \(on the PE side\)  in this Iron Fly Strategy  and the underlying seems to be  in a mild downwardly direction, then additional Far OTM __PEs can be sold__ \(i\.e\. Short PEs to be initiated of the same Expiry series as that of the original PE Short leg\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. However, if the underlying breaches the Breakeven Strike of this Strategy upwardly i\.e\. breaking the upper range \(on the CE side\) in this Strategy and the underlying seems to be trending upwardly with momentum but to a limited extent, then additional Far OTM __CEs can be sold __\(*i\.e\. Short CEs to be initiated of the same Expiry series as that of the original CE Short leg*\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

__Iron Fly Strategy in Different Market Situations__

__If trade goes as per plan, in Iron Fly Strategy__:

The underlying remains within the narrow rangebound, then both the two Short legs will generate profit due to regular expansion and contraction of Time Value / Premium of the ATM Options due to such up & down movement of the underlying\. However, there will also be premium loss on both the hedged Long legs of the Strategy, but, the rangebound movement will still help achieve the maximum profit to the extent of aggregate Net Premium Credit in the Strategy by Expiry\.

Therefore, when until Expiry, the underlying remains within the tight range and the underlying closes on Expiry at the Strike on which the CE Short and PE Short leg have been initiated, then the both the Short leg Strikes would expire worthless as ATMs/ OTMs generating full profit to the tune of the aggregate Premium collected on this Strategy\.   

__If underlying movement breaches the Short Strike but not the Breakeven Strike, in Iron Fly Strategy__:

But if the underlying breaches either of the Strikes at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Strategy may yield some profit\. In such event too, some profit will be generated by this Strategy, however, such profit will be lesser than the aggregate Net  Premium collected on this Strategy\. The limited profit however can be calculated on Expiry, as per the calculations discussed above\.

__If trade does not go as per plan and the Breakeven Strike is breached by the underlying, in Iron Fly Strategy__:

If the underlying breaks the Breakeven Strike range, on either side, and starts trending after crossing beyond the Breakeven Strike of that side, then this Strategy will start yielding loss\. However, the loss in this Strategy will be limited because the Long position initiated on that side as the hedged leg will help curtail the loss arising from the Short leg whose side the Breakeven Strike has been breached by the underlying\. 

The Loss, however,  on Expiry will be limited and can be calculated on Expiry, as per the calculations already discussed\.

<__end__>

__Loss in Iron Fly Strategy, and its Calculations__

__Loss in Iron Fly Strategy:__

Max Loss on Iron Fly Strategy occurs when the underlying breaches the Breakeven Strike of either side and eventually closes by Expiry at or higher than the CE Long leg of the Strategy or if the underlying closes at or lower than the PE Long Strike of the Strategy\.

In this situation, both the Short & Long leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side Options, both Long & Short leg becomes even farther OTM\. This situation generates the Limited Max Loss situation on the Strategy\.

__Calculation of Max Loss in Iron Fly Strategy:__

Maximum loss in Iron Fly Strategy will be limited and can be pre\-calculated\. The Maximum Loss in Iron Fly Strategy is calculated as:

<__start__> *Max Loss for CE side, in Iron Fly Strategy*: is calculated as: 

- \[*Strike difference between CE Long Strike and CE Short Strike*\]

__*minus*__ 

- \[*aggregate of Net Premium Credit received on CE side & PE side on this Strategy*\]\.

*Max Loss for PE side, in Iron Fly Strategy*: is calculated as: 

- \[*Strike difference between PE Short Strike and PE Long Strike*\]

- \[*aggregate of Net Premium Credit received on CE side & PE side on this Strategy*\] <__end__>

__Impact on Max Loss situation, due to variation in Strike Difference between CE side & PE side, in Iron Fly Strategy:__

__Level of starting loss in Iron Fly Strategy and Loss Zone in Iron Fly Strategy__:

If the underlying breaks\-out and starts trending after crossing beyond the Breakeven Strike of either side, then this Iron Fly Strategy will start yielding loss\. Thus, breaching the BE Level on either side, is the Level from which loss would start on the Iron Fly Strategy\.

- *Loss Zone on the CE side, in Iron Fly Strategy:* If the underlying, gets bullish and breaches the Breakeven Strike on the CE side of the Strategy and closes higher than the BE Strike on the CE side, then this Strategy would yield loss on the upside\. Higher the underlying would close by Expiry after breaching the BE Strike on the CE side, higher will be the loss\. But if the underlying closes by Expiry, at or beyond the CE Long leg then the Limited Max Loss situation would accrue on this Strategy \(*i\.e\. applicable Max Loss on CE side, as per Max Loss calculations given above*\)\.

- *Loss Zone on the PE side, in Iron Fly Strategy*: If the underlying, gets bearish and breaches the Breakeven Strike on the PE side of the Strategy and closes lower than the BE Strike on the PE side, then this Strategy would yield loss on the downside\. Lower the underlying would close by Expiry after breaching the BE Strike on the PE side, higher will be the loss\. But if the underlying closes by Expiry, at or beyond the PE Long leg then the Limited Max Loss situation would accrue on this Strategy \(*i\.e\. applicable Max Loss on PE side, as per Max Loss calculations given above*\)\.

Thus, the Loss zone on the PE side, is the BE Strike on the PE side till PE Long Strike and lower\. If the underlying closes by Expiry within this Loss Zone, but towards the BE Strike on the PE side then the loss on the Strategy will be lower; but if the underlying closes towards the PE Long Strike within the zone, then the loss on the Strategy would be relatively more\. In this Loss zone, the PE Short leg becomes an ITM, whereas the PE Long leg remains an OTM\. 

__Calculation of final loss amount on in Iron Fly Strategy__:

If the underlying closes by Expiry within the Loss Zone \(*either on CE side or PE Side*\), then the Loss on Expiry in Iron Fly Strategy will be calculated as:

- <a id="_Hlk137131880"></a>\[the final premium value of Short Option of the momentum side on Expiry \(*i\.e\. Short leg which becomes / expires as an ITM\)*\]

- the Net Premium Credit collected on the overall Strategy\.

<__start__> *For example: If Nifty 17000 CE is sold at Rs\. 250 per Lot & Nifty 17300 CE is bought at Rs\. 150, for the CE side of this Strategy; and Nifty 17000 PE is sold at Rs\. 200 per Lot & Nifty 16700 PE is bought at Rs\. 100 per Lot,  for the PE side of this Strategy, then: *

- *the Net Premium Credit received on this Strategy will be: \[\(250\+200\) – \(150\+100\)\] = 450 – 250 = 200*
- *BE Strike on CE side = 17000\+ 200 = 17200 CE*
- *BE Strike on PE side = 17000\-200 = 16800 PE*

*Max Loss on the CE side \(i\.e\. if the underlying breaches the CE Long Strike of 17300 CE on the upside, will be: \[17300\-17000\] – \[200\] = 300\-200 = 100 per qty i\.e\. Rs 100 x 50 = Rs\. 5000 per Lot*

*Max Loss on the PE side \(i\.e\. if the underlying breaches the PE Long Strike of 16700 PE on the downside, will be:  \[17000\-16700\] – \[200\] = 300\-200 = Rs\. 100 qty i\.e\. Rs 100 x 50 = Rs\. 5000  per Lot*

*However, if by Expiry, Nifty rises above and closes at 17250 Strike \(as ATM\), i\.e\., within the Loss Zone on the CE side, then CE Short leg of 17000 will be an ITM with final LTP of about Rs\. 250 \(because on Expiry, final LTP of this CE Strike will be equal to its Intrinsic Value, which is calculated as ATM Strike – CE ITM Strike = 17250 – 17000 = 250\)\.*

<__end__>

__Profit in Iron Fly Strategy, and its Calculations__

__Max Profit scenario in Iron Fly Strategy__: The aggregate Net Premium Credit received on this Strategy, which is notionally credited at the time of initiating this Strategy, is the Maximum Profit / Reward in this Strategy, i\.e\. aggregate Premium Credit received on the Strategy  \(i\.e\. *sum of Premium Credit received on CE Short & PE Short legs*\) *minus *aggregate Premium Paid on this Strategy \(i\.e\. *sum of Premium paid on CE Long & PE Long legs*\)\.

__Max Profit Level in Iron Fly Strategy__:

__Profit zone in Iron Fly Strategy__: 

In the event the underlying moves beyond the Strike at which Shorts have been initiated but do not cross the Breakeven Strike of that side, then too this Iron Fly Strategy would yield some profit\. Therefore, the overall profit zone on the Iron Fly Strategy ranges from BE Strike on the CE side to BE Strike on the PE side\. If the underlying closes anywhere within this zone by Expiry, then the Iron Fly Strategy will generate profit\.

- *On the CE side, in Iron Fly Strategy*: if the underlying closes, between the CE Short Strike and the BE level of the Strategy on the CE side range, then some profit would be generated by the Strategy\. This is the Profit zone on the CE side\. If the underlying closes by Expiry near the CE Short Strike within this zone, then profit will be relatively more; than if the underlying closes near the BE Strike range on the CE side within this zone\. Therefore, the profit zone on the CE side is: when the underlying closes  by Expiry between the CE Short Strike and the BE Strike level on the CE side\.
- *On the PE side, in Iron Fly Strategy:* if the underlying closes, between the PE Short Strike and the BE level of the Strategy on the PE side profit zone, then some profit would be generated by the Strategy\. If the underlying closes by Expiry near the PE Short Strike within the profit zone, then profit will be relatively more; than if the underlying closes within the profit zone, near the BE Strike on the PE side\. Therefore, the profit zone on the PE side is: when the underlying closes  by Expiry between the PE Short Strike and the BE Strike level on PE side\.

__Calculation of final profit on Iron Fly Strategy__: 

If the underlying breaches the Strike at which Shorts have been initiated \(*on either side*\), but do not cross the Breakeven Strike of that side and closes within the profit zone \(of that side\) by Expiry, then too this Iron Fly Strategy would yield some profit\. This profit  in such situation will be calculated as: 

- \[final LTP value of the Short Option leg, on Expiry, which expires as an ITM\] 

<__start__> *For example: If Nifty 17000 CE is sold at Rs\. 250 per Lot & Nifty 17300 CE is bought at Rs\. 150, for the CE side of this Strategy; and Nifty 17000 PE is sold at Rs\. 200 per Lot & Nifty 16700 PE is bought at Rs\. 100 per Lot,  for the PE side of this Strategy, then *

*Thus, if the underlying by Expiry of the Options Shorted, closes at the same Strike on which the two Short legs are initiated and consequently both the Short primary legs expire as ATM/ OTM, then the entire Rs\. 200 per Lot aggregate Net Premium Credit received on this Strategy shall be the Max Profit in this Strategy\.*

*However, if Nifty moves higher than the 17000 CE Strike, but does not breach the Breakeven Strike of 17200 CE on the upper side and expire at 17150 ATM \(which implies that 17000 CE Short leg becomes an ITM; and 17300 CE Long leg and both PE legs \(i\.e\. 17000 PE Short & 16700 PE Long\) expire as OTMs and thus become zero\), then the Max Profit in this Strategy will be  the \[final LTP of the 17000 CE Short leg minus aggregate Net Premium Credit of Rs\. 200 per Lot received on this Strategy\]\.* * *

*The final LTP of the 17000 CE Short leg on Expiry will be equivalent to its Intrinsic Value \(which is determined as ATM – ITM CE\) i\.e\.  17150 – 17000 = Rs\. 150\)\.*

*Thus, the profit on this Strategy, as per aforesaid formula would be:  Rs 200 \(aggregate Premium Credit received on this Strategy\) minus* Rs\. 150 \(*final premium value of 17000 CE on Expiry\) = Rs\. 50 per qty in the Lot\.* * *

*Thus, overall profit on this Strategy got reduced \(from a Net Premium Credit of Rs\. 200 on the overall Strategy, to Rs\. 50 only\) as the Strike at which Short was initiated was breached by Expiry \(but loss in this Strategy did not occur because the Breakeven Strike was not breached by Expiry\)\. <*__end__*>*

<__end__>

__Profit & Loss Areas in Iron Fly Strategy__

__*Profit & Loss Levels in Iron Fly Strategy, from Expiry perspective*:__

__<start> BE Level on the upside \(CE side\)* *in Iron Fly Strategy__: \[CE Short Strike \+ Net Premium Credit collected on both CE & PE sides\]

__BE Level on the downside \(PE side\) in Iron Fly Strategy__: \[PE Short Strike – Net Premium Credit collected on both CE & PE sides\] __<end>__

__Min Profit Level in Iron Fly Strategy__: If underlying closes by Expiry just above the BE Level on the PE side \(*that is higher Strike than BE Strike Level on PE side*\) or if the underlying closes just below the BE Level on the CE side \(*that is lower Strike than BE Strike Level on CE side*\)\.

__Max Profit Level in Iron Fly Strategy__: If underlying closes by Expiry at the same Strike on which CE Short & PE Short  positions were initiated  in this Strategy\. 

__Profit Zone in Iron Fly Strategy__:  If underlying closes by Expiry between the BE Level on PE side and BE Level on CE side\. In this profit zone the following situation may arise:

- *If underlying closes between the PE Short Strike and BE Level on the PE side:* Then some profit would be generated on the overall Strategy\. In such case higher profit would be generated on the Strategy if the underlying closes by Expiry near the PE Short Strike; and the profit would be less if the underlying closes towards the BE Level on the PE side\. 
- *If underlying closes between the CE Short Strike and BE Level on the CE side:* Then some profit would be generated on the overall Strategy\. In such case higher profit would be generated on the Strategy if the underlying closes by Expiry near the CE Short Strike; and the profit would be less if the underlying closes towards the BE Level on the CE side\.

__Loss Starting Level in Iron Fly Strategy__: If underlying closes by Expiry below the BE Level on the PE side \(*that is lower Strike than BE Strike Level on PE side*\) or above the BE Level on the CE side \(*that is higher Strike than BE Strike Level on CE side*\)\.

__Max Loss situation in Iron Fly Strategy__: If the underlying closes by Expiry below the PE Long Strike on the PE side or above the CE Long Strike on the CE side, then the Max Loss may arise on this Strategy 

__Loss Zone in Iron Fly Strategy__:  If underlying closes by Expiry below the BE Level on PE side or above the BE Level on the CE side\. In this loss zone the following situation may arise:

- *If underlying closes below the BE Level on the PE side and above the PE Long Strike:* Then some loss would be generated on the overall Strategy\. In such case lower would be the loss generated on the Strategy if the underlying closes by Expiry near the BE Level on the PE side; and the loss would be relatively more if the underlying closes towards the PE Long Strike\.
- *If underlying closes above the BE Level on the CE side and below the CE Long Strike:* Then some loss would be generated on the overall Strategy\. In such case lower would be the loss generated on the Strategy, if the underlying closes by Expiry near the BE Level on the CE side; and the loss would be relatively more if the underlying closes towards the CE Long Strike\.

<__end__>

__Demerits and Merits of Iron Fly Strategy__:

__Demerits of Iron Fly Strategy__:

- Since, in this Strategy on each CE and PE sides, there is one Short position initiated at a higher Premium \(on ATM Strike or near ATM Strikes\) and a Long position initiated at a OTM Strike with lower Premium, therefore, this Strategy have a Net Premium Credit \(*i\.e\. Premium received on Short leg – Premium paid on Long leg*\)\. This Net Credit Premium on Iron Fly Strategy is less than the aggregate Premium Credit on naked Short Straddle\. Therefore, the quantum of profit is less in Iron Fly than in Short Straddle if the underlying remains on Expiry within the Breakeven Strike range defined by the Short legs \(initiated on the same Strikes in Iron Fly and Short Straddle\)\.
- When Short Straddle is hedged and is played in the form of Iron Fly, then the profit gets squeezed \(*due to lesser Net Premium Credit*\) in Iron Fly, as compared to Short Straddle\. Also, the Breakeven Level gets narrowed down in Iron Fly, thereby reducing the area upto which profit can occur \(due to lesser Premium Credit in Iron Fly\), implying that if the underlying takes momentum in one side then the chances of breaching the Breakeven Strike on that side increases \(*hence slightly enhancing loss probability; which ofcourse in Iron Fly is limited*\)\. Thus, this Strategy has lesser profit potential than naked Short Straddle\. 

__Benefits of Iron Fly:__

- It is a hedged Strategy \(*i\.e\. Iron Fly is hedged Short Straddle*\)\. Consequently, the unlimited Max Loss potential in naked Short Straddle gets capped to a pre\-defined limited Max Loss in Iron Fly\.
- Since, it is a hedged Strategy, the capital / margin required is less as compared to Short Strangle and does not require much capital towards any MTM requirements\.
- Since, less capital is required to implement this Strategy as compared to Short Straddle, more quantity/ Lots can be initiated in this Strategy for same amount of capital as compared to the Short Straddle\.
- Since, this a hedged Strategy, therefore, any breakout by the underlying before Expiry on either side of the defined range is covered by the Long Options hedged leg on that side\. Thus, this Strategy helps curtail the unlimited loss situation that may arise in Short Straddle owing to the Long Options positions added in this Strategy \(*provided such Long Options do not lose their Premium significantly due to Volatility crash or Theta decay*\)\.
- This Strategy is suitable for a very tight rangebound / sideways view\. A very narrow rangebound movement of the underlying within the tight range from the current price levels of the underlying \(i\.e\. within the Breakeven Strike range of this Strategy\), generates profit in both the ATM Short legs due to erosion of Time Value owing to such movement in the underlying\.
- With the passage of time, if the underlying remains within the narrow range as expected, then both the Short legs continues to be ATM Strikes or one near OTM & another near ITM, consequently generating profit in this Strategy due to the rising Theta impact\. If by Expiry of the Options Shorted, if the underlying remains within the tight range in this Strategy and the Options Shorted would expire within their Breakeven Strike range, then both the Shorted legs would expire worthless as ATM \(or one of them would become OTM and expire worthless and another as near ITM yet having less Premium left due to Theta effect on Expiry\), generating profit on this Strategy\.
- Volatility crash is favourable on the Strategy, as the reduction in volatility causes erosion in the Time Value of both the primary leg \(as well as the hedged leg\), which eventually yield profit on the Strategy\.
- However, Volatility spike will cause addition of Time Value in the premium of both the Long & Short legs \(*even if there is not much movement in the underlying in any particular direction*\), thus exhibiting some virtual loss on the Strategy\. But so long the Breakeven Strike is not breached on either side by Expiry, then inspite of increase in premium value and virtual loss on the Strategy due to volatility spike, there will not be an actual loss scenario on the Strategy\.

__Call Butterfly Strategy__

As earlier discussed, Iron Butterfly, which is a hedged Short Straddle, comprising a pair of Bear Call Credit Spread and Bull PE Credit Spread\. This Strategy  has 4 legs, in which Short CE & PE are joined at ATM Strike and Long CE & PE legs are OTM Strike\. Further, this is played to benefit from a narrow range and neutral view on the underlying for limited profit, running risk of limited loss\.

However, such narrow range and neutral view on the underlying for limited profit, running risk of limited loss, can also be played only on CE side, through __Call Butterfly Strategy__\. In this Strategy, 2 Short CEs are initiated at ATM and 1 Long CE as Near ITM and 1 Long CE as Near OTM, all on same Expiry series\. Both the Long CEs maintain the same Strike difference from the ATM Short leg\. Thus, essentially it is a pairing of a Bull CE Debit Spread and a Bear CE Credit Spread, joined on the common Short Strike\. It is a Net Premium Debit Strategy, therefore, the max loss is capped to the extent of Net Premium paid on the Strategy\. The payoff of this Strategy, from Expiry perspective,  looks same as Iron Butterfly \(and Put Butterfly\)\. 

In this Strategy: \(i\) max profit generated at Short leg; \(ii\) max loss is accrued beyond either Long CE Strikes; and \(iii\) profit zone of this Strategy is between the two BE Strikes\. Volatility crash and Theta decay is favourable for this Strategy\.

__Call Brokenwing Butterfly Spread Strategy__

It is an uneven/ unbalanced Call Butterfly Strategy, to play a tight range to bearish view on the underlying for limited profit, running risk of limited loss\.

Like, a Call Butterfly Strategy, this Strategy too is a pairing of a Bull CE Debit Spread and a Bear CE Credit Spread, joined on the common Short Strike\. However, this Strategy comprises of 1 Long CE as Near ITM and 2 Short CEs are initiated at Near OTM and 1 Long CE Near OTM which is around two Strikes higher than the CE Short leg, all on same Expiry series\. Thus, essentially, the Long CEs do not maintain the same Strike difference from the Short leg, and thus this Spread is referred to as brokenwing\.

This Strategy is ensured to be initiated with Net Premium Credit, hence there is no downside risk in this Strategy\. Max profit is generated at the Short Strike\. Further, limited max loss  in this Strategy is yielded if the underlying closes by Expiry higher than the OTM CE Long Strike\.

Volatility crash and Theta decay is favourable for this Strategy\.

__Put Butterfly Strategy__

As discussed earlier, Iron Butterfly, which is a hedged Short Straddle, comprising a pair of Bear Call Credit Spread and Bull PE Credit Spread\. This Strategy  has 4 legs, in which Short CE & PE are joined at ATM Strike and Long CE & PE legs are OTM Strike\. Further, this is played to benefit from a narrow range and neutral view on the underlying for limited profit, running risk of limited loss\.

However, such narrow range and neutral view on the underlying for limited profit, running risk of limited loss, can also be played only on PE side, through __Put Butterfly Strategy__\. In this Strategy, 2 Short PEs are initiated at ATM and 1 Long PE as Near ITM and 1 Long PE as Near OTM, all on same Expiry series\. Both the Long PEs maintain the same Strike difference from the ATM Short leg\. Thus, essentially it is a pairing of a Bear PE Debit Spread and a Bull PE Credit Spread, joined on the common Short Strike\. It is a Net Premium Debit Strategy, therefore, the max loss is capped to the extent of Net Premium paid on the Strategy\. The payoff of this Strategy, from Expiry perspective,  looks same as Iron Butterfly \(and Call Butterfly\)\. 

In this Strategy: \(i\) max profit generated at Short leg; \(ii\) max loss is accrued beyond either Long PE Strikes; and \(iii\) profit zone of this Strategy is between the two BE Strikes\. Volatility crash and Theta decay is favourable for this Strategy\.

__Put  Brokenwing Butterfly Spread Strategy__

It is an uneven/ unbalanced Put  Butterfly Strategy, to play a tight range to bullish view on the underlying for limited profit, running risk of limited loss\.

Like, a Put Butterfly Strategy, this Strategy too is a pairing of a Bear PE Debit Spread and a Bull PE Credit Spread, joined on the common Short Strike\. However, this Strategy comprises of 1 Long PE as Near ITM and 2 Short PEs are initiated at Near OTM and 1 Long PE Near OTM which is around two Strikes lower than the PE Short leg, all on same Expiry series\. Thus, essentially, the Long PEs do not maintain the same Strike difference from the Short leg, and thus this Spread is referred to as brokenwing\.

This Strategy is ensured to be initiated with Net Premium Credit, hence there is no upside risk in this Strategy\. Max profit is generated at the Short Strike\. Further, limited max loss  in this Strategy is yielded if the underlying closes by Expiry lower than the OTM PE Long Strike\.

__Selection of Option Strike for hedged leg of Married Put Strategy__

Where continuation of uptrend in the investments gets highly uncertain and downtrend reversal seems a good possibility then it is better to  initiate Married Put to hedge investments\.

PE Strike for the hedged leg in this strategy should be such which should have lower Theta value\. Next Month or farther Expiry PE would have lower Theta impact but will be available at  higher Premium\.

Further, depending upon the momentum in the downtrend a suitable Delta value of PE can be selected \(an ITM PE would be preferrable if uptrend is expected with momentum so as to suitably cover the losses in the investment position\)\. Even Synthetic Futures i\.e\. deep ITM PE with 100% Intrinsic Value having Delta value of 1 can also be considered to play a sound downtrend momentum, as it will be very effective to mitigate losses in the investment positions\. Such Synthetic Futures will have negligible Time Value and therefore will not be impacted with fall in Volatility or Theta impact\.

Basis aforesaid factors, depending on the intended holding time of the trade, a suitable PE Option of a particular Expiry series and Delta value may be selected to go Long\.

__Married Put Strategy: Its Trade Legs & Objective__

__Trade Legs in Married Put Strategy__:

- Long PE \(*hedged leg*\)

__Objective in Married Put Strategy__:

Objective is to mitigate the risk / loss that may arise if the primary leg with bullish view on the investment gets reversed\. Then upon such reversal the loss in the primary leg will get covered to an unlimited extent by the PE Long position initiated as  the hedged leg with a bearish view\.

__Payoff for Married Put Strategy__

__<img43>__

__<end>__

__Breakeven Strike, its Calculation and Payoff Chart in Married Put Strategy__

__Breakeven Strike in Married Put Strategy, from Expiry perspective__:

If the underlying starts falling, then the Breakeven Price level, below which the profit will arise in the hedged leg of PE Long \(so as to enable it to mitigate losses on the investments held in the primary leg\): 

__<start> Formula__: \[PE Strike – Premium paid for the PE Long hedged leg\]\. Below this level, the Married Put will cover up the losses incurred on the investments held in the primary leg\. __<end>__

__<start> Payoff for Married Put Strategy: __

__<end>__

__Profit & Loss Areas in Married Put Strategy__

__Max Loss in Married Put Strategy, from Expiry perspective:__

If by Expiry of the PE Long position, the underlying falls but fail to fall with momentum so as to fall below the Breakeven price level of the PE Long hedged leg, then both the primary leg holding investment would incur loss, as well as there will be loss in the PE Long hedged leg to the maximum extent of the Premium paid for buying the PEs\.

__Max Reward in Married Put Strategy, from Expiry perspective__:

Maximum reward would be generated in this Strategy, if by Expiry the investments held in the primary leg gets profitable due to the upward move of the underlying, and the profit incurred on the investments is much higher than the total Premium paid on the Long PEs in the hedged leg\. This situation would arise, if the underlying keeps trending higher and the investments held in the primary leg gets extremely profitable after absorbing the loss on the premium paid for the Protective Puts\.

__<end>__

__Adjustment in Married Put Strategy, by conversion to Collar__

Addition of CE Short leg to this Married Put Strategy will make it a Collar Strategy\.

CE Short leg will be required to be added to the Married Put Strategy, if the underlying seems to be not likely to go down with momentum and may appear to be bearish to sideways\. In such situation of bearish to sideways movement of the underlying, the underlying is not expected to cross\-below the Breakeven Strike of the PE Long leg and therefore the entire Premium paid on the PE Long leg would be a loss\. Thus, in order to mitigate the loss of Premium paid on the PE Long leg, sufficient quantity of Far OTM CEs can be Sold, with the view that the underlying would not breach the Breakeven Strike of these CE Shorts \(i\.e\. *CE Strike \+ Premium received on these CE Shorts*\) and thereby these CE Shorts would expire as OTM by Expiry and the entire Premium Credit received on these CE Shorts would be the profit on these CE Shorts which will help absorb the loss of Premium on Long Puts\. Thus, addition of CE Shorts to this Married Put Strategy, would convert Married Put into Collar Strategy\.

Conversion of Married Put into Collar can be adopted as an adjustment to Married Put Strategy, when the underlying does not seem to be falling down with momentum \(*which was the original view basis which Married Put was initiated to cover for losses on investments held in the primary leg*\)\. Collar Strategy makes the overall Strategy a limited profit and limited loss Strategy\.

__Demerits and Benefits of Married Put Strategy__

__Demerits of Married Put Strategy__:

- PE Long is a Debit position i\.e\. Premium is paid for this hedged leg, and this Premium will have to be recovered by crossing over the Breakeven Strike from Expiry perspective, else it will generate loss\.
- Long PE position in the hedged leg will be subject to time decay and will be suitable only in the event of a strong downtrend reversal on the investments held in the primary leg\.

__Benefits of Married Put:__

- Buying Put is cheaper than Shorting Call\. Further, there is no MTM hassle in being Long in PE\.
- This is a very suitable Strategy to cover losses incurred on investment position due to strong downtrend; and so long the strong downtrend continues Long PE position will generate unlimited profit\.

__BE Strike Level in Covered Call Strategy and its Calculations__

__Breakeven Strike in Covered Call Strategy, from Expiry perspective__:

So long the underlying keeps moving higher this Strategy would be in profit\. Further, if the underlying closes by Expiry, between the CE Short Strike and the Breakeven Strike of this Strategy, then this Strategy would yield profit\. Therefore, there is no upside risk on this Strategy\.

However, if the underlying starts falling, then Futures Long primary leg would start generating loss and CE Short leg would start generating profit\. The CE Short leg can generate profit to the maximum extent of Premium credit received\. Therefore, from Expiry perspective, if the underlying starts falling, then Futures’ Long primary leg would start giving unlimited loss; and CE Short hedged leg would be able to cover the losses incurred on Futures Long primary leg to the maximum extent of the Premium Credit received on the CE Short position\. Therefore, there is an unlimited downside risk in this Strategy\. Thus, we need to understand the Breakeven level below which if the underlying closes on Expiry, then this Strategy would yield loss\.

__BE Strike Level in Covered Call Strategy__: The Breakeven Price level, below which the loss will arise in this Strategy is calculated as:

__<start> Calculation: Breakeven Strike: \[Futures Buy Price – Premium Credit received on CE Short\]__\. Below this level, this Strategy would enter into unlimited loss situation\. __<end>__

__<start> Example: for BE Strike calculation in Covered Call Strategy__: 

*If Nifty Futures is at 17000 and a Covered Call Strategy is initiated with the following legs:*

- *Nifty Futures Long 17000; and *
- *Nifty ATM CE 17000 Short at Rs\. 200 Premium *

*then the Breakeven level would be: 17000 – 200 = 16800\. *

*Thus, from Expiry perspective, if the underlying slips below 16800, then this Covered Call Strategy would yield loss\. Lower the underlying trends by Expiry below the said Breakeven level, greater the loss incurred on this Strategy\.  *__<end>__

If the underlying closes above the BE Strike, then the Strategy would yield profit\. A near ITM CE has more premium than OTM CE Strike, therefore, if for the hedged leg an ITM CE Short Strike is used then the Breakeven gets expanded and more favourable\. That is: below this BE Strike if underlying closes by Expiry, then loss situation will arise; and if underlying closes anywhere higher than the BE Strike, the Strategy would yield some profit\.

__<start> Payoff Chart of Covered Call: __

__<img40>__

__<end>__

__Covered Call Strategy: its Types, Trade Legs and Objective__

If there is a main position with mild bullish view, either in cash Stocks or Long in Futures \(the __primary leg__\), then this primary leg can be hedged by introducing a hedged leg with a bearish view by employing Options \(the __hedged leg__\)\. This hedged leg can be created by selling CE \(i\.e\. Call Short\)\. This hedged position/ strategy where a bullish primary leg is hedged with Call Short position – it is called a __Covered Call Strategy__\.

__Trade legs of Covered Call__:

- Long Futures \(*primary leg*\)
- Short CE \(*hedged leg*\) __<end>__

Or

This Strategy wherein Cash segment investments are hedged by Shorting CE, is called Big Boy’s Covered Call\. Here, the investments on the primary leg must be in the multiples of the Lot size in FNO of that particular Stock, in order to play Covered Call Strategy through Shorting CEs of equivalent number of Lots \(*depending on the quantity of stocks held as investments, in the multiples of Lot size in FNO segment of that scrip*\)\.

__Objective of Covered Call__:

Objective is to generate limited pre\-determined profit from the rangebound\-to\-mild bullish move in the underlying; and to mitigate the risk / loss that may arise if the primary leg with bullish view gets reversed\. 

Then upon such reversal the loss in the primary leg will get covered to some extent \(i\.e\. *to the extent of Premium received on CE Short*\) by the hedged leg initiated to cover the downside risk\.

Covered Call can also be played through Synthetic Futures i\.e\. deep ITM CE with almost 100% Intrinsic Value \(*instead of Futures Long position*\) for the primary leg\. The hedged leg would as usual be played through CE Short positions\. Such Covered Call is called __Poor Man’s Covered Call__\.

Covered Call can also be played as a __Big Boy’s Covered Call__ for the investments held in the Cash segment / other instruments\.

__Big Boy’s Covered Call__: When a CE Short position is introduced as a hedged leg to an existing investment \(in Stocks, ETFs or otherwise\), then such Covered Call are referred to as the Big Boy’s Covered Call\. For example: *Against 1500 shares of SBI on cash holding, 1 Lot Far OTM SBIN CE is sold \(1 Lot of SBIN in F&O segment comprise of 1500 shares of SBI\)\.*

__Poor Man’s Covered Call__: When in a Covered Call strategy, Synthetic Futures \(i\.e\. an ITM CE Option with 100% Intrinsic Value having Delta Value of 1\) is employed in the primary leg instead of Futures or stocks, in order to optimize the margin requirements/ deploy less capital and to avoid MTM risk by taking main position in Futures, then such Covered Call are referred to as the Poor Man’s Covered Call\. Besides aforesaid, the max loss situation in a Poor Man’s Covered Call gets curtailed to the maximum extent of net premium debit incurred on the Strategy \(*i\.e\. premium paid for the deep ITM CE minus the premium credit received on the CE Short hedged leg*\)\. For example: Long Deep ITM CE  & OTM CE Short*\.*

__Examples of Covered Call: __

__<start> __*For Covered Call:*

- *Nifty Futures 4 Lot Long @ 17108;*
- *Nifty ATM 4 Lot CE 17000 Short at Rs\. 200 Premium *__<end>__

__<start> __*For Poor Man’s Covered Call:*

- *Nifty Deep ITM 16000 CE Long \(Synthetic Futures with 100% Intrinsic Value\) 4 Lot at Rs\. 1400 Premium per Lot;*
- *Nifty ATM CE 17000 Short 4 Lot at Rs\. 200 Premium per Lot *__<end>__

__<start> __*For Big Boy’s Covered Call*__*:*__

- Investments in Shares \(*eg: Tata Steel, SBIN etc*\) equivalent to 1 Lot equivalent in FNO segment of such Shares
- Short ATM CE of such FNO Stock \(*eg: Tata Steel, SBIN etc*\) 1 Lot __<end>__

__Different Trade situations in Covered Call Strategy__

- __If Covered Call trade goes as per plan__: Future goes higher, Future Long primary leg will generate profit\. But with Future going higher, the hedged CE Short leg will generate loss \(*because the LTP of CE Short leg will rise due to underlying going upward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\. But as the underlying expires at the CE Short Strike or anywhere on any higher Strike, then the Strategy would yield the limited, pre\-determined, max profit on the Strategy\. In such situation, profit target on this Strategy is achieved and hence profit must be booked\.
- __If underlying becomes sideways, during Covered Call trade__: If the underlying keeps fluctuating in  a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the hedged leg would generate profit due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in profit in both primary and hedged leg, if Futures end up closing even slightly higher than its buying price\. 
- __If Covered Call trade does not go as per plan__: Future starts falling, and Futures Long primary leg will generate loss\. But with Futures falling down, the hedged CE Short leg will generate limited profit to the extent of Premium received on the Short position\. Thus, the CE Short hedged leg will protect the loss in Futures Long primary leg to the extent of Premium collected on the CE Short hedged leg\. Accordingly, if by Expiry the underlying closes between the CE Short Strike and the BE Strike level of the Strategy, then also due to premium credit collected on CE Short leg, the Strategy would yield some profit\. If underlying closes towards the CE Short Strike then profit would be closer to Max Profit, but if the underlying closes by Expiry towards the BE Strike of the Strategy, then the profit will be less\.

However, if the underlying keeps falling even further breaching the Breakeven Strike of the Strategy downwardly, then beyond this level the premium credit of the CE Short leg would get exhausted and the Futures Long primary leg \(*which is having a positive Delta of 1, per Lot basis*\) will start incurring losses; and in such situation the trade need to be adjusted to mitigate potential losses which may be unlimited if the underlying keeps falling\.

__Strike Selection of Hedged Leg and Delta Play in Covered Call Strategy__

__Strike / Delta value in Covered Call Strategy__:

- Future has Delta value of 1
- CE Short can be initiated with a Delta value of 0\.5 to 0\.6 \(*0\.5 Delta is of ATM and 0\.6 is of near ITM*\)

Even Synthetic Futures \(*deep ITM CE*\) in Poor Man’s Covered Call Strategy, would also have a Delta value close to 1\.

The Delta difference between the primary leg and the hedged leg will help ensure max reward in this Strategy if by Expiry the Futures closes at CE Short Strike or at any higher Strike than the CE Short Strike\.

For a strong conviction bullish to sideways view, a lower Delta value ATM CE would be suitable; but where the view is little uncertain and reversal seems a good possibility then it is better to  initiate CE Short at Near ITM with higher Delta value \(*in order to maintain a net lower Delta difference between the primary leg and the hedged leg*\) and a larger Breakeven room to cover the loss on the downside \(*also this BE level from which profit would be generated on the Strategy, will be much lower, if ITM CE is shorted instead of an ATM CE\. Hence enhancing the profit probability in case of a bullish view*\)\.

It is pertinent to note that a higher CE Strike \(*like Near OTM Strike, as against ITM*\) on the hedged leg, would have higher profit potential, because the max profit is generated if Expiry happens at CE Short leg or higher\. Therefore, higher the CE Short Strike, larger the profit potential, if Futures expires at that CE Short Strike or even higher\. But at the same time, in case of a higher OTM CE Short Strike, the underlying will have to travel much higher upto the CE Short Strike in order to generate max profit on the Strategy\.

But a lower CE Strike \(*like Near ITM Strike, as against OTM*\) offers higher Delta and larger Breakeven room, to mitigate the loss on the downside\. But lower CE Strike would reduce the limited max profit potential on the Strategy\. But at the same time, in case of a lower OTM CE Short Strike, the underlying will have to close only little higher \(i\.e\. upto the CE Short Strike\) in order to generate max profit on the Strategy\.

__Selection of Option Strike for hedged leg in Covered Call__:

CE Strike for the hedged leg in this Strategy should be such which should have decent Premium value\. Next Month or farther Expiry CE may have higher Premium but lower Theta impact\.

Also, the CE Short should be initiated at such Strike, keeping in mind that if the underlying remains sideways then the Theta impact should yield reasonable profit in the hedged leg\. Current Month CE will have higher Theta impact\.

Also, lower CE Short Strike will have less amount of max profit, but a higher probability to generate max profit in case the underlying  by Expiry closes near the CE Short Strike\. However, a higher CE Short Strike will have higher amount of max profit, but the underlying will have to close higher i\.e\. upwardly upto the higher CE Short Strike, in order to generate max reward on the Strategy\.

If there is rise in Volatility then CE Short on the hedged leg may be done at good Premium value at Far OTM CE Strikes, to target profit from Theta decay on the CE Short positions, especially if view on the underlying is inclined more on the bullish side\.

Basis aforesaid factors, depending on the intended holding time of the trade, a suitable CE Option Strike level of a particular Expiry series and Delta value may be selected for the hedged leg\.

__Adjustments \(if trade does not go as per plan\) in Covered Call Strategy__

Since, in Covered Call Strategy, the hedged leg will be able to cover the losses arising in the primary leg to the extent of the Premium received on CE Short, the following adjustments may be considered: \(i\) Long PE; or \(ii\) Short CE\. These two adjustments are discussed below:

1. If there seems to be a trending downtrend, then __PEs can be bought \(Long PE\)__\. Buying OTM PEs to protect the downside risk in a Covered Call with OTM CE Short converts such a Covered Call into __Collar__ \(i\.e\. Covered Call with OTM CE Short \+ Long OTM PE\)\. This additional PE will overcome the limitation of limited downside protection offered by the hedged leg of CE Short; and this PE Long position will take care of unlimited bearish trend if it continues\. Buying PEs to protect the downside risk in this Strategy will add a debit position, therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\.

While, the PE Long position will help CE Short to mitigate the loss incurred on the Futures Long/ Cash buy in primary leg, but the difference between the Delta value of the Futures Long and PE Long will determine the net loss\. Thus, depending upon the momentum in the downtrend, suitable Delta value of PEs can be added at higher Strike levels \(ITM PEs would be preferrable if downtrend is expected with momentum so as to suitably cover the losses in Futures Long position\), so that in case of continuation of strong downtrend, Long PEs should generate more profit and help cover losses in the Futures Long primary leg\. Also, depending upon the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Long PEs in comparison to the original number of Lots initiated on the hedged leg of this Strategy\. Such number of PEs must be added, such that the effective overall Delta position of the Strategy becomes negative \(thus, favourable for the bearish move in the underlying\)\.

1. If there seems to be a slow downtrend, then an __OTM CEs can be sold \(Short CE\)__\. This additional CE Short will cover further losses that may be incurred in the Futures primary leg as the downtrend continues, to the extent of Premium received by selling this additional CE\. __Far OTM CEs can be sold__ \(CE Short\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the loss generated on the original Strategy \(due to Futures Long primary leg\)\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Short CE in comparison to the original number of Lots in the hedged leg initiated on the original Strategy\. Such number of additional Short CEs must be added, such that the effective overall Delta position of the Strategy becomes negative \(thus, favourable for the bearish move in the underlying\)\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.

__Payoff Chart of Covered Call Strategy__

__<end>__

__Profit and Loss in Covered Call Strategy, and its Calculations__

__Max Loss in Covered Call, from Expiry perspective:__

Below the Breakeven price level, there could be unlimited loss in this Strategy if the underlying keeps slipping down below the Breakeven Strike level of this Strategy\.

*Loss Level in Covered Call Strategy*: If by Expiry, the underlying closes on the downside, below the Breakeven Strike level of the Strategy, then __from this BE level onwards the loss would commence and become unlimited as the underlying keeps falling__ below the said BE Strike level of the Strategy\.

__<start> Example of BE Level in Covered Call Strategy__: *If Nifty Futures is at 17000 and a Covered Call Strategy is initiated with the following legs:*

- *Nifty Futures Long 17000; *
- *Nifty ATM CE 17000 Short at Rs\. 200 Premium\.*

*then if Nifty Futures starts slipping below the Breakeven level of 16800 \(i\.e\. 17000 – 200\) then this Strategy would start incurring unlimited loss\. *__<end>__

__*Covered Call with Limited Max Loss:*__ If the Covered Call is initiated as a Poor Man’s Covered Call \(*i\.e\. with deep ITM CE having almost 100% Intrinsic Value, instead of Futures Long on the primary leg*\), then the unlimited max loss situation on a regular Covered Call, would get curtailed to the limited extent of the net premium debit incurred in the Strategy \(*i\.e\. premium debit paid on deep ITM CE * *minus premium credit collected on CE Short hedged leg*\)\.This is a big advantage of a Poor Man’s Covered Call\.

__Max Reward in Covered Call Strategy, from Expiry perspective__:

If the underlying moves upwardly, then the Futures’ Buy primary leg would be in profit; but if the Futures trends much higher crossing above the CE Short Strike, then the Futures Long leg will generate profit but CE Short hedged leg would start generating loss\. However, due to the Delta difference between the Futures’ Long primary leg and the CE Short hedged leg, the Strategy would be in net profit and would generate limited max profit even if the underlying expires at or keeps trending higher than the CE Short leg\.  

__*Max Profit Level* *in Covered Call Strategy*__: Thus, the maximum limited reward would be generated in this Strategy, if by Expiry the underlying closes at CE Short Strike or at any higher Strike than the CE Short Strike\. This max reward, which is however limited, is calculated as:

__<start> Calculation: Max profit = \[CE Short Strike \+ premium credit received\] – \[Futures Buying Price\] x Lot qty <end>__

Thus, this maximum limited reward situation can be targeted on this Strategy when the view is rangebound to mildly bullish on the underlying\.

__*Profit Zone* *in Covered Call Strategy*__: If by Expiry the __underlying closes between the CE Short Strike and the BE Strike of the Strategy__, then also this Strategy would generate some profit\. However, if the underlying would close by Expiry closer towards the CE Short Strike, then the profit would be relatively higher, but if the underlying closes lower towards the BE Strike of the Strategy then the profit would be less\.

__<end>__

__Profit & Loss Areas in Covered Call Strategy__

__Profit & Loss Levels in Covered Call Strategy, from Expiry perspective:__

1. __BE Level__: \[Futures Buying Price \- Premium Credit received on CE Short leg\]
4. __Profit Zone__:  If underlying closes by Expiry anywhere higher than the BE Level\. If underlying closes at or higher than CE Short Strike, then Max Profit is generated; and if underlying closes towards the BE Level \(*on the downside*\) then less profit generated on the Spread\.
6. __Max Loss Level__: If underlying closes by Expiry, below the BE Level, then the unlimited loss area starts; lower the underlying would close below the BE Level, higher will be the loss incurred on the Strategy\. Thus, below the BE level, unlimited Max Loss may occur, depending on the fall in the underlying below the BE Level by Expiry\. 
7. __Loss Zone__:  If underlying closes by Expiry anywhere lower than the BE Level, the Strategy enters into unlimited loss area\.  Lower the underlying will close by Expiry, higher will be the loss incurred on the Strategy\.

__<end>__

__Options Behaviour in Covered Call Strategy__

1. The primary objective in a regular Covered Call is to target profit due to rangebound\-to\-mild bullish move in the underlying\. However, even if the underlying gets bullish such that __the underlying closes by Expiry at or higher than the CE Short leg, then the max reward would be reaped on the Strategy__\. This max reward on the Strategy would be limited, irrespective of how much higher the underlying keeps trending beyond the CE Short Strike level by the Expiry\. The Delta difference between the Futures Long \(*or Synthetic Futures: Deep ITM CE in case of Poor Man’s Covered Call Strategy*\) primary leg and CE Short hedged leg, helps to maintain a balance between the net profit position, in case of extreme bullish move in the underlying\.
2. In case the __underlying remains rangebound__, then there will not be erosion on the Futures Long primary leg, but the CE Short leg will lose its premium \(*due to expansion & erosion in its Time Value*\), thereby generating profit on the overall Strategy\.
3. Further, in case the underlying remains rangebound, and there is Volatility crash \(i\.e\. India VIX crashes from 18 to 12\), then there will not be erosion on the Futures Long primary leg, but the CE Short leg will lose its premium due to erosion in its Time Value due to volatility crash\. Thus, the Strategy would generate profit in such situation\. 
4. Also, if after a long holding time, the underlying closes around the same level where the Strategy was initiated, then also there will not be much loss on the Futures Long primary leg, but the Theta impact on the CE short leg would generate profit on the Strategy to the extent of erosion in its Time Value\.
5. If the underlying falls down, but closes on Expiry between the CE Short Strike and the Breakeven Strike \(i\.e\. without breaching the BE Strike of the Strategy downwardly\), then too this Strategy would yield some profit, because the loss in the Futures position would not be more than the profit generated on the CE Short leg \(because the CE Short leg in such situation would expire worthless as OTM and entire premium credit would be the profit on the CE Short leg, which would set\-off the loss on Futures Long leg\)\. However, in the aforesaid situation, lower the Futures fall towards the BE Strike level of the Strategy, lower would be the profit generated on the Strategy\.
6. However, if the underlying falls down and closes on Expiry below the Breakeven Strike \(i\.e\. breaching the BE Strike of the Strategy downwardly\), then the Strategy would yield loss, because the entire premium credit on CE Short leg would get exhausted due to the big downfall/ gapdown and the hedged leg therefore will not be able to cover for any loss below the BE Strike level of the Strategy\. In such situation, lower the underlying would fall below the BE Strike of the Strategy, the Futures Long position \(having positive Delta of 1, on per Lot basis\) would keep generating loss on the Strategy\. Further, in such situation, regular Covered Call with Futures Long position on the primary leg, would keep generating unlimited loss as the fall extends in the underlying\. However, if the Strategy is played as a Poor Man’s Covered Call \(with  primary leg comprising of Deep ITM CE\), then the max loss on the Strategy would be limited to the extent of net premium debit incurred on the Strategy, in the event the underlying keep extending its fall\.

__Demerits and benefits of Covered Call Strategy__

- __Demerits of Covered Call Strategy__:
- Max reward / profit is limited and max loss situation is unlimited\.
- Buying Futures and Shorting Options, both require huge margin and MTM issues\.
- While, Covered Call Strategy can also be played as Poor Man’s Covered Call, in which Futures’ Long primary leg is replaced with Synthetic Futures i\.e\. ITM CE with almost 100% Intrinsic Value, however, such deep ITM CE may not be liquid \(especially in case of Stock Options\)\.
- Low Volatility may not offer good premium for Shorting CEs for the hedged leg, thereby reducing the loss area/ Breakeven Strike upon reversal besides low Premium as profit from Theta decay\.
- Sometimes, it may be prudent to Short ITM CE for the hedged leg, to have larger Breakeven room on the downside on this Strategy\. But this Strategy may pose risk in instruments \(*like FNO stocks*\) where there is a requirement to comply with physical delivery obligations\. Because if the primary leg and/or Short leg comprising of FNO instruments expires as an ITM of such underlying / assets \(which is subject of physical delivery obligations\), then even though the Strategy may be overall profitable, but the trader would have to unnecessarily comply with the physical delivery obligations\. Hence, even if such assets/ underlying are chosen to play Covered Call \(even, Big Boy’s Covered Call\), then it is advisable to not hold the positions in Futures or Options till Expiry \(or even near to Expiry\)\. Instead, it is advisable to play this Strategy on Indices/ assets, where there is no requirements toward physical delivery *viz\. Nifty FNO / BankNifty FNO etc*
- __Benefits of Covered Call:__
- Futures’ Long primary leg can be replaced with Synthetic Futures i\.e\. Long ITM CE with almost 100% Intrinsic Value \(called,  __Poor Man’s Covered Call__\) to avoid huge margin and MTM requirements applicable on Futures\. Further, such Synthetic Futures restricts the loss to maximum extent of the net premium debit incurred on the Strategy \(*i\.e\. premium debit incurred on buying Synthetic Futures \(deep ITM CE\) minus premium credit collected on CE Short leg*\)\.
- This Covered Call Strategy can also be used to hedge investments made in Stocks/ other segments\. This is done by way of initiating CE Short position as a hedged leg, to hedge the already existing position in cash segment i\.e\. investments \(called, __Big Boy’s Covered Call__\)\.  While, the hedged leg continues to protect the downside on the already existing investments \(in stocks, Nifty Bees, Bank Bees etc\.\), the hedged leg can help earn regular income by virtue of Theta impact on OTM CE Short leg by its Expiry\. This process of introduction of hedged leg can be done regularly to earn rental income on investments until  the OTM CE Short leg becomes a deep ITM, requiring the investments held on the primary leg to be liquidated\. We have covered this Strategy in detail in the Next Chapter \(Customised Strategies\)\. Big Boy’s Covered Call on Stocks should not be held until expiry due to physical delivery obligations applicable on FNO Stocks\.
- This Strategy is also suitable when the Volatility is relatively high, as CE Shorts for the hedged leg can be initiated at suitable Near OTM Strikes with good Premium\. When India VIX is high \(*like above 20 or so*\), then good premium credit can be targeted on Near ITM / ATM / Near OTM CE Strikes for the Short leg, and profit margin in such cases increases phenomenally\.

__Breakeven Strike in Covered Put Strategy, from Expiry perspective and its Payoff Chart__

So long the underlying keeps moving lower this Strategy would be in profit\. Further, if the underlying closes by Expiry, between the PE Short Strike and the Breakeven Strike of this Strategy, then this Strategy would yield profit\. Therefore, there is no downside risk on this Strategy\.

However, if the underlying starts rising higher, then Futures Short primary leg would start generating loss and PE Short leg would start generating profit\. The PE Short leg can generate profit to the maximum extent of Premium credit received\. Therefore, from Expiry perspective, if the underlying starts rising higher, then Futures’ Short primary leg would start giving unlimited loss; and PE Short hedged leg would be able to cover the losses incurred on Futures Short primary leg to the maximum extent of the Premium Credit received on the PE Short position\. Therefore, there is an unlimited upside risk in this Strategy\. Thus, we need to understand the Breakeven level above which if the underlying closes on Expiry, then this Strategy would yield loss\.

__BE Strike Level of Covered Put Strategy__: Accordingly, the Breakeven Price level, above which the loss will arise in this Strategy is calculated as:

__<start> Formula: Breakeven Strike: \[Futures’ Sell Price \+ Premium Credit received on PE Short\]__\. Above this level, this Strategy would enter into unlimited loss situation\. __<end>__

- *Nifty Futures Sell 17000; and *
- *Nifty ITM PE 17100 Short at Rs\. 250 Premium *

*then the Breakeven level would be: 17000 \+ 250 = 17250\. *

*Thus, from Expiry perspective, if the underlying is found trending above 17250 Strike, then this Covered Put Strategy would yield loss\. Higher the underlying trends by Expiry above the said Breakeven level, greater the loss incurred on this Strategy\. *__<end>__

If the underlying closes below the BE Strike, then the Strategy would yield profit\. A near ITM PE has more premium than OTM PE Strike, therefore, if for the hedged leg an ITM PE Short Strike is used then the Breakeven gets expanded and more favourable\. That is: above this BE Strike if underlying closes by Expiry, then loss situation will arise; and if underlying closes anywhere lower than the BE Strike, the Strategy would yield some profit\.

__<start>__ __Payoff Chart of Covered Put Strategy: __

__<img41>__

__<end>__

__Covered Put Strategy: Its Trade legs & Objective__

If there is a main position with mild bearish view, either in cash Stocks or Short in Futures \(the __primary leg__\), then this primary leg can be hedged by introducing a hedged leg with a bullish view by employing Options \(the __hedged leg__\)\. This hedged leg can be created by selling PE \(i\.e\. Put Short\)\. This hedged position/ strategy where a bearish primary leg is hedged with Put Short position – it is called a __Covered Put Strategy\.__

__Trade legs of Covered Put Strategy__:

- Short Futures \(*primary leg*\)
- Short PE \(*hedged leg*\)

__Objective in Covered Put Strategy__:

Objective is to generate limited pre\-determined profit from the rangebound\-to\-mild bearish move in the underlying; and to mitigate the risk / loss that may arise if the primary leg with bearish view gets reversed\. 

Then upon such reversal the loss in the primary leg will get covered to some extent \(i\.e\. *to the extent of Premium received on PE Short*\) by the hedged leg initiated to cover the upside risk\.

Covered Put can also be played through Synthetic Futures i\.e\. deep ITM PE with almost 100% Intrinsic Value \(*instead of Futures Short position*\) for the primary leg\. The hedged leg would be played through PE Short positions\. Such Covered Put is called __Poor Man’s Covered Put\.__

__Poor Man’s Covered Put__: When in a Covered Put strategy, Synthetic Futures \(i\.e\. an ITM PE Option with 100% Intrinsic Value having Delta Value of 1\) is employed in the primary leg instead of shorting Futures or stocks, in order to optimize the margin requirements/ deploy less capital and to avoid MTM risk by taking main position in Futures, then such Covered Put are referred to as the Poor Man’s Covered Put\. Besides aforesaid, the max loss situation in a Poor Man’s Covered Put gets curtailed to the maximum extent of net premium debit incurred on the Strategy \(*i\.e\. premium paid for the deep ITM PE minus the premium credit received on the PE Short hedged leg*\)\. For example: Long Deep ITM PE  & OTM PE Short\.

__Examples:__

__<start> __*For Covered Put:*

- *Nifty Futures 4 Lot Short @ 17104;*
- *Nifty ATM 4 Lot PE 17000 Short at Rs\. 200 Premium *__<end>__

__<start> __*For Poor Man’s Covered Put:*

- *Nifty Deep ITM 18000 PE Long \(Synthetic Futures with 100% Intrinsic Value\) 4 Lot at Rs\. 1500 Premium per Lot;*
- *Nifty ATM PE 17000 Short 4 Lot at Rs\. 200 Premium per Lot *__<end>__

__Trade Situations in Covered Put Strategy__

__If trade in Covered Put Strategy, goes as per plan__: Future goes lower, Future Short primary leg will generate profit\. But with Future going lower, the hedged PE Short leg will generate loss \(*because the LTP of PE Short leg will rise due to underlying going downward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\. But as the underlying expires at the PE Short Strike or anywhere on any lower Strike, then the Strategy would yield the limited, pre\-determined, max profit on the Strategy\. In such situation, profit target on this Strategy is achieved and hence profit must be booked\.

__If underlying becomes sideways, during Covered Put Strategy__: If the underlying keeps fluctuating in  a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the hedged leg would generate profit due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in profit in both primary and hedged leg, if Futures end up closing even slightly lower from its selling price\.

__If trade does not go as per plan, in Covered Put Strategy__: Future starts rising, and Future Short primary leg will generate loss\. But with Futures rising up, the hedged PE Short leg will generate limited profit to the extent of Premium received on the Short position\. Thus, the PE Short hedged leg will protect the loss in Futures Short primary leg to the extent of Premium collected on the PE Short hedged leg\. Accordingly, if by Expiry the underlying closes between the PE Short Strike and the BE Strike level of the Strategy, then also due to premium credit collected on PE Short leg, the Strategy would yield some profit\. If underlying closes towards the PE Short Strike then profit would be closer to Max Profit, but if the underlying closes by Expiry towards the BE Strike of the Strategy, then the profit will be less\.

However, if the Futures keeps rising even further breaching the Breakeven Strike of the Strategy upwardly, then beyond this level the premium credit of the PE Short leg would get exhausted and the Futures Short primary leg \(*which is having a negative Delta of 1, per Lot basis*\) will start incurring losses; and in such situation the trade need to be adjusted to mitigate potential losses which may be unlimited if the underlying keeps trending upwardly\.

__Strike Selection for Hedged Leg and Delta Play in Covered Put Strategy __

__Strike / Delta value, in Covered Put Strategy__:

- PE Short can be initiated with a Delta value of 0\.5 to 0\.6 \(*0\.5 Delta is of ATM and 0\.6 is of near ITM*\)

Even Synthetic Futures \(*deep ITM PE*\) in Poor Man’s Covered Put Strategy, would also have a Delta value close to 1\.

The Delta difference between the primary leg and the hedged leg will help ensure max reward in this Strategy if by Expiry the Futures closes at PE Short Strike or at any lower Strike than the PE Short Strike\.

For a strong conviction bearish to sideways view, a lower Delta value ATM PE would be suitable; but where the view is little uncertain and reversal seems a good possibility then it is better to  initiate PE Short at Near ITM with higher Delta value \(*in order to maintain a net lower Delta difference between the primary leg and the hedged leg*\) and a larger Breakeven room to cover the loss on the upside \(*also this BE level from which profit would be generated on the Strategy, will be much higher, if ITM PE is shorted instead of an ATM PE\. Hence enhancing the profit probability in case of a bearish view*\)\.

It is pertinent to note that a lower PE Strike \(*like Near OTM Strike, as against ITM*\) on the hedged leg, would have higher profit potential, because the max profit is generated if Expiry happens at PE Short leg or lower\. Therefore, lower the PE Short Strike, larger the profit potential, if Futures expires at that PE Short Strike or even lower\. But at the same time, in case of a lower OTM PE Short Strike, the underlying will have to travel much lower upto the PE Short Strike in order to generate max profit on the Strategy\.

But a higher PE Strike \(*like Near ITM Strike, as against OTM*\) offers higher Delta and larger Breakeven room, to mitigate the loss on the upside\. But lower CE Strike would reduce the limited max profit potential on the Strategy\. But at the same time, in case of a lower OTM PE Short Strike, the underlying will have to close only little lower \(i\.e\. upto the PE Short Strike\) in order to generate max profit on the Strategy\.

__Selection of Option Strike for hedged leg in Covered Put Strategy__:

PE Strike for the hedged leg in this Strategy should be such which should have decent Premium value\. Next Month or farther Expiry PE may have higher Premium but lower Theta impact\.

Also, the PE Short should be initiated at such Strike, keeping in mind that if the underlying remains sideways then the Theta impact should yield reasonable profit in the hedged leg\. Current Month PE will have higher Theta impact\.

Also, higher PE Short Strike will have less amount of max profit, but a higher probability to generate max profit in case the underlying by Expiry closes near the PE Short Strike\. However, a lower PE Short Strike will have higher amount of max profit, but the underlying will have to close lower i\.e\. downwardly upto the lower PE Short Strike, in order to generate max reward on the Strategy\.

If there is rise in Volatility then PE Short on the hedged leg may be done at good Premium value at Far OTM PE Strikes, to target profit from Theta decay on the PE Short positions, especially if view on the underlying is inclined more on the bearish side\.

Basis aforesaid factors, depending on the intended holding time of the trade, a suitable PE Option Strike level of a particular Expiry series and Delta value may be selected for the hedged leg\.

__Adjustments \(if trade does not go as per plan\) in Covered Put Strategy__:

Since, in Covered Put Strategy, the hedged leg will be able to cover the losses arising in the primary leg to the extent of the Premium received on PE Short, the following adjustments may be considered: \(i\) Long CE; or \(ii\) Short PE\. These two adjustments are discussed below\.

1. If there seems to be a trending uptrend, then __CEs can be bought \(Long CE\)__\. Buying OTM CEs to protect the upside risk in a Covered Put  with OTM PE Short converts makes it akin to __Collar__ strategy for the Covered Put\. This additional CE will overcome the limitation of limited upside protection offered by the hedged leg of PE Short; and this CE Long position will take care of unlimited bullish trend if it continues\. Buying CEs to protect the upside risk in this Strategy will add a debit position, therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\.

While, the CE Long position will help PE Short to mitigate the loss incurred on the Futures  Short/Cash  Short in primary leg, but the difference between the Delta value of the Futures Short and CE Long will determine the net loss\. Thus, depending upon the momentum in the upside, suitable Delta value of CEs can be added \(ITM CEs would be preferrable if uptrend is expected with momentum so as to suitably cover the losses in Futures Short position\), so that in case of continuation of strong uptrend, Long CEs should generate more profit and help cover losses in the Futures Short primary leg\. Also, depending upon the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Long CEs in comparison to the original number of Lots initiated on the hedged leg of this Strategy\. Such number of CEs must be added, such that the effective overall Delta position of the Strategy becomes positive \(thus, favourable for the bullish move in the underlying\)\.

1. If there seems to be a slow uptrend, then an __OTM PEs can be sold \(Short PE\)__\. This additional PE Short will cover further losses that may be incurred in the Futures primary leg as the uptrend continues, to the extent of Premium received by selling this additional PE\. __Far OTM PEs can be sold__ \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the loss generated on the original Strategy \(due to Futures Short primary leg\)\. Generally, atleast 4 to 8 times more Lot quantity may be required to be added to Short PE in comparison to the original number of Lots in the hedged leg initiated on the original Strategy\. Such number of Short PEs must be added, such that the effective overall Delta position of the Strategy becomes positive \(thus, favourable for the bullish move in the underlying\)\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Payoff Chart of Covered Put Strategy__

__<end>__

__Profit and Loss in Covered Put Strategy, and its Calculations__

__Max Loss in Covered Put Strategy, from Expiry perspective:__

Above the Breakeven price level, there could be unlimited loss in this Strategy if the underlying keeps rising higher above the Breakeven Strike level of this Strategy\.

*Loss Level in Covered Put Strategy*: If by Expiry, the underlying closes on the upside,  above the Breakeven Strike level of the Strategy, then __from this BE level onwards the loss would commence and become unlimited as the underlying keeps trending higher __the said BE Strike level of the Strategy\.

__<start> *Example in Covered Put Strategy*__*: If Nifty Futures is at 17000 and a Covered Put Strategy is initiated with the following legs:*

*then if Nifty Futures starts rising above the Breakeven level of 17250 \(i\.e\. 17000 \+ 250\) then this Strategy would start incurring unlimited loss\. *__<end>__

__*Covered Put with Limited Max Loss:*__ If the Covered Put is initiated as a Poor Man’s Covered Put \(*i\.e\. with deep ITM PE having almost 100% Intrinsic Value, instead of Futures Short on the primary leg*\), then the unlimited max loss situation on a regular Covered Put, would get curtailed to the limited extent of the net premium debit incurred in the Strategy \(*i\.e\. premium debit paid on deep ITM PE * *minus premium credit collected on PE Short hedged leg*\)\.This is a big advantage of a Poor Man’s Covered Put\.

__Max Reward in Covered Put Strategy, from Expiry perspective__:

If the underlying moves downwardly, then the Futures’ Sell primary leg would be in profit; but if the Futures trends much lower crossing below the PE Short Strike, then the Futures Short leg  will generate profit but PE Short hedged leg would start generating loss\. However, due to the Delta difference between the Futures’ Short primary leg and the PE Short hedged leg, the Strategy would be in net profit and would generate limited max profit even if the underlying expires at or keeps trending lower than the PE Short leg\.

__*Max Profit Level in Covered Put Strategy*__: Thus, the maximum limited reward would be generated in this Strategy, if by Expiry the underlying closes at PE Short Strike or at any lower Strike than the PE Short Strike\. This max reward, which is however limited, and is calculated as:

__<start> Formula: Max profit = \[PE Short Strike \- premium credit received\] – \[Futures Selling Price\] X Lot qty <end>__

Thus, this maximum limited reward situation can be targeted on this Strategy when the view is rangebound to mildly bearish on the underlying\.

__*Profit Zone in Covered Put Strategy*__: If by Expiry the __underlying closes between the PE Short Strike and the BE Strike of the Strategy__, then also this Strategy would generate some profit\. However, if the underlying would close by Expiry closer towards the PE Short Strike, then the profit would be relatively higher, but if the underlying closes higher towards the BE Strike of the Strategy then the profit would be less\.

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__<end>__

__Profit & Loss Areas in Covered Put Strategy__

__Profit & Loss Levels on Covered Put Strategy, from Expiry perspective:__

1. __BE Level__: \[Futures Selling Price \+ Premium Credit received on PE Short leg\]
2. __Min Profit Level__: If underlying closes by Expiry below the BE Level 
4. __Profit Zone__:  If underlying closes by Expiry anywhere lower than the BE Level\. If underlying closes at or lower than PE Short Strike, then Max Profit is generated; and if underlying closes towards the BE Level \(*on the upside*\) then less profit generated on the Spread\.
6. __Max Loss Level__: If underlying closes by Expiry, above the BE Level, then the unlimited loss area starts; higher the underlying would close abive the BE Level, higher will be the loss incurred on the Strategy\. Thus, above the BE level, unlimited Max Loss may occur, depending on the rise in the underlying above the BE Level by Expiry\.
7. __Loss Zone__:  If underlying closes by Expiry anywhere higher than the BE Level, the Strategy enters into unlimited loss area\.  Higher the underlying will close by Expiry, higher will be the loss incurred on the Strategy\.

__<end>__

__Options Behaviour in Covered Put Strategy__

The primary objective in a regular Covered Put is to target profit due to rangebound\-to\-mild bearish move in the underlying\. However, even if the underlying gets bearish such that __the underlying closes by Expiry at or lower than the PE Short leg, then the limited max reward would be reaped on the Strategy__\. The Delta difference between the Futures Short \(*or Synthetic Futures: Deep ITM PE in case of Poor Man’s Covered Put Strategy*\) on the primary and the PE Short hedged leg, helps to maintain a balance between the net profit position, in case of extreme bearish move in the underlying\. The Delta difference in the Futures Short & PE Short leg would help ensuring the limited max profit on this Strategy, in the aforesaid situation, i\.e\. howsoever low the underlying keeps going below the PE Short Strike and closes by Expiry lower than the PE Short Strike, the max reward would be same\.

In case __the underlying remains rangebound__, then there will not be erosion on the Futures Short primary leg, but the PE Short leg will lose its premium \(*due to expansion & erosion in its Time Value*\), thereby generating profit on the overall Strategy\.

Further, __in case the underlying remains rangebound, and there is Volatility crash__ \(*i\.e\. India VIX crashes from 18 to 12*\), then there will not be erosion on the Futures Short primary leg, but the PE Short leg will lose its premium due to erosion in its Time Value due to volatility crash\. Thus, the Strategy would generate profit in such situation\. 

Also, __if after a long holding time, the underlying closes around the same level__ where the Strategy was initiated, then also there will not be much loss on the Futures Short primary leg, but the Theta impact on the PE short leg would generate profit on the Strategy to the extent of erosion in its Time Value\.

If the __underlying surges upwardly, but closes on Expiry between the PE Short Strike and the Breakeven Strike __\(*i\.e\. without breaching the BE Strike of the Strategy upwardly*\), then too this Strategy would yield some profit, because the loss in the Futures position would not be more than the profit generated on the PE Short leg \(*because the PE Short leg in such situation would expire worthless as OTM and entire premium credit would be the profit on the PE Short leg, which would set\-off the loss on Futures Short leg*\)\. However, in the aforesaid situation, higher the Futures rise towards the BE Strike level of the Strategy, lower would be the profit generated on the Strategy\.

However, __if the underlying gets trending upwardly and closes on Expiry above the Breakeven Strike__ \(*i\.e\. breaching the BE Strike of the Strategy upwardly*\), then the Strategy would yield loss, because the entire premium credit on PE Short leg would get exhausted due to the strong upmove/ gapup in the underlying and the hedged leg therefore will not be able to cover for any loss above the BE Strike level of the Strategy\. In such situation, higher the underlying rises above the BE Strike of the Strategy, the Futures Short position \(*having negative Delta of 1, on per Lot basis*\) would keep generating loss on the Strategy\. Further, in such situation, regular Covered Call with Futures Short position on the primary leg, would keep generating unlimited loss as the upward move continues in the underlying\. However, if the Strategy is played as a Poor Man’s Covered Put \(*with  primary leg comprising of Deep ITM PE\)*, then the max loss on the Strategy would be limited to the extent of net premium debit incurred on the Strategy, in the event the underlying keep extending its uptrend\.

__Demerits and Benefits of Covered Put Strategy__

__Demerits of Covered Put Strategy__:

- Shorting Futures and Shorting Options, both require huge margin and MTM issues\.
- While, Covered Put Strategy can also be played as Poor Man’s Covered Put, in which Futures’ Short primary leg is replaced with Synthetic Futures i\.e\. ITM PE with almost 100% Intrinsic Value, however, such deep ITM PE may not be liquid \(especially in case of Stock Options\)\.
- Low Volatility may not offer good premium for Shorting PEs for the hedged leg, thereby reducing the loss area/ Breakeven Strike upon reversal besides low Premium as profit from Theta decay\.
- Sometimes, it may be prudent to Short ITM PE for the hedged leg, to have larger Breakeven room on the upside on this Strategy\. But this Strategy may pose risk in instruments \(*like FNO stocks*\) where there is a requirement to comply with physical delivery obligations\. Because if the primary leg and/or Short leg comprising of FNO instruments expires as an ITM of such underlying / assets \(which is subject of physical delivery obligations\), then even though the Strategy may be overall profitable, but the trader would have to unnecessarily comply with the physical delivery obligations\. Hence, even if such assets/ underlying are chosen to play Covered Call \(even, Big Boy’s Covered Call\), then it is advisable to not hold the positions in Futures or Options till Expiry \(or even near to Expiry\)\. Instead, it is advisable to play this Strategy on Indices/ assets, where there is no requirements toward physical delivery *viz\. Nifty FNO / BankNifty FNO etc\.*

__Benefits of Covered Put Strategy:__

- Futures’ Short primary leg can be replaced with Synthetic Futures i\.e\. Long ITM PE with almost 100% Intrinsic Value \(called,  __Poor Man’s Covered Put__\) to avoid huge margin and MTM requirements applicable on Futures\. Further, such Synthetic Futures restricts the loss to maximum extent of the premium debit incurred on the Strategy \(*i\.e\. premium debit incurred on buying Synthetic Futures \(deep ITM PE\) minus premium credit collected on PE Short leg*\)\.
- This is a very suitable Strategy for a mild bearish to rangebound underlying \(as the PE Short hedged leg would generate profit due to Theta impact\)\.
- This Strategy is also suitable when the Volatility is relatively high, as PE Shorts for the hedged leg can be initiated at suitable Near OTM Strikes with good Premium\. When India VIX is high \(*like above 20 or so*\), then good premium credit can be targeted on Near ITM / ATM / Near OTM PE Strikes for the Short leg, and profit margin in such cases increases phenomenally\.

__Calendar__ __Spreads __\(*also called as *__*Time Spreads *__*or *__*Horizontal Spreads*__\) and __Diagonal Spreads:__

__Rangebound\-to\-Mild Bullish__ and __Rangebound\-to\-Mild Bearish__ view can be played through Calendar Spreads\. When the Long Option and the Short Option in a Spread Strategy, are initiated on different Expiry series, then such Spreads are called __Calendar__ __Spreads __\(also called as __Time Spreads __or __Horizontal Spreads__\)\. 

Mostly, Calendar Spread Strategy consists of: Short leg on closer Expiry series and Long leg on farther Expiry series, thus are also referred to as __Long Calendar Spread__\. However, a Calendar Spread can also be initiated with Short leg on farther Expiry series and the Long leg on closer Expiry series\. Such a Calendar Spread is called as __Reverse Calendar Spread __\(also called as__ Reverse Time Spreads __or__ Reverse Horizontal Spreads\)__\. Such Reverse Calendar Spread is a net Premium credit Strategy, and is therefore a __Short Calendar Spread__\.

Further, when the primary leg \(Short Option\) and the hedged leg \(Long Option\) in a Call Spread Strategy or Put Spread Strategy, are initiated not only on different Expiry series but also on different Strikes, then such Calendar Spreads are called __Diagonal Spreads__\. It is called a Diagonal Spread because it combines features of a Horizontal \(Calendar\) Spread and a Vertical Spread\. The Vertical Spread involves two same side Options of same Expiry series on different Strikes\.

The Calendar Spread can be made on Call side as well as on Put side, depending upon the view on the movement in the underlying\.

__Breakeven Strike of Put Calendar Spread Strategy, its Calculation and Payoff Chart__

__Breakeven Strike of Put Calendar Spread Strategy from Expiry perspective:__

The Breakeven of Calendar Spreads cannot be ascertained accurately \(*as Long leg’s premium value cannot be precisely ascertained on the Expiry of the Short leg, besides the impact of volatility situation prevailing at that time*\)\. However, we can deploy with Strategy with a tentative idea about the Breakeven, as discussed below\.

This Strategy has an upside BE Strike and a downside BE Strike\. These BE Strikes can be  tentatively determined applying the following logic:

- The BE Level for the PE Short leg, would be: \[PE Short Strike  *– *Premium Credit of PE Short leg\]\. Thus, if the underlying reaches upto this BE Strike level of PE Short leg on the downside, then PE Long leg \(*being on the same Strike*\) would also rise by about same points equivalent to the Premium Credit of the PE Short leg\. Thus, effectively, on the downside the loss from Expiry perspective would not happen at the PE Short leg’s BE Strike, but slightly more than twice the Premium Credit collected on the Short leg\. Therefore, the BE Strike on the lower side of the Strategy can be tentatively calculated with the following formula:

__<start> BE Strike on the downside for this Strategy = __PE Short Strike *–* \(2 x Premium Credit of the PE Short\) __<end>__

      Actual BE Strike on the lower side should be higher than that as determined from the above formula, because the PE Long leg would generate more profit \(*i\.e\. greater than the Premium Credit collected on the PE Short if the underlying reaches upto the BE Strike of the PE Short leg, as PE Long leg is on higher Expiry and hence experiencing higher Delta advantage and lower Theta impact*\)\. However, Volatility squeeze can cut down this extra cushion to the formation of BE Strike Level on the lower side for this Strategy\.  

- If the underlying takes an upward move, then the PE Short leg would cover the loss to the maximum extent of the Premium Credit collected on the PE Short leg, from Expiry perspective\. So, we can say that the BE Strike of the Strategy on the upside can be atleast: \[PE Short Strike \+ Premium Credit of PE Short leg\]\. Therefore, the BE Strike on the upper side  of the Strategy can be tentatively calculated with the following formula:

__<start> BE Strike on the upside for this Strategy = __\[PE Short Strike \+ Premium Credit of the PE Short\] __<end>__

     	Actual BE Strike on the upper side may get even smaller than that as determined from the above formula, because the PE Long leg may generate more loss \(*as PE Long leg may be on a higher negative Delta by virtue of being on higher Expiry*\)\. Further, Volatility squeeze may slightly reduce the BE Strike Level on the upper side for this Strategy\.  

Therefore, basis the aforesaid discussions and logic, we can conclude that we can tentatively determine the upper and lower BE Strike level for this Calendar Spread Strategy, applying the following formula:

- __BE Strike on the downside for this Strategy = __PE Short Strike *–* \(2 x Premium Credit of the PE Short\)
- __BE Strike on the upside for this Strategy = __PE Short Strike \+__ __Premium Credit of the PE Short\.

Thus, from Expiry perspective \(*i\.e\. Expiry of the PE Short leg, which is on closer Expiry than PE Long*\), if the underlying closes between the upside BE Strike and the downside BE Strike, then this Strategy would yield profit\. __<end>__

In the aforesaid example, where the trade legs of the Strategy are:

- Nifty 1 Lot Short PE ATM 17000 \(*at a premium of Rs\. 200 per Lot*\) Current Month Expiry
- Nifty 1 Lot long PE ATM 17000 \(at a premium of Rs\. 300 per Lot\) of Next Month Expiry

Then, BE Strike of the Strategy on the downside would be approx\.: 17000\-200\-100 = 16700 PE; and

BE Strike of the Strategy on the upside would be: 17000\+200 = 17200 PE\. __<end>__

__<start> Payoff for Put Calendar Spread:__

__<img51>__

__<end>__

__Put Calendar Spread Strategy: Its Trade Legs & Objective__

When the view on the underlying is sideways\-to\-mild bearish, we can play the limited downtrend / rangebound movement in the underlying through Long Calendar Spread Strategy on the PE side: 

- Shorting ATM / OTM Put Options of a closer Expiry Series \(the __primary __ __leg__\); and 
- initiating a Long PE on same Strike ATM /OTM position of a farther Expiry Series \(the __hedged leg__\)\. 

In this Spread, we are calling the PE Short leg as the primary leg, as we expect the PE Short leg of the Strategy to primarily generate profit due to erosion in its Premium value; and the expectation from the PE Long leg is to yield profit from a straight mild\-bearish move in the underlying \(besides covering for any losses that may occur on the PE Short leg, if the underlying gets super\-bearish\)\.

Further in this Put Calendar Spread, PE Short leg is on closer Expiry series and the PE Long leg is on farther Expiry series, therefore, this Long Calendar Spread is a net Premium debit Strategy\. Further, the primary leg and the hedged leg have the same number of Lots \(*i\.e\. the quantity is in the ratio of 1:1 in terms of Lots/ quantity*\), on the same underlying but on different Expiry series and at ATM Strike\. Thus, overall this Strategy is a __Put__ __Calendar Spread \(Long\) Strategy__\. 

Further, a Reverse Calendar Spread Strategy \(as a Short Spread\) on the PE side can be initiated for a rangebound\-to\-mild bullish view on the underlying, in which PE Short leg is initiated on ATM Strike of farther Expiry series and PE Long is initiated on ATM Strike of closer Expiry series\. This Strategy is called as __Reverse Put Calendar Spread__ or __Put__ __Calendar Spread \(Short\) Strategy__\.

__Put Calendar \(Long\) Spread Strategy__

The Put Calendar Spread Strategy, on the Long side, is discussed herein / in the Book\.

__Trade legs of Put Calendar \(Long\) Spread Strategy:__

- Short PE ATM of closer Expiry series \(*primary leg*\); and
- Long PE ATM of farther Expiry series \(*hedged leg*\)

Equal number of Lots in primary and hedged leg\.

PE Long leg being on farther Expiry series will have more Premium than the closer Expiry series PE Short, thus making it a __Net Debit Strategy__\. 

__<start> Example of Put Calendar \(Long\) Spread Strategy: __

- Nifty 1 Lot Long PE ATM 17000 \(at a premium of Rs\. 300 per Lot\) of Next Month Expiry

*Net premium debit incurred = premium paid – premium credit received = 300–200 = 100 per Lot\.* __<end>__

__Objective in Put Calendar \(Long\) Spread Strategy__:

Objective is to play rangebound to mild bearish view through Shorting ATM PEs of near Expiry as the primary leg;  and buying ATM PEs of farther Expiry series as the hedged leg\.   

Same Strike PE of farther Expiry series will have more Premium than the closer Expiry series, but a farther Expiry series will have lower Theta than the same Strike on closer Expiry series\. 

In this Strategy profit is targeted mainly on the PE Short primary leg \(*which on higher Theta due to closer Expiry*\), which will generate profit due to faster  erosion in Time Value \(than PE Long leg\) due to mild bearish or rangebound movement in the underlying\. This would be because PE Short leg has a closer Expiry than PE Long leg\.

This Strategy is played uptill the Expiry of the PE Short leg position \(*which is on closer Expiry series than the PE Long*\) in this Strategy\.

It is a limited reward and limited risk Strategy\.

__Adjustments in Put Calendar Spread__

__Adjustments \(if the underlying gets into an upward trend and Put Calendar Spread Strategy does not go as per plan\)__:

This Put Calendar Spread strategy is a Debit Calendar Spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on hedged leg and the Premium collected in the primary leg*\) could be the max loss on the Strategy from Expiry perspective \(*i\.e\. expiry of the PE Short leg*\), in case of a huge gapup / bullish momentum trend in the underlying\. 

The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy to the max extent of Net Premium debit incurred on the overall Strategy: \(i\) Short PEs; or \(ii\) Long CEs\. These adjustments are discussed below\.

1. Counter Adjustment through Short Option: __Far OTM PEs of same Expiry series as that of the hedged leg, below the Support level,  having an aggregate Premium credit received on these fresh Short PEs equivalent \(or more\) to the Net Premium paid on the Strategy can be sold__ \(i\.e\. additional Short PEs\)\. Idea in this adjustment is to pick up  suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry \(*even if the uptrend again reverses on the bearish side*\) thereby giving full Premium at which Short is initiated as profit\. The additional PE Shorts can be initiated on such aggregate Premium so as to cover for the Net Premium debit amount on the original Strategy\. As these additional PE Short would most likely be executed upon commencement of the uptrend, therefore, these additional PE Shorts would be on higher PE Strikes than original PE Short Strikes\. However, if sufficient premium value is not available on the Far OTM PE Shorts of the Current Expiry series \(*i\.e\. same Expiry series as that of the PE Short primary leg*\), then these additional PE Shorts may be initiated on Far OTM PEs below a suitable Support level, of even Next Week \(or even Next\-to\-Next Week\) Expiry series\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.
2. Counter Adjustments through Long CEs: If the uptrend is expected to be trending and  continued bullish in the underlying with strong momentum, then it would be advisable to initiate Counter Adjustments through Long CE in Near OTMs \(pertaining to Expiry series on which Long PEs are initiated\)\. The number of Long CEs should be such that this CE Long leg must be on higher Delta on aggregate basis than the existing PE Long leg\. Initiating such CE Long position will help cover the max loss that may be incurred on the Strategy to the extent of Net Premium debit on the Strategy\. However, this CE Long positions must only be added when there is strong conviction of continuation of bullish momentum\. Also, instead of naked Long CE positions as Counter Adjustment in this situation, Bull CE Debit Spread can also be initiated\. However, even this CE Spread must be executed with such quantity, such that the Net Delta of the Spread must be higher than the Delta of the PE long leg on aggregate basis\.

__Adjustments \(*if the underlying gets into super bearish momentum and the limited bearish move in Put Calendar Spread Strategy does not go as per plan*\)__:

The original Put Calendar Spread Strategy is basically adopted to benefit from Theta decay on the Short leg initiated on closer Expiry series\. However, if the underlying gets in a strong bearish momentum or makes a huge gapdown, then the hedged leg of PE Long will generate profit\. But with the underlying falling fast, the primary PE Short leg will generate loss, which if by its Expiry crosses below the Breakeven Strike of the hedged leg, then the PE Short position will become an ITM\. Even though the PE Long may also become an ITM in case of such huge bearish momentum in the underlying, but overall the Strategy may yield some loss\.

Having said above, the loss situation on the Put Calendar Spread Strategy, which may arise due to a strong momentum bearish move in the underlying can be mitigated by making following adjustments: \(i\) Long PE; or \(ii\) Short CE\. These adjustments are explained below:

1. Counter Adjustment through Long Option: If there seems to be a trending downtrend with momentum, then additional __PEs can be bought__ \(Long PE\) of the same Expiry series as that of the hedged leg \(*so as to keep Theta impact relatively lower on these additional PEs, than that of the primary PE Short leg*\)\. Buying PEs to protect the downside risk in the hedged leg of this Strategy, will add up another debit position, therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. This Long PE will help overcome the loss accruing on the Strategy due to super bearish move\. However, Long PEs should be initiated at Strike having Delta value higher than the current Delta value of the Short PE leg \(i\.e\. at a higher Strike than the PE sell Strike\), so that in case of continuation of strong downtrend, Long PEs should generate more profit than the loss generated by the Short PEs on the primary leg\. Also, depending upon the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Suitable number of Long PEs can be added, so as to ensure that the overall Delta position on aggregate basis on the Strategy become negative\. If the Long PEs generates profit covering up the loss generated by the PE Short leg,  then it would be advisable to immediately book the profit on the Strategy and exit\. This Counter Adjustment can also be done by initiating Bear PE Spread Strategy instead of initiating naked Long PEs\. But in case of such Bear PE Spread too, it must be ensured that the Delta value of the overall Strategy remains negative so as to generate overall profit on the Strategy due to continued bearish momentum\.
2. Counter Adjustment through Short CEs: The loss accruing in the short leg due to bearish momentum move in the underlying can also be adjusted by Shorting Far OTM CEs, which are above the Resistance level\. __Far OTM CEs of same Expiry series as that of the  primary PE Short leg, above the Resistance level,  having reasonable Premium credit \(*so as to further enhance the Breakeven Strike by adding premium credits on the Strategy*\) can be sold__\. Idea in this adjustment is to pick up a suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry \(*even if the downtrend again reverses on the bullish side*\) thereby giving full Premium at which CE Short is initiated as profit\. If, however, sufficient premium value is not available on the Far OTM CE Shorts of the Current Expiry series \(*i\.e\. same as that of the PE Short primary leg*\), then these CE Shorts may be initiated on Far OTM CEs  above the  suitable Resistance level, of even Next Week \(or even Next\-to\-Next Week\) Expiry series in order to take the Delta benefit of bearish move\. However, selling additional CEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Payoff for Put Calendar Spread__

__<end>__

__Profit & Loss in Put Calendar Spread, and its Calculations__

- __*Loss in Put Calendar Spread Strategy, from Expiry perspective*:__

__Max Loss on the Put Calendar Spread Strategy__:

Net Premium incurred in the Strategy \(*i\.e\. the difference between the: premium credit received on the primary leg  and the premium paid on  the hedged leg*\), is the Maximum Loss that may be incurred in this Strategy when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\.

*Net premium debit incurred = premium paid – premium credit received = 300–200 = 100 per Lot\.*

Thus, Max Loss in this Strategy, on Expiry of the PE Short leg, would be Rs\. 100 per quantity \(*i\.e\. for Nifty Rs\. 100 x 50 = Rs\. 5000 per Lot*\) when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\. <__end__>

- __*Profit in Put Calendar Spread Strategy, from Expiry perspective*:__

__Max Profit in Put Calendar Spread__: Maximum profit is generated in this Strategy when the underlying closes by Expiry at \(or near\) the PE Short Strike\.

Thus, if on Expiry, the underlying closes at \(or near\) the PE Short Strike, then the Short Strike position will expire as  an ATM / OTM yielding complete Premium Credit of the PE Short leg as profit\. At the same time, while even the PE Long would also be an ATM / OTM, it will still have sufficient premium value \(*due to lower Theta decay, as it is of a farther Expiry series  and there is ample time in its expiry*\)\. 

Therefore, the profit generated on the Short leg *minus *the loss of premium on the PE Long leg, would still generate  net profit on the Strategy\. Thus, we can get a tentative idea about the Max profit\. However, a precise Max profit will be difficult to ascertain \(*because the final premium value of Long leg cannot be precisely ascertained at the expiry of the Short leg; besides the impact of prevailing volatility on the Long leg at that time*\)\.

__Profit Level on overall Put Calendar Spread Strategy__:

If the underlying by Expiry closes anywhere between the upside and downside Breakeven Strikes of the Strategy, then this Strategy would yield some profit\.

__Profit Zone\(s\) in Put Calendar Spread Strategy:__

There are following two profit zones in this Strategy from Expiry perspective:

1. If the underlying by Expiry closes between the downside Breakeven Strike and PE Short Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards PE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the PE Short Strike on Expiry, then limited max profit will be realised on this Strategy\. However, if the underlying crosses beyond the BE Strike on the downside, then limited loss may be incurred\. 
2. If the underlying by Expiry closes between the PE Short Strike and upside Breakeven Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards BE Strike on the upside, lower will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the PE Short Strike on Expiry, then limited max profit will be realised on this Strategy\.  However, if the underlying crosses beyond the BE Strike on the upside, then limited loss may be incurred on Expiry of the Short leg in this Strategy\.

__<end>__

__Options Behaviour in Put Calendar Spread__

- This Strategy is basically adopted to benefit from Theta decay on the PE Short primary leg initiated on closer Expiry series, which has higher Theta decay than the Theta decay on PE Long leg initiated on farther Expiry, even though both PE Short and PE Long are initiated on ATM strikes of respective Expiry series\.
- Since, intention on this Strategy is to generate profit out of faster Theta decay on PE Short leg, therefore it must be targeted that sufficient premium value credit is received on the PE Short leg\.
- Higher the Premium credit on Short leg, lower the risk / Max Loss on the Strategy, because the Max Loss would be the Net premium Debit incurred on the overall Strategy\. 
- This Strategy is designed for a rangebound underlying to mild bearish move in the underlying, such that the underlying is not expected to breach the Breakeven Strike\(s\) of the Strategy, to reap Profit on the Strategy\.
- In case of mild bearish move of the underlying, the primary leg generates profit due to erosion in its Time Value with approaching Expiry; and the hedged leg generates profits due to mild bearish move\. However, in case of extreme gapdown or bearish move below the downside Breakeven Strike of the Strategy, both PE short leg and PE Long leg may become an ITM and both would rise in their premium value and the Strategy may yield some loss and may require adjustments to be made\. However, in this situation, the PE short leg even if it becomes an ITM, would have some Time Value left *which may be lost on its Expiry, thus reducing the final premium value of the PE Short Strike*\)\.
- However, if the underlying rises up swiftly \(*or makes a huge gapup*\), then in such extreme bullish situation, when the underlying would close by Expiry crossing above the upside BE Strike, this Strategy can yield a limited max loss  upto a maximum extent of the Net Premium Debit incurred on the overall Strategy\.
- Slight rise in Volatility may not adversely impact this Strategy, as slight rise in Volatility would be favourable to the PE Long leg\. Further, slight rise in Volatility may adversely impact the PE Short leg, however, if the underlying by Expiry remains between the Breakeven Strike\(s\) of the Strategy then PE Short leg would also generate some profit due to erosion in its Time Value by its Expiry \(*thereby nullifying the adverse impact of rise in its premium value due to slight rise in Volatility*\) as it becomes zero when it expires as an OTM\. 
- Falling state of Volatility may be favourable to this Strategy, as the drop in Volatility will erode the Premium value of both the primary leg and the hedged leg\. However, the fall in Volatility is likely to eventually cause more drop in the Premium of the primary Short leg than the hedged Long leg, as the fall in Volatility will get a further impetus by the higher Theta impact on the primary Short leg\.

__Put Calendar Spread, in different Market Situations__

__If trade goes as per plan and underlying remains rangebound, in Put Calendar Spread__:

If the movement of the underlying remains sluggish and rangebound, then the Theta impact would cause erosion in the Premium value of both PE Long and PE Short leg\. However, PE Short leg would suffer more from Theta decay/ erosion in its Time Value than the PE long leg and thus the Strategy would generate profit on overall basis\.

__If trade goes as per plan with limited bearish move, in Put Calendar Spread__:

If the underlying remains limited bearish, with underlying being slightly above the downside Breakeven Strike of the Strategy, then the PE Long leg will generate profit due to mild bearish move in the underlying and less erosion in its Time Value by virtue of being on a farther Expiry series\. Further, the PE Short leg would also generate profit to the extent of erosion in its Time Value due to expiry Theta effect\. Thus, the Strategy would generate profit on overall basis\.

__If trade goes as per plan with limited bullish move, in Put Calendar Spread__:

If the underlying remains limited bullish, with underlying closing below the upside Breakeven Strike of the Strategy, then the PE Short will expire as an OTM yielding its entire Premium Credit as profit; but the PE Long leg will generate less loss due to relatively less erosion in its Time Value by virtue of being on a farther Expiry series\. Thus, the Strategy would generate profit on overall basis\.

__If trade does not go as per plan, in Put Calendar Spread__:

- If the underlying gets into extreme uptrend \(or huge gapup\), then the PE Short leg will generate profit due to erosion in its premium value, may be to the maximum extent of premium credit received on the PE Short leg\. However, the PE Long will generate limited loss to the extent of Premium paid\. However, since, the overall Strategy is a Net Premium debit Strategy, therefore, in case of extreme bullish move in the underlying \(*crossing above the upside Breakeven Strike of the Strategy*\), the overall Strategy my yield Max Loss to the extent of the Net Premium debit incurred on the Strategy\. This Max Loss situation may be mitigated by making certain adjustments \(*as discussed below here*\)\.
- If the underlying gets into a strong bearish momentum or huge gapdown \(*as against a limited bearish move as originally expected in the Strategy*\), then the hedged leg of PE Long will generate profit\. But with the underlying falling fast \(*crossing below the downside Breakeven Strike of the Strategy*\), the primary leg comprising of PE Short leg will generate loss and if the strong bearish momentum continues in the underlying, then potential loss that may arise on the Strategy may  need to be contained by making certain adjustments\.

__Demerits & Merits of Put Calendar \(Long\) Spread Strategy__

__Demerits of Put Calendar \(Long\) Spread__:

- This Spread strategy will be suitable for a sideways\-to\-mild bearish move of the underlying\. Extreme bearish or bullish move in the underlying may cause loss on the Strategy\.
- If the bearish move catches strong momentum, then the primary Short leg will start giving loss if the underlying crosses below the tentative Breakeven Strike of the PE Short hedged leg\. In case of both strong bearish move in the underlying or extreme rise in Volatility, the PE Short will generate more loss than the profit generated on the PE Long leg\.
- In case the trend becomes strongly bearish, then the PE Short leg would start yielding MTM loss, thus requiring more capital to provide for MTM losses\.
- It is a Net Debit strategy i\.e\. Long PE leg has more premium debit incurred than the premium credit received on the PE Short leg \(*because it is on the closer Expiry*\)\. Thus, in case of extreme Volatility crash or strong bullish move in the underlying, the max loss to the extent of Net Premium debit paid on the Strategy, may be incurred\.
- It is a limited reward Strategy\.

__Benefits of PE Calendar \(Long\) Spread:__

- This is a very suitable Strategy for a sideways\-to\-mild bearish trend\. This Strategy is played to benefit from faster Theta decay on PE Short leg than PE Long leg\.
- The risk is limited to the extent of Net Premium paid on the Strategy, i\.e\. Max Loss is limited on the upside risk\.
- If the underlying remains rangebound, then in this Strategy, the PE Short primary leg \(*which on higher Theta due to closer Expiry*\), will generate profit due to faster  erosion in Time Value \(than PE Long leg\) due to rangebound movement in the underlying\.
- If there occurs any limited bearish move in the underlying, then also this Strategy  generates profit, because  PE Long leg would become an ITM generating profit with relatively less erosion in its Time Value; whereas,  the PE Short primary leg, even if it becomes an ITM, would speedily loose substantial portion of its Time Value as its Expiry approach closer\. Thus, the Strategy would be profitable in this scenario of mild bearish move in the underlying\.
- If there is a bullish move in the underlying, then too this Strategy would likely be profitable because PE Short leg would lose its premium by its Expiry, but the PE Long would have some premium left on the Expiry day of the PE Short leg\.
- Thus, we get a range in this Strategy, within which if the underlying closes on Expiry, then the Strategy yield profit\. This makes it akin to Short Straddle \(*except that Calendar Spread is a Net Premium Debit Strategy with limited loss on either side, whereas Short Straddle is a Net Premium Credit Strategy with  unlimited risk on either side*\)\.

__Breakeven Strike of Call Calendar \(Long\) Spread Strategy, its Calculation and Payoff Chart__

__Breakeven Strike of Call Calendar \(Long\) Spread Strategy, from Expiry perspective:__

The Breakeven of Calendar Spreads cannot be ascertained accurately \(*as Long leg’s premium value cannot be precisely ascertained on the Expiry of the Short leg, besides the impact of volatility situation prevailing at that time*\)\. However, we can deploy with Strategy with a tentative idea about the Breakeven, as discussed below\. 

- The BE Level for the CE Short leg, would be: CE Short Strike \+ Premium Credit of CE Short leg\. Thus, if the underlying reaches upto this BE Strike level of CE Short leg, then CE Long leg \(*being on the same Strike*\) would also rise by about same points equivalent to the Premium Credit of the CE Short leg\. Thus, effectively, on the upside the loss from Expiry perspective would not happen at the CE Short leg’s BE Strike, but slightly more than twice the Premium Credit collected on the Short leg\. Therefore, the BE Strike on the upper side of the Strategy can be tentatively calculated with the following formula:

__<start> BE Strike on the upside for this Strategy = __CE Short Strike \+ \(2 x Premium Credit of the CE Short\) __<end>__

Actual BE Strike on the upper side should be higher than that as determined from the above formula, because the CE Long leg would generate more profit \(*i\.e\. greater than the Premium Credit collected on the CE Short if the underlying reaches upto the BE Strike of the CE Short leg, as CE Long leg is on higher Expiry and hence experiencing higher Delta advantage and lower Theta impact*\)\. However, Volatility squeeze can cut down this extra cushion to the formation of BE Strike Level on the upper side for this Strategy\.  

- If the underlying takes a downward move, then the CE Short leg would cover the loss to the maximum extent of the Premium Credit collected on the CE Short leg, from Expiry perspective\. So, we can say that the BE Strike of the Strategy on the downside can be atleast: \[CE Short Strike *–* Premium Credit of CE Short leg\]\. Therefore, the BE Strike on the lower side of the Strategy can be tentatively calculated with the following formula:

__<start> BE Strike on the downside for this Strategy = __\[CE Short Strike *–* Premium Credit of the CE Short\] __<end>__

Actual BE Strike on the lower side may get even smaller than that as determined from the above formula, because the CE Long leg may generate more loss \(*as CE Long leg may be on a higher positive Delta by virtue of being on higher Expiry*\)\. Further, Volatility squeeze may slightly reduce the BE Strike Level on the lower side for this Strategy\.

Thus, basis the aforesaid discussions and logic, we can conclude that we can tentatively determine the upper and lower BE Strike level for this Calendar Spread Strategy, applying the following formula:__ __

- __BE Strike on the upside for this Strategy = __CE Short Strike \+ \(2 x Premium Credit of the CE Short\) 
- __BE Strike on the downside for this Strategy = __CE Short Strike *–* Premium Credit of the CE Short __<end>__

Therefore, from Expiry perspective \(*i\.e\. Expiry of the CE Short leg, which is on closer Expiry than CE Long*\), if the underlying closes between the upside BE Strike and the downside BE Strike, then this Strategy would yield profit\.

- Nifty 1 Lot Short CE ATM 17000 \(*at a premium of Rs\. 200 per Lot*\) Current Month Expiry
- Nifty 1 Lot long CE ATM 17000 \(at a premium of Rs\. 300 per Lot\) of Next Month Expiry

Then, BE Strike of the Strategy on the upside would be atleast: 17000\+ \(2 x 200\) = 17400 CE; and

BE Strike of the Strategy on the downside would be approx\.: 17000 *– *200 = 16800 CE\. __<end>__

__<start> Payoff for Call Calendar Spread:__

__<img50>__

__<end>__

__Call Calendar \(Long\) Spread Strategy: Its Trade legs & Objective__

When the view on the underlying is sideways\-to\-mild bullish, we can play the limited uptrend / rangebound movement in the underlying through Long Calendar Spread Strategy on the CE side: 

- Shorting ATM / OTM Call Options of a closer Expiry Series \(the __primary __ __leg__\); and 
- initiating a Long CE on same Strike ATM /OTM position of a farther Expiry Series \(the __hedged leg__\)\. 

In this Spread, we are calling the CE Short leg as the primary leg, as we expect the CE Short leg of the Strategy to primarily generate profit due to erosion in its Premium value; and the expectation from the CE Long leg is to yield profit from a straight mild\-bullish move in the underlying \(besides covering for any losses that may occur on the CE Short leg, if the underlying gets super\-bullish\)\.  

Further, in this Call side Calendar Spread, the CE Short leg is on closer Expiry series and the CE Long leg is on farther Expiry series, therefore, this Long Calendar Spread is a net Premium debit Strategy\. Also, the primary leg and the hedged leg have the same number of Lots \(*i\.e\. the quantity is in the ratio of 1:1 in terms of Lots/ quantity*\), on the same underlying but on different Expiry series and at same ATM / OTM Strike\. Thus, overall this Strategy is a __Call Calendar Spread \(Long\) Strategy__\.

Further, a Reverse Calendar Spread Strategy \(as a Short Spread\) on the CE side can be initiated for a rangebound\-to\-mild bearish view on the underlying, in which CE Short leg is initiated on ATM Strike of farther Expiry series and CE Long is initiated on ATM Strike of closer Expiry series\. This Strategy is called as __Reverse Call Calendar Spread__ or __Call Calendar Spread \(Short\) Strategy__\.

__Call Calendar \(Long\) Spread Strategy__

The Call Calendar Spread, as a Long Position, is discussed herein / in the Book\.

__Trade legs of Call Calendar \(Long\) Spread__:

- Short CE ATM of closer Expiry series \(*primary leg*\); and
- Long CE ATM of farther Expiry series \(*hedged leg*\)

CE Long leg being on farther Expiry series will have more Premium than the closer Expiry series CE Short, thus making it a __Net Debit Strategy__\. 

__<start> Example of Call Calendar \(Long\) Spread:__

- Nifty 1 Lot Long CE ATM 17000 \(at a premium of Rs\. 300 per Lot\) of Next Month Expiry

__Objective of Call Calendar \(Long\) Spread__:

Objective is to play rangebound to  mild bullish view through Shorting ATM CEs of near Expiry as the primary leg;  and buying ATM CEs of farther Expiry series as the hedged leg\.   

Same Strike CE of farther Expiry series will have more Premium than the closer Expiry series, but a farther Expiry series will have lower Theta than the same Strike on closer Expiry series\. 

In this Strategy profit is targeted mainly on the CE Short primary leg \(*which on higher Theta due to closer Expiry*\), which will generate profit due to faster  erosion in Time Value \(than CE Long leg\) due to mild bullish or rangebound movement in the underlying\. This would be because CE Short leg has a closer Expiry than CE Long leg\.

This Strategy is played uptill the Expiry of the CE Short leg position \(*which is on closer Expiry series than the CE Long*\) in this Strategy\.

__Adjustments  in Call Calendar Spread Strategy__

__Adjustments \(if the underlying gets into a downward trend and Call Calendar Spread Strategy does not go as per plan\)__:

This Call Calendar Spread strategy is a Debit Calendar Spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on hedged leg and the Premium collected in the primary leg*\) could be the max loss on the Strategy from Expiry perspective \(*i\.e\. expiry of the CE Short leg*\), in case of a huge gapdown / bearish momentum trend in the underlying\. 

The following adjustments can be considered to cover up for the potential loss that may occur in this Strategy to the max extent of Net Premium debit incurred on the overall Strategy: \(i\) Short CEs; or \(ii\) Long PEs\. These adjustments are discussed below\.

1. Counter Adjustment through Short Option: __Far OTM CEs of same Expiry series as that of the hedged leg, above the Resistance level,  having an aggregate Premium credit received on these fresh Short CEs equivalent \(or more\) to the Net Premium paid on the Strategy can be sold__ \(i\.e\. additional Short CEs\)\. Idea in this adjustment is to pick up  suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry \(*even if the downtrend again reverses on the bullish side*\) thereby giving full Premium at which Short is initiated as profit\. The additional CE Shorts can be initiated on such aggregate Premium so as to cover for the Net Premium debit amount on the original Strategy\. As these additional CE Short would most likely be executed upon commencement of the downtrend, therefore, these additional CE Shorts would be on lower CE Strikes than original CE Short Strikes\. However, if sufficient premium value is not available on the Far OTM CE Shorts of the Current Expiry series \(*i\.e\. same Expiry series as that of the CE Short primary leg*\), then these additional CE Shorts may be initiated on Far OTM CEs above a suitable Resistance level, of even Next Week \(or even Next\-to\-Next Week\) Expiry series\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.
2. Counter Adjustments through Long PEs: If the downtrend is expected to be trending and  continued bearish in the underlying with strong momentum, then it would be advisable to initiate Counter Adjustments through Long PE in Near OTMs \(pertaining to Expiry series on which Long CEs are initiated\)\. The number of Long PEs should be such that this PE Long leg must be on higher Delta on aggregate basis than the existing CE Long leg\. Initiating such PE Long position will help cover the max loss that may be incurred on the Strategy to the extent of Net Premium debit on the Strategy\. However, this PE Long positions must only be added when there is strong conviction of continuation of bearish momentum\. Also, instead of naked Long PE positions as Counter Adjustment in this situation, Bear PE Debit Spread can also be initiated\. However, even this PE Spread must be executed with such quantity, such that the Net Delta of the Spread must be higher than the Delta of the CE long leg on aggregate basis\.

__Adjustments \(*if the underlying gets into super bullish momentum and the limited bullish move in *Call Calendar Spread* Strategy does not go as per plan*\)__:

The original Call Calendar Spread Strategy is basically adopted to benefit from Theta decay on the Short leg initiated on closer Expiry series\. However, if the underlying gets in a strong bullish momentum or makes a huge gapup, then the hedged leg of CE Long will generate profit\. But with the underlying rising fast, the primary CE Short leg will generate loss, which if by its Expiry crosses above the Breakeven Strike of the hedged leg, then the CE Short position will become an ITM\. Even though the CE Long may also become an ITM in case of such huge bullish momentum in the underlying, but overall the Strategy may yield some loss\.

Having said above, the loss situation on the Call Calendar Spread Strategy, which may arise due to a strong momentum bullish move in the underlying can be mitigated by making following adjustments: \(i\) Long CE; or \(ii\) Short PE\. These adjustments are explained below:

1. Counter Adjustment through Long Option: If there seems to be a trending uptrend with momentum, then additional __CEs can be bought__ \(Long CE\) of the same Expiry series as that of the hedged leg \(*so as to keep Theta impact relatively lower on these additional CEs than that of the primary CE Short leg*\)\. Buying CEs to protect the upside risk in the hedged leg of this Strategy, will add up another debit position, therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. This Long CE will help overcome the loss accruing on the Strategy due to super bullish move\. However, Long CEs should be initiated at Strike having Delta value higher than the current Delta value of the Short CE leg \(i\.e\. at a lower Strike than the CE sell Strike\), so that in case of continuation of strong uptrend, Long CEs should generate more profit than the loss generated by the Short CEs on the primary leg\. Also, depending upon the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Suitable number of Long CEs can be added, so as to ensure that the overall Delta position on aggregate basis on the Strategy become positive\. If the Long CEs generates profit covering up the loss generated by the CE Short leg,  then it would be advisable to immediately book the profit on the Strategy and exit\. This Counter Adjustment can also be done by initiating Bull CE Spread Strategy instead of initiating naked Long CEs\. But in case of such Bull CE Spread too, it must be ensured that the Delta value of the overall Strategy remains positive so as to generate overall profit on the Strategy due to continued bullish momentum\.
2. Counter Adjustment through Short PEs: The loss accruing in the Short leg due to bullish momentum move in the underlying can also be adjusted by Shorting Far OTM PEs, which are below the Support level\. __Far OTM PEs of same Expiry series as that of the primary  CE Short leg, below the Support level,  having reasonable Premium credit \(*so as to further enhance the Breakeven Strike by adding premium credits on the Strategy*\) can be sold__\. Idea in this adjustment is to pick up a suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry \(*even if the uptrend again reverses on the bearish side*\) thereby giving full Premium at which PE Short is initiated as profit\. If, however, sufficient premium value is not available on the Far OTM PE Shorts of the Current Expiry series \(*i\.e\. same as that of the CE Short primary leg*\), then these PE Shorts may be initiated on Far OTM PEs below the  suitable Support level, of even Next Week \(or even Next\-to\-Next Week\) Expiry series in order to take the Delta benefit of bullish move\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__Payoff for Call Calendar Spread Strategy:__

__<end>__

__Profit &  Loss in Call Calendar Spread Strategy and its Calculations__

- __*Loss in Call Calendar Spread Strategy, from Expiry perspective*:__

__Max Loss on the Call Calendar Spread Strategy__:

Net Premium incurred in the Strategy \(*i\.e\. the difference between the: premium credit received on the primary leg  and the premium paid on  the hedged leg*\), is the Maximum Loss that may be incurred in this Strategy when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\. 

Thus, Max Loss in this Strategy, on Expiry of the CE Short leg, would be Rs\. 100 per quantity \(*i\.e\. for Nifty Rs\. 100 x 50 = Rs\. 5000 per Lot*\) when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\. __<end>__

- __*Profit in Call Calendar Spread Strategy, from Expiry perspective*:__

__Max Profit in Call Calendar Spread__: Maximum profit is generated in this Strategy when the underlying closes by Expiry at \(or near\) the CE Short Strike\.

Thus, if on Expiry, the underlying closes at \(or near\) the CE Short Strike, then the Short Strike position will expire as  an ATM / OTM yielding complete Premium Credit of the CE Short leg as profit\. At the same time, while even the CE Long would also be an ATM / OTM, it will still have sufficient premium value \(*due to lower Theta decay, as it is of a farther Expiry series  and there is ample time in its expiry*\)\. 

Therefore, the profit generated on the Short leg *minus *the loss of premium on the CE Long leg, would still generate  net profit on the Strategy\. Thus, we can get a tentative idea about the Max profit\. However, a precise Max profit will be difficult to ascertain \(*because the final premium value of Long leg cannot be precisely ascertained at the expiry of the Short leg; besides the impact of prevailing volatility on the Long at that time*\)\.

__Profit Level in Call Calendar Spread Strategy__:

__Profit Zone\(s\) in Call Calendar Spread Strategy:__

1. If the underlying by Expiry closes between the downside Breakeven Strike and CE Short Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards CE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the CE Short Strike on Expiry, then limited max profit will be realised on this Strategy\. However, if the underlying crosses beyond the BE Strike on the downside, then limited loss may be incurred\. 
2. If the underlying by Expiry closes between the CE Short Strike and upside Breakeven Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards BE Strike on the upside, lower will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the CE Short Strike on Expiry, then limited max profit will be realised on this Strategy\.  However, if the underlying crosses beyond the BE Strike on the upside, then limited loss may be incurred on Expiry of the Short leg in this Strategy\.

__Options Behaviour in Call Calendar Spread__

- This Strategy is basically adopted to benefit from Theta decay on the CE Short primary leg initiated on closer Expiry series, which has higher Theta decay than the Theta decay on CE Long leg initiated on farther Expiry, even though both CE Short and CE Long are initiated on ATM strikes of respective Expiry series\.
- Since, intention on this Strategy is to generate profit out of faster Theta decay on CE Short leg, therefore it must be targeted that sufficient premium value credit is received on the CE Short leg\.
- This Strategy is designed for a rangebound underlying to mild bullish move in the underlying, such that the underlying is not expected to breach the Breakeven Strike\(s\) of the Strategy , to reap Profit on the Strategy\.
- In case of mild bullish move of the underlying, the primary leg generates profit due to erosion in its Time Value with approaching Expiry; and the hedged leg generates profits due to mild bullish move\. However, in case of extreme gapup or bullish move beyond the upside Breakeven Strike of the Strategy, both CE short leg and CE Long leg may become an ITM and both would rise in their premium value and the Strategy may yield some loss and may require adjustments to be made\. However, in this situation, the CE short leg even if it becomes an ITM, would have some Time Value left \(*which may be lost on its Expiry, thus reducing the final premium value of the CE Short Strike*\)\.
- However, if the underlying falls down heavily \(*or makes a huge gapdown*\), then in such extreme bearish situation, when the underlying would close by Expiry crossing below the downside BE Strike, this Strategy can yield a limited max loss  upto a maximum extent of the Net Premium Debit incurred on the overall Strategy\.
- Slight rise in Volatility may not adversely impact this Strategy, as slight rise in Volatility would be favourable to the CE Long leg\. Further, slight rise in Volatility may adversely impact the CE Short leg, however, if the underlying by Expiry remains between the Breakeven Strike\(s\) of the Strategy then CE Short leg would also generate some profit due to erosion in its Time Value by its Expiry \(*thereby nullifying the adverse impact of rise in its premium value due to slight rise in Volatility*\) as it becomes zero when it expires as an OTM\)\. 

__Call Calendar Spread Strategy in Different Market Situations__

__If trade goes as per plan and underlying remains rangebound, in Call Calendar Spread Strategy__:

If the movement of the underlying remains sluggish and rangebound, then the Theta impact would cause erosion in the Premium value of both CE Long and CE Short leg\. However, CE Short leg would suffer more from Theta decay/ erosion in its Time Value than the CE long leg and thus the Strategy would generate profit on overall basis\. 

__If trade goes as per plan with limited bullish move, in Call Calendar Spread Strategy__:

If the underlying remains limited bullish, with underlying being slightly below the upside Breakeven Strike of the Strategy, then the CE Long leg will generate profit due to mild bullish move in the underlying and less erosion in its Time Value by virtue of being on a farther Expiry series\. Further, the CE Short leg would also generate profit to the extent of erosion in its Time Value due to expiry Theta effect\. Thus, the Strategy would generate profit on overall basis\.

__If trade goes as per plan with limited bearish move, in Call Calendar Spread Strategy__:

If the underlying remains limited bearish, with underlying closing above the downside Breakeven Strike of the Strategy, then the CE Short will expire as an OTM yielding its entire Premium Credit as profit; but the CE Long leg will generate less loss due to relatively less erosion in its Time Value by virtue of being on a farther Expiry series\. Thus, the Strategy would generate profit on overall basis\.

__If trade does not go as per plan, in Call Calendar Spread Strategy__:

- If the underlying gets into extreme downtrend \(or huge gapdown\), then the CE Short leg will generate profit due to erosion in its premium value, may be to the maximum extent of premium credit received on the CE Short leg\. However, the CE Long will generate limited loss to the extent of Premium paid\. However, since, the overall Strategy is a Net Premium debit Strategy, therefore, in case of extreme bearish move in the underlying \(*crossing below the downside Breakeven Strike of the Strategy*\), the overall Strategy my yield Max Loss to the extent of the Net Premium debit incurred on the Strategy\. This Max Loss situation may be mitigated by making certain adjustments \(*as discussed below here*\)\.
- If the underlying gets into a strong bullish momentum or huge gapup \(*as against a limited bullish move as originally expected in the Strategy*\), then the hedged leg of CE Long will generate profit\. But with the underlying rising fast \(*crossing above the upside Breakeven Strike of the Strategy*\), the primary leg comprising of CE Short leg will generate loss and if the strong bullish momentum continues in the underlying, then potential loss that may arise on the Strategy may need to be contained by making certain adjustments\.

__Demerits & Merits of Call Calendar \(Long\) Spread Strategy__

__Demerits of Call Calendar Spread Strategy__:

- This Spread strategy will be suitable for a mild  sideways\-to\-mild bullish move of the underlying\. Extreme bullish or bearish move in the underlying may cause loss on the Strategy\.
- If the bullish move catches strong momentum, then the primary Short leg will start giving loss if the underlying crosses above the tentative Breakeven Strike of the CE Short hedged leg\. In case of both strong bullish move in the underlying or extreme rise in Volatility, the CE Short will generate more loss than the profit generated on the CE Long leg\.
- In case the trend becomes strongly bullish, then the CE Short leg would start yielding MTM loss, thus requiring more capital to provide for MTM losses\.
- It is a Net Debit strategy i\.e\. Long CE leg has more premium debit incurred than the premium credit received on the CE Short leg \(*because it is on the closer Expiry*\)\. Thus, in case of extreme Volatility crash or strong bearish move in the underlying, the max loss to the extent of Net Premium debit paid on the Strategy, may be incurred\.

__Benefits CE Calendar Spread:__

- This is a very suitable Strategy for a sideways\-to\-mild bullish trend\. This Strategy is played to benefit from faster Theta decay on CE Short leg than CE Long leg\.
- The risk is limited to the extent of Net Premium paid on the Strategy, i\.e\. Max Loss is limited on the downside risk\.
- If the underlying remains rangebound, then in this Strategy, the CE Short primary leg \(*which on higher Theta due to closer Expiry*\), will generate profit due to faster  erosion in Time Value \(than CE Long leg\) due to rangebound movement in the underlying\.
- If there occurs any limited bullish move in the underlying, then also this Strategy  generates profit, because  CE Long leg would become an ITM generating profit with relatively less erosion in its Time Value; whereas,  the CE Short primary leg, even if it becomes an ITM, would speedily loose substantial portion of its Time Value as its Expiry approach closer\. Thus, the Strategy would be profitable in this scenario of mild bullish move in the underlying\.
- If there is a bearish move in the underlying, then too this Strategy would likely be profitable because CE Short leg would lose its premium by its Expiry, but the CE Long would have some premium left on the Expiry day of the CE Short leg\.

__Collar Strategy__: When in a Covered Call strategy, in order to contain a further downside risk \(due to trending downward momentum of the underlying\), Long OTM PEs position is added, then such Strategy is called a Collar in the context of a Covered Call\. 

__<start> Example__: \[Futures Long \+ OTM CE Short\] \+ OTM PEs Long\. __<end>__

Also, when a Married Put Strategy \[comprising: Stocks bought \+ OTM PE Long\] seems to be not going into a downwardly trending momentum \(as was anticipated\), but appears to be mildly bearish, then CE Shorts are added to cover for the losses on the Premium paid on the PE Long of Married Put\. This addition of Short CEs to Married Put, also makes this Strategy, a Collar Strategy\. 

__<start> Example__: \[Stocks bought \+ OTM PE Long\] \+ OTM CE Short\.  __<end>__

Likewise,__ __when in a Covered Put strategy, in order to contain a further upside risk, a Long OTM CE position is added, then such Strategy is called a Collar in the context of a Covered Put\. 

__<start> Example__: \[Futures Short \+ OTM PE Short\] \+ OTM CE Long\. __<end>__

__Breakeven Strike of Reverse Iron Fly Strategy, its calculation & Payoff Chart__

__*Breakeven Strike of Reverse Iron Fly Strategy, from Expiry perspective*__:

The CE side comprises of CE Long primary leg at higher Premium and CE short hedged leg at lower Premium\. Thus, there is a Net Premium Debit on the CE side of Reverse IronFly\.

Likewise, the PE side comprises of PE Long primary leg at higher Premium and PE Short hedged leg at lower Premium\. Thus, there is a Net Premium Debit on the PE side of Reverse Iron Fly\.

The sum of the Net Premium Debit on the CE and PE Side is the aggregate Net Premium Debit paid in this Strategy\. Accordingly:

- *the Breakeven Strike of the CE side in Reverse Iron Fly Strategy \(upper range\) is*: \[CE Long primary leg Strike \+ the aggregate Net Premium Debit in the strategy\]; and
- *the Breakeven Strike of the PE side in Reverse Iron Fly Strategy \(lower range\) is*: \[PE Short primary leg Strike \- the aggregate Net Premium Debit in the Strategy\]\. <__end__>

Thus, if by Expiry of the Long Options, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. However, if by Expiry of these Options, the underlying fails to cross\-over either upper or lower side of the Breakeven Strikes, then the Strategy would yield loss \(*which may extend to the maximum extent of the Net Premium paid on the Strategy*\)\. 

<__start__> *For example: If Nifty ATM is at 17000 for Reverse Iron Fly:* 

*Nifty 17000 is bought at Rs\. 350 per Lot & Nifty 17500 CE is sold at Rs\. 200 per Lot; and*

*Nifty 17000 PE is bought at Rs\. 300 per Lot & Nifty 16500 PE is sold at Rs\. 150 per Lot, then:*

*the Net Premium Debit paid on this Strategy will be: \[\(350\+300\) – \(200\+150\] = 650 – 350 = 300*

*Thus, the BE Strike of this Reverse Iron Fly Strategy will be:*

- *On CE side: 17000 \+ 300 = 17300 CE Strike; and*
- *On PE side: 17000 \- 300 = 16700 PE Strike*

*Thus, if by Expiry, the underlying successfully crosses\-over the aforesaid Breakeven Strikes \(either on the upper side or the lower side\), then this Strategy would yield profit; but if by Expiry, the underlying fails to successfully cross\-over the relevant Breakeven Strike on either side, then the Strategy would yield loss \(which may extend to the maximum extent of Rs\. 300 per Lot, i\.e\. the net Premium paid on this Strategy\)\.*

*Thus, in the aforementioned example: if the underlying goes higher until Expiry and successfully crosses\-over the upper Breakeven Strike i\.e\. 17300 CE and keeps trending higher then the Reverse Iron Fly Strategy will be in profit; but if the underlying by Expiry fails to successfully cross\-over the Breakeven Strike of 17300, then this Strategy will incur loss \(which may extend to the maximum extent of Net Premium paid on this Strategy \(i\.e\. Rs\. 300 per Lot\)\)\.*

*Likewise, if the underlying goes lower until Expiry and successfully crosses\-over the lower Breakeven Strike i\.e\. 16700 PE and keeps trending lower, then the Strategy will be in profit; but if the underlying by Expiry fails to successfully cross\-over the Breakeven Strike of 16700, then this Strategy will incur loss \(which may extend to the maximum extent of Net Premium paid on this Strategy \(i\.e\. Rs\. 300 per Lot\)\)\. *<__end__>

__Payoff of Reverse Iron Fly Strategy__

<__img59__>

<__end__>

__Reverse__ __Iron Fly or Reverse Iron Butterfly Strategy: Its Trade Legs & Objective__

Thus, when the view on the underlying is that it is expected to make one sided strong momentum move very soon, but it is not certain that in which direction the underlying would make such a move; and such situation is played out through Long positions in Naked ATM CE & PE Options, then such a Strategy is called __Long__ __Straddle__\.

However, when the Long Straddle \(naked Strategy\) is hedged with Short Options on OTM Strikes \(on both CE & PE side\), then such Strategy is called __Reverse__ __Iron Fly or Reverse Iron Butterfly \(also referred to as Long Iron Fly or Long Iron Butterfly\)__\. Usually, when the OTM Short legs of both CE & PE sides are closer to the ATM in this Strategy, then it is referred to as Reverse Iron Fly; and when the Short legs of both CE & PE sides are little farther away from the ATM in this Strategy, then it is referred to as Reverse Iron Butterfly Strategy\.

In Reverse Iron Butterfly Strategy, there is \(i\) ATM CE Long \(__CE primary leg__\) and OTM CE Short \(__CE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series; and \(ii\) ATM PE Long \(__PE primary leg__\) and OTM PE Short \(__PE hedged leg__\), in equal quantity, on the same underlying pertaining to same Expiry series\. In essence, Reverse Iron Butterfly is pairing of Bull Call Debit Spread Strategy and Bear Put Debit Spread Strategy joined at the ATM; and in aggregate involves 4 legs\. Like in Long Straddle, in Reverse Iron Butterfly too, the expectation is that the underlying will soon make a sudden one sided strong momentum move, and may trend much beyond the current level either upwardly or downwardly within a short span of time, crossing beyond the Breakeven Strikes of the Long Options on either side; however the hedged legs are added to the both the Long legs of Long Straddle in order to ensure that if the underlying do not soon make a sudden one sided strong momentum move as expected on either direction, such that the Breakeven Strike of Reverse Iron Fly Strategy is not crossed\-over by the underlying by Expiry, then the CE hedged leg and PE hedged leg will cover up for the losses that may be incurred on the CE & PE primary legs\. Thus, Reverse Iron Butterfly Strategy reduces the Loss amount in Long Straddle if the Breakeven range is not breached by the underlying with good momentum\. However, in doing so, the Unlimited Profit potential in naked Long Straddle is also reduced to pre\-calculated Limited Profit in Reverse Iron Butterfly, if the underlying moves swiftly with strong momentum on either side\.

__Trade Legs of Reverse__ __Iron Fly Strategy__:

- Long ATM CE Strike with higher Premium \(*CE primary leg*\) 
- Short OTM CE i\.e\. higher Strike with lower Premium \(*CE hedged leg*\)
- Long ATM PE Strike with higher Premium \(*PE primary leg*\)  
- Short OTM PE i\.e\. lower Strike with lower Premium \(*PE hedged leg*\)

CE Long and PE Long would be ATM Strike; and CE Short and PE Short must be of nearly same Premium value\. 

It is a hedged Long Straddle, making a pair of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy, joined at the ATM Strike\.

__<start> Example of Reverse__ __Iron Fly Startegy:__

*If Nifty ATM is at 17000, then for Reverse Iron Butterfly:*

- *Buy 4 Lots Nifty 17000 ATM CE of Current Week Expiry \(at Rs\. 220 per Lot\)*
- *Sell 4 Lots Nifty 17500 CE of Current Week Expiry \(at Rs\. 120 per Lot\)Id*
- *Buy 4 Lots Nifty 17000 ATM PE of Current Week Expiry \(at Rs\. 250 per Lot\) *
- *Sell 4 Lots Nifty 16500 PE of Current Week Expiry \(at Rs\. 160 per Lot\) *__<end>__

__Objective in Reverse__ __Iron Fly Strategy__:

Objective is to play a Neutral / uncertain strong momentum one\-sided directional move on the underlying on account of any event, news, outcomes etc\., through buying ATM CEs and PEs \(both as the primary leg\), as the expectation is that the underlying will soon make a sudden  strong momentum one\-sided directional move \(*or a huge gapup or gapdown*\),  and may trend in that direction, just like in a naked Long Straddle Strategy\.

However, in this Strategy: in order to mitigate the risk / loss that may arise if the underlying fails to breach the Breakeven Strike on the primary legs by Expiry, a pair of Short Options are also initiated simultaneously with the primary Long legs, such that this Strategy becomes hedged Long Straddle, comprising of a pair of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy, joined at the ATM through the Long legs\. Therefore, if the underlying fails to breach the Breakeven Strike of the Long Options, then OTM Short Options on the hedged leg would expire as an OTM too, thereby reducing the loss caused to the maximum extent of Premium paid on the Long legs, out of the Credit or Premium received on the Short legs\.

Thus, in effect, Reverse Iron Fly comprising of Bull CE Debit Spread Strategy and Bear PE Debit Spread Strategy, converts the naked Long Straddle into a hedged Long Straddle so as to cover and limit the loss that may arise in a naked Long Straddle position, if the underlying fails to breach the Breakeven Strike of the Long Straddle due to non\-arrival of a strong momentum trend in either direction\.

This Strategy comprising of two Long Options \(on ATM Strikes\) and two Short Options \(on OTM Strikes\) makes this strategy a Net Debit Strategy, because both the Long Options are initiated  by paying higher Premiums, and the Short Options are initiated by collecting lesser Premiums\.

On arrival of a soon strong momentum one\-sided directional move on the underlying \(or a huge gapup or gapdown\), either side of ATM Long primary leg becomes an ITM and the other side ATM Long position & Short position becomes an even farther OTM\. When the underlying crosses beyond the Breakeven Strike of this Strategy on either side such that the one of the Long Option side \(*i\.e\. CE side or PE side, as the case may be*\) becomes an ITM, then this Strategy generates profit; because the Long Option which becomes an ITM generates higher profit than the Net premium paid on the Strategy\. However, in this Strategy the profit potential gets limited \(due to the Short legs added to otherwise naked Long Straddle\)\.

Accordingly, this Strategy can generate limited loss to the maximum extent of the aggregate Net Premium paid on this Strategy, but if the underlying takes a strong momentum one\-sided trending move \(or a huge gapup or gapdown\), then this Strategy is capable of generating good profit, which is capable of yielding a limited pre\-calculated max profit\. Both the max profit & max loss in this Strategy can be pre\-calculated from Expiry perspective\.

__Significance & Impact of Strike / Delta value in Reverse Iron Fly Strategy__

__Strike / Delta value in Reverse Iron Fly Strategy__:

The two Long legs, i\.e\. CE Long and PE Long are ATMs, and consequently have same Delta value of 0\.5 \(on single Lot basis\)\. This equal Delta value Long legs helps to ensure uniformity in the profitability irrespective in whichever direction the momentum in the underlying arrives\. Likewise, the two Short hedged legs in this Strategy, i\.e\. CE Short  and PE Short must be Far OTMs, and can be initiated at such Strike levels which have more or less same LTP or Delta value\. This equal Delta value Short legs helps to ensure uniformity in profitability in one side \(*where momentum arrives*\) and the loss incidence on the other side \(*which is not favoured by the momentum move in the underlying*\)\. This is because, if there is uncertainty with regard to which direction the underlying is going to push forward its strong momentum move, then it is better to initiate both Long primary legs with equal Delta values as well as both Short legs with equal Delta values, thereby maintaining Delta neutrality at the time of initiating the Strategy\.

Thus, with approx\. equal Delta values on CE Long and PE Long legs; and equal Delta values on CE Short and PE Short legs, Delta neutrality is ensured in this Strategy to maintain a balance between the profit and loss situation amongst the two sides, i\.e\.: 

- when CE Long leg gets profitable due to rise in its LTP \(i\.e\. when underlying rises with momentum\), greater profitability is achieved as the CE Long Option moves up the higher Delta ladder \(as it slides deeper in the money\)\. However, with the rise in the underlying, the PE Long leg generates loss \(as the LTP of PE would reduce\) and the PE Long leg slides down lower Delta as it goes deeper out of the money\. But the rate at which greater profitability on CE side is generated *vis\-à\-vis* loss on the PE Long Option, gets wider and wider, as the underlying moves higher, because CE Long would move through ascending Delta values, whereas the PE Long would slide down through descending Delta values\. Further, while CE Long  leg generates profit as the underlying moves higher, however, the CE Short hedged leg incurs loss and accordingly net profit is generated between the CE Long & Short leg\. Similarly, as the underlying moves higher, the  PE Long leg generates loss, however, the PE Short hedged leg generates profit  and accordingly the loss generated by the PE Long is absorbed to some extent by the PE Short leg\. But the Delta neutrality ensured at the time of initiating the Strategy helps to generate increased profit on CE side and reduced loss on the PE side, as the underlying keeps trending higher\. 
- Likewise, when PE Long leg gets profitable due to rise in its LTP \(i\.e\. when underlying falls with momentum\), greater profitability is achieved as the PE Long Option moves up the higher Delta ladder \(as it slides deeper in the money\)\. However, with the fall in the underlying, the CE Long leg generates loss \(as the LTP of CE would reduce\) and the CE Long leg slides down lower Delta as it goes deeper out of the money\. But the rate at which greater profitability on PE side is generated *vis\-à\-vis* loss on the CE Long Option, gets wider and wider, as the underlying moves lower, because PE Long would move through ascending Delta values, whereas the CE Long would slide down through descending Delta values\. Further, while PE Long Option generates profit as the underlying moves lower, however, the PE Short hedged leg incurs loss and accordingly net profit is generated between the PE Long & Short leg\. Similarly, as the underlying moves lower, the  CE Long option generates loss however, the CE Short hedged leg generates profit  and accordingly the loss generated by the CE Long is absorbed to some extent by the CE Short leg\. But the Delta neutrality ensured at the time of initiating the Strategy helps to generate increased profit on PE side and reduced loss on the CE side, as the underlying keeps trending lower\.

<__start__> *For example: If Nifty ATM is at 17000, then for ensuring Delta neutrality in Reverse Iron Fly: *

- *For Long leg: If Nifty 17000 ATM CE is bought at Rs\. 350 per Lot and Nifty 17000 ATM PE is bought at Rs\. 300 per Lot, both having ATM Delta value of 0\.50 \(single Lot basis\); and*
- *For Short leg: if Nifty 17500 CE is sold at Rs\. 250 per Lot at Delta of 0\.3 \(single Lot basis\), then Nifty 16500 PE sell can be initiated at around Rs\. 150 per Lot having similar Delta value of approx\. 0\.29 \(single Lot basis\) *<__end__>

__Selection of Option Strikes in Reverse Iron Fly Strategy__:

Selection of the CE & PE Long legs are ATMs with same Delta value;  and CE & PE Short legs Strikes must be such OTM Strikes which have equal LTP / Delta values in order to maintain Delta neutrality at the time of initiating the Strategy, if the view is neutral and uncertain, but expecting huge gapup/ gapdown \(or very strong trending momentum in a very short span of time\)\.

Basis aforesaid factors, ATM CE & PE Option Strike levels for the Long leg and suitable OTM CE & PE for Short leg of a particular Expiry series may be selected for this Strategy\.

Since, the success of this Strategy is also mainly dependent on the low Theta decay, therefore farther Expiry series \(or larger time to Expiry Options\) would be preferable for this Strategy\.

__Options Behaviour in Reverse Iron Fly Strategy__

- In this Strategy, three factors help in generating profit: \(i\) strong momentum trending move of the underlying \(or huge gapup / gapdown; and \(ii\) the momentum trend should arrive soon, otherwise Theta decay would adversely impact the probability of profit; and \(iii\) Volatility should either rise or remain constant, but should not go into steep falling state\. Therefore, profitability in this Strategy is heavily dependent on these factors\.
- Further, since the CE & PE Strikes are ATM, it results in higher Premium being paid; and consequently this Strategy in order to generate profit, need very strong momentum to arrive soon such that the underlying crosses\-over the Breakeven Strike\. However, the Net Premium paid in this Strategy is lesser than the Total Premium paid on a naked Long Straddle, hence the Breakeven Strikes are shorter than the Long Straddle and max loss is lesser in this Strategy than the Long Straddle\.
- Further, as the Expiry approaches near, the Theta impact on the ATM Strike CE & PE is highest \(*if the underlying becomes sideways and both the primary Long legs remains an ATM*\), would cause erosion on the Premium values of the Long Options\. However, since in this Strategy the Long leg is hedged with Short positions therefore, the Theta also impacts the OTM CE & PE Short legs thereby helping to absorb the loss on the Long Options leg through profit on the Short leg\. Thus, near Expiry this Strategy must be avoided unless when quick strong momentum \(or huge gapup/ gapdown\) is expected within a very short span of time \(like next day or so\) after this Strategy is initiated\.
- Rise in Volatility is favourable for this Strategy as rise in Volatility will help the Premium of the Long Options to rise \(or to not cause them fall much\)\.Delta neutral position is strived for in this Strategy at the time of initiating this Strategy\.

__Adjustments in Reverse Iron Fly Strategy__

__Adjustments \(if the Breakeven Strike is not breached by the underlying and Reverse Iron Fly Strategy does not go as per plan\)__:

Since, this Reverse Iron Fly Strategy is a Premium Debit strategy, therefore, the Net  Premium paid \(*i\.e\. the difference between the total Premium paid  on the CE & PE Long leg and the total premium credit received on the CE & PE Short leg*\) need to be first recovered from the profit in this Strategy, from Expiry perspective, in order for this Reverse Iron Fly Strategy to be overall profitable by Expiry\. 

However, when underlying does not seem to be trending enough to be able to cross\-over the Breakeven Strike on either side by Expiry, then the potential loss \(*limited to the maximum extent of the Net Premium paid on this Reverse Iron Fly Strategy*\) situation can be handled by making following adjustments: \(i\) Short both CEs & PEs; or \(ii\) Short CEs; or \(iii\) Short PEs\. These adjustments are discussed below:

1. Counter Adjustment in Reverse Iron Fly through Short Option \(both sides\): If the underlying do not seem to be breaching the Breakeven Strike of this Reverse Iron Fly Strategy and seems to remain until Expiry of the Long Options, within a range, then, additional __Far OTM CEs and PEs can be sold __\(i\.e\. additional Short CE & PE to be initiated\)\. These additional Short CEs and PEs must be even Far OTMs than the Short Options on the hedged leg, and of the same or closer Expiry series than that of the Long Options leg\. 

Further, these additional Short CEs & PEs can be initiated on equal quantities but in such sufficient quantities to receive aggregate Credit which is equal to or more than the Net Debit incurred on this Strategy\. With this adjustment, the Reverse Iron Fly gets converted into both side Ratio Spreads \(*with more Shorts than Longs on both CE side & PE side*\)\.

Idea in this adjustment is to pick suitable Far OTM CEs & PEs for Shorting, such that these Far OTM Options expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This additional Short Options position will help cover the potential loss that may be generated on this Reverse Iron Fly Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying breaksout and breaches the Breakeven Strike on any side, then in that situation too these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Thus, suitable number of Short Options \(additional CEs and PEs Short\) need to be considered to be added as an adjustment to absorb or outweigh the loss in the Reverse Iron Fly Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to Short Options position as an adjustment in comparison to the original number of Lots initiated on the Strategy\. If the Short Options generates profit and reasonably minimizes the loss in this Strategy before Expiry,  then it would be advisable to book the profit and to exit this Strategy\. However, selling Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Counter Adjustment in Reverse Iron Fly through Short Option \(one side\): If there seems to be a slow trend on the downward, such that the Breakeven Strike does not seem to be breached downwardly \(i\.e\. on the PE side\)  in this Reverse Iron Fly Strategy  and the underlying seems to be  in a mild downwardly direction, then Far OTM __CEs can be sold__ \(i\.e\. additional Short CEs to be initiated\)\. However, If there seems to be a slow uptrend, such that the Breakeven Strike does not seem to be breached upwardly \(i\.e\. on the CE side\)  in this Strategy  and the underlying seems to be  in a mild upwardly direction, then Far OTM __PEs can be sold__ \(i\.e\. additional Short PEs to be initiated\)\. 

Idea in this adjustment is to pick up a suitable Far OTM Option for Shorting, such that this Far OTM Option expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This Short Options position will help cover the potential loss that may be generated on this Reverse Iron Fly Strategy\. Selection of a Far OTM Option for this adjustment is important because even if the direction of the underlying reverses on the opposite side \(i\.e\. against the additional Short Options position\), then these additional Short Options positions \(initiated as part of adjustments\) must be such which can be expected to expire as an OTM on Expiry, thereby generating profit to the extent of its Premium on Expiry\. Also, depending upon the potential loss in the original Strategy and the likely mild trend of the underlying and the Premium available on the relevant Far OTM Options \(CEs or PEs as the case may be\), suitable number of Options can be Shorted as an adjustment to absorb or outweigh the loss in the Strategy\. Generally, atleast 2 to 4 times more Lot quantity may be required to be added to these additional Short Options position in comparison to the original number of Lots initiated on the Reverse Iron Fly Strategy\. These additional Short Options position should be initiated at such Far OTM Strike\(s\), which may have reasonable Premium and is expected to expire worthless as OTM on Expiry\. However, selling additional Options will require higher margin / capital and MTM requirements will also have to be met\.

1. Adjustment in Reverse Iron Fly through Pyramiding: If the underlying seems to be moving in one direction \(and not really hovering in a range\) but with limited momentum and does not seem to be able to breach the Breakeven Strike in that direction \(CE or PE, as the case may be\), then Far OTM Options of that direction \(in which the underlying has been trending\) can be Shorted\. That is: If there seems to be a limited trend with momentum in the downward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the PE side, then additional Far OTM __PEs can be sold__ \(i\.e\. additional Short PEs to be initiated\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry\. Likewise, If there seems to be a limited trend with momentum in the upward direction, but the underlying does not seem to be able to breach the Breakeven Strike on the CE side by Expiry, then additional  Far OTM __CEs can be sold__ \(i\.e\. additional Short CEs to be initiated\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry\. 

- as the downtrend continues Far OTM PEs’ Premium would rise, therefore, additional Short PEs positions can be added at subsequent lower Strike levels as the downtrend continues with lower PEs gaining decent Premium values\. *For example, when the downtrend continues in Nifty, a Far OTM PE at 16000 having Premium of Rs\. 50 can be sold, thereafter when the Nifty slips down further, subsequent lower PE at 15800 \(whose Premium would have become 50 due to continuous downtrend\) can be sold in equal or double quantity and so on*\. 
- As the uptrend continues Far OTM CEs’ Premium would rise, therefore, additional Short CEs positions can be added at subsequent higher Strike levels as the uptrend continues with higher CEs gaining decent Premium values\. *For example, when the uptrend continues in Nifty, a Far OTM CE at 17800 having Premium of Rs\. 50 can be sold, thereafter when the Nifty rises further, subsequent higher CE at 17900 \(whose Premium would have become 50 due to continuous uptrend\) can be sold in equal or double quantity and so on*\.

__Reverse Iron Fly Strategy in Different Market Situations__

__If trade goes as per plan as trends beyond the Breakeven Strike, from Expiry perspective, in Reverse Iron Fly Strategy__:

If by Expiry of the Long Options, if the underlying starts trending strongly with momentum on one side \(*or if takes a huge gapup / gapdown*\) and successfully breaches the Breakeven Strikes of the Strategy on that particular side \(*i\.e\. either upwardly on the CE side or downwardly on the PE side*\), then this Strategy would yield profit\. The strength and length of the momentum would decide the quantum of profit in this Strategy\. 

Therefore, in case of continuous trending movement of the underlying \(or if takes a huge gapup / gapdown\)  after breaching of the Breakeven Strike on any one side by the underlying, a limited profit situation may arise on this Strategy from Expiry perspective\.    

__If underlying’s movement fails to breach the Breakeven Strike, from Expiry perspective, in Reverse Iron Fly Strategy__:

However, if by Expiry of the Options, the underlying fails to cross\-over the Breakeven Strikes either upwardly on the CE side or downwardly on the PE side, then the Strategy would yield loss\(*which may extend upto a maximum extent of the Net Premium paid on the Strategy*\)\.

<__end__>

__Loss in Reverse Iron Fly Strategy, and its Calculations__

__*Loss in Reverse Iron Fly Strategy, from Expiry perspective*:__

__Max Loss in Reverse Iron Fly: __If by Expiry of these Options, the underlying fails to cross\-over either upper or lower side of the Breakeven Strikes, then the Strategy would yield loss \(*which may extend to the maximum extent of the aggregate Net Premium paid on this Strategy*\)\. 

Thus, Maximum Loss in this Strategy will be limited and can be pre\-calculated\. The Maximum Loss in this Strategy is the Net Premium paid on this Strategy\.

__<start> Max Loss on Reverse Iron Fly __= \[*Aggregate Premium Paid on CE Long leg & PE Long Leg*\] __*minus*__ \[*Aggregate Premium Credit received on CE Short leg & PE Short Leg*\] <__end__>

__Max Loss scenario in Reverse Iron Fly:__

__Loss zone in Reverse Iron Fly:__

- *Loss Zone on the CE side in Reverse Iron Fly*: if the underlying closes higher than the CE Long leg but below the BE Strike on the CE side, then loss would be incurred on the Strategy\. Thus, on the CE side, CE Long Strike to BE Strike on the CE side of the Strategy is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on CE side; and higher loss would be generated on the Strategy if the underlying closes near or at the CE Long Strike\.
- *Loss zone on the PE side in Reverse Iron Fly*: if the underlying closes lower than the PE Long leg but above the BE Strike on the PE side, then some loss would be incurred on the Strategy\. Thus, on the PE side, PE Long Strike to BE Strike of the Strategy on the PE side is a Loss zone\. Lower loss would be generated on the Strategy if the underlying by Expiry closes  towards the BE Strike on PE side; and higher loss will be generated on the Strategy if the underIying closes near or at the PE Long Strike\.

*<*__start__*> Example: If Nifty ATM is at 17000, then for Reverse Iron Fly:* 

*Nifty 17000 CE is bought at Rs\. 350 per Lot & Nifty 17500 CE is sold at Rs\. 200 per Lot; and*

*the Net Premium Debit paid on this Strategy will be: \[\(350\+300\) – \(200\+150\)\] = 650 – 350 = 300*

*If the underlying fails to breach the Breakeven Strike of 17300 or 1670IExpiry, then this Strategy  would yield loss\. Further, if Nifty closes by Expiry at 17000 Strike \(i\.e\. the Strike at which Long legs have been initiated\), then Max Loss equivalent to total aggregate Premium of Rs\. 300 per Lot would be incurred on this Strategy\. *<__end__>

<__end__>

__Profit in Reverse Iron Fly Strategy, and its Calculations__

__*Profit in Reverse Iron Fly Strategy, from Expiry perspective*: __

__Max Profit in Reverse Iron Fly: __If by Expiry of the Options, the underlying successfully crosses\-over the Breakeven Strikes of the Strategy \(*either on the upper side or the lower side*\), then this Strategy would yield profit\. More trending the underlying gets in one direction with momentum \(or in case of huge gapup / gapdown\), crossing beyond the BE Strike level of the Strategy on that side, higher the profit that will be generated\. However, the Max Profit potential on this Strategy is limited \(*as against unlimited profit in naked Long Straddle, in case of continuous trending momentum on any particular side*\) and the max profit on this Strategy can be pre\-calculated\.

__Max Profit Level in Reverse Iron Fly:__

If the underlying by Expiry closes either at or beyond the Short leg of any particular side \(*i\.e\. CE Short leg on the upside and PE Short leg on the downside*\), then the Strategy would yield Max Profit, which is limited\. In this situation, both the Long leg & Short leg of that side Option \(*where the BE Strike is breached\) *becomes an ITM\. The other side of Options, both Long & Short leg becomes even farther OTM\. This situation generates the Limited Max Profit situation on the Strategy\. However, in this Strategy, even if the underlying gets trending on one side but it crosses beyond the Short leg of the Strategy on that side, then no higher profit would be generated on this Strategy from Expiry perspective other than the pre\-calculated Max Profit that can be generated on this Strategy\. Thus, this Strategy is a limited max profit Strategy; and the max profit on this Strategy can be pre\-calculated\. 

__Calculation of Max Profit on in Reverse Iron Fly Strategy:__

The Max Profit potential of this in Reverse Iron Fly Strategy can  be pre\-calculated as:

Using the above formula, the Max Profit potential for each of CE side and PE side can be separately calculated\. Thus, we can determine the Max Profit potential on any particular side of this in Reverse Iron Fly Strategy\. However, if the Strike difference between Long & Short leg is same for both CE side and PE side, then calculation of Max Profit as per aforesaid formula, would be same for both CE side and PE side\.

__Impact on Max Profit situation, due to variation in Strike Difference between CE side & PE side, in Reverse Iron Fly Strategy:__

__Profit Zone:__

- *Profit zone on CE side, in Reverse Iron Fly: *Thus, if the underlying by Expiry crosses above the BE Strike on the CE side and closes between the BE Strike on CE side and at or higher than the CE Short Strike, then the Strategy would generate profit on the CE side\. Therefore, this is the Profit zone on the CE side\. However, if the underlying closes by Expiry at or above the CE Short Strike then Max Profit would be generated on this Strategy\. The profit in this zone would be less, if the underlying closes just above the BE Strike level on the CE side; but if the underlying closes near the CE Short Strike level, then the Strategy would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or above the CE Short Strike by Expiry*\)\.
- *Profit zone on PE side, in Reverse Iron Fly: *Similarly, if the underlying by Expiry crosses below the BE Strike on the PE side and closes between the BE Strike on PE side and at or lower than the PE Short Strike, then the Strategy would generate profit on the PE side\. Therefore, this is the Profit zone on the PE side\. However, if the underlying closes by Expiry at or below the PE Short Strike then Max Profit would be generated on this Strategy\. The profit in this zone would be less, if the underlying closes just below the BE Strike level on the PE side; but if the underlying closes near the PE Short Strike level, then the Strategy would generate higher profit \(*which may extend upto Max Profit, if the underlying closes at or below the PE Short Strike by Expiry*\)\.

__Calculation of Profit generated on the Reverse Iron Fly Strategy:__

On arrival of a strong momentum one\-sided directional move on the underlying, that side of ATM Long primary leg becomes an ITM and the other side ATM Long position & Short position becomes Far OTMs\. The Option side which is in the direction of the momentum \(*i\.e\. Long Option on the CE side or PE side, as the case may be*\) which becomes an ITM due to movement in the underlying generates profit; and the other Option side which becomes Far OTMs generates loss\.

- \[the final premium value Long Option of the momentum side on Expiry \(*i\.e\.* *Long leg which becomes / expires as an ITM*\)\]

*<*__start__*> For example: If Nifty ATM is at 17000, then for Reverse Iron Fly: If Nifty 17000 CE is bought at Rs\. 350 per Lot & Nifty 17500 CE is sold at Rs\. 200 per Lot; and*

- *the Net Premium Debit paid on this Strategy will be: \[\(350\+300\) – \(200\+150\)\] = 650 – 350 = I00 per Lot*
- *Breakeven Strike of this Strategy on upper range will be: 17000 \+ 300 = 17300 CE*
- *Breakeven Strike of this Strategy on lower range will be: 17000 \- 300 = 16700 PE*

*Thus, in this in Reverse Iron Fly Strategy, if: *

1. *Nifty crosses above the Breakeven Strike of 17300 Strike upwardly by Expiry, then 17000 CE Long leg expires as an ITM generating profit, as CE Long leg Premium would rise\) and the PE 17000 Long expires as Far OTM generating loss \(as PE Long premium would fall\), thereby giving a net profit in this Strategy due to upward trending move in the Nifty\. Deeper the CE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. However, the maximum profit that can be realised on the CE side by Expiry would be: \[17500 CE –17000 CE\] – \[300\] = Rs\. 200 per Lot\. Thus, overall profit in such situation on the Strategy would be Rs\. 200 per qty in the Lot i\.e\. 50 x 200 = Rs\. 10,000 per Lot\. This max profit on CE side would be realized on Expiry, if the underlying trends higher and closes at or above the CE Short leg\. But if the underlying closes at 17400 on Expiry i\.e\. in the Profit Zone on the CE side, then the CE Long leg of 17000 would be an ITM with final premium value on Expiry of Rs\. 400 \(because on Expiry, the final premium value is equal to the Intrinsic Value of the ITM, which is calculated as ATM – ITM CE Strike\)\. Therefore, the final premium value of 17000 CE would be : \[17400–17000=400\]\. Thus, the final overall profit on the Strategy would be: 17000 CE final premium value – Net premium paid on the Strategy = 400 – 300 = Rs\. 100 per qty in a Lot i\.e\. 50 x 100 = Rs 5000 in a Lot\.   *
2. *Nifty crosses below the Breakeven Strike of 16700 Strike downwardly by Expiry, then 17000 PE Long leg expires as an ITM generating profit \(as PE Long leg Premium would rise\) and the CE 17000 Long expires as Far OTM generating loss \(as CE Long leg Premium would fall\), thereby giving a net profit in this Strategy due to downward trending move in the Nifty\. Deeper the PE Long leg goes as an ITM by Expiry, more profitable the Strategy would be\. However, the maximum profit on the PE side by Expiry would be: \[17000 PE – 16500 PE\] – \[300\] = Rs\. 200 per Lot\. Thus, overall profit in such situation on the Strategy would be Rs\. 200 per qty in the Lot i\.e\. 50 x 200 = Rs\. 10,000 per Lot\. This max profit on PE side would be realized on Expiry, if the underlying trends lower and closes at or below the PE Short leg\. But if the underlying closes at 16600 on Expiry i\.e\. in the Profit Zone on the PE side, then the PE Long leg of 17000 would be an ITM with final premium value on Expiry of Rs\. 400 \(because on Expiry, the final premium value is equal to the Intrinsic Value of the ITM, which is calculated as ITM PE Strike – ATM\)\. Therefore, the final premium value of 17000 PE would be \[17000\-16600=400\]\. Thus, the final overall profit on the Strategy would be: 17000 PE final premium value – Net premium paid on the Strategy = 400 – 300 = Rs\. 100 per qty in a Lot i\.e\. 50 x 100 = Rs 5000 in a Lot\.* *<*__end__*>*

<__end__>

__Profit & Loss Areas on the Reverse Iron Fly Strategy, and its Calculations__

__*Profit & Loss Levels on the Reverse Iron Fly Strategy, from Expiry perspective*:__

__<start> BE Level on CE side in Reverse Iron Fly__: \[CE Long Strike \+ Net Premium Debit paid on the Strategy\] __<end>__

__<start> BE Level on PE side in Reverse Iron Fly__: \[PE Long Strike – Net Premium Debit paid on the Strategy\] __<end>__

__Min Profit Level in Reverse Iron Fly__: If underlying closes by Expiry just above the BE Level on CE side \(*i\.e\. higher CE Strike than BE Strike*\) or if the underlying closes by Expiry just below the BE Level on PE side \(*i\.e\. lower PE Strike than BE Strike*\)\.

__Max Profit Level in Reverse Iron Fly__: Max Profit is limited if the underlying successfully crosses\-over the Short Strike on either CE side or PE Side \(*such that one side both Long & Short Strikes becomes an ITM*\)\. Anywhere deeper the underlying may close beyond the Short leg, the Max Profit shall be limited to the pre\-calculated Max Profit Level on that side\.

__Loss Zone in Reverse Iron Fly__:  If the underlying closes by Expiry anywhere between the BE Level on the CE side and the BE Strike on the PE side, then loss would be incurred on this Strategy\.

__Max Loss Zone in Reverse Iron Fly__:  If underlying closes by Expiry at the Strike on which CE Long and PE Long legs have been initiated, then Max Loss would be incurred on this Strategy\.

<__end__>

__Demerits & Merits of Reverse Iron Fly Strategy__

__Demerits of Reverse Iron Fly Strategy__:

- Since, in this Strategy on each CE and PE sides, there is one Long position initiated at a higher Premium ATM; and a Short position initiated at a lower Premium OTM\. Thus, each of the CE and PE legs have a Net Premium Debit \(*i\.e\. Premium paid on Long leg – Premium received on Short leg*\)\. This Net Debit Premium on Reverse Iron Fly Strategy is less than the aggregate Premium Debit on Long Straddle\.
- Since, this Strategy is a Net Debit Strategy, therefore, from Expiry perspective, the aggregate Net Premium paid need to be first covered up as profit in this Strategy, to become overall profitable in this Strategy\.
- This Strategy is workable/ profitable only when there is a strong conviction that soon there will be arrival of a strong momentum one\-sided trending move of the underlying \(or a huge gapup or gapdown\)\. From Expiry perspective, for this Strategy  to be profitable it is required that the  underlying must either trend downwardly and cross below the Breakeven Strike of this Strategy on the PE side; or  the underlying must trend upwardly and cross above the Breakeven Strike of this Strategy on the CE side \(*the Breakeven Strikes in this Strategy are discussed below here*\)\. 
- Thus, with the passage of time, if the underlying does not move with momentum, then both the Long legs may continue to be ATM Strikes \(*or one side Options may be a near ITM and another side Options may be a near OTM*\) and the primary leg starts generating loss due to the rising Theta impact\. At the same time, both the Short legs will generate profit due to Theta decay in aforesaid situation\. Thus, if by Expiry of the Options, if the underlying fails to make the one\-sided momentum trending move \(or huge gapup/ gapdown\) and do not cross the Breakeven Strike of this Strategy on either side, then both the Long legs and may expire as ATM/OTM and both the Short legs would expire worthless as OTM, thereby this Strategy may generate maximum loss to the extent of aggregate Net Premium paid on this Strategy\.
- Therefore, two factors which are most detrimental to this Strategy are: \(i\) rangebound move in the underlying; and \(ii\) Theta impact on the primary legs\. Therefore, this Strategy is heavily dependent on strong momentum one\-sided trending move of the underlying \(or a huge gapup/ gapdown\)\.
- When the Volatility is in a falling state, then there will be erosion caused to the Premium of the Long Options \(or it may act as a deterrence to let the Premium of the Long Options rise\), thereby making this Strategy not viable from profit perspective, as even though the erosion would also be caused in the Premium Credit on the Short legs but the fall in Volatility may expedite loss of Net Premium Debit made on this Strategy\.

__Benefits of Reverse Iron Fly:__

- This is a neutral Strategy i\.e\. when the view is uncertain in which direction the underlying can move with strong momentum \(or might take a huge gapup or gapdown\) as a result of any news, event or outcome etc\., this Strategy can be implemented\.  
- It is a hedged Strategy \(i\.e\. Reverse Iron Fly is hedged Long Straddle\)\. 
- Thus, rise in Volatility and one\-sided strong momentum trending move is the requirement for profitability in this Strategy\. Further, if there is huge Volatility spike, then the premium value of both CE Long and PE Long legs would rise exponentially, even if there is no significant move in the underlying\.

__Customised Strategies in the Book__

Now, we will be discussing about a few Customised Strategies, which can be deployed, to successfully play different market trends with more precision, high probability and controlled risk\. These Strategies are advanced versions of the Conventional Strategies; and these have been designed keeping in mind certain market conditions and specific parameters, so as to optimise a better risk and reward situation\. We would be discussing in detail about all the relevant factors which make these Customised Strategies extremely powerful and rewarding when played in the relevant market conditions\.

In order to appreciate the design and the relevant factors which defines and optimises these Customised Strategies, it is very important to have a sound understanding about the following concepts regarding FNO, broadly segregated below: 

2. Factors to be considered for initiating / designing a trading position / Strategy \(*viz\., trend, Premium debit/credit*<a id="_Hlk138293718"></a>*, effects of Options Greeks etc\.*\) and Trade Adjustments that may be considered if the original trade position goes wrong\. 

These aforesaid aspects are extremely crucial and forms the backbone of all the F&O trades\. Of these two broadly categorised concepts, topics mentioned as \(i\) above are explained in Volume\-I of our  Book and those mentioned as \(ii\) above have been explained in Volume\-II of our Book\. Make sure that you have a sound understanding of these important concepts, as it will help you to plan, identify, execute, ride manage and adjust a trading position, basis the dynamic market conditions\.

Here we will learn and focus on a few significant and highly successful Customised Strategies involving Options, both naked and hedged trades\. <a id="_Hlk138694141"></a>Further, we would be discussing here in\-depth about various important parameters in relation to each of the Customised Strategies, viz\. __its objective, merits & demerits, Breakeven levels, Profit & loss scenario, Payoff charts, Risk & Reward, Options behaviour and inter\-play of Greeks, selection of Strikes, the logic behind the design of a Strategy and possible adjustments should the Strategy seems to fail its expectation__\. We have also explained about the aspects of Technical Analysis which may be considered to ascertain the trend for which a particular Strategy has been designed\. While discussing each of these Strategies, we have tried to cover as many aspects as are practically relevant to be learnt about these Strategies; and have thus provided comprehensive coverage to each heads and subheads for each Strategy, to bring ultra\-clarity and sound understanding on their various facets\.

__Word of Caution in respect of F&O Trading__

Before we start discussions on various F&O Strategies, we would like to again upfront highlight as a __caution that:__ __one must avoid to trade in FNO instruments of such asset class / underlying \(*like FNO stocks*\), where there is a requirement to comply with physical delivery__\. Because if the FNO instruments of such underlying / assets \(*which is subject of physical delivery requirements*\) expires as an ITM, then even though any given Strategy may be overall profitable, but such situation may warrant the trader to unnecessarily comply with the physical delivery requirements\. Hence, if any Strategy is executed deploying F&O instruments in relation to such assets/ underlying \(*which are subject to physical delivery requirements*\), then it is advisable to not hold the trading positions in such instruments till Expiry \(or even near to Expiry\)\. Instead, it is advisable to play any trading Strategy\(ies\) on positional basis, only on Indices/ assets, where there is no requirements toward physical delivery *viz\. Nifty FNO / BankNifty FNO / FinNifty FNO etc\., *so as completely avoid unwarranted situation which may fall upon due to any factor beyond one’s control\.

<a id="_Hlk138694829"></a>Also, it must be clearly understood that knowing Strategies alone is not sufficient to be profitable in a trade, as the market can be unexpectedly very volatility \(especially on Expiry Days\) and there can be numerous factors beyond the knowledge and control of a trader which may influence the trade plan or outcome of a Strategy\. Therefore, every trader must first acquire the relevant knowledge and then devote time to develop his trading skill by testing different Strategies in different market conditions, by practicing first on some virtual trading platform and then starting with real trades in just one or two Lots\. We have discussed about this aspect of learning and skill development in detail in our __Chapter: Golden Rules \(‘Dos’ & Don’ts in Trading’\)__ contained in Volume I of our Book\. Please go through that Chapter, before you decide to start initiating real trades\.

__List of Customised Strategies covered in the Book__

Having said above, we are going to now explore about 20 different high probability Customised Strategies, which can be successfully played out basis specific prevailing market dynamics\. <a id="_Hlk138694068"></a>The Customised Strategies which are discussed in our Book, are outlined in the Table below:

“__Sl\. No\.__”: “1”, “__Strategy__”: “Futures Hedge \(for intraday & positional momentum play\)”, “__Trade Positions__”: “\[Futures Long \+ ITM PE Long\]”, “__To Play the Trend__”: “Bullish Momentum”,

“__Sl\. No\.__”: “2”, “__Strategy__”: “Futures Hedge \(for intraday & positional momentum play\)”, “__Trade Positions__”: “\[Futures Short \+ ITM CE Long\]”, “__To Play the Trend__”: “Bearish Momentum”,

“__Sl\. No\.__”: “3”, “__Strategy__”: “__Hedge\-17: Basis contra movement in Nifty & BankNifty Indices__

__\(for Mid\-Range Market, Positional Trade\)__”, “__Trade Positions__”: “\[\(BankNifty OTM CE Sell \+ Nifty Synthetic Futures \(ITM CE\) Buy\) and \(Nifty Bull CE Debit Spread\)\]”, “__To Play the Trend__”: “Mild Bullish \(Retest Resistance\) or when BNF Weak & Nifty Strong”,

“__Sl\. No\.__”: “4”, “__Strategy__”: “__Hedge\-17: Basis contra movement in Nifty & BankNifty Indices__

__\(for Mid\-Range Market, Positional Trade\)__”, “__Trade Positions__”: “\[\(BankNifty OTM PE Sell \+ Nifty Synthetic Futures \(ITM PE\) Buy\) and \(Nifty Bear PE Debit Spread\)\]”, “__To Play the Trend__”: “Mild Bearish \(Retest Support\) or when BNF Strong & Nifty Weak”,

“__Sl\. No\.__”: “5”, “__Strategy__”: “__A\-19 Hedge: Calendar Long Spread Strategy \(for Rangebound Market, Positional Trade\)__”, “__Trade Positions__”: “\[CE Calendar Spread: ATM CE Sell of Closer Expiry \+ ATM CE Buy of Farther Expiry\]”, “__To Play the Trend__”: “Rangebound to Mild Bullish”,

“__Sl\. No\.__”: “6”, “__Strategy__”: “__A\-19 Hedge: Calendar Long Spread Strategy \(for Rangebound Market, Positional Trade\)__”, “__Trade Positions__”: “\[PE Calendar Spread: ATM PE Sell of Closer Expiry \+ ATM PE Buy of Farther Expiry\]”, “__To Play the Trend__”: “Rangebound to Mild Bearish”,

“__Sl\. No\.__”: “7”, “__Strategy__”: “__1:4 Diagonal Ratio Spread \(Targeting Overnight Expiry Decay\)__

__\(For BTST / STBT Trade\)__”, “__Trade Positions__”: “\[1:4 CE Diagonal Ratio Spread: OTM CE Sell Current Week \+ OTM CE Long Next Week\]”, “__To Play the Trend__”: “Mild Bullish”,

“__Sl\. No\.__”: “8”, “__Strategy__”: “__1:4 Diagonal Ratio Spread \(Targeting Overnight Expiry Decay\)__

__\(For BTST / STBT Trade\)__”, “__Trade Positions__”: “\[1:4 PE Diagonal  Ratio Spread: OTM PE Sell Current Week \+ OTM PE Long Next Week\]”, “__To Play the Trend__”: “Mild Bearish”,

“__Sl\. No\.__”: “9”, “__Strategy__”: “__1:4 Diagonal Ratio Spread \(Targeting Overnight Expiry Decay\)__

__\(For BTST / STBT Trade\)__”, “__Trade Positions__”: “\[\(OTM CE Sell Current Week \+ OTM CE Long Next Week\) and \(OTM PE Sell Current Week \+ OTM PE Long Next Week\)\]”, “__To Play the Trend__”: “Non\-Directional”,

“__Sl\. No\.__”: “10”, “__Strategy__”: “__Toofani Hedge: Diagonal Spread \(for Intraday and Positional Trade till Expiry\)__”, “__Trade Positions__”: “\[OTM CE Sell of Closer Expiry \+ OTM CE Buy of Farther Expiry\]”, “__To Play the Trend__”: “Mild Bullish”,

“__Sl\. No\.__”: “11”, “__Strategy__”: “__Toofani Hedge: Diagonal Spread \(for Intraday and Positional Trade till Expiry\)__”, “__Trade Positions__”: “\[OTM PE Sell of Closer Expiry \+ OTM PE Buy of Farther Expiry\]”, “__To Play the Trend__”: “Mild Bearish”,

“__Sl\. No\.__”: “12”, “__Strategy__”: “__Toofani Hedge: Diagonal Spread \(for Intraday and Positional Trade till Expiry\)__”, “__Trade Positions__”: “\[\(OTM CE Sell of Closer Expiry \+ OTM CE Buy of Farther Expiry\) and \(OTM PE Sell of Closer Expiry \+ OTM PE Buy of Farther Expiry\)\]”, “__To Play the Trend__”: “Non\-Directional Rangebound”,

“__Sl\. No\.__”: “13”, “__Strategy__”: “__Advanced Covered Call Strategy \(for Positional trade\)__”, “__Trade Positions__”: “\[\(Futures Long \+ CE Short\) \+ \(PE Long \+ Bear PE Debit Spread\)\]”, “__To Play the Trend__”: “Mild Bullish”,

“__Sl\. No\.__”: “14”, “__Strategy__”: “__Advanced Covered Put Strategy \(for Positional trade\)__”, “__Trade Positions__”: “\[\(Futures Short \+ PE Short\) \+ \(CE Long \+ Bull CE Debit Spread\)\]”, “__To Play the Trend__”: “Mild Bearish”,

“__Sl\. No\.__”: “15”, “__Strategy__”: “__Non\-Directional Credit Ratio Spread Strategy \(for Positional trade\)__”, “__Trade Positions__”: “\[Both CE Credit Ratio Spread & PE Credit Ratio Spread: \(Far OTM CE Long \+ Farther OTM CE Short in 1:2 Ratio\) \+ \(Far OTM PE Long \+ Farther OTM PE Short in 1:2 Ratio\)\]”, “__To Play the Trend__”: “Non\-directional \(wide range\)”,

“__Sl\. No\.__”: “16”, “__Strategy__”: “__Far Month Expiry: Short Opportunity \(for Positional trade\)__”, “__Trade Positions__”: “\[New Far Month Expiry Series: OTM PE Sell\]”, “__To Play the Trend__”: “Bullish / Mild Bullish”,

“__Sl\. No\.__”: “17”, “__Strategy__”: “__Far Month Expiry: Short Opportunity \(for Positional trade\)__”, “__Trade Positions__”: “\[New Far Month Expiry Series: OTM CE Sell\]”, “__To Play the Trend__”: “Bearish / Mild Bearish”,

“__Sl\. No\.__”: “18”, “__Strategy__”: “__Regular Income from Options Strategy \(for Positional trade\)__”, “__Trade Positions__”: “\[Covered Call with Index Bees:\(Long Nifty Bees / Bank Bees\) \+ \(Near ITM/ ATM CE Short\)\]”, “__To Play the Trend__”: “Regular Income”,

“__Sl\. No\.__”: “19”, “__Strategy__”: “__Naked Option Buying Opportunity \(for Positional trade\)__”, “__Trade Positions__”: “\[Long Strategy in Stone\-age Options\]”, “__To Play the Trend__”: “Directional”,

“__Sl\. No\.__”: “20”, “__Strategy__”: “__Naked Option Buying Opportunity \(for Positional trade\)__”, “__Trade Positions__”: “\[Long Strategy in Stone\-age Options\]”, “__To Play the Trend__”: “Non\-Directional”,  

<__end__>

Apart from the fact that the aforesaid Strategies pertain to play out different market conditions; these aforesaid Strategies is a mixed bag of Strategies, involving: both naked & hedged Strategies\. These Strategies will further arm the traders with additional arsenal besides the Conventional Strategies already covered in the Book\.

Further, for the purpose of practical trading, it is important to understand the objective, logic, merits & demerits, play of Options’ behaviour, selection of Strikes, Breakeven Strikes to determine the profit & loss area and the risk & reward calculations for each of these Strategies, and also the possible adjustments that may be employed in case the trade does not seem to be going as expected\. Thus, we would be discussing all of the aforesaid factors in relation to the said Strategies, so as to get a comprehensive understanding about them\.

Thus, we have explored around 20 Customised Strategies, which can be successfully deployed to play out the specific market condition for which they are designed\.

Further, as already mentioned above and as you must have noted that in order to be able to dissect a Strategy or to initiate/ manage a trading position, every trader must have a sound understanding about the relevant aspects, viz\.  the net premium position, the net Delta position on inception, the inter\-play of Greeks, behaviour of Options to different market scenarios, profit & loss levels, risk and reward potential etc\. A sound understanding of these concepts  helps a great deal in planning and managing a trade, and to eventually evolve as a pro\. It is, therefore, a sincere request to revisit any of the Chapters \(in this Volume\-II or Volume\-I of our Book\) on any of the aforementioned aspects, if the same is still not very clear\. I am sure, a thorough read would help you absorb the concept and include the same in your knowledge bank, which will be your arsenal in the battlefield of trading\.

__Breakeven Strike of Ratio Credit Spread \(Non\-Directional\) Strategy, its Calculation & Payoff Chart__

__*Breakeven Strike of Ratio Credit Spread \(Non\-Directional\) Strategy, from Expiry perspective*:__

The Breakeven Strike on the upper side and the lower side for this Strategy are calculated as follows:

__BE on the upper side, in Ratio Credit Spread \(Non\-Directional\) Strategy__: The Breakeven Strike \(BE\) in case of a CE Ratio Spread, need to be understood as explained below:

1. The __CE Short leg’s BE Strike is CE Short Strike \+ premium credit received on CE Short leg__\. This means that when the underlying crosses upwardly beyond this BE Strike level and closes by Expiry higher than the aid BE level, then the CE Short leg from Expiry perspective would yield loss on the CE Short leg\.
2. But from a CE Ratio perspective, since we also have a CE Long position on the primary leg, therefore, if CE Short leg reaches its BE strike level on the upside, then the CE Long leg would be generating profit \(*because it is on higher Delta than the Short leg*\)\. This profit generated on the CE Long leg due to upside move in the underlying, would further add up to the BE level on the CE Short leg\. Thus, in order to define the BE level on overall basis on the CE Ratio Spread Strategy, we need to calculate the tentative net profit that would be generated on the CE Long leg if the underlying reaches upwardly upto the BE level of the CE Short leg\. This __net profit on the CE Long is determined as per the calculation: \[Strike difference between CE Long & Short leg\] *minus *\[Net premium debit, per single Lot basis between CE Long & Short leg\]__

__<start> __Accordingly, the __BE Strike on the CE Ratio Spread,__ would be the sum of \(i\) & \(ii\) above, i\.e:  __\[BE of CE Short leg\] \+ \[\(Strike difference\-Net Premium Debit\)\]__\. __<end>__

__BE on the lower side, in Ratio Credit Spread \(Non\-Directional\) Strategy__: The Breakeven Strike \(BE\) in case of a PE Ratio Spread, need to be understood as explained below:

2. But from a PE Ratio perspective, since we also have a PE Long position on the primary leg, therefore, if PE Short leg reaches its BE strike level on the downside, then the PE Long leg would be generating profit \(*because it is on higher Delta than the Short leg*\)\. This profit generated on the PE Long leg due to downside move in the underlying, would further add up to the BE level on the PE Short leg\. Thus, in order to define the BE level on overall basis on the PE Ratio Spread Strategy, we need to calculate the tentative net profit that would be generated on the PE Long leg if the underlying reaches downwardly upto the BE level of the PE Short leg\. This __net profit on the PE Long is determined as per the calculation: \[Strike difference between PE Long & Short leg\] *minus *\[Net premium debit, per single Lot basis between PE Long & Short leg\]__

__<start> __Accordingly, the __BE Strike on the PE Ratio Spread,__ would be \(i\) *minus* \(ii\) above, i\.e: __\[BE of PE Short leg\] \- \[\(Strike difference\-Net Premium Debit\)\]__\. __<end>__ 

This implies that if the underlying by Expiry closes below this BE Strike level on the downside, then the PE Ratio Spread would generate loss\. Lower the underlying would move below this BE level, the PE Ratio Spread would enter unlimited loss area\.  

__<start> Illustration for calculation of BE \(both on upside & downside\)__:

Thus, in the Breakeven Strikes in the given example, comprising of following trade legs, are mentioned below:

- BankNifty June __Long CE__ 43000, 1 Lot \(*at premium of Rs\. 350 per Lot*\)
- BankNifty June __Short CE__ 44000, 2 Lot \(*at premium of Rs\. 180 per Lot*\)
- BankNifty June __Long PE__ 40000, 1 Lot \(*at premium of Rs\. 300 per Lot*\)
- BankNifty June __Short PE__ 39000, 2 Lot \(*at premium of Rs\. 160 per Lot*\)
- BE on upper CE side: \[44000\+180\] \+ \[1000\-170\]= \[44180\+830\]=45010 CE
- BE on upper PE side: \[39000\-160\] \- \[1000\-140\]= \[38840\-860\]=37980 PE

*Accordingly, in the aforesaid example, the Breakeven Strike of 45010 CE must not be breached upwardly by BankNifty, in order that this Strategy be profitable from Expiry perspective\. Further, in the aforesaid example, the Breakeven Strike of 37980 PE must not be breached downwardly by BankNifty, in order that this Strategy be profitable from Expiry perspective\. *__<end>__

__Payoff Chart for Ratio Credit Spread \(Non\-Directional\) Strategy: __

The payoff Chart for this Strategy looks like as indicatively shown below\.

<__img70__>

- The peaks of the left\-hand side pyramid is the PE Short Strike\.
- The peaks of the right\-hand side pyramid is the CE Short Strike\.
- The straight line in between the two pyramids, shows the range between the PE Long \(*on left side*\) and CE Long \(*on the right side*\)
- The levels on the left side \(i\.e\. PE side\) and on the right side \(i\.e\. CE side\), the loss is exhibited is the BE Levels of the respective sides\.

__<end>__

__Non\-Directional, Ratio Credit Spread Strategy: Its Trade Legs & Objective__

__This Strategy, is much safer and high probability trade design than a conventional Ratio Spread__\. 

Mildly Bullish and Mildly Bearish view can be played through Ratio Spreads i\.e\. by employing Options in different proportion/ ratio in the primary leg and hedged leg\. In this Strategy, there are less Longs on the primary leg and more Shorts on the hedged leg, usually in ratio of 1:2, 2:3 or 1:3 etc\., on the same underlying with same expiry series at different Strike levels\.

This Strategy has been designed to make it non\-directional, thereby employing Ratio Spreads on both CE side as well as PE side\. In order to keep the Breakeven \(determining loss area, on either side\), the position is deployed using Far OTMs of Next Month or Far Month Expiry\. Further, since, the main objective in a Ratio Spread is to benefit from decay / erosion of the Premium on the Short leg, therefore, it is important that the Short leg comprises of decent Premium value\. Thus, this Strategy has been designed to be deployed on BankNifty Next Month or Far Month Expiry Options, as the BankNifty Options are more volatile and therefore has higher Premium value on Far OTMs\. Moreover, BankNifty is an Index which does not have physical delivery obligations \(Stock Options must be avoided for this Strategy, due to physical delivery issues in Stock Options\)\.

Accordingly, Far OTMs of Next Month or Far Month Expiry helps widen the loss area for the Strategy significantly; and at the same time offering high Premium values on Far OTMs help gain significant profit on the Strategy due to fast erosion of Time Value on these Far OTMs\. Further, in this Strategy, it is ensured that the Short leg \(on both CE side & PE side\) has more Premium than the Long leg of that side, so as to maintain the essence of Ratio Spreads\. 

Thus, this Strategy comprises of Call Ratio Spread and Put Ratio Spread deployed on BankNifty Far OTMs pertaining to next Month or Far Month Expiry series, with respective Short legs comprising of more Premium credit on aggregate basis than the Premium debit paid on the respective Long leg\. This non\-directional Strategy can be deployed on positional basis\.

__Trade Legs in Ratio Credit Spread \(Non\-Directional\) Strategy__:

- BankNifty Long Far OTM CE of lower Strike with higher Premium \(*CE primary leg*\)
- BankNifty Short Far OTM CE of higher Strike with lower Premium \(*CE hedged leg*\)
- BankNifty Long Far OTM PE of higher Strike with higher Premium \(*PE primary leg*\)
- BankNifty Short Far OTM PE of lower Strike with lower Premium \(*PE hedged leg*\)

All the above four legs are initiated on Far OTM Strikes of Next Month or Far Month Expiry series of BankNifty\. Both Long legs would have equal quantity; and both Short legs would have double the quantity than their respective Long leg\. i\.e\. the ratio spread will be in 1:2 ratio between the Long and Short leg on each side\.

Further, CE hedged leg \(i\.e\. CE Short leg\) must be initiated at such Far OTM CE Strike, which is above/higher than some major Resistance area \(*which the underlying is not expected to breach by Expiry*\)\. Likewise, PE hedged leg \(i\.e\. PE Short leg\) must be initiated at such Far OTM PE Strike, which is below/lower than some major Support area \(*which the underlying is not expected to breach by Expiry*\)*\.* This major Resistance and Support area can be upper and lower Bollinger band on Weekly Time Frame or horizontal trendline high resistance point & low support points on weekly Time Frame\.

Also, the CE Long leg must be atleast 1000 to 1500 point away Far OTM from Spot; and PE Long leg must be atleast 1500\-2000 point away Far OTM from Spot\. The CE Short leg and PE Short leg must be initiated at a distance of atleast 1000 points away from the respective Long leg\. It must be ensured that the Short leg \(on both CE side & PE side\) should have more Premium credit on aggregate basis than the Premium debit on the Long leg of that side\.

Thus, to summarise, the CE Long must be slightly below some major Resistance level, but atleast 1000 points Far OTM from Spot; and the CE Short leg must be even farther OTM Strike, which must be atleast 1000 point away from the CE Long leg and consequently the CE Short leg shall be above the major Resistance level\. Likewise, the PE Long leg must be slightly above some major Support level, but atleast 1500\-2000 points Far OTM from Spot; and the PE Short leg must be even farther OTM Strike, which must be atleast 1000\-1200 point away from the PE Long leg and consequently the PE Short leg shall be below the major Support level\.

__<start> Example of Ratio Credit Spread \(Non\-Directional\) Strategy:__

If currently in May, BankNifty Spot is at 42000 and major Resistance on Weekly TF is at 43500 and  major Support on Weekly TF is at 39000, then we can initiate the Strategy with the following trade legs:

- BankNifty June Long CE 43000, 1 Lot \(*at premium of Rs\. 350 per Lot*\)
- BankNifty June Short CE 44000, 2 Lot \(*at premium of Rs\. 180 per Lot*\)
- BankNifty June Long PE 40000, 1 Lot \(*at premium of Rs\. 300 per Lot*\)
- BankNifty June Short PE 39000, 2 Lot \(*at premium of Rs\. 160 per Lot*\)

Here, CE Short leg is above major Resistance and PE Short is below major Support level\. CE Long is about 1000 points away from Spot and PE Long is about 2000 points away from Spot\. PE side Long leg must be even farther than Spot \(*i\.e\. about 2000 points away from Spot, while CE Long can be atleast 1000 points away*\)\. Both Short legs are about 1000 point away from their respective Long legs\. Further, Short leg on aggregate basis has almost equal to or more premium credit than the premium debit incurred on the respective Long leg\. __<end>__

__Objective in Ratio Credit Spread \(Non\-Directional\) Strategy__:

Objective is to play a non\-directional view, within a very broad range, which is ensured by creating positions on Far OTMs of Next Month Expiry series\. Because of the wide range created in this Strategy, the probability of loss in this strategy is very minimal\. 

Main idea here is to get benefit from Theta decay on Far OTM Short legs \(*which are about 1000 points Far OTM than their respective Long legs*\), which will exhibit quick Theta decay than their respective Long leg\. As soon as the Far OTMs Short legs generate decent profit due to decay, and the overall Strategy generates decent profit of more than 1% to 1\.5% or more \(*on the trading capital deployed on this Strategy*\), then the profit can be booked on this Strategy\.

From Expiry perspective, if the underlying makes significant move upwardly bullish, but remains below the CE Short Strike level \(*which is about 2000 points away from Spot*\) by Expiry, then CE Long leg would generate profit and CE Short leg and PE Short leg would expire worthless as OTMs thereby generating profit\. Long PE leg may in such situation generate loss, but  due to profits on CE Long and both Short legs, the Strategy would be overall in profit\.  

However, if the underlying by Expiry makes significant move downwardly bearish, but remains above the PE Short Strike level \(*which is about 3000 points away from Spot*\), then PE Long leg would generate profit and CE Short leg and PE Short leg would expire worthless as OTMs thereby generating profit\. Long CE leg may in such situation generate loss, but  due to profits on PE Long and both Short legs, the Strategy would be overall in profit\.

In case the underlying remains rangebound and by Expiry closes between the CE Long & PE Long strikes, then the Strategy would generate a profit to a maximum extent of net premium credit \(*i\.e\. aggregate premium credit on both Short legs minus  aggregate premium debit on both Long legs*\)\. In such case, the Strategy can be expected to generate around 1% on the capital deployed on the Strategy\.

__Adjustments in Ratio Credit Spread \(Non\-Directional\) Strategy__

__*Adjustments \(if limited bullish view and Ratio Credit Spread \(Non\-Directional\) Strategy does not go as per plan\)*__:

If the underlying moves higher than the Breakeven Strike on the CE side, then this Strategy enters towards an unlimited loss scenario, because, then it implies that both CE buy and CE Short leg have become an ITM\. In such a scenario, the Long CE will cover the losses arising on the CE Short leg to some extent as the underlying moves higher, but that will not be sufficient to cover the losses that will be incurred on the CE Short leg as there are more CE Shorts than CE buy in this Strategy\. Thus, from Expiry perspective the loss incurred on the CE Short leg on Expiry minus the profit on the CE buy leg, would be the actual loss on Expiry \(calculated basis their final LTP on Expiry\)\. In this situation, certain adjustments can be made in order to curtail the potential loss scenario in this Strategy\. 

1. Counter Adjustment through Long Option: If there seems to be a trending uptrend with momentum, then __CEs can be bought__ \(Long CE\)\. Buying CEs to protect the upside risk in this Strategy will add up another debit position, therefore this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. This Long CE will help overcome the loss accruing on this Strategy arising due to more CE Shorts\. However, Long CEs should be initiated at Strike having Delta value higher than the current Delta value of the Short CE hedged leg \(*i\.e\. at a lower Strike than the CE sell Strike*\), so that in case of continuation of strong uptrend, these fresh Long CEs should generate more profit than the loss generated by the Short CEs hedged leg\. Also, depending upon the likely uptrend momentum, suitable number of Long CEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Atleast fresh Long CEs equal to extra Lot on CE Short leg must be added\. These fresh Long CEs at higher Delta would turn the CE Ratio into a Bull CE Spread\. If the Long CEs generates profit covering up the loss generated by the CE Short leg,  then it would be advisable to immediately book the profit on the Strategy\.
2. Counter Adjustment through Short Option: If the uptrend is expected to be continued but not with very strong momentum \(and may be expected to even reverse downwardly\), then __Far OTM PEs can be sold__ \(PE Short\) below the major Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a downtrend move\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this far OTM PEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the loss generated on the original Strategy, if the underlying expires above the Strike at which CE Short is initiated in the hedged leg\. Further, depending upon the potential loss that may be incurred in the original Strategy if the underlying expires above the Strike at which CE Short is initiated in the hedged leg of the original Strategy, suitable number of Far OTM PEs \(of lower Far OTM Strike below Support area\) can be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short PEs due to time decay on Expiry\. Usually atleast 4 to 8 times more Lot quantity may be required to be added to Short PE in comparison to the original number of extra Lots in the CE Short hedged leg initiated on the original Strategy\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\.

__*Adjustments \(if limited bearish view and Ratio Credit Spread \(Non\-Directional\) Strategy does not go as per plan\)*:__

If the underlying moves lower than the Breakeven Strike on the PE side, then this Strategy enters towards an unlimited loss scenario, because, then it implies that both PE buy and PE Short leg have become an ITM\. In such a scenario, the Long PE will cover the losses arising on the PE Short leg to some extent as the underlying moves lower, but that will not be sufficient to cover the losses that will be incurred on the PE Short leg as there are more PE Shorts than PE buy in this Strategy\. Thus, from Expiry perspective the loss incurred on the PE Short leg on Expiry minus the profit on the PE buy leg, would be the actual loss on Expiry \(calculated basis their final LTP on Expiry\)\. In this situation, certain adjustments can be made in order to curtail the potential loss scenario in this Strategy\. 

1. Counter Adjustment through Long Option: If there seems to be a trending downtrend with momentum, then __PEs can be bought__ \(Long PE\)\. Buying PEs to protect the downside risk in this Strategy will add up another debit position, therefore this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. This Long PE will help overcome the loss accruing on this Strategy arising due to more PE Shorts\. However, Long PEs should be initiated at Strike having Delta value higher than the current Delta value of the Short PE hedged leg \(*i\.e\. at a higher Strike than the PE sell Strike*\), so that in case of continuation of strong downtrend, these fresh Long PEs should generate more profit than the loss generated by the Short PEs hedged leg\. Also, depending upon the likely downtrend momentum, suitable number of Long PEs can be considered to be added as an adjustment to absorb or outweigh the loss in the Strategy\. Atleast fresh Long PEs equal to extra Lot on PE Short leg must be added\. These fresh Long PEs at higher Delta would turn the PE Ratio into a Bear PE Spread\. If the Long PEs generates profit covering up the loss generated by the PE Short leg,  then it would be advisable to immediately book the profit on the Strategy\.
2. Counter Adjustment through Short Option: If the downtrend is expected to be continued but not with very strong momentum \(and may be expected to even reverse upwardly\), then __Far OTM CEs can be sold__ \(CE Short\) above the major Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of an uptrend move\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the loss generated on the original Strategy, if the underlying expires below the Strike at which PE Short is initiated in the hedged leg\. Further, depending upon the potential loss that may be incurred in the original Strategy if the underlying expires below the Strike at which PE Short is initiated in the hedged leg of the original Strategy, suitable number of Far OTM CEs \(of higher Far OTM Strike above Resistance area\) can be Shorted as an adjustment to absorb or outweigh the potential loss in the Strategy, by the profit yielded by these Short CEs due to time decay on Expiry\. Usually atleast 4 to 8 times more Lot quantity may be required to be added to Short CE in comparison to the original number of extra Lots in the PE Short hedged leg initiated on the original Strategy\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\.

__Payoff Chart for Ratio Credit Spread \(Non\-Directional\) Strategy:__

__<end>__

__Profit & Loss in Ratio Credit Spread \(Non\-Directional\) Strategy, and its Calculations__

__*Loss in Ratio Credit Spread \(Non\-Directional\) Strategy, from Expiry perspective*:__

Since, there are more Shorts than Long, on both CE and PE sides, therefore, if the trend becomes extreme bullish or bearish crossing the Breakeven strike on the upper side or lower side, as the case may be, then the Strategy would get exposed to unlimited loss situation\. 

Therefore, from Expiry perspective, if the underlying gets super bullish even crossing beyond the Breakeven Strike on the CE side, then the __difference between final Premium of CE Short leg and the final Premium of CE buy leg on Expiry \(after subtracting the net premium credit gained on the PE side due to bullish move\) will determine the actual quantum of loss in this Strategy__\. The max loss would enter unlimited territory if the underlying keeps trending higher breaching the Breakeven Strike on the CE side\.

Likewise, from Expiry perspective, if the underlying gets super bearish even falling below the Breakeven Strike on the PE side, then the __difference between final Premium of PE Short leg and the final Premium of PE buy leg on Expiry  \(after subtracting the net premium credit gained on the CE side due to bearish move\) will determine the actual quantum of loss in this Strategy__\. The max loss would enter unlimited territory if the underlying keeps trending lower breaching the Breakeven Strike on the PE side\.

__*Calculation of Maximum Reward in Ratio Credit Spread \(Non\-Directional\) Strategy*: __

The max reward on this Strategy is gained if by Expiry, the underlying closes at near the CE Short leg or near the PE Short leg\. 

__*Max profit on Ratio Credit Spread \(Non\-Directional\) Strategy, if underlying gets bullish:*__ If underlying gets bullish, then: 

<__start__> the __max reward potential on the CE side would be calculated as: \[*max profit on the equal qty of Bull CE Spread*\] \+ \[*aggregate Premium Credit Received on extra CE Short*\]__\.

*Note: Max Profit in Bull CE Spread is calculated for each quantity as: \[difference between Long & Short Strike\] \- Net Premium debit paid on the Spread* <__end__>

Besides, aforesaid profit on the CE side, the net premium credit on the PE side will also add on to the overall profit on the Strategy, in case of bullish move in the underlying by Expiry\. In such case, the assumption is that the underlying does not breach the Breakeven Strike of the Strategy on the CE side\.

Further, the max profit on the CE side, due to bullish move in the underlying would be generated, if the underlying moves higher and closes right at the CE Short strike\. In such situation, the CE Long leg would get benefitted from the upmove in the underlying and due to Expiry happening at the CE Short leg, the CE Long would be an ITM \(*thus its profit would be protected*\) and CE Short would expire worthless as an ATM / near OTM \(*thus generating full premium credit on CE Short leg as profit*\)\.

*<*__start__*> In the aforementioned example, if BankNifty expires just below the CE Short Strike of 44000, then the primary CE Long leg would be in good profit \(as the Long CE of 43000 Strike becomes ITM, from being originally about 1000 point away Far OTM\); and the entire aggregate Premium of Rs\. 360 received on the 2 Lots CE hedged leg will also be the profit in this Strategy\. In such event, max profit is reaped on the CE side\. Further, in such situation, the net premium credit on the PE side would also contribute to the overall profit in this Strategy\.* <__end__>

__*Max profit on Ratio Credit Spread \(Non\-Directional\) Strategy, if underlying gets bearish:*__ If underlying gets bearish, then: 

<__start__> the __max reward potential on the PE side would be calculated as: \[*max profit on the equal qty of Bear PE Spread*\] \- \[*aggregate Premium Credit Received on extra PE Short*\]__\. 

*Note: Max Profit in Bear PE Spread is calculated for each quantity as: \[difference between Long & Short Strike\] \- Net Premium debit paid on the Spread *<__end__>

Besides, aforesaid profit on the PE side, the net premium credit on the CE side will also add on to the overall profit on the Strategy, in case of bearish move in the underlying by Expiry\. In such case, the assumption is that the underlying does not breach the Breakeven Strike of the Strategy on the PE side\.

Further, the max profit on the PE side, due to bearish move in the underlying would be generated, if the underlying moves lower and closes right at the PE Short strike\. In such situation, the PE Long leg would get benefitted from the downmove in the underlying and due to Expiry happening at the PE Short leg, the PE Long would be an ITM \(*thus its profit would be protected*\) and PE Short would expire worthless as an ATM / near OTM \(*thus generating full premium credit on PE Short leg as profit*\)\.

<__start__> *In the aforementioned example, if BankNifty expires just above the PE Short Strike of 39000, then the primary PE Long leg would be in good profit \(as the Long PE 40000 Strike becomes an ITM, from being originally about \+1000 point away Far OTM\);  and the entire aggregate Premium of Rs\. 320 received on the 2 Lots PE hedged leg will also be the profit in this Strategy\. In such event, max profit is reaped on the PE side\. Further, in such situation, the net premium credit on the CE side would also contribute to the profit in this Strategy\.* <__end__>

However, __*if the underlying gets rangebound*__ \(*and by Expiry remains between the CE Long & PE Long legs*\): then the net premium credit on the overall Strategy, would be the max profit possible on this Strategy\. 

*<*__start__*> In the aforesaid example, if BankNifty by Expiry hovers somewhere between 43000 CE & 40000 PE, then the net premium credit on the overall Strategy would be the max profit, calculated as follows:*

Net credit on CE side: \[\(180x2\)\-350=10\)\]; and 

Net credit on PE: \[\(160x2\)\-300=20\] 

Thus, the max profit would be 30 points on the Strategy\. *<*__end__*>*

__*Profit Zone\(s\) in Ratio Credit Spread \(Non\-Directional\) Strategy*:__

There are following profit zones in this Strategy from Expiry perspective:

1. __*Min profit zone on the Strategy: *__If the underlying by Expiry closes between the CE Long leg and the PE Long leg, then Min profit to the extent of Net Premium Credit would be generated on this Strategy\. Thus, in this profit zone, only Min profit amount would be generated on this Strategy\.
2. __*Min to Max profit zone on the CE side: *__If the underlying by Expiry closes between  the CE Long Strike and CE Short Strike\. Higher the underlying closes  towards CE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at the CE Short Strike on Expiry, then max profit will be realised on this Strategy \(*as per calculations explained above*\)\. Thus, in this profit zone, profit on this Strategy would be between Min profit to Max profit amount\.
3. __*Max to Min profit zone on the CE side: *__If the underlying by Expiry closes between  the CE Short Strike and Breakeven Strike on the CE side\. Higher the underlying closes  towards Breakeven Strike on the CE side, lower will be the profit generated within this zone\. Thus, in this profit zone, profit on this Strategy would be between Max profit amount to zero profit\. However, if the underlying closes above the CE side Breakeven Strike on Expiry, then max loss situation arise on this Strategy \(*as already explained above*\)\.
4. __*Min to Max profit zone on the PE side: *__If the underlying by Expiry closes between  the PE Long Strike and PE Short Strike\. Lower the underlying closes  towards PE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at the PE Short Strike on Expiry, then max profit will be realised on this Strategy \(*as per calculations explained above*\)\. Thus, in this profit zone, profit on this Strategy would be between Min profit to Max profit amount\.
5. __*Max to Min profit zone on the PE side: *__If the underlying by Expiry closes between  the PE Short Strike and Breakeven Strike on the PE side  of the Strategy\. Lower the underlying closes  towards Breakeven Strike on the PE side, lower will be the profit generated within this zone\. Thus, in this profit zone, profit on this Strategy would be between Max profit amount to zero profit\. However, if the underlying closes below the PE side Breakeven Strike on Expiry, then max loss situation arise on this Strategy\.

__<start> Payoff Chart for Ratio Credit Spread \(Non\-Directional\) Strategy:__

__<end>__

__Options Behaviour and Significance of Strike Selection in Ratio Credit Spread \(Non\-Directional\) Strategy__

__*Options Behaviour in Ratio Credit Spread \(Non\-Directional\) Strategy*:__

Idea is to play a non\-directional trading positions with a very wide range\. If the underlying remains mild bullish upto about \+2000 points or remains mild bearish upto \+2000 points, then irrespective of any directional move of the underlying within such broad range the Strategy would yield profit\. If the underlying by Expiry closes near the Short leg on either side, then the Strategy would yield max reward\.

In this Strategy, selection of CE Short Strike for the CE hedged leg is made at such Far OTM where the underlying is not expected to reach on the upside by Expiry \(thus, the CE Short must be above the major Resistance level\)\.  Likewise,  selection of PE Short Strike for the PE hedged leg is also made at such Far OTM where the underlying is not expected to reach on the downside by Expiry \(thus, the PE Short must be below the major Support level\)\.

Consequently, in this Strategy, both the CE & PE Short legs are on very Far OTMs, with a substantial gap of atleast 1000 points vis\-à\-vis the corresponding Long leg on that side\. Therefore, from the perspective of Options behaviour, the Short legs would face more premium erosion that the Long legs, due to Theta decay\. Thus, due to Theta play, both CE & PE Short legs \(*which has more premium credit than the premium debit incurred on the Long legs*\) would generate more profit\. Further, if the underlying move slowly in any one direction but remains below the Short leg, then that side Long leg would also generate huge profits\.

Additionally, in this Strategy, more naked Far OTM CE Shorts \(higher than the Resistance level\) are added at the same Strike as that of the hedged leg, such that there are more CE Shorts on the hedged leg than CE buy on the primary leg\. This is done such that the Far OTM CEs will expire worthless as OTM Strikes on Expiry, thus yielding profit in the hedged leg containing more CE Shorts\. Likewise, in this Strategy, more naked Far OTM PEs Shorts \(below the Support level\) are added at the same Strike as that of the hedged leg, such that there are more PE Shorts on the hedged leg than PE buy on the primary leg\. This is done such that the Far OTM PEs will expire worthless as OTM Strikes on Expiry, thus yielding profit in the hedged leg containing more PE Shorts\.

However, if near to Expiry, the CE buy leg is in profit due to the bullish move of the underlying but does not seem to expire as an ITM on Expiry then it is better to book profit on the CE buy leg and to hold the CE Short positions until Expiry to let them expire as OTM on Expiry \(*provided the trading account has enough margin to support the naked CE Short positions, after CE Long is squared\-off for booking profit*\)\. Similarly, if the underlying falls down with a bearish move, and if near to Expiry the PE buy leg is in profit due to the bearish move of the underlying but does not seem to expire as an ITM on Expiry then it is better to book profit on the PE buy leg and to hold the PE Short positions until Expiry to let them expire as OTM on Expiry \(*provided the trading account has enough margin to support the naked PE Short positions, after PE Long is squared\-off for booking profit*\)\.

__*Selection of Option Strikes in Ratio Credit Spread \(Non\-Directional\) Strategy*__:

As already mentioned, the CE Long leg must be atleast 1000 to 1500 point away Far OTM from Spot; and PE Long leg must be atleast 1500\-2000 point away Far OTM from Spot\. The CE Short leg and PE Short leg must be initiated at a distance of atleast 1000 points way from the respective Long leg\. 

Further, the CE hedged leg \(i\.e\. CE Short leg\) must be initiated at such Far OTM CE Strike, which is above/higher than some major Resistance area \(*which the underlying is not expected to breach by Expiry*\)\. Likewise, PE hedged leg \(i\.e\. PE Short leg\) must be initiated at such Far OTM PE Strike, which is below/lower than some major Support area \(*which the underlying is not expected to breach by Expiry*\)*\.* This major Resistance and Support area can be upper and lower Bollinger band on Weekly Time Frame or horizontal trendline high resistance point & low support points on weekly Time Frame\.

Also, it must be ensured that the Short leg \(on both CE side & PE side\) should have more Premium credit on aggregate basis than the Premium debit on the Long leg of that side\.

__Impact of different market Situations on Ratio Credit Spread \(Non\-Directional\) Strategy__

__*If trade goes as per plan, in Ratio Credit Spread \(Non\-Directional\) Strategy*__:

If the underlying remains bullish by Expiry \(*i\.e\. the underlying does not breach the CE Short leg on the upside*\), then the CE buy primary leg would generate profit due to the bullish move\. Further, if the CE buy does not become an ITM by Expiry then the profit on this CE buy leg must be booked before Expiry \(*because if the CE buy leg is an OTM on Expiry then its Premium will become zero*\)\. However, if the CE buy leg becomes an ITM by Expiry, and the Strategy is held till Expiry, then the final LTP will determine the profit on the CE buy primary leg\. Further, if the underlying remains bullish upto the major Resistance level \(or at max upto the CE Short leg\), then the CE Long primary leg will generate good profit; and if by Expiry the underlying closes just below the CE Short leg i\.e\. neckline on the CE side, then the Strategy would yield max reward\. 

Likewise, if the underlying remains bearish \(*i\.e\. the underlying does not breach the PE Short leg on the downside*\), then the PE buy primary leg would generate profit due to the bearish move\. Further, if the PE buy does not become an ITM by Expiry then the profit on this PE buy leg must be booked before Expiry \(*because if the PE buy leg is an OTM on Expiry then its Premium will become zero*\)\. However, if the PE buy leg becomes an ITM by Expiry, and the Strategy is held till Expiry, then the final LTP will determine the profit on the PE buy primary leg\. Further, if the underlying remains bearish upto the major Support level \(or at max upto the PE Short leg\), then the PE Long primary leg will generate good profit; and if by Expiry the underlying closes just above the PE Short leg i\.e\. neckline on the PE side, then also the Strategy would yield max reward\.

Further, so far as the CE Short & PE Short hedged legs are concerned, if the underlying does not breach the Breakeven Strike on either side, as originally expected, then the entire Premium collected on Shorting CEs & PEs generates profit on both the hedged leg\.

__*If movement of the underlying is slow /  sideways, during Ratio Credit Spread \(Non\-Directional\) Strategy*__:

However, if the movement of the underlying becomes slow / sluggish in its upward / downward movement or if the underlying keeps fluctuating in  a range, then the Theta impact may cause erosion in the Premium value of both CE Short & PE Short more than the corresponding Long legs \(*as the Shorts are at very far OTM Strikes, thus erosion of their premium would be faster than that of the Long legs*\)\. Further, if the  underlying gets rangebound and by Expiry remains between the CE Long & PE Long legs, then the Net Premium Credit \(*on aggregate basis*\) on the overall Strategy would be the maximum profit by Expiry\.

__*If trade does not go as per plan, in Ratio Credit Spread \(Non\-Directional\) Strategy*__:

However, if the underlying moves higher than the Breakeven Strike of the CE Short leg or slips lower than the Breakeven strike on the PE side, then the Strategy may generate loss and enter into unlimited loss situation\. In such scenario, certain adjustments may be required to be\.

__Merits & Demerits of Ratio Credit Spread \(Non\-Directional\) Strategy__

__*Demerits of Ratio Credit Spread \(Non\-Directional\) Strategy*__:

- If VIX is low, there may not be reasonable Premium to create Shorts thereon for the hedged leg\. Such situations will require more Shorts to be initiated in order to have a reasonable aggregate Premium value to target from Theta decay perspective\. In such event Far Month Expiry series may be explored\. However, Far Month Expiry series may pose liquidity issue\.
- This Ratio Spread strategy will be suitable for a mild bullish to bullish view which must not breach the CE Short Strike on the upside; or where the view is mild bearish to bearish which must not breach the PE Short Strike on the downside\. Strong bullish uptrend or downtrend, which may breach the Short legs on either direction, may cause this Strategy to suffer loss \(because Shorts on either side are more than the Longs\)\. However, occurrence of such momentum within 30 days holding time is little unlikely, as the Shorts are initiated about 2500 to 3000 points away from the Spot\.
- Thus, from Expiry perspective, the extreme bullish or bearish move in the underlying must not cross beyond the Breakeven Strike of this Strategy, on either side\.

__*Benefits of Ratio Credit Spread \(Non\-Directional\) Strategy*:__

- This is a very suitable Strategy for a mild bullish to mild bearish trend of the underlying, as the primary leg will yield profit on upmove / downmove and the Short legs too will yield profit due to Theta decay\.
- This Strategy being a Net premium Credit Strategy, on both CE & PE side, that too on a very wide range spanning over 3000 points Breakeven levels, therefore this Strategy is extremely safe and high probability Strategy for profit\.

__Playing the Strategy \(for Regular Monthly Income From Options Strategy\):__

After the first step of the Strategy i\.e\. making investments into Nifty Bees / Bank Bees, in the multiples \(on equivalent basis\) of 1 Lot Nifty, is deployed, we need to commence the second part of the Strategy\.

The second part of the Strategy comprises of Shorting Near ITM CE of Next Month Expiry series or even better: Near ITM CE of Far Month Expiry series\.

Accordingly,__ this Strategy is played as a Big Boy’s Covered Call Strategy__, comprising of the following two trade legs:

- __Long Nifty Bees / Bank Bees__ \(*primary leg*\)
- __Short Near ITM CE__ of Next Month Expiry series or Far Month Expiry series \(*hedged leg*\)\.

In order to initiate trade positions for playing this Strategy, the following aspects must be complied:

- In case investments for the primary leg are made in Nifty Bees, then ITM CE Short position for the hedged leg would be initiated on ITM CE of Nifty; and if  the investments for the primary leg are made in Bank Bees, then ITM CE Short position for the hedged leg would be initiated on ITM CE of BankNifty\. 
- If 1 Lot equivalent of Nifty Bees / Bank Bees are bought, then 1 Lot ITM CE of Nifty / BankNifty need to be Shorted\. The trade legs must be in 1:1 ratio\.
- If Far Month Expiry series are not liquid, then Next Month Expiry series ITM CE can be Shorted; but if Far Month Expiry series is liquid then that should be opted for the hedged leg\. Far Month Expiry series would offer relatively higher premium credit, than the Next Month Expiry series\.

__<start> Example of Initiating Trade for Regular Monthly Income From Options Strategy:__

If between January and February, Nifty Spot has fallen to 12% or 17% level from the top; and is currently at 15,000, and following trade legs of the Strategy are initiated in the last week of February expecting reversal on the upside: 

- __*Primary leg*:__ 7500 quantity of Nifty Bees bought \(*after a 12% or 17% decline in Nifty from the top*\) with investment amount of Rs\. 7\.5 Lakhs at Rs\. 100 per unit of Nifty Bees\(*i\.e\. equivalent of 1 Lot of Nifty*\) ; and
- __*Hedged leg*:__  Short 14900 ITM CE of April Expiry series at a premium credit of Rs\. 550 per Lot __<end>__

__Total Capital required for this Regular Monthly Income From Options Strategy:__

We already discussed, the tentative Capital requirement for making investments into Nifty Bees / Bank Bees i\.e\. towards the primary leg of the Strategy\. However, the hedged leg comprises of CE Short position, therefore, even the margin requirement of Shorting 1 Lot CE would be approx\. Rs\. 1\.5 Lakhs or so\. Also, since, the hedged leg comprises of the CE Short position, which if goes into loss would require MTM adherence \(*which must be atleast another Rs\. 1\.5Lakhs per Lot of CE Short*\)\.

 Therefore, the Capital towards this Strategy must account for: \(i\) investment amount for buying Nifty Bees/ Bank Bees, equivalent to the multiples of Lots for that Indices, proposed to be deployed; \(ii\) Margin requirement towards CE Short leg, accounting for the no\. of Lots proposed to be deployed; and \(iii\) MTM requirements on the CE Short leg\.

Therefore, basis the level of the Spot and the Indices selected, execution & implementation of Strategy in single Lot basis, would entail a Capital of about Rs\. 10 Lakhs to 14 Lakhs, on safe side\.  

__REGULAR MONTHLY INCOME FROM OPTIONS STRATEGY__

__*Through Big Boy’s Covered Call for Positional Trade*__

Options can also be used to generate monthly income on regular basis\. This methodology would be very suitable for people who cannot be actively involved with trading or those who are retired and expect to generate some regular income out of their limited superannuation/ retirement corpus\. Through this Strategy, much higher return as compared to bank deposits may be normally expected\. However, in this Strategy, the Capital which would be required to be deployed would be in the multiples of approximately 8 Lakhs to 12 Lakhs \(*applicable for deploying this Strategy on 1 Lot basis*\)\. With this sort of Capital, a return of atleast 1% or 2% in a  month can be expected\. 

This kind of return on Capital is much higher than even from a rental income from a house property in a Tier\-I or II city\. In order to generate rental income of about Rs\. 20,000 /\- per month, an investment towards owning a house property worth atleast Rs\. 30 Lakhs or more would be required in a Tier\-I or Tier\-II city in India\. Thus, if an income of around Rs\. 10,000\-20,000 per month \(*on average basis, in a year*\) is generated through this Options Strategy, from an investment of about Rs\. 8 Lakhs to 12 Lakhs, then the returns are obviously much higher \(*needless to make that comparison with bank fixed deposit*\)\.

With this background, let us now discuss how to create  this Strategy for a regular income\.

__Strategy requires Investment in Nifty Bees / Bank Bees:__

As a first step towards this Strategy, we need to make an investment in an Index ETF, which Index is traded in the FNO segment\. Accordingly, we zero\-in on Nifty Bees and Bank Bees\. We select these Index ETFs because these ETFs closely correspond to the total returns generated by the respective Indices \(*except possibility of a tracking error*\)\. Moreover, unlike Stocks etc\., Indices pose no risk of any corporate action like bankruptcy, insider trading, corporate fraud etc\.; and are extremely safe and are bound to eventually rise & increase in their value / returns as the relevant Index rises higher and makes higher highs in percentage terms\. Also, these ETFs are reasonably liquid like Stocks and do not have any Expiry date attached with them like in case of FNO instruments\. Moreover, these ETFs are not subject to time decay like in Options and closely correspond to the total returns generated by the respective Indices, hence they are similar to Index Futures in that respect\.   Thus, owing to these aforementioned factors, Nifty Bees and Bank Bees are safest liquid instruments for our investment purposes in this Strategy, and are a preferred bet over Stocks\. 

The investment in Nifty Bees or Bank Bees, for the purpose of our Strategy, has to be made in the multiples of the Lot size of that relevant Index in the FNO segment\. This is because, buying these ETFs in the multiples equivalent of relevant Lot size of that Indices, generates the investment akin to that many Lots of Futures of that Indices\. 

Let us understand how much Capital would be need to make investments for the purpose of our Strategy: 

- Currently, Nifty’s Lot size in FNO is 50\. Therefore, the total investment that will be required to buy __Nifty Bees equivalent to worth 1 Lot of Nifty, would be determined as:__ __\[the Nifty Spot price\] x \[50\]__\. If Nifty is trading at 17000, then total investment required at that Spot price,  would be in the multiples of \[17000 x 50 = Rs\. 8,50,000\]\. Thus, purchasing Nifty Bees, equivalent to a Nifty’s 1 Lot, we will have to make an investment of Rs\. 8,50,000/\-\. Therefore, buying of Nifty Bees basis the prevailing Nifty Spot price, for an aggregate quantity equivalent to a Nifty Lot size, would make our investment in Nifty Bees akin to 1 Lot of Nifty Futures\. Accordingly, in order to make investments in Nifty Bees, worth equivalent to 2 Lots of Nifty, at the aforementioned price levels of Nifty Spot, we will have to have a Capital of \[8,50,000 x 2 = Rs\. 17 Lakhs\], and so on\.

Basis aforesaid, discussions, if Nifty Spot is at 17000 and Nifty Bees are trading at that time at say, Rs\. 175 per Unit \(*like one Share*\), then in order to __buy 1 Lot Nifty equivalent worth of Nifty Bees, we will invest Rs\. 8,50,000 in the following manner: \[Rs\. 8,50,000 / 175 = about 4,857 Units of Nifty Bees at a buying price of Rs 175 per Unit\]__\.

- Likewise, in case of BankNifty \(from July 2023 onwards, FNO Lot size being: 15\), the total investment that will be required to buy __Bank Bees equivalent to worth 1 Lot of BankNifty, would be determined as:__ __\[the BankNifty Spot price\] x \[15\]__\. If BankNifty is trading at 35000, then total investment required at that Spot price, would be in the multiples of \[35000 x 15 = Rs\. 5,25,000\]\. Thus, purchasing Bank Bees, equivalent to a BankNifty’s 1 Lot, we will have to make an investment of Rs\. 5,25,000/\. Therefore, buying of Bank Bees, basis the prevailing BankNifty Spot price, for an aggregate quantity equivalent to a BankNifty Lot size, would make our investment in Bank Bees akin to 1 Lot of BankNifty Futures\. Accordingly, in order to make investments in Bank Bees, worth equivalent to 2 Lots of BankNifty, at the aforementioned price levels of BankNifty Spot, we will have to have a Capital of \[5,25,000 x 2 = Rs\. 10\.5 Lakhs\], and so on\.

Basis aforesaid, discussions, if BankNifty Spot is at 35000 and Bank Bees are trading at that time at say, Rs\. 300 per Unit \(*like one Share*\), then in order to __buy 1 Lot BankNifty equivalent worth of Bank Bees, we will invest Rs\. 5,25,000 in the following manner: \[Rs\. 5,25,000 / 300 = about 1,750 Units of Bank Bees at a buying price of Rs 300 per Unit\]__\.

Trust, the aforesaid examples clarify, how we are supposed to compute the Capital required for buying relevant Lot size equivalents \(in multiples\) of Nifty Bees and Bank Bees, in order to play this Strategy\.

Now, let us understand the levels at which we have to make this aforesaid investment of buying Nifty Bees / Bank Bees, as the case may be\. We can play this Strategy by making investments in Bank Bees or Nifty Bees \(or both\), as per the Capital available or one’s Index choice or the market situation of these Indices\.

__Objective of for Regular Monthly Income From Options Strategy and the Trade Plan__

The __objective in this Strategy, is to generate profit from the premium collected on the CE Short hedged leg on month\-on\-month basis, against the investments held on the primary leg__\. Therefore, so long CE Short leg generates profit, we would keep reaping the same on month\-on\-month basis; and if on any given month CE Short leg generates loss, then that loss would get adequately mitigated by the profit generated on the investments held in the primary leg\.

The CE Short leg would generate profit, so long the underlying Index closes below the Breakeven Strike of CE Short leg; and the CE Short leg would generate loss if the underlying Index crosses above and closes beyond the Breakeven Strike of the CE Short leg\. These scenarios, with profit / loss potential and trade plan are discussed below:

1. If the underlying Index \(Nifty / BankNifty\), takes support after falling and reverses upside, and the __Index moves higher or remains rangebound, but closes below the Breakeven Strike of the CE Short hedged leg__  \(*i\.e\. CE Short Strike \+ premium credit received*\) by its Expiry, then: 

- the CE Short leg would generate profit to the extent of erosion in the Time Value from the premium credit collected on Shorting; and
- the investment would also be in profit due to the upmove in the underlying Index, almost to the extent of percentage rise in the Index\.

Further, in this situation, we would book profit on the hedged leg of CE Short and hold the investments on the primary\. Thereafter, we would again create fresh CE Short positions \(*on relevant Next Month Expiry or Far Month Expiry series*\) as the hedged leg, against the investments held on the primary leg, in order to generate another income through Shorting CEs\. We will keep repeating this process of generating profits by deploying fresh CE Short positions and holding it close to its Expiry, to benefit from Theta decay\. But so long, CE Shorts do not go into any significant loss situation \(*which is discussed at point no\. 3 below*\), we will continue to hold the investments as our primary leg\.

1. If the underlying Index \(Nifty / BankNifty\), falls even further after our investment and deployment of both the primary & hedged leg of the Strategy, and the __Index moves lower and closes below the CE Short hedged leg__ by its Expiry, then: 

- the CE Short Strike would expire worthless as an OTM and consequently would generate profit to the extent of total premium credit collected on Shorting; and
- the investment on the primary leg would be in loss due to the fall in the underlying Index, almost to the extent of percentage fall in the Index\. However, since, we have already made investments after about 12% or 17% level fall in Nifty, therefore, our investments are not over\-priced and eventually our investments would catch up and become profitable as the Index would again make its upward move, back to its previous high and beyond\. Therefore, in such situation, we would continue to hold our investment as the primary leg\.

Thus, in this situation, we would book profit on the hedged leg of CE Short and hold the investments on the primary leg\. Thereafter, we would again create fresh CE Short positions \(*on relevant Next Month Expiry or Far Month Expiry series*\) as the hedged leg, against the investments held on the primary leg, in order to generate another income through Shorting CEs\.

1. If the underlying Index \(Nifty / BankNifty\), takes support after falling and reverses upside, and the __Index moves very high, closing much higher after crossing the Breakeven Strike of the CE Short hedged leg__  \(*i\.e\. CE Short Strike \+ premium credit received*\) by its Expiry, then: 

- the CE Short leg would become a deep ITM thereby generating loss; and the total loss on this leg would be the difference between the final premium of the CE Short Strike and the premium credit collected on Shorting; and
- the investment would be in extreme profit due to the upmove in the underlying Index, almost to the extent of percentage rise in the Index from our buying price\. This profit would be higher than the loss incurred on the CE Short leg; thereby generating overall profit on the Strategy\.

Thus, in this situation, we will have to book profit on the entire Strategy and will have to even exit our investments of Nifty Bees/ Bank Bees, as the case may be, so as to book overall profit on the Strategy\. Thereafter, we will have to wait again for the time when we can make fresh investments into Nifty Bees / Bank Bees, after Nifty makes a decline to the extent of atleast 12% or 17%, as the case may be\. Once, this level is found, fresh investments need to be made for the primary leg; and thereafter we will again commence Shorting ITM CEs, as aforementioned, in order to reap profit from CE Short positions against our investments on month\-on\-month basis, as before\.

__SWOT on this Strategy for Regular Monthly Income from Options Strategy:__

Let us now discuss about the Strength, Weakness, Opportunity and Threat / Risk aspects of this Strategy\. These aspects are discussed below:

__Strength of this Strategy for Regular Monthly Income from Options Strategy:__

- This Strategy attempts to ensure making investment in Nifty Bees / Bank Bees at relatively much lower buying price\.
- The investment made in Nifty Bees/ Bank Bees for the primary leg of this Strategy is extremely safe and liquid\. Further, they do not pose any risk of time decay or expiry, as applicable to FNO Instruments\.
- The Strategy generates profit in all market conditions, that is: when the underlying Index goes up or when it goes down or when it remains range bound\. When the underlying Index, goes down or remains range bound, the entire premium credit on the CE  Short leg  generates profit\. And when the underlying Index goes extremely higher up, the investments made in Nifty Bees / Bank Bees at relatively much lower buying price, helps mitigate the loss on the CE Short leg, and thus maintains the overall profitability of the Strategy intact\.

__Weakness of this Strategy for Regular Monthly Income from Options Strategy:__

- The Strategy requires reasonably high capital, in order to initiate this Strategy even on single Lot basis\. Approximate capital required for deploying one Lot equivalent Strategy, is about Rs\. 10 Lakhs to Rs\. 14 Lakhs\.
- In the event, CE Short leg suffers loss, then MTM requirement, will also have to be met\.
- In the event the underlying Index turns extremely bullish such that the underlying crosses much higher over the  Breakeven Strike of the CE Short leg, then the entire investment on the primary leg of this Strategy will have to be liquidated\.
- In order to initiate the Strategy afresh \(or to redeploy, after exiting\), one has to wait for the Nifty to fall, at least upto 12% or 17% level from its top\.
- If India VIX, goes down below 13, then the premium credit for the CE Short leg, may not be decent enough, as compared to the times when the volatility is quite high \(*such as when India VIX is above 18 or 20*\)\.
- If volatility starts rising exponentially, the premium of the CE Short leg would also rise significantly, even though there is not much movement in the underlying Index\. This situation may pose virtual loss on the CE Short leg\. However, such rise in volatility would not result in actual loss on the CE Short leg, if the underlying Index by the Expiry date of the CE Short leg, closes below the Breakeven Strike of the CE Short leg\.
- While Far Month Expiry Series may offer high premium credit for the CE Short leg, but sometimes they may not be liquid; and thus, we may have to settle for Next Month Expiry series Near ITM CE for gaining premium credit for the hedged leg of our Strategy\.
- There may be instances when the entire investment amount has been deployed and then Nifty may further fall to the next lower level\. In this situation, one may have to patiently wait to see the investments made for the primary leg, generate decent returns\.

__Opportunities in this Strategy for Regular Monthly Income from Options Strategy:__

- Nifty in a year usually falls upto a level of at least 12% from its top, and sometimes up to a level of 17% from its top\. Thus, every year, one can get an opportunity, to make investment in Nifty Bees or Bank Bees, at least once and sometimes more than two times\.
- If after some tranches\(s\) of the investment amount \(or part thereof\) have been made, and subsequently there is a further fall upto 17% level or 38% level, as the case may be, then such subsequent fall in Nifty may provide an opportunity to add subsequent tranches of the investment amount to average out the investments made earlier in Nifty Bees or Bank Bees, by buying their additional quantities at subsequent lower level of Nifty\. This way averaging the investments in Nifty Bees / Bank Bees, would eventually help to bring down the average buying price of the investments to a reasonably low cost\.
- India VIX crosses above 20, a few times in a year\. During such times, the Options would have higher Premium\. Consequently, the CE Short leg of the Strategy would be able to have more premium credit\. Higher the premium credit on the CE Short leg, greater the monthly profit margin on the Strategy, and higher the Breakeven Strike for the CE Short leg to generate loss\.
- This Strategy offers an opportunity to generate profit of 1% to 2%, on monthly average basis in a year, on the total capital deployed on the Strategy\. This kind of a return \(in percentage terms\) is much higher than the return generated on Bank deposits or rental income generated from any house property\.

__Threat / Risk involved in this Strategy for Regular Monthly Income from Options Strategy:__

Once in 3 to 4 years’ time, Nifty may fall up to 38% level  from its top\. Therefore, if total investment amount has been deployed already at 12% percent level or 17% level, and thereafter  Nifty further falls down to 38% level, then the investment made in Nifty Bees or Bank Bees may pose a substantial loss\. In such case, longer time may be taken by the Nifty to again come back up to the buying price level of the investments made\.

__Entry Time of Investment in Nifty Bees / Bank Bees \(for Regular Monthly Income From Options Strategy\):__

The aforesaid investment in Nifty Bees or Bank Bees, is not supposed to be made at any time\. Infact, we need to make these investments upon market correction\. The market correction could be due to a sudden geo\-political issue like Russia\-Ukraine war of the recent times or Covid pandemic of 2020; or may also be due to regular market conditions of getting overbought and so on\. Idea is to make our investments into Nifty Bees and Bank Bees, when the Indices have substantially corrected so that we are able to accumulate decent quantity of Nifty Bees / Bank Bees from our investment amount\.

Typically, Nifty every year makes a correction of about 5% to 12%, and sometimes also slips down to 17% in a year; and in rare case in 4\-5 years’ time period, Nifty may even fall down upto 38% in a year from the top it made\. Thus, we can keep these levels for Nifty as tentative levels upto which Nifty may drop down\. But mostly, Nifty makes a correction of 5% to 12% on year\-on\-year basis\. Further, since BankNifty has common Stocks with Nifty \(to the extent of its 25% composition of Nifty\), therefore, a fall in Nifty usually also results in a fall in BankNifty\. Thus, we got to keep an eye for these levels to be touched by Nifty during a year\. __In a year, usually 12% level fall in Nifty is generally found, therefore, we can wait and watch out if Nifty falls upto 12% level from the top before initiating deployment of the investment amount in Nifty Bees or Bank Bees__\.  

Having said above, in order to start deployment of investment amount in Nifty Bees/ Bank Bees, one can examine on the chart of Nifty if the Index seems to take support after a fall of 12% from the top or appears to reverse for sustained upside move\. If it appears that the Nifty, may not sustain at 12% level after falling from the top on technical analysis basis, then we can wait further, before initiating even our first tranche of investment amount \(or part thereof\), to watch out if Nifty is likely to continue its fall or not\. This is because, __if Nifty does fall beyond 12% level, then we will watch out to deploy our investment into Nifty Bees/ Bank Bees, only after Nifty falls down upto around 17% level from the top and starts to take support there and reverses for the upside on sustained basis__\. 

__Deployment of Investment Amount into Nifty Bees / Bank Bees \(for Regular Monthly Income From Options Strategy\):__

Thus, if, after Nifty falls down upto around 12% level or upto a subsequent 17% level from the top, as the case may be; and chartically it appears that Nifty has started to take support around that level and has convincingly started to reverse for the upside on sustained basis from that level, then we will initiate deployment of our planned investment amount \(or part thereof\) and would complete our deployment around that level\. 

However, if we have deployed full investment amount into Nifty Bees/ Bank Bees at around 12% level or 17% level, as the case may be, and thereafter Nifty further falls down to the next lower level of 17% or 38% \(as the case may be\),  then in that case we will have to patiently wait for the Nifty to again come up to our buying level and move higher\. 

But in order to avoid such a situation, one can consider making deployment of the investment amount in tranches \(*eg: buying 2 Lakhs worth of Nifty Bees/ Bank Bees, and after waiting and watching, buying another 2 Lakh worth of Nifty Bees/ Bank Bees, and in this fashion can keep deploying investment amount in small tranches,  so as to avoid getting caught in a situation of further extreme fall in Nifty, from our buying level, after we have deployed our full investment amount*\)\. In this way, even if Nifty further falls down convincingly, after we have made a few tranches of deployment, then we can wait and watch for Nifty to take support at the next lower level \(*i\.e\. 17% or 38%, as the case may be*\)\. And at that level if it appears that Nifty has formed its base after taking support, and has started to reverse for the upside on sustained basis from that level, then we can deploy balance amount of our investment corpus into buying Nifty Bees / Bank Bees, in one or more tranches\.

__Diagonal \(Long\) 1:4 Ratio Spread: A General Introduction__

__This Strategy is relatively high probability trade design, than  conventional Credit Spread based Strategies like Short Strangle & Iron Condor, which are played for profit from Overnight Expiry Theta decay__\.

This Strategy has been designed to play extreme decay on Far OTMs between one\-day\-prior\-to\-Expiry \(referred to as, __Previous Day__\) and opening of trading session on next\-day\-Expiry day \(referred to as, __Expiry Day__\)\. 

In case of Nifty Options, this Strategy is created on Wednesday \(i\.e\. one\-day\-prior\-to\-Expiry\) to play the overnight decay in Far OTMs on next day \(Thursday\) Expiry, in both Weekly and Monthly Expiry series\. In case of BankNifty Options, this Strategy is created on Thursday \(i\.e\. one\-day\-prior\-to\-Expiry\) to play the overnight decay in Far OTMs on next day \(Friday\) Expiry, in both Weekly and Monthly Expiry series\.  In case of FinNifty Options, this Strategy is created on Monday \(i\.e\. one\-day\-prior\-to\-Expiry\) to play the overnight decay in Far OTMs on next day \(Tuesday\) Expiry, in both Weekly and Monthly Expiry series\. This Strategy may be implemented on FinNifty only if there is ample liquidity for the Long leg \(to be initiated on next week’s / month’s Expiry series, as the case may be\)\.

In this Strategy:

- if on a Previous Day, the trend for the next day \(i\.e\. Expiry Day\) appears to be mildly bullish, then this Strategy may be created on the CE side with CE Short on Far OTM Current Week Expiry series \(*i\.e\.* *CEs expiring next day*\) and CE Long leg initiated on Near OTM of Next Week Expiry series\. The Short legs will comprise of more CE Shorts than CE Long\. The ratio to be maintained between Long CE & Short CEs is 1:4 i\.e\. for every 1 Lot CE bought on Next Week Expiry series, 4 Lot CEs need to be sold of Current Week Expiry series\. Thus, this Strategy is actually a CE Long Diagonal Spread executed as a CE Ratio Spread \(i\.e\. __CE Diagonal \(Long\) Ratio Spread\)__\.

- If on a Previous Day, the trend for the next day \(i\.e\. Expiry Day\) appears to be mildly bearish, then this Strategy may be created on the PE side with PE Short on Far OTM Current Week Expiry series \(*i\.e\.* *PEs expiring next day*\) and PE Long leg initiated on Near OTM of Next Week Expiry series\. The Short legs will comprise of more PE Shorts than PE Long\. The ratio to be maintained between Long PE & Short PEs is 1:4 i\.e\. for every 1 Lot PE bought on Next Week Expiry series, 4 Lot CEs need to be sold of Current Week Expiry series\. Thus, this Strategy is actually a PE Long Diagonal Spread executed as a PE Ratio Spread \(i\.e\. __PE Diagonal \(Long\) Ratio Spread__\)\.
- if the trend  for the Expiry Day is not certain but is expected to be either mildly bullish or mildly bearish, then this Strategy can also be created on a Previous Day, on both CE & PE side in equal quantity \(i\.e\. maintaining original ratios of 1:4 on both sides\) i\.e\. a combination of above mentioned  CE Diagonal \(Long\) Ratio Spread and PE Diagonal \(Long\) Ratio Spread\.

However, one must bear in mind that the PE Short side is relatively riskier than CE Short side, because, when the underlying falls, the volatility too usually rises which causes PEs to rise in their premium value much higher than rise in CE premium when the underlying rises upwardly\. Thus, __PE side Strategy must only be implemented when the broader trend of the underlying is not in the downtrend, and are suitable to be implemented when the broader trend of the underlying is in uptrend__\.

As mentioned, this Strategy is created on Previous Day and is squared\-off on the opening of trading session on the Expiry Day \(i\.e\. overnight holding time or BTST / STBT sorts\)\. This is because the objective of this Strategy is to benefit on the Short leg from extreme Overnight Theta decay applicable on the next day expiring Options \(on the Short leg\) immediately upon opening of the Expiry day itself; and to additionally get some benefit due to the expected mild\-bullish / mild\-bearish move in the underlying on the opening of the Expiry day trading session\. Thus, the positions are targeted to be immediately squared\-off, upon opening of the trading session on Expiry day in order to benefit from extreme overnight Theta decay on Short leg and also book benefit on the Long leg from the expected move in the underlying\.

Having said above, if upon opening of the trading session on the Expiry Day, the trend appears to be mild in the direction as expected, and does not seem to breach the OTM Strike at which Shorts are initiated, then the position may be carried/held till full Expiry, instead of squaring\-off immediately upon opening of the Expiry Day\. 

__Options Behaviour in Call Diagonal 1:4 Ratio Spread Strategy__

- This __*Strategy is mainly devised to capture the overnight decay*__ \(*i\.e\. between close of trading session on Previous Day and opening on Expiry Day*\) in Far OTMs of Current Week Expiry\. Accordingly, in this Strategy, __*CE Short primary leg being created on Current Week Expiry faces severe Theta impact, while the CE Long hedged leg being initiated on the Next Week Expiry, is not much affected on account of Theta*__ \(especially, between the Previous Day and Expiry Day of the primary leg Options\)\.
- In this Strategy, the premium credit collected on CE Short leg is usually slightly higher than 50% of the Premium Debit incurred on the CE Long\. Thus, this Strategy is a net Premium Debit Strategy and the amount of net Premium Debit incurred \(*i\.e\. aggregate Premium Credit collected on CE Short leg – total Premium Debit incurred on CE Long leg*\) could be the potential max loss in this Strategy if the underlying keeps falling \(__Downward Risk Level__\)\. Thus, it is important to ensure that if the trend gets downward, then this Strategy must be exited before Premium Credit collected on CE Short leg gets exhausted due to the steep down move in the underlying\. 
- But if the underlying starts trending with strong bullish momentum \(*against the mild bullish move as originally expected*\), then also this Strategy could yield substantial loss, because the CE Short leg would become deep ITM and its Premium would rise significantly, which the profit generated on the CE Long would not be able to absorb \(*even though CE Long leg also becomes even more deep ITM than CE Short leg*\)\. Thus, it is important to ensure that if the trend gets super bullish, such that the CE Short Strike can be breached by the underlying on closing basis \(__Upside Risk Level__\), then this Strategy must be exited before Premium of the CE Short leg becomes too high as the CE Short Strike appears to become an ATM and may even expire as an ITM on sustained basis after breaching its BE Strike\.    
- In order that this Strategy does not cause loss, it is important to keep watch that both the Upside Risk and Downside Risk \(*as explained above*\) is protected\.
- When this Strategy is created on the CE side, 4 Lots of CE Short would generally have a higher negative Delta on aggregate basis, than the positive Delta on 1 Lot CE Long \(*i\.e\. if underlying starts falling, then* *CE Short will generate more profit than loss generated by CE Long*\)\. Therefore, if immediately upon creation of this Strategy, the underlying starts falling, then owing to __*net negative Delta position*__ __*on this CE side Strategy*__, this Strategy would start showing profit\. But if the underlying starts rising up with mild uptrend, before the close of trading session on the Previous Day, then this Strategy may show some minor virtual loss due to higher negative Delta on CE Shorts \(*which gets set\-off on account of Theta impact on Expiry Day opening on CE Shorts*\)\. Further, if on the Previous Day, after this Strategy is initiated, there arrives a strong bullish momentum, then this Strategy may pose higher loss \(*especially, if momentum appears to make the CE Short Strike as an ATM or cross\-over above the BE Strike of this Strategy*\), due to net negative Delta on this CE side Strategy\. __Thus, on start of bullish momentum on the Previous Day itself, this Strategy must be immediately exited__, and then again can be re\-initiated later during the day, once the upward momentum has ceased\.
- Also, if bullish momentum of limited extent arrives on Previous Day, then CE Long position will get tremendously benefited due to addition of Premium \(even it may become an ITM\), but mild bullish momentum will not much negatively impact the CE Short leg as it is on Far OTMs\. Far OTMs will not be able to retain any addition of Premium due to mild bullish momentum due to extreme Theta impact on Far OTMs, towards the end of the trading session on Previous Day itself\.
- When this Strategy is created on the CE side, the CE Shorts would generally have a higher negative Vega on aggregate basis, than the positive Vega on CE Long \(*i\.e\. if Volatility starts falling then CE Short will generate more profit than loss on CE Long*\)\. Therefore, if immediately upon creation of this Strategy, the Volatility starts falling down, then owing to net negative Vega position on this Strategy, this Strategy would start showing profit due to Volatility crash\. But if Volatility starts  rising up, then owing to __*net negative Vega position*__ __*on this Strategy*__, this Strategy would start showing loss due to rise in Volatility\. Thus, while rise in Volatility is an issue in this Strategy, but so long the underlying seems to expire below the CE Short Strike, rise in Volatility alone will not result in loss in this Strategy \(infact, CE Long will get benefited from rise in Volatility\)\.  
- When this Strategy is created on the CE side, a mild bullish move during the Previous Day itself or a mild gapup on Expiry Day opening, yields profit on the CE Long hedged leg; and so long the CE Short leg is still an OTM atleast 3 or 4 Strikes away from ATM on the Expiry Day opening, the CE Short leg too will yield profit due to Theta impact of overnight decay\.
- If the underlying opens gapdown on Expiry Day opening then CE Short leg will be on higher negative Delta on aggregate basis than the positive Delta on CE Long\. Consequently, to the extent of aggregate Premium Credit received on the CE Short leg, this Strategy will remain in profit or no\-profit\-no\-loss situation\. __*Thus, it is important that the Premium Credit on CE Short is more than 50% of the Premium Debit incurred on CE Long leg, as the Premium Credit received will cover the loss on this Strategy to that extent*__\. A fall of around \-1\.5% to \-2% or so is conveniently absorbed by this Strategy \(*especially, if Volatility crashes*\)\. Thus, in case the underlying seems to be in a downtrend for Expiry Day, then this Strategy may be exited with minor profit/loss, as the case may be on Expiry Day opening\.
- In case of a big gapup on Expiry Day opening, so long the CE Short leg is still an OTM, the CE Long \(*which in such case would become an ITM*\) should generate reasonable profit to substantially set\-off loss on the CE Short leg\. Hence, the Strategy may not yield big loss\. However, if the gapup is so huge \(*viz\. \+1000 points or more in case of BankNifty*\) that the CE Short leg also becomes an ITM, then the profit generated on CE Long \(*which would also be an even deeper ITM in such case*\) may not be able to substantially set\-off loss on the CE Short leg, thereby resulting losses on this Strategy\. In the event of loss on account of such huge gapup on Expiry Day opening, some loss may be attempted to be mitigated by initiating Counter Adjustments \(*as explained below*\)\.
- __If this Strategy is held to continue playing it for the full Expiry Day__, and then if during the Expiry Day:
- there arrives a strong upward momentum \(*so much so that it appears that it may likely cross\-over above the BE level of the CE Short leg*\), then this Strategy may generate significant loss due to being net negative Delta on CE side\. Thus, in such situation it would be prudent to immediately square\-off this Strategy as soon as the price seems to breach and sustain above the major Resistance level on Expiry Day\. 
- there arrives a downward move, then this Strategy would generate some profit, as it is net negative Delta on CE side, until the aggregate Premium Credit collected on CE Shorts is exhausted \(*because the CE Short leg becomes even deeper OTM*, *during downward move*\)\. Therefore, in this situation, as soon as the downtrend seems to be sustaining and the Premium collected on CE Short leg is almost about to get exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the downtrend continues after Premium Credit of CE Short leg is exhausted, then the balance Premium Debit \(*i\.e\. aggregate Premium Credit collected on CE Short – Premium Debit paid in total for the CE Long*\) would start generating max loss on this Strategy\. Further, if the downfall arrives with momentum or the downtrend arrives in the last 1 hour or so on the Expiry Day, then the Delta value of CE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta positive on the CE side\. And as soon as the net Delta position of this Strategy turns positive, any further downmove would start causing loss in the Strategy\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes positive, if the downtrend seems to sustain and continue during the Expiry Day\.

*Note: It is pertinent to note that on Expiry Day, as soon as Far OTM CE Options reduces significantly in their premium value resulting in its LTP of 3 or so, either due to fast downtrend \(LTP of CE option gets reduced when underlying falls\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)\.*

- there remains a mild bullish trend throughout the Expiry Day, which does not seem to cross over above the major Resistance level \(above which the CE Short leg was initiated\) and expires near that Resistance level, then a maximum profit situation emerges, because CE Short leg expires worthless as Far OTM thereby yielding entire aggregate Premium Credit as profit; and the CE Long leg also generates profit due to continuation of mild bullish trend during the Expiry Day\. In this situation, after half the trading session on Expiry Day is over, the Far OTM CE Short leg would lose its Premium value to severe Theta decay, by virtue of belonging to the Current Week Expiry \(*inspite of the mild bullish move in the underlying, because mild bullish move will not be able to negatively impact the decay being caused by Theta of Expiry Day*\) and consequently its Delta value would become negligible / zero, thereby resulting this Strategy into a net Delta positive Strategy \(*owing to CE Long leg, whose Delta value remains intact, as it does not get impacted by Theta decay, by virtue of belonging to the Next Week Expiry and not Current Week Expiry*\)\.
- the underlying remains rangebound throughout the Expiry Day, then also this Strategy would yield profit as CE Short leg on Current Week Expiry would get severely impacted due to Theta impact of Expiry, while CE Long leg on Next Week Expiry faces much less Theta decay, hence net profitable situation\.

__Call Diagonal 1:4 Ratio Spread Strategy__

__\(Target View: Mild Bullish Opening on Expiry Day\)__

__Requisite Technical Conditions for Call Diagonal 1:4 Ratio Spread:__

- Trend for BTST / STBT appears to be mild bullish\.
- Identify major Resistance level \(*viz\. 20 SMA / Pivot Point / Upper Bollinger Band / previous resistance trendline on daily / weekly TF*\)\. CE Shorts must be initiated at an OTM Strike above such major Resistance level on Spot chart\.
- This Strategy should not be deployed, if on a Previous Day or Expiry Day, the Volatility is expected to rise due to unfolding of some news or event\.
- If on a Previous Day, the price of the underlying is hovering or closes near some major Resistance level \(*on hrly or daily TF*\), then the underlying may likely take a gapup on Expiry day in order to cross\-over above the said Resistance level\. Therefore, in such situations, the primary leg for CE Shorts must be initiated higher than the next higher major Resistance level\. Idea here is that the underlying must not cross above the major Resistance level on Expiry day opening \(*consequently, the CE Short Strike should always remain higher than ATM\+4 Strikes on Expiry Day opening*\)\.

*Note: Major Resistance levels are crossed over upwardly, either by way of a sustained gapup or a bullish supercandle on D TF \(i\.e\. a very bullish move in intraday, resulting in a big green supercandle on Daily TF\)\.*

__Point of initiating Call Diagonal 1:4 Ratio Spread:__

- This Strategy may be initiated after at around 10\.15 am to 10\.30am on a Previous Day, if the intraday appears to be rangebound \(*technically, large spinning top type of candle on 1 hr TF*\)\. However, if on the Previous Day in intraday, at any time, the underlying becomes bullish and appears to move upwardly with momentum  \(*viz\. technically, Bollinger band blast upwardly on any TF*\), then it is better to exit from both legs of this Strategy by immediately booking minor profit/loss, as the case may be, and to re\-initiate this Strategy around 1 hr before the end of trading session on the Previous Day, after bullish momentum seems to have ceased for intraday\. If the bullish momentum on intraday day basis seems to continue then this Strategy if already running must immediately be exited and may be freshly initiated just 15mins before the close of trading session on Previous Day\.
- In order to avoid frequent exits or stop loss getting hit on this Strategy on the Previous Day due to bullish intraday momentum, this Strategy may be initiated around the time when half the trading day is over \(*instead of during the first 1 hour of the trading session in the morning*\)\. This will help cut down on the number of pre\-mature exits from this Strategy by nearly 50%\. However, as mentioned, if the bullish momentum arrives in the second half of the trading session on Previous Day after the positions have already been initiated, then this Strategy must be immediately exited and re\-initiated at around just 15mins before the close of trading session on Previous Day\.
- CE Shorts must pertain to Strike, above the major Resistance level of Spot\. 
- In case of Nifty and FinNifty \(*when VIX is between 15 to 20*\): CE Shorts must be atleast 300 to 350 points aways from the ATM \(besides being above the major Resistance level\); and CE Long must be 50 points away from the ATM \(i\.e\. ATM \+ 1 Strike\)\.
- In case of BankNifty \(*when VIX is between 15 to 20*\): CE Shorts must be atleast 700 to 800 points aways from the ATM \(besides being above the major Resistance level\); and CE Long must be 100 points away from the ATM \(i\.e\. ATM \+ 1 Strike\)\.
- When VIX is higher than 20, then the CE Short Strike must be even farther OTM\. However, when VIX is lower than 15, then CE Short Strikes may be slightly lower but surely not close towards ATM\. 
- Target Premium Credit for CE Shorts leg in Nifty and FinNifty should be atleast 30 to 40 points per Lot; and for BankNifty it should be atleast is 70 to 80 points per Lot\.
- Further, it must be ensured that: aggregate Credit of Premium on 4 Lots on CE Short, must be atleast 50% of Premium Debit incurred on 1 Lot of CE Long position\. This Premium balance between the primary leg and the hedged leg helps to contain the overall loss on this Strategy on the downside \(*i\.e\. if the underlying falls about \-1\.5% to \-2% or so by way of gapdown or otherwise on Expiry Day opening*\)\.

__Significance of Strike / Delta values in Call Diagonal 1:4 Ratio Spread__

__Strike Selection in Call Diagonal 1:4 Ratio Spread Strategy__:

One must be careful to not select a Strike for initiating CE Short leg of the Strategy, which is closer to ATM \(or which can likely become an ITM on Expiry\), even if lucrative Premiums are available in near OTM CEs\.

Always target CE Short leg Strike selection which is well beyond/ higher than any major Resistance level \(*which gives a comfort that the underlying would not breach that Resistance level by Expiry*\), thereby, ensuring that the CE Short leg would expire worthless as OTM\.

In BankNifty Weekly Options, 65 to 75 premium value per Lot, is decent, for initiating CE Short leg\. In Nifty Weekly Options, 25 to 35 premium value per Lot, is decent, for initiating CE Short leg\. 

It need to be ensured for the CE Short leg that per Lot premium is 50% or more of the premium on the CE Long leg\.  

CE Long leg, would be an OTM which would be not more than  ATM \+ 2 Strike levels\.

__Delta fluctuations in Call Diagonal 1:4 Ratio Spread Strategy:__

- Since, in this Strategy there are 4 CE Shorts against 1 Long CE, the effective Delta on the overall Strategy would be negative, which implies that if soon after initiating this Strategy, the underlying would trend on the upside, then the Strategy would exhibit virtual loss and if the underlying moves in downtrend then the Strategy would exhibit profit\.
- If after initiating the Strategy, the underlying moves in a downtrend with momentum, then so long the effective Delta position is negative on the Strategy, downward move in the underlying would generate profit on the Strategy\. But once, the steep downward move in the underlying causes quick and substantial loss of the Premium value of the CE Short leg, then the negative Delta position on the overall Strategy turns net positive Delta Strategy\. As soon as the Strategy turns net Delta positive then any further downward move in the underlying would start causing loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the downward move further continues \(Downward Risk\)\.
- However, after the Overnight Decay, the net negative Delta position on the overall Strategy would reduce\. Thus, after overnight decay i\.e\. on the Expiry Day if the underlying moves in uptrend then the effective virtual loss would be relatively lesser\.
- But if the uptrend occurs with strong momentum, even on the Expiry day before considerable decay on the CE Short leg premium has occurred, the overall Strategy would exhibit strong virtual loss due to overall negative Delta impact on the Strategy\. As soon as the CE Short leg Strike appears likely to become an ITM then any further upward move in the underlying would start exhibiting heavy loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the upward move further continues \(Upward Risk\)\.
- However, if the uptrend arrives on Expiry day, after considerable decay to the Premium on the CE Short leg \(*i\.e\. when the Premium is almost about to become zero, and is hovering around 3 or 4 Rs\.*\) then the effective Delta on the overall Strategy would turn positive, and in such situation any upmove in the underlying would exhibit higher profits on the Strategy\.

__Target & stop Loss in Call Diagonal 1:4 Ratio Spread__

__Target in Call Diagonal 1:4 Ratio Spread:__

There can be two targets on this Strategy that may be aimed for as part of the trade plan on this in Call Diagonal 1:4 Ratio Spread Strategy:

1. Target on opening of the Expiry Day: Upon opening of the market on the Expiry day trading session, due to Overnight Theta impact, if the underlying opens almost near the close of the Previous Day or takes a gap up but opens at a reasonable distance below the major Resistance level \(*such that the CE Short Strike is about 2 to 4 CE OTM Strikes away from ATM on opening*\), then this Strategy would generate a decent profit\. In such event it is likely that both CE Long leg \(*due to gap up*\) and CE Short leg \(*due to overnight decay*\) would generate profit upon such opening on the Expiry Day\. A trader can book such a profit, upon opening on the Expiry Day and exit from his positions\.
2. Target towards the end of the Expiry Day: This trade can also be continued till close to the end of the Expiry Day\. In such event the maximum reward would be generated if the CE Short leg closes as an ATM or very near OTM \(ATM \+ 1 or so\) on Expiry\. However, if the underlying remains in a downward trend on Expiry Day, then the target should be to exit the trade as soon as the Premium on the CE Short leg is almost close to becoming zero due to the continuous downtrend on Expiry Day\. It must be borne in mind that this trade should not be further continued after Premium on the CE Short leg is close to turning zero, as CE Long leg would then cause such loss due to downtrend which may eat up the profits generated on the CE Short leg due to intraday downtrend of the Expiry Day\. Further, if after the CE Short leg Premium is close to becoming zero due to intraday downtrend on the Expiry day, the underlying takes a reversal towards the uptrend in the second half of the trading session on Expiry Day, then it may be advisable to hold the trade, as the uptrend momentum may not add much Premium on the CE Short leg \(*due to Expiry Day Theta impact*\) but the Premium would get added on the CE Long leg \(*as it is on Next Week Expiry series*\), thereby, generating relatively more profit by the close of the Expiry Day \(so long the uptrend does not breach the CE Short leg Strike\)\.

__Stop Loss & Risk Management in Call Diagonal 1:4 Ratio Spread:__

Stop Loss will have to be determined on the basis of Upside Risk / Downside Risk and also on the Volatility Spike\.

1. Stop Loss in case of Upside Risk:  In case of Upside Risk, if the underlying is expected to close on the Expiry Day on the upside, such that the CE Short leg on Expiry may end up beyond 2nd Strike level ITM \(i\.e\. ATM \- 2\) or even deeper, then it may be advisable to take stop loss when the CE Short leg becomes an ATM and sustains at that level and seems likely to end up being an ITM\. However, if the uptrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by CE Short leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM PEs of Current Week Expiry series; or \(ii\) initiating Counter Adjustments through Long CEs on not\-so\-deep\-OTMs \(upto ATM\+2 CEs\) of Current Week Expiry series or Next Week Expiry series\. But if there is another strong Resistance level just above the CE Short leg Strike then \(a\) either, a chance may be taken for reversal of the underlying on the downside so as to check if the CE Short leg may not remain an ITM deeper than one Strike Level from ATM by close of Expiry; or \(b\) Counter Adjustments by Shorting additional slightly Far OTM CEs of Current Week Expiry series may be initiated\.
2. Stop Loss in case of Downside Risk:  In case of Downside Risk, if the underlying is expected to close on the Expiry Day on the downside after a huge gapdown, such that the CE Short leg during the Expiry Day soon loses almost all its Premium immediately due to the gapdown / steep downtrend on Expiry Day, and the underlying is expected to fall even beyond during the remainder of the Expiry Day, then it may be advisable to immediately exit from this trade at minor profit / loss, as CE Long leg would then cause further loss due to continued downtrend during the Expiry Day\. However, if the downtrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by CE Long leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM CEs of Current Week Expiry series; or \(ii\) initiating Counter Adjustments through Long PEs on not\-so\-deep\-OTMs \(upto ATM\-2 PEs\) of Current Week Expiry series or Next Week Expiry series may be initiated\.
3. Volatility Spike: If after the trade is initiated there is sudden volatility spike, then the Premium on the CE Short leg would start increasing more than the Premium on CE Long leg\. Therefore, if there seems to be an uncontrolled volatility spike, then it may be advisable to immediately exit the Strategy at minor loss / profit and re\-initiate the Strategy when the volatility spike has stopped\. Volatility crash would be suitable for the Strategy not volatility spike\.

__Adjustments in Call Diagonal 1:4 Ratio Spread__

__*Adjustments in Call Diagonal 1:4 Ratio Spread \(if trade does not go as per plan\)*__:

Adjustments for Upside Risk, in Call Diagonal 1:4 Ratio Spread: If the trend becomes super bullish and the major Resistance level is likely to be breached by the underlying by Expiry on closing basis, then the Strategy may yield loss\. This Upside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM PEs, of Current Week Expiry series, in double the quantity than the CE Short leg\. The additional Premium Credit received on Shorting these PEs would help absorb some loss on the CE Short leg due to strong bullish momentum making the CE Short Strike an ITM\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.
- If there seems to be a strong uptrend, then additional near __OTM CEs can be bought \(Long CE\) of Next Week Expiry series__, besides Long CE already on the hedged leg\. The additional CEs can be ATM or near OTMs, with higher quantities than the CEs on Short leg\. Idea here should be that the Delta value of all Long CEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of CE Short position, so as to generate profit on this Strategy on account of super bullish momentum\. All Long CEs on this Strategy, with higher Delta value on aggregate basis than the CE Short leg, should generate more profit and help cover losses in the CE Short primary leg\. However, buying additional CEs will add additional debit positions, therefore, this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. Further, these Long CEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on CE Long unless bullish momentum is super strong and swift\.

Adjustments for Downside Risk, in Call Diagonal 1:4 Ratio Spread: If the underlying is likely to get in strong downtrend even after the Premium on CE Short leg is close to zero due to downward momentum, then the Strategy may yield loss, as the Long CE leg would generate further loss to the maximum extent of net premium debit position on the Strategy\. This Downside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by Shorting \(selling\) ATM CEs, of current Expiry series, in such quantity so as to receive sufficient Premium Credit on these additional CE Shorts in order to absorb the net Premium Debit on the Strategy\. The additional premium credit received on these Short CEs would help absorb the loss caused by the CE Long leg to the extent of net Premium Debit on the original Strategy\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.
- If there seems to be a strong downtrend, then additional near __OTM PEs can be bought \(Long PE\) of Next Week Expiry series__\. These Long PEs can be ATM or near OTMs, with reasonable quantities which should generate profit due to strong downtrend sufficient to absorb the max loss situation on the original Strategy\. Idea here should be that the Delta value of all Long PEs on aggregate basis should be higher than the aggregate Delta value  on CE Long position, so as to generate profit on this Strategy on account of super bearish momentum\. All Long PEs on this Strategy, with higher Delta value on aggregate basis than the CE Long leg, should generate more profit and help cover max loss situation on the original Strategy\. However, buying additional PEs will add additional debit positions, therefore, this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. Further, these Long PEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on PE Long unless bearish momentum is super strong and swift\.

__Impact of Different Market situations on Call Diagonal 1:4 Ratio Spread__

__If trade goes as per plan, in Call Diagonal 1:4 Ratio Spread__: 

If there occurs a mild gapup after Overnight Decay on Expiry Day opening or if the mild uptrend continues in intraday during the Expiry Day and the underlying does not seem to breach the CE Short leg strike on the upside, then the  Strategy may be continued for the relevant target as discussed above\. 

__If underlying becomes sideways, in Call Diagonal 1:4 Ratio Spread__: If the trend gets rangebound until Expiry then the Strategy may be held until the Premium on the CE Short leg is almost close to zero\. However, if volatility during Expiry Day is crashing down then the Strategy should be attempted to be exited as soon as the Premium on CE Short leg is close to zero\. There may not be any point to hold the Strategy any longer after Premium on CE Short leg is almost exhausted, because volatility crash would also cause depletion of premium on the CE Long leg, thus adversely affecting the net profit situation on this Strategy\.  

__If trade does not go as per plan, in Call Diagonal 1:4 Ratio Spread__: 

If it appears that there may  occur: 

1. an Upside Risk situation \(*i\.e\. the underlying is likely to breach and sustain the major Resistance level basis which CE Short leg was initiated*\); or 
2. a Downside Risk situation \(*i\.e\. the underlying is likely to get in strong downtrend even after the Premium on CE Short leg is close to zero due to downward momentum*\),

then this Strategy may need certain adjustments in order to mitigate any potential loss on the Strategy due to the aforesaid Upside Risk and Downside Risk situations\.

__Merits & Demerits of Call Diagonal 1:4 Ratio Spread Strategy__

__Benefits of Call Diagonal 1:4 Ratio Spread Strategy:__

- Overnight decay \(*between close of Previous Day and opening of Expiry Day*\) in Far OTMs is a sure thing due to Options behaviour\. Thus, playing this Strategy to harness profit from overnight Expiry decay makes it a high probability Strategy, except unless huge gapup makes the Far OTM CE Short Strike an ITM on Expiry Day opening \(*thereby ruining the Theta decay impact by a huge Delta move due to big gapup*\)\. Having said this, huge gapups of such magnitude that it can convert such a Far OTM CE into a deep ITM is a seldom event \(i\.e\. about once or twice in 6 times\)\. Moreover, in this Strategy, CE Short leg is properly hedged with CE Long leg of Next Week Expiry \(*which has Delta value not much less than the aggregate Delta value of CE Short leg; but has much less Theta impact as compared to the CE Short leg*\)\. Thus, this Strategy offers a good winning probability\. 
- This Strategy gives a decent range between the Upside Risk and the Downside Risk \(*as explained above*\), for the movement of the underlying, in order to generate profit on this Strategy, within a span of 1 to 2 trading sessions\.
- Not only when the market opens mild bullish on Expiry Day, but also when market opens at the same level where it closed on the Previous Day, this Strategy would yield profit on opening of Expiry Day \(*as CE Short leg on Current Week Expiry would get severely impacted due to Overnight Expiry decay, while CE Long leg on Next Week Expiry faces much less Theta decay, hence net profitable situation*\)\. 
- Further, if the underlying appears to be rangebound during the Expiry Day or is expected to remain mildly bullish \(without breaching the major Resistance\), then this Strategy may also be held until full day Expiry to reap full benefit of Theta decay of Expiry on CE Short leg\. 
- In case there occurs a huge gapup which causes Far OTM CE Shorts to become deep ITM and thereby causing loss in the Strategy, then certain risk mitigating Counter Adjustments can be initiated to play out on the Expiry Day in order to cut down the loss on this Strategy\.
- The opportunity to play overnight Expiry decay on Far OTMs, can be harnessed on a weekly basis\. Thus, every week, atleast thrice an opportunity is granted by Index Options \(*i\.e\. on Monday by FinNifty for its Tuesday Expiry; and on Wednesday by Nifty for its Thursday Expiry; and on Thursday by BankNifty for its Friday Expiry*\)\.
- If there is Volatility crash on Expiry Day opening, then this Strategy may yield profit, as it is a net negative Vega strategy \(*as explained above*\)\.

__Demerits of Call Diagonal 1:4 Ratio Spread Strategy__:

- This Strategy has both Upside Risk as well as Downside Risk\. While, this Strategy offers a decent range for the movement of the underlying, between the two aforesaid risk levels, for / during the Expiry Day, but the Expiry Day’s are usually very volatile with big swings on either side\. Thus, a watchful eye on the trade is a must, with clarity on the stop loss area\. Therefore, to play this Strategy safely, it is best to deploy it only for overnight Expiry decay and avoid holding for full Expiry Day unless very sure of the trend of the Expiry day on technical basis\. 
- If a strong upward momentum arrives after initiating this Strategy, then the positions on both the legs may have to be exited \(*as it is a net negative Delta Strategy on the CE side, as explained above*\); and this Strategy may be re\-initiated after the momentum ceases or just before the close of the Previous Day’ trading session\.
- In case of huge gapup on Expiry Day opening, CE Short leg may end up being a deep ITM, and the huge Delta move on 4 Lots of CE Short may generate much higher loss than the profit generated by 1 Lot of CE Long \(*even though it would become an even deeper ITM*\)\. A huge Delta move, due to a big gapup, can ruin the expected Theta impact on CE Shorts, and instead cause a big loss on the Strategy \(*which is a net negative Delta Strategy on the CE side*\)\. While, the loss generated on this Strategy on account of a big gapup, may be attempted to be mitigated though Counter Adjustments \(*i\.e\. by way of selling Far OTM PEs on Expiry Day*\), but practically sometimes it may get little complicated\.
- Also, since, this Strategy is a net Vega negative Strategy \(*due to higher Vega on CE Short leg than CE Long leg*\), therefore, if any news breaks out or any events unfold which results in rise in Volatility, then this Strategy would get negatively impacted due to such rise in Volatility\. But, while rise in Volatility is an issue in this Strategy, but so long the underlying seems to expire below the CE Short Strike, rise in Volatility alone will not result in loss in this Strategy \(infact, CE Long will get benefited from rise in Volatility\)\.
- Generally, when VIX is below 15, it may become difficult to find good premium for the CE Short leg at reasonably Far OTM \(above major Resistance level\) consequently the overall target profit on the Strategy might substantially reduce\. Further, initiating CE Shorts below major Resistance or near to ATM may be very risky and must be avoided\. 
- This Strategy is a CE Ratio Spread \(*implemented like a Diagonal Long Spread*\), involving 4 times more Shorts than Long and therefore the margin requirement is high\. While, higher margin implication on this Strategy may be substantially reduced by buying same quantity of even Far OTM CEs of Current Week Expiry \(*as explained above*\), however, initiating these Long CEs on Far OTMs may not be possible due to restrictions imposed by certain brokers\.
- In this Strategy, premium credit collected on the CE Short leg on aggregate basis is usually slightly higher than 50% of the Premium Debit incurred on the CE Long leg\. Therefore, if there arrives a big fall, the loss that this Strategy would be able to absorb will be to the extent of Premium Credit collected on CE Short leg\. But if the fall continues, after the Premium Credit gets exhausted, then the balance 50% premium debit on the CE Long will cause the maximum loss on this Strategy \(*explained below*\)\. Therefore, when it appears that the downtrend is going to continue and the Premium Credit is almost getting exhausted then Counter Adjustments \(*as explained below*\) must be initiated to mitigate the max loss situation\.

__Breakeven Strike \(BE\) in* *Call Diagonal 1:4 Ratio Spread, its Calculation and Payoff Chart__

__*Breakeven Strike \(BE\) in Call Diagonal 1:4 Ratio Spread, from Expiry perspective*__:

As already mentioned above that this Strategy has both Upside Risk Level and Downside Risk Level\. 

__*BE for Upside Risk in Call Diagonal 1:4 Ratio Spread:*__

<__start__> From Expiry perspective, the BE Strike for protection from the Upside Risk on this Strategy will be: __\[CE Short Strike \+ Premium collected per Lot\]__ <__end__>

<__start__> To illustrate, we can look at the Example mentioned above, in which CE Short Strike is 34000 and the Premium collected per Lot on Short leg is 75\. Thus, BE will be: 34000\+75= 34075\.

Now, if BankNifty rises up and slightly breaches the BE Strike level of 34075 on closing basis on Expiry Day, by say 50 or 100 points, then on Expiry 34000 CE Short Strike would become a near ITM\. Thus, if CE Short leg becomes a near ITM \(upto 100 or 150 points deep from ATM\) on Expiry, after breaching the BE on the upside, then on close of Expiry session the CE Short Strike’s Premium would be equivalent to its Intrinsic Value \(*which means that upon Expiry: difference between ATM and the ITM CE Strike level, will be the Intrinsic Value or Final Premium Value of the CE Short leg*\)\. Consequently, the difference between the __Final Premium Value of the CE Short leg \(per Lot\) on Expiry – Premium credit of 75 \(per Lot\) collected at the time of initiating the Strategy__, will be the per Lot basis loss on the CE Short leg \(__Loss__ __on CE Short Leg__\)\. But at the same time, because the underlying has risen much higher, the CE Long leg of the Strategy would have also become a deep ITM and would generate decent profit \(__Profit on CE Long Leg__\) which will to some extent set\-off the loss caused on CE Short leg by virtue of it becoming an ITM on Expiry\.

Thus, the maximum loss caused due to the Upside Risk on Call  Side Strategy shall be: __\[Loss on CE Short Leg – Profit on CE Long Leg\]__\. If the CE Short leg becomes a near ITM on Expiry, then usually the loss on the Strategy will not be much on per Lot basis \(*but on heavy volume it may percolate to be a big number, especially if CE Short leg turns into an ITM which is deeper beyond ATM\-2 CE Strike on Expiry*\)\. 

But if as a result of huge gapup or strong bullish momentum, the CE Short leg becomes a deep ITM, then basis the above calculations, the Upside Risk may be significantly higher \(*especially on heavy volume*\)\. Thus, it is advisable that in order to avoid the Upside Risk, the Strategy must be carefully watched for appearance of any strong bullish momentum; and if such momentum seems to arrive then this Strategy must be either immediately exited or Counter Adjustments \(*as explained below*\) must be initiated\. Also, if the Strategy gets hit with the Upside Risk on account of gapup on Expiry Day opening, then also the relevant Adjustments \(*as discussed below*\) may be implemented during the Expiry Day to mitigate the loss\. <__end__>

__*BE for Downside Risk in Call Diagonal 1:4 Ratio Spread:*__

If a strong downside move arrives, which seems to be sustaining \(*with little chance of reversal on the upside*\), and the Premium collected on CE Short leg gets almost exhausted \(i\.e\. their Premium value going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the downtrend continues after Premium Credit of CE Short leg is exhausted, then the balance Premium Debit on this Strategy \(*i\.e\. aggregate premium credit collected on CE Short – Premium Debit paid in total for the CE Long*\) would start generating max loss on this Strategy i\.e\. the Downside Risk would get triggered after exhaustion of the Premium Credit of the CE Short leg\. Thus, net Premium Debit on per Lot basis is the BE for the Downside Risk\. 

<__start__> To illustrate, we can look at the Example mentioned above, in which Premium collected on CE Short Strike of 34000 is 75 per Lot and the Premium paid on CE Long leg of 33500 is 490 per Lot\. Therefore, the net Premium Debit will be: 490\-75 = 415 per Lot basis\. Thus, if the Premium of the CE Long leg gets reduced to around 415 per Lot, due to the downtrend, then this Strategy must be exited so as to avoid losing the balance 415 per Lot left on CE Long leg, if the downtrend is expected to sustain and continue\. Thus, the BE for the Downside Risk shall be the net Premium Debit of 415 per Lot\. 

Further, if the downfall arrives with momentum or the downtrend arrives in the last 1 hour of the trading session on the Expiry Day, then the Delta value of CE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta positive on the CE side\. And as soon as the net Delta position of this Strategy turns positive, any further downmove would start causing loss in the Strategy on account of the Downside Risk\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes positive, if the downtrend seems to sustain and continue during the Expiry Day\.

*Note:* *It is pertinent to note that on Expiry Day, as soon as Far OTM CE Options reduces significantly in their premium value to Rs\. 3 or so, either due to fast downtrend \(LTP of CE option gets reduced when underlying falls\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)*

Thus, for the Downside Risk, BE level shall be: As soon as the premium credit collected on the CE Short Leg is about to get exhausted due to downward move of the underlying; and the downward move seems to sustain and may even continue, then this Strategy must be exited or relevant Adjustments \(*as discussed below*\) to mitigate loss on the Strategy, on account of Downside Risk, may be initiated\. <__end__>

__Payoff Chart for Call Diagonal 1:4 Ratio Spread __

<__img66__>

<__end__>

__Payoff Chart for Call Diagonal 1:4 Ratio Spread__

<__end__>

__Profit & Loss in Call Diagonal 1:4 Ratio Spread, and its Calculations__

__*Loss *__<a id="_Hlk160562888"></a>__*in Call Diagonal 1:4 Ratio Spread, from Expiry perspective*:__

This Strategy has both Upside Risk and Downside Risk, as already discussed above\.

- Due to the Upside Risk, Max Loss shall be: __\[Loss on CE Short Leg – Profit on CE Long Leg\]__\.
- Due to the Downside Risk, Max Loss shall be: Net Premium debit on the Strategy i\.e\. __\[aggregate Premium credit collected on CE Short – total Premium debit paid for the CE Long\]__ <__end__>

__*Profit in Call Diagonal 1:4 Ratio Spread, from Expiry perspective*__:

- If this Strategy is played for Overnight Expiry Decay \(*i\.e\. initiated on the Previous Day with an intent to square\-off upon opening on the Expiry Day*\), then the maximum reward will be fetched if upon opening on Expiry day, the mild bullish trend causes the CE Long Strike to yield profit; and the CE Short leg Strike continues to be an OTM on opening of the Expiry day yielding profit due to overnight Expiry decay \(*remaining not affected much from the mild bullish move*\)\. There is no fixed reward situation on this Strategy, as it will depend upon how much decay benefit occurred on CE Short leg and how much CE Long got benefitted due to mild bullish move\. Also, rise and fall in volatility can also increase / decrease the profitability on this Strategy before it is squared\-off\.
- If this Strategy is initiated on the Previous Day and held during the Expiry Day, then the maximum reward will be fetched if between the Previous Day until the Expiry Day, the mild bullish trend remains intact causing the CE Long Strike to yield profit \(which faces very less Theta impact, as it is on Next week Expiry\); and the CE Short leg Strike continues to be an OTM and expires worthless as an OTM / ATM on Expiry Day \(as it is on Current Week Expiry\) yielding profit due to Theta impact of Expiry\. There is no fixed reward situation on this Strategy, as it will depend upon how much CE Long gets benefitted due to mild bullish move\. Also, rise and fall in volatility can also increase/decrease the profitability on the CE Long before the Strategy is squared\-off\.
- Having said above, max profit would be generated on this Strategy, if the underlying by Expiry rises higher and closes very close to the CE Short Strike\. Thus, CE Short Strike expires as an ATM/ OTM and yields its entire Premium Credit as profit; and the mild bullish move in the underlying from Previous Day close to CE Short Strike would also generate some additional profit for the Strategy\.

<__end__>

__Call Diagonal 1:4 Ratio Spread Strategy: Its Trade Legs & Objective__

__*Trade legs in Call Diagonal 1:4 Ratio Spread Strategy*__:

- Short Far OTM CEs in 4 Lots of Current Week Expiry \(*primary leg*\)
- Long ATM\+1 OTM CE in 1 Lot of Next Week Expiry \(*hedged leg*\)

It is a CE Diagonal \(Long\) Ratio Spread\. 

Since, it is a CE Ratio Spread, therefore, the ratio between primary leg and the hedged leg must be maintained in the ratio of 4:1 \(i\.e\. against 4 Lot CE Sell, there will be 1 Lot CE buy on the hedged leg\)\. 

Further, the CEs on the primary and the hedged leg  are of different Expiry series \(i\.e\.* Short position must pertain to current Week Expiry and Long position must pertain to next Week Expiry*\), but both must be Options of the same underlying\.

__*Margin reduction:*__* Because the primary leg is not properly hedged \(i\.e\. with equal quantity of Long CEs\), thus higher margin requirement will apply in this Strategy\. One set on this Strategy \(i\.e\. 4 Shorts and 1 Long\) requires about 2\.5 Lakhs to 3\.5 Lakhs\. However, this higher margin requirement can be reduced significantly by buying Far OTM CEs \(of same Expiry series and underlying as that of the primary leg\) of nominal premium \(say, Rs\. 1 per Lot\) in same quantity as that of  CEs sold in the primary leg\.*

__*Objective in Call Diagonal 1:4 Ratio Spread Strategy*__:

Objective is to profit on the CE Short leg from the fast and strong decay caused due to Theta impact on Far OTMs of current Week Expiry, during overnight holding time \(i\.e\. *between close of trading session on Previous Day and opening of trading session on Expiry Day*\)\. All Far OTM CEs of Current Week Expiry, beyond 3\-4 Strikes above the ATM, on Expiry Day opening, loose their premium substantially\. However, since CE Long position is created in Next Week Expiry, therefore, there is very low Theta impact on its premium \(thus, less decay\) on Expiry Day opening\.

Having said above, if on the Expiry Day, the trend appears to be mild on the upside as expected \(*and that the upmove seems to respect the major Resistance level and that it would not cross\-over above the CE Short Strike*\) or if the trend for the Expiry Day appears to be rangebound, then the position may also be carried/held till full Expiry, instead of squaring\-off upon opening of the Expiry Day\. Thus, this Strategy then can be played till the close of Expiry Day if the trend remains intact as mild bullish / rangebound\. 

Further, in this Strategy it is expected that the CE Long leg will generate profit benefitting from the mild bullish move in the underlying\. Accordingly, if upon opening on Expiry Day, the underlying takes a mild gapup then the CE Long on the hedged leg also generates some profit upon opening on Expiry Day, and likely that it may become an ITM\. Also, if by the close of trading session on the Previous Day, CE Long leg generates some profit and this profit is sustained or increased on Expiry Day opening, then even the CE Long leg yields some profit on this Strategy upon opening on the Expiry Day \(besides profit generated on CE Short leg due to overnight decay\)\.

Profit on this Strategy, basis aforesaid objective, can only be achieved if mild bullish trend remains intact benefitting Long CE leg and CE Short leg remains OTM\.

__<start> *Example in Call Diagonal 1:4 Ratio Spread*:__

- BNF Spot: 33,315
- D TF Resistance: 33,800
- Sell 4 Lot BankNifty 34000 CE \(Current Week\) at Rs\. 75 \(*primary leg*\); and
- Buy 1 Lot BankNifty 33500 CE \(Next Week\) at a premium of Rs\. 490 \(*hedged leg*\)

Note that CE Short leg is higher than the Daily TF Resistance of 33,800 and nearly 700 points away from the Spot\. 

Further, note that the aforesaid trade position satisfies the requirement of having an aggregate Premium Credit on the primary leg,  higher than 50% of the Premium Debit made on the hedged leg\. Accordingly, in above example, Premium Credit received on 4 Lots of CE Short is on aggregate basis 300, which is greater than 50% of Premium Debit of 490 on CE Long\.

For margin reduction on the above trade positions: 4 Lots of BankNifty 34500 CE \(of Current Week\) having premium of around Rs 1 can be bought\. 

*Note: If the broker disallows buying Far OTMs on a Previous Day, then 4 Lots of some Far OTMs \(eg: 34400 CE\) can be first temporarily sold; and immediately thereafter the desired 34500 CE 4 Lots can be bought\. Further, as soon as the desired 34500 CEs are bought, all the Far OTM CEs sold here temporarily \(eg: 34400 CE\) must be immediately exited\. This process will have to be repeated 4 times to be able to buy 4 Lots of 34500 CE\. If, however, there is not sufficient capital to sell the aforesaid 4 Lots all together \(eg: 34400 CE\), then one Lot at a time of such Far OTM CE can be sold \(trading account must have additional 2 lakhs capital to be able to do this\), and as soon as 1 Lot of such Far OTM CE is sold, 1 Lot of desired Far OTM 34500 CE can be bought\. And after successfully buying this Far OTM 34500 CE, the temporary 1 Lot 34400 CE can be immediately exited\. This process will have to be  repeated 4 times in order to accumulate 4 lots of 34500 CE Long for margin reduction\. *__<end>__

__Options Behaviour in Put Diagonal 1:4 Ratio Spread Strategy__

- This __*Strategy is mainly devised to capture the overnight decay*__ \(*i\.e\. between close of trading session on Previous Day and opening on Expiry Day*\) in Far OTMs of Current Week Expiry\. Accordingly, in this Strategy, __*PE Short primary leg being created on Current Week Expiry faces severe Theta impact, while the PE Long hedged leg being initiated on the Next Week Expiry, is not much affected on account of Theta*__ \(especially, between the Previous Day and Expiry Day of the primary leg Options\)\.
- In this Strategy, the premium credit collected on PE Short leg is usually slightly higher than 50% of the Premium Debit incurred on the PE Long\. Thus, this Strategy is a net Premium Debit Strategy and the amount of net Premium Debit incurred \(*i\.e\. aggregate Premium Credit collected on PE Short leg – total Premium Debit incurred on PE Long leg*\) could be the potential max loss in this Strategy if the underlying keeps rising \(__Upside Risk Level__\)\. Thus, it is important to ensure that if the trend gets upward, then this Strategy must be exited before Premium Credit collected on PE Short leg gets exhausted due to the steep up move in the underlying\.
- But if the underlying starts trending with strong bearish momentum \(*against the mild bearish move as originally expected*\), then also this Strategy could yield substantial loss, because the PE Short leg would become deep ITM and its Premium would rise significantly, which the profit generated on the PE Long would not be able to absorb \(*even though PE Long leg also becomes even more deep ITM than PE Short leg*\)\. Thus, it is important to ensure that if the trend gets super bearish, such that the PE Short Strike can be breached by the underlying on closing basis \(__Downward Risk Level__\), then this Strategy must be exited before Premium of the PE Short leg becomes too high as the PE Short Strike appears to become an ATM and may even expire as an ITM on sustained basis after breaching its BE Strike\.
- When this Strategy is created on the PE side, 4 Lots of PE Short would generally have a higher positive Delta on aggregate basis, than the negative Delta on 1 Lot PE Long \(*i\.e\. if underlying starts rising upwards,* *then* *PE Short will generate more profit than loss on PE Long*\)\. Therefore, if immediately upon creation of this Strategy, the underlying starts rising, then owing to __*net positive Delta position*__ __*on this PE side Strategy*__, this Strategy would start showing profit\. But if the underlying starts falling down with mild downtrend, before the close of trading session on the Previous Day, then this Strategy may show some minor virtual loss due to higher positive Delta on PE Shorts \(*which gets set\-off on account of Theta impact on Expiry Day opening on PE Shorts*\)\. Further, if on the Previous Day, after this Strategy is initiated, there arrives a strong bearish momentum, then this Strategy may pose higher loss \(*especially, if momentum appears to make the PE Short Strike as an ATM or cross\-over below the BE Strike of this Strategy*\), due to net positive Delta on this PE side Strategy\. __Thus, on start of bearish momentum on the Previous Day itself, this Strategy must be immediately exited__, and then again can be re\-initiated later during the day, once the downward momentum has ceased\.
- Also, if bearish momentum of limited extent arrives on Previous Day, then PE Long position will get tremendously benefited due to addition of Premium \(even it may become an ITM\), but mild bearish momentum will not much negatively impact the PE Short leg as it is on Far OTMs\. Far OTMs will not be able to retain any addition of Premium due to mild bearish momentum due to extreme Theta impact on Far OTMs, towards the end of the trading session on Previous Day itself\.
- When this Strategy is created on the PE side, the PE Shorts would generally have a higher negative Vega on aggregate basis, than the positive Vega on PE Long \(*i\.e\. if Volatility starts falling then PE Short will generate more profit than loss on PE Long*\)\. Therefore, if immediately upon creation of this Strategy, the Volatility starts falling down, then owing to net negative Vega position on this Strategy, this Strategy would start showing profit due to Volatility crash\. But if Volatility starts  rising up, then owing to __*net negative Vega position*__ __*on this Strategy*__, this Strategy would start showing loss due to rise in Volatility\. Thus, while rise in Volatility is an issue in this Strategy, but so long the underlying seems to expire above the PE Short Strike, rise in Volatility alone will not result in loss in this Strategy \(infact, PE Long will get benefited from rise in Volatility\)\.
- When this Strategy is created on the PE side, a mild bearish move during the Previous Day itself or a mild gapdown on Expiry Day opening, yields profit on the PE Long hedged leg; and so long the PE Short leg is still an OTM atleast 3 or 4 Strikes away from ATM on the Expiry Day opening, the PE Short leg too will yield profit due to Theta impact of overnight decay\.
- If the underlying opens gapup on Expiry Day opening then PE Short leg will be on higher positive Delta on aggregate basis than the negative Delta on PE Long\. Consequently, to the extent of aggregate Premium Credit received on the PE Short leg, this Strategy will remain in profit or no\-profit\-no\-loss situation\. __*Thus, it is important that the Premium Credit on PE Short is more than 50% of the Premium Debit incurred on PE Long leg, as the Premium Credit received will cover the loss on this Strategy to that extent*__\. A rise in the underlying of around \+1\.5% to \+2% or so is conveniently absorbed by this Strategy \(*especially, if Volatility crashes*\)\. Thus, in case the underlying seems to be in an uptrend for Expiry Day, then this Strategy may be exited with minor profit/loss, as the case may be on Expiry Day opening\.
- In case of a big gapdown on Expiry Day opening, so long the PE Short leg is still an OTM, the PE Long \(*which in such case would become an ITM*\) should generate reasonable profit to substantially set\-off loss on the PE Short leg\. Hence, the Strategy may not yield big loss\. However, if the gapdown is so huge \(*viz\. \+1000 points or more in case of BankNifty*\) that the PE Short leg also becomes an ITM, then the profit generated on PE Long \(*which would be an even deeper ITM in such case*\) may not be able to substantially set\-off loss on the PE Short leg, thereby resulting losses on this Strategy\. In the event of loss on account of such huge gapdown on Expiry Day opening, some loss may be attempted to be mitigated by initiating Counter Adjustments \(*as explained below*\)\.
- there arrives a strong downward momentum \(*so much so that it appears that it may likely cross\-over below the BE level of the PE Short leg*\), then this Strategy may generate significant loss due to being net positive Delta on PE side\. Thus, in such situation it would be prudent to immediately square\-off this Strategy as soon as the price seems to breach and sustain below the major Support level on Expiry Day\. 
- there arrives an upward move, then this Strategy would generate some profit, as it is net positive Delta on PE side, until the aggregate Premium Credit collected on PE Shorts is exhausted \(*because the PE Short leg becomes even deeper OTM, during upward move*\)\. Therefore, in this situation, as soon as the uptrend seems to be sustaining and the Premium collected on PE Short leg is almost about to get exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the uptrend continues after Premium Credit of PE Short leg is exhausted, then the balance Premium Debit \(*i\.e\. aggregate Premium Credit collected on PE Short – Premium Debit paid in total for the PE Long*\) would start generating max loss on this Strategy\. Further, if the uptrend arrives with momentum or the uptrend arrives in the last 1 hour or so on the Expiry Day, then the Delta value of PE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta negative on the PE side\. And as soon as the net Delta position of this Strategy turns negative, any further upmove would start causing loss in the Strategy\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes negative, if the uptrend seems to sustain and continue during the Expiry Day\.

*Note: It is pertinent to note that on Expiry Day, as soon as Far OTM PE Options reduces significantly in their premium value resulting in its LTP of 3 or so, either due to fast upmove \(LTP of PE option gets reduced when underlying rises\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)\.*

- there remains a mild bearish trend throughout the Expiry Day, which does not seem to cross over below the major Support level \(below which the PE Short leg was initiated\) and expires near that Support level, then a maximum profit situation emerges, because PE Short leg expires worthless as Far OTM thereby yielding entire aggregate Premium Credit as profit; and the PE Long leg also generates profit due to continuation of mild bearish trend during the Expiry Day\. In this situation, after half the trading session on Expiry Day is over, the Far OTM PE Short leg would lose its Premium value to severe Theta decay, by virtue of belonging to the Current Week Expiry \(*inspite of the mild bearish move in the underlying, because mild bearish move will not be able to negatively impact the decay being caused by Theta of Expiry Day*\) and consequently its Delta value would become negligible / zero, thereby resulting this Strategy into a net Delta negative Strategy \(*owing to PE Long leg, whose Delta value remains intact, as it does not get impacted by Theta decay, by virtue of belonging to the Next Week Expiry and not Current Week Expiry*\)\.
- the underlying remains rangebound throughout the Expiry Day, then also this Strategy would yield profit as PE Short leg on Current Week Expiry would get severely impacted due to Theta impact of Expiry, while PE Long leg on Next Week Expiry faces much less Theta decay, hence net profitable situation\.    

__Put Diagonal 1:4 Ratio Spread Strategy__

__\(Mild Bearish Opening on Expiry Day\)__

__*Requisite Technical Conditions in Put Diagonal 1:4 Ratio Spread*:__

- Trend for BTST / STBT appears to be mild bearish\.
- Identify major Support level \(*viz\. 20 SMA / Pivot Point / Lower Bollinger Band / previous support trendline on daily / weekly TF*\)\. PE Shorts must be initiated at an OTM Strike below such major Support level on Spot chart\.
- If on a Previous Day, the price of the underlying is hovering or closes near some major Support level \(*on hrly or daily TF*\), then the underlying may likely take a gapdown on Expiry day in order to cross\-over below the said Support level\. Therefore, in such situations, the primary leg for PE Shorts must be initiated lower than the next lower major Support level\. Idea here is that the underlying must not cross below the major Support level on Expiry day opening \(*consequently, the PE Short Strike should always remain lower than ATM\-4 Strikes on Expiry Day opening*\)\.

*Note: Major Support levels are crossed over downwardly, either by way of a sustained gapdown or a bearish supercandle on D TF \(i\.e\. a very bearish move in intraday, resulting in a big red supercandle on Daily TF\)\.*

__*Point of initiating* *Put Diagonal 1:4 Ratio Spread*:__

- This Strategy may be initiated at around 10\.15 am to 10\.30am on a Previous Day, if the intraday appears to be rangebound \(*technically, large spinning top type of candle on 1 hr TF*\)\. However, if on the Previous Day in intraday, at any time, the underlying becomes bearish and appears to move downwardly with momentum  \(*viz\. technically, Bollinger band blast downwardly on any TF*\), then it is better to exit from both legs of this Strategy by immediately booking minor profit/loss, as the case may be, and to re\-initiate this Strategy around 1 hr before the end of trading session on the Previous Day, after bearish momentum seems to have ceased for intraday\. If the bearish momentum on intraday day basis seems to continue then this Strategy if already running must immediately be exited and may be freshly initiated just 15mins before close of trading session on Previous Day\.
- In order to avoid frequent exits or stop loss getting hit on this Strategy on the Previous Day due to bearish intraday momentum, this Strategy may be initiated around the time when half the trading day is over \(*instead of during the first 1 hour of the trading session in the morning*\)\. This will help cut down on the number of pre\-mature exits from this Strategy by nearly 50%\. However, as mentioned, if the bearish momentum arrives in the second half of the trading session on Previous Day after the positions have already been initiated, then this Strategy must be immediately exited and re\-initiated at around just 15mins before the close of trading session on Previous Day\.
- PE Shorts must pertain to Strike, below the major Support level of Spot\. 
- In case of Nifty and FinNifty \(*when VIX is between 15 to 20*\): PE Shorts must be atleast 300 to 350 points aways from the ATM \(besides being below the major Support level\); and PE Long must be 50 points away from the ATM \(i\.e\. ATM – 1 Strike\)\.
- In case of BankNifty \(*when VIX is between 15 to 20*\): PE Shorts must be atleast 700 to 800 points aways from the ATM \(besides being below the major Support level\); and PE Long must be 100 points away from the ATM \(i\.e\. ATM – 1 Strike\)\.
- When VIX is higher than 20, then the PE Short Strike must be even farther OTM\. However, when VIX is lower than 15, then PE Short Strikes may be slightly lower but surely not close towards ATM\. 
- Target Premium Credit for PE Shorts leg in Nifty and FinNifty should be atleast 30 to 40 points per Lot; and for BankNifty it should be atleast 70 to 80 points per Lot\.
- Further, it must be ensured that: aggregate Credit of Premium on 4 Lots on PE Short, must be atleast 50% of Premium Debit incurred on 1 Lot of PE Long position\. This Premium balance between the primary leg and the hedged leg helps to contain the overall loss on this Strategy on the upside \(*i\.e\. if the underlying rises about \+1\.5% to \+2% or so by way of gapup or otherwise on Expiry Day opening*\)\.

__Significance of Strike / delta value in Put Diagonal 1:4 Ratio Spread Strategy__

__*Strike Selection in Put Diagonal 1:4 Ratio Spread Strategy*__:

One must be careful to not select a Strike for initiating PE Short leg of the Strategy, which is closer to ATM \(or which can likely become an ITM on Expiry\), even if lucrative Premiums are available in near OTM PEs\.

Always target PE Short leg Strike selection which is much lower than any major Support level \(*which gives a comfort that the underlying would not breach that Support level by Expiry*\), thereby, ensuring that the PE Short leg would expire worthless as OTM\.

In BankNifty Weekly Options, 65 to 75 premium value per Lot, is decent, for initiating PE Short leg\. In Nifty Weekly Options, 25 to 35 premium value per Lot, is decent, for initiating PE Short leg\. 

It need to be ensured for the PE Short leg that per Lot premium is 50% or more of the premium on the PE Long leg\.  

PE Long leg, would be an OTM which would be not more than  ATM \- 2 Strike levels\.

__*Delta fluctuations in Put Diagonal 1:4 Ratio Spread Strategy*:__

- Since, in this Strategy there are 4 PE Shorts against 1 Long PE, the effective Delta on the overall Strategy would be positive, which implies that if soon after initiating this Strategy, the underlying would trend on the downside, then the Strategy would exhibit virtual loss and if the underlying moves in uptrend then the Strategy would exhibit profit\.
- If after initiating the Strategy, the underlying moves in an uptrend with momentum, then so long the effective Delta position is positive on the Strategy, upward move in the underlying would generate profit on the Strategy\. But once, the steep upward move in the underlying causes quick and substantial loss of the Premium value of the PE Short leg, then the positive Delta position on the overall Strategy turns net negative Delta Strategy\. As soon as the Strategy turns net Delta negative then any further upward move in the underlying would start causing loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the upward move further continues \(Upward Risk\)\.
- However, after the Overnight Decay, the net positive Delta position on the overall Strategy would reduce\. Thus, after overnight decay i\.e\. on the Expiry Day if the underlying moves in downtrend then the effective virtual loss would be relatively lesser\.
- But if the downtrend occurs with strong momentum, even on the Expiry day before considerable decay on the PE Short leg premium has occurred, the overall Strategy would exhibit strong virtual loss due to overall positive Delta impact on the Strategy\. As soon as the PE Short leg Strike appears likely to become an ITM then any further downward move in the underlying would start exhibiting heavy loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the downward move further continues \(Downward Risk\)\.
- However, if the downtrend arrives on Expiry day, after considerable decay to the Premium on the PE Short leg \(*i\.e\. when the Premium is almost about to become zero, and is hovering around 3 or 4 Rs\.*\) then the effective Delta on the overall Strategy would turn negative, and in such situation any downmove in the underlying would exhibit higher profits on the Strategy\.

__Target and Stop Loss in Put Diagonal 1:4 Ratio Spread Strategy__

__*Target on in Put Diagonal 1:4 Ratio Spread Strategy*:__

There can be two targets on this Strategy that may be aimed for as part of the trade plan on this Put Diagonal 1:4 Ratio Spread__ __Strategy:

1. Target on opening of the Expiry Day: Upon opening of the market on the Expiry day trading session, due to Overnight Theta impact, if the underlying opens almost near  the close of the Previous Day or takes a gap down but opens at a reasonable distance above the major Support level \(*such that the PE Short Strike is about 2 to 4 PE OTM Strikes away from ATM on opening*\), then this Strategy would generate a decent profit\. In such event it is likely that both PE Long leg \(*due to gap down*\) and PE Short leg \(*due to overnight decay*\) would generate profit upon such opening on the Expiry Day\. A trader can book such a profit, upon opening on the Expiry Day and exit from his positions\.
2. Target towards the end of the Expiry Day: This trade can also be continued till close to the end of the Expiry Day\. In such event the maximum reward would be generated if the PE Short leg closes as an ATM or very near OTM \(ATM – 1 or so\) on Expiry\. However, if the underlying remains in an upward trend on Expiry Day, then the target should be to exit the trade as soon as the Premium on the PE Short leg is almost close to becoming zero due to the continuous uptrend on Expiry Day\. It must be borne in mind that this trade should not be further continued after Premium on the PE Short leg is close to turning zero, as PE Long leg would then cause such loss due to uptrend which may eat up the profits generated on the PE Short leg due to intraday uptrend of the Expiry Day\. Further, if after the PE Short leg Premium is close to becoming zero due to intraday uptrend on the Expiry day, the underlying takes a reversal towards the downtrend in the second half of the trading session on Expiry Day, then it may be advisable to hold the trade, as the downtrend momentum may not add much premium on the PE Short leg \(*due to Expiry Day Theta impact*\) but the Premium would get added on the PE Long leg \(*as it is on Next Week Expiry series*\), thereby, generating relatively more profit by the close of the Expiry Day \(so long the downtrend does not breach the PE Short leg Strike\)\.

__Stop Loss & Risk Management in Put Diagonal 1:4 Ratio Spread Strategy:__

1. Stop Loss in case of Downside Risk:  In case of Downside Risk, if the underlying is expected to close on the Expiry Day on the downside, such that the PE Short leg on Expiry may end up beyond 2nd Strike level ITM \(i\.e\. ATM \+ 2\) or even deeper, then it may be advisable to take stop loss when the PE Short leg becomes an ATM and sustains at that level and seems likely to end up being an ITM\. However, if the downtrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by PE Short leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM CEs of current week Expiry series; or \(ii\) initiating Counter Adjustments through Long PEs on not\-so\-deep\-OTMs \(upto ATM\-2 PEs\) of Current Week Expiry series or Next Week Expiry series\. But if there is another strong Support level just below the PE Short leg Strike then \(a\) either, a chance may be taken for reversal of the underlying on the upside so as to check if the PE Short leg may not remain an ITM deeper than one Strike Level from ATM by close of Expiry; or \(b\) Counter Adjustments by Shorting additional slightly Far OTM PEs of Current Week Expiry series may be initiated\.
2. Stop Loss in case of Upside Risk:  In case of Upside Risk, if the underlying is expected to close on the Expiry Day on the upside after a huge gapup, such that the PE Short leg during the Expiry Day soon loses almost all its Premium immediately due to the gapup / steep uptrend on Expiry Day, and the underlying is expected to rise even beyond during the remainder of the Expiry Day, then it may be advisable to immediately exit from this trade at minor profit / loss, as PE Long leg would then cause further loss due to continued uptrend during the Expiry Day\. However, if the uptrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by PE Long leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM PEs of Current Week Expiry series; or \(ii\) initiating Counter Adjustments through Long CEs on not\-so\-deep\-OTMs \(upto ATM\+2 CEs\) of Current Week Expiry series or Next Week Expiry series may be initiated\.
3. Volatility Spike: If after the trade is initiated there is sudden volatility spike, then the Premium on the PE Short leg would start increasing more than the Premium on PE Long leg\. Therefore, if there seems to be an uncontrolled volatility spike, then it may be advisable to immediately exit the Strategy at minor loss / profit and re\-initiate the Strategy when the volatility spike has stopped\. Volatility crash would be suitable for the Strategy not volatility spike\.

__Adjustments in Put Diagonal 1:4 Ratio Spread Strategy__

__*Adjustments in Put Diagonal 1:4 Ratio Spread \(if trade does not go as per plan\)*__:

Adjustments for Downside Risk, in Put Diagonal 1:4 Ratio Spread: If the trend becomes super bearish and the major Support level is likely to be breached by the underlying by Expiry on closing basis, then the Strategy may yield loss\. This Downside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM CEs, of Current Week Expiry series, in double the quantity than the PE Short leg\. The additional Premium Credit received on Shorting these CEs would help absorb some loss on the PE Short leg due to strong bearish momentum making the PE Short Strike an ITM\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.
- If there seems to be a strong downtrend, then additional near __OTM PEs can be bought \(Long PE\) of Next Week Expiry series__, besides Long PE already on the hedged leg\. The additional PEs can be ATM or near OTMs, with higher quantities than the PEs on Short leg\. Idea here should be that the Delta value of all Long PEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of PE Short position, so as to generate profit on this Strategy on account of super bearish momentum\. All Long PEs on this Strategy, with higher Delta value on aggregate basis than the PE Short leg, should generate more profit and help cover losses in the PE Short primary leg\. However, buying additional PEs will add additional debit positions, therefore, this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. Further, these Long PEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on PE Long unless bearish momentum is super strong and swift\.

Adjustments for Upside Risk, in Put Diagonal 1:4 Ratio Spread: If the underlying is likely to get in strong uptrend even after the Premium on PE Short leg is close to zero due to upward momentum, then the Strategy may yield loss, as the Long PE leg would generate further loss to the maximum extent of net premium debit position on the Strategy\. This Upside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by Shorting \(selling\) ATM PEs, of current Expiry series, in such quantity so as to receive sufficient Premium Credit on these additional PE Shorts in order to absorb the net premium debit on the Strategy\. The additional Premium Credit received on these Short PEs would help absorb the loss caused by the PE Long leg to the extent of net Premium Debit on the original Strategy\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.
- If there seems to be a strong uptrend, then additional near __OTM CEs can be bought \(Long CE\) of Next Week Expiry series__\. These Long CEs can be ATM or near OTMs, with reasonable quantities which should generate profit due to strong uptrend sufficient to absorb the max loss situation on the original Strategy\. Idea here should be that the Delta value of all Long CEs on aggregate basis should be higher than the aggregate Delta value  on PE Long position, so as to generate profit on this Strategy on account of super bullish momentum\. All Long CEs on this Strategy, with higher Delta value on aggregate basis than the PE Long leg, should generate more profit and help cover max loss situation on the original Strategy\. However, buying additional CEs will add additional debit positions, therefore, this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. Further, these Long CEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on CE Long unless bullish momentum is super strong and swift\.

__Impact of Different Market Situations in Put Diagonal 1:4 Ratio Spread Strategy__

__If trade goes as per plan, in Put Diagonal 1:4 Ratio Spread Strategy__:

If there occurs a mild gapdown after Overnight Decay on Expiry Day opening or if the mild downtrend continues in intraday during the Expiry Day and the underlying does not seem to breach the PE Short leg strike on the downside, then the  Strategy may be continued for the relevant target as discussed above\.

__If underlying becomes sideways, in Put Diagonal 1:4 Ratio Spread Strategy__: If the trend gets rangebound until Expiry then the Strategy may be held until the Premium on the PE Short leg is almost close to zero\. However, if volatility during Expiry Day is crashing down then the Strategy should be attempted to be exited as soon as the Premium on PE Short leg is close to zero\. There may not be any point to hold the Strategy any longer after Premium on PE Short leg is almost exhausted, because volatility crash would also cause depletion of premium on the PE Long leg, thus adversely affecting the net profit situation on this Strategy\.

\.

__If trade does not go as per plan, in Put Diagonal 1:4 Ratio Spread Strategy__: 

1. a Downside Risk situation \(*i\.e\. the underlying is likely to breach and sustain the major Support level basis which PE Short leg was initiated*\); or 
2. an Upside Risk situation \(*i\.e\. the underlying is likely to get in strong uptrend even after the Premium on PE Short leg is close to zero due to upward momentum*\),

then this Strategy may need certain adjustments in order to mitigate any potential loss on the Strategy due to the aforesaid Downside Risk and Upside Risk situations\.

__Merits & Demerits of Put Diagonal 1:4 Ratio Spread Strategy__

__*Benefits of* *Put Diagonal 1:4 Ratio Spread Strategy*:__

- Overnight decay \(*between close of Previous Day and opening of Expiry Day*\) in Far OTMs is a sure thing due to Options behaviour\. Thus, playing this Strategy to harness profit from overnight Expiry decay makes it a high probability Strategy, except unless huge gapdown makes the Far OTM PE Short Strike an ITM on Expiry Day opening \(*thereby ruining the Theta decay impact by a huge Delta move due to big gapdown*\)\. Having said this, huge gapdowns of such magnitude that it can convert such a Far OTM PE into a deep ITM is a seldom event \(i\.e\. about once or twice in 6 times\)\. Moreover, in this Strategy, PE Short leg is properly hedged with PE Long leg of Next Week Expiry \(*which has Delta value not much less than the aggregate Delta value of PE Short leg; but has much less Theta impact as compared to the PE Short leg*\)\. Thus, this Strategy offers a good winning probability\.
- This Strategy gives a decent range between the Upside Risk and the Downside Risk \(*as explained above*\), for the movement of the underlying, in order to generate profit on this Strategy, within a span of 1 to 2 trading sessions\.  
- Not only when the market opens mild bearish on Expiry Day, but also when market opens at the same level where it closed on the Previous Day, this Strategy would yield profit on opening of Expiry Day \(*as PE Short leg on Current Week Expiry would get severely impacted due to Overnight Expiry decay, while PE Long leg on Next Week Expiry faces much less Theta decay, hence net profitable situation*\)\.
- Further, if the underlying appears to be rangebound during the Expiry Day or is expected to remain mildly bearish \(without breaching the major Support\), then this Strategy may also be held until full day Expiry to reap full benefit of Theta decay of Expiry on PE Short leg\.
- In case there occurs a huge gapdown which causes Far OTM PE Shorts to become deep ITM and thereby causing loss in the Strategy, then certain risk mitigating Counter Adjustments can be initiated to play out on the Expiry Day in order to cut down the loss on this Strategy\.
- The opportunity to play overnight Expiry decay on Far OTMs, can be harnessed on a weekly basis\. Thus, every week, atleast twice an opportunity is granted by Index Options \(*i\.e\. on Monday by FinNifty for its Tuesday Expiry; and on Wednesday by Nifty for its Thursday Expiry; and on Thursday by BankNifty for its Friday Expiry*\)\.

__Demerits of Put Diagonal 1:4 Ratio Spread Strategy__:

- This Strategy has both Upside Risk as well as Downside Risk\. While, this Strategy offers a decent range for the movement of the underlying, between the two aforesaid risk levels, for / during the Expiry Day, but the Expiry Day’s are usually very volatile with big swings on either side\. Thus, a watchful eye on the trade is a must, with clarity on the stop loss area\. Therefore, to play this Strategy safely, it is best to deploy it only for overnight Expiry decay and avoid holding for full Expiry Day unless very sure of the trend of the Expiry day on technical basis\.
- If a strong downward momentum arrives after initiating this Strategy, then the positions on both the legs may have to be exited \(*as it is a net positive Delta Strategy on the PE side, as explained above*\); and this Strategy may be re\-initiated after the momentum ceases or just before the close of the Previous Day’ trading session\.
- In case of huge gapdown on Expiry Day opening, PE Short leg may end up being a deep ITM, and the huge Delta move on 4 Lots of PE Short may generate much higher loss than the profit generated by 1 Lot of PE Long \(*even though it would become an even deeper ITM*\)\. A huge Delta move, due to a big gapdown, can ruin the expected Theta impact on PE Shorts, and instead cause a big loss on the Strategy \(*which is a net positive Delta Strategy on the PE side*\)\. While, the loss generated on this Strategy on account of a big gapdown, may be attempted to be mitigated though Counter Adjustments \(*i\.e\. by way of selling Far OTM CEs on Expiry Day*\), but practically sometimes it may get little complicated\.
- Also, since, this Strategy is a net Vega negative Strategy \(*due to higher Vega on PE Short leg than PE Long leg*\), therefore, if any news breaks out or any events unfold which results in rise in Volatility, then this Strategy would get negatively impacted due to such rise in Volatility\. But, while rise in Volatility is an issue in this Strategy, but so long the underlying seems to expire above the PE Short Strike, rise in Volatility alone will not result in loss in this Strategy \(infact, PE Long will get benefited from rise in Volatility\)\.
- Generally, when VIX is below 15, it may become difficult to find good premium for the PE Short leg at reasonably Far OTM \(below major Support level\) and consequently the overall target profit on the Strategy might substantially reduce\. Further, initiating PE Shorts above major Support or near to ATM may be very risky and must be avoided\.
- This Strategy is a PE Ratio Spread \(*implemented like a Diagonal Long Spread*\), involving 4 times more Shorts than Long and therefore the margin requirement is high\. While, higher margin implication on this Strategy may be substantially reduced by buying same quantity of even Far OTM PEs of Current Week Expiry \(*as explained above*\), however, initiating these Long PEs on Far OTMs may not be possible due to restrictions imposed by certain brokers\.
- In this Strategy, premium credit collected on the PE Short leg on aggregate basis is usually slightly higher than 50% of the Premium Debit incurred on the PE Long leg\. Therefore, if there arrives a big upmove/ gapup, the loss that this Strategy would be able to absorb will be to the extent of Premium Credit collected on PE Short leg\. But if the uptrend continues, after the Premium Credit gets exhausted, then the balance 50% premium debit on the PE Long will cause the maximum loss on this Strategy \(*explained below*\)\. Therefore, when it appears that the uptrend is going to continue and the Premium Credit is almost getting exhausted then Counter Adjustments \(*as explained below*\) must be initiated to mitigate the max loss situation\.
- Implementation of this Strategy on PE side is more riskier than on the CE side, because, in case of severe gapdown / downtrend, the VIX usually rises significantly and the pace with which PE rises is mostly much steeper than the rise of CE in an uptrend\. Therefore, since this Strategy is a net Vega and net positive Delta Strategy, any steep downmove / gapdown may cause this Strategy on the PE side to generate big loss \(than usually observed if the CE side Strategy gets hit with a huge gapup/ upmove\)\. Thus, PE side must be implemented alongside CE side Strategy, during broadly bullish trends on Daily TF, so as to act as a hedge cover for the CE side Strategy\. PE side Strategy on exclusive basis must be avoided, especially when the major trend on Daily TF  broadly is downwardly inclined\.

__Breakeven Strike \(BE\)  in Put Diagonal 1:4 Ratio Spread Strategy, its Calculation and Payoff Chart__

__*Breakeven Strike \(BE\) in Put Diagonal 1:4 Ratio Spread Strategy, from Expiry perspective*: __

As already mentioned above that this Strategy has both Downside Risk Level and Upside Risk Level\. 

__*BE for Downside Risk in Put Diagonal 1:4 Ratio Spread Strategy:*__

<__start__> From Expiry perspective, the BE Strike for protection from the Downside Risk on this Strategy will be: __\[PE Short Strike – Premium collected per Lot\] <end>__

<__start__> To illustrate, we can look at the Example mentioned above, in which PE Short Strike is 32500 and the Premium collected per Lot on Short leg is 70\. Thus, BE will be: 32500\-70= 32430\.

Now, if BankNifty slides down and slightly breaches the BE Strike level of 32425 on closing basis on Expiry Day, by say 50 or 100 points, then on Expiry 32500 PE Short Strike would become a near ITM\. Thus, if PE Short leg becomes a near ITM \(upto 100 or 150 points\) on Expiry, after breaching the BE on the downside, then on close of Expiry session the PE Short Strike’s Premium would be equivalent to its Intrinsic Value \(*which means that upon Expiry: difference between ITM PE Strike level and the ATM, will be the Intrinsic Value or Final Premium Value of the PE Short leg*\)\. Consequently, the difference between the __Final Premium Value of the PE Short leg \(per Lot\) on Expiry – Premium credit of 70 \(per Lot\) collected at the time of initiating the Strategy__, will be the per Lot basis loss on the PE Short leg \(__Loss__ __on PE Short Leg__\)\. But at the same time, because the underlying has fallen much lower, the PE Long leg of the Strategy would have also become a deep ITM and would generate decent profit \(__Profit on PE Long Leg__\) which will to some extent set\-off the loss caused on PE Short leg by virtue of it becoming an ITM on Expiry\.

Thus, the maximum loss caused due to the Downside Risk on Put Side Strategy shall be: __\[Loss on PE Short Leg – Profit on PE Long Leg\]__\. If the PE Short leg becomes a near ITM on Expiry, then usually the loss on the Strategy will not be much on per Lot basis \(*but on heavy volume it may percolate to be a big number, especially if PE Short leg turns into an ITM which is deeper beyond ATM\+2 PE Strike on Expiry*\)\.

But if as a result of huge gapdown or strong bearish momentum, the PE Short leg becomes a deep ITM, then basis the above calculations, the Downside Risk may be significantly higher \(*especially on heavy volume*\)\. Thus, it is advisable that in order to avoid the Downside Risk, the Strategy must be carefully watched for appearance of any strong bearish momentum; and if such momentum seems to arrive then this Strategy must be either immediately exited or Counter Adjustments \(*as explained below*\) must be initiated\. Also, if the Strategy gets hit with the Downside Risk on account of gapdown on Expiry Day opening, then also the relevant Adjustments \(*as discussed below*\) may be implemented during the Expiry Day to mitigate the loss\. <__end__>

__*BE for Upside Risk in Put Diagonal 1:4 Ratio Spread Strategy:*__

If a strong upside move arrives, which seems to be sustaining \(*with little chance of reversal on the downside*\), and the Premium collected on PE Short leg gets almost exhausted \(i\.e\. their Premium value going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the uptrend continues after Premium Credit of PE Short leg is exhausted, then the balance Premium Debit on this Strategy \(*i\.e\. aggregate Premium Credit collected on PE Short – Premium Debit paid in total for the PE Long*\) would start generating max loss on this Strategy i\.e\. the Upside Risk would get triggered after exhaustion of the Premium Credit of the PE Short leg\. Thus, net Premium Debit on per Lot basis is the BE for the Upside Risk\.

<__start__> To illustrate, we can look at the Example mentioned above, in which Premium collected on PE Short Strike of 32500 is 70 per Lot and the Premium paid on PE Long leg of 33100 is 480 per Lot\. Therefore, the net Premium Debit will be: 480\-70 = 410 per Lot basis\. Thus, if the Premium of the PE Long leg gets reduced to around 410 per Lot, due to the uptrend, then this Strategy must be exited so as to avoid losing the balance 410 per Lot left on PE Long leg, if the uptrend is expected to sustain and continue\. Thus, the BE for the Upside Risk shall be the net Premium Debit of 410 per Lot\.

Further, if the upmove arrives with momentum or the uptrend arrives around in the last 1 hour of the trading session on the Expiry Day, then the Delta value of PE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta negative on the PE side\. And as soon as the net Delta position of this Strategy turns negative, any further upmove would start causing loss in the Strategy on account of the Upside Risk\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes negative, if the uptrend seems to sustain and continue during the Expiry Day\.

*Note: It is pertinent to note that on Expiry Day, as soon as Far OTM PE Options reduces significantly in their premium value to Rs\. 3 or so, either due to fast uptrend \(LTP of PE option gets reduced when underlying rises\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)\.*

Thus, for the Upside Risk, BE level shall be: As soon as the premium credit collected on the PE Short Leg is about to get exhausted due to upward move of the underlying; and the upward move seems to sustain and may even continue, then this Strategy must be exited or relevant Adjustments \(*as discussed below*\) to mitigate loss on the Strategy, on account of Upside Risk, may be initiated\. <__end__>

__Payoff Chart for Put Diagonal 1:4 Ratio Spread Strategy __

__<img67>__

__<end>__

__Payoff Chart for Put Diagonal 1:4 Ratio Spread Strategy__

__<end>__

__Profit & Loss in Put Diagonal 1:4 Ratio Spread Strategy, and its Calculations__

__*Loss in Put Diagonal 1:4 Ratio Spread Strategy, from Expiry perspective*:__

This Strategy has both Downside Risk and Upside Risk, as already discussed above\.

- Due to the Downside Risk, Max Loss shall be: __\[Loss on PE Short Leg – Profit on PE Long Leg\]__\.
- Due to the Upside Risk, Max Loss shall be: Net Premium debit on the Strategy i\.e\. __\[aggregate Premium credit collected on PE Short – total Premium debit paid for the PE Long\]__ <__end__>

__*Profit in Put Diagonal 1:4 Ratio Spread Strategy, from Expiry perspective*__:

- If this Strategy is played for Overnight Expiry Decay \(*i\.e\. initiated on the Previous Day with an intent to square\-off upon opening on the Expiry Day*\), then the maximum reward will be fetched if upon opening on Expiry day, the mild bearish trend causes the PE Long Strike to yield profit; and the PE Short leg Strike continues to be an OTM on opening of the Expiry Day yielding profit due to overnight Expiry decay \(*remaining not affected much from the mild bullish move*\)\. There is no fixed reward situation on this Strategy, as it will depend upon how much decay benefit occurred on PE Short leg and how much PE Long got benefitted due to mild bearish move\. Also, rise and fall in volatility can also increase / decrease the profitability on this Strategy before it is squared\-off\.
- If this Strategy is initiated on the Previous Day and held during the Expiry Day, then the maximum reward will be fetched if between the Previous Day until the Expiry Day, the mild bearish trend remains intact causing the PE Long Strike to yield profit \(which faces very less Theta impact, as it is on Next week Expiry\); and the PE Short leg Strike continues to be an OTM and expires worthless as an OTM / ATM on Expiry Day \(as it is on Current Week Expiry\) yielding profit due to Theta impact of Expiry\. There is no fixed reward situation on this Strategy, as it will depend upon how much PE Long gets benefitted due to mild bearish move\. Also, rise and fall in volatility can also increase/decrease the profitability on the PE Long before the Strategy is squared\-off\.
- Having said above, max profit would be generated on this Strategy, if the underlying by Expiry drops down slightly and closes very close to the PE Short Strike\. Thus, PE Short Strike expires as an ATM/ OTM and yields its entire Premium Credit as profit; and the mild bearish move in the underlying from Previous Day close to PE Short Strike would also generate some additional profit for the Strategy\.

__Payoff Chart of Put Diagonal 1:4 Ratio Spread Strategy__

__<end>__

__Put Diagonal 1:4 Ratio Spread Strategy: Its Trade Legs & Objective__

__*Trade legs in Put Diagonal 1:4 Ratio Spread Strategy*__:

- Short Far OTM PEs in 4 Lots of Current Week Expiry \(*primary leg*\)
- Long ATM\-1 OTM PE in 1 Lot of Next Week Expiry \(*hedged leg*\)

It is a PE Diagonal \(Long\) Ratio Spread\. 

Since, it is a PE Ratio Spread, therefore, the ratio between primary leg and the hedged leg must be maintained in the ratio of 4:1 \(i\.e\. against 4 Lot PE Sell, there will be 1 Lot PE buy on the hedged leg\)\. 

Further, the PEs on the primary and the hedged leg  are of different Expiry series \(i\.e\.* Short position must pertain to current Week Expiry and Long position must pertain to next Week Expiry*\), but both must be Options of the same underlying\.

__*Margin reduction: *__*Because the primary leg is not properly hedged \(i\.e\. with equal quantity of Long PEs\), thus higher margin requirement will apply in this Strategy\. One set on this Strategy \(i\.e\. 4 Shorts and 1 Long\) requires about 2\.5 Lakhs to 3\.5 Lakhs\.  However, this higher margin requirement can be reduced significantly by buying Far OTM PEs \(of same Expiry series and underlying as that of the primary leg\) of nominal premium \(say, Rs\. 1 per Lot\) in same quantity as that of  PEs sold in the primary leg\.*

__*Objective in Put Diagonal 1:4 Ratio Spread Strategy*__:

Objective is to profit on the PE Short leg from the fast and strong decay caused due to Theta impact on Far OTMs of current Week Expiry, during overnight holding time \(i\.e\. *between close of trading session on Previous Day and opening of trading session on Expiry Day*\)\. All Far OTM PEs of Current Week Expiry, beyond 3\-4 Strikes below the ATM, on Expiry Day opening, loose their premium substantially\. However, since PE Long position is created in Next Week Expiry, therefore, there is very low Theta impact on its premium \(thus, less decay\) on Expiry Day opening\.

Having said above, if on the Expiry Day, the trend appears to be mild on the downside as expected \(*and that the downward move seems to respect the major Support level and that it would not cross\-over below the PE Short Strike*\) or if the trend for the Expiry Day appears to be rangebound, then the position may also be carried/held till full Expiry, instead of squaring\-off upon opening of the Expiry Day\. Thus, this Strategy then can be played till the close of Expiry Day if the trend remains intact as mild bearish / rangebound\.

Further, in this Strategy it is expected that the PE Long leg will generate profit benefitting from the mild bearish move in the underlying\. Accordingly, if upon opening on Expiry Day, the underlying takes a mild gapdown then the PE Long on the hedged leg also generates some profit upon opening on Expiry Day, and likely that it may become an ITM\. Also, if by the close of trading session on the Previous Day, PE Long leg generates some profit and this profit is sustained or increased on Expiry Day opening, then even the PE Long leg yields some profit on this Strategy upon opening on the Expiry Day \(besides profit generated on PE Short leg due to overnight decay\)\.

Profit on this Strategy, basis aforesaid objective, can only be achieved if mild bearish trend remains intact benefitting Long PE leg and PE Short leg remains OTM\.

__<start> *Example* *in Put Diagonal 1:4 Ratio Spread Strategy*: __

- D TF Support: 32,800
- Sell 4 Lot BankNifty 32500 PE \(Current Week\) at Rs\. 70 \(*primary leg*\); and
- Buy 1 Lot BankNifty 33100 PE \(Next Week\) at a premium of Rs\. 480 \(*hedged leg*\)

Note that PE Short leg is lower than the Daily TF Support of 32,800 and nearly 800 points away from the Spot\.

Further, note that the aforesaid trade position satisfies the requirement of having an aggregate Premium Credit on the primary leg,  higher than 50% of the Premium Debit made on the hedged leg\. Accordingly, in above example, Premium Credit received on 4 Lots of PE Short is on aggregate basis 280, which is greater than 50% of Premium Debit of 480 on PE Long\.

For margin reduction on the above trade positions: 4 Lots of BankNifty 32000 PE \(of Current Week\) having premium of around Rs 1 can be bought\.

*Note: If the broker disallows buying Far OTMs on a Previous Day, then 4 Lots of some Far OTMs \(eg: 32200 PE\) can be first temporarily sold; and immediately thereafter the desired 32000 PE 4 Lots can be bought\. Further, as soon as the desired 32000 PEs are bought, all the Far OTM PEs sold here temporarily \(eg: 32200 PE\) must be immediately exited\. This process will have to be repeated 4 times to be able to buy 4 Lots of 32000 PE\. If, however, there is not sufficient capital to sell the aforesaid 4 Lots all together \(eg: 32200 PE\), then one Lot at a time of such Far OTM PE can be sold \(trading account must have additional 2 lakhs capital to be able to do this\), and as soon as 1 Lot of such Far OTM PE is sold, 1 Lot of desired Far OTM 32000 PE can be bought\. And after successfully buying this Far OTM 32000 PE, the temporary 1 Lot 32200 PE can be immediately exited\. This process will have to be  repeated 4 times in order to accumulate 4 lots of 32000 PE Long for margin reduction\.* __<end>__

__Toofani Hedge: A Long Diagonal Spread: A General Introduction__

__This Strategy is much safer and high probability trade design than a conventional Credit Spread based Strategies like Short Strangle, Iron Condor and regular Calendar Spread, which are played for profit from Theta decay__\.

This Strategy is a hedged Strategy comprising of a Short leg on closer Expiry series and a Long leg on a farther Expiry series; and the Short & Long legs are on different Strikes\. Therefore, this Strategy is constituted as a __Diagonal \(Long\) Spread__\. In this Strategy, expectation is to derive profit on the Short leg from increasing Theta decay with the approaching Expiry Day and to also target profit on the Long leg from the expected movement  in the underlying\. This Strategy is primarily created for positional trade to target aforesaid profit, and can be created on both weekly and monthly Expiry series\. Obviously, the positional holding time of this Strategy would be longer in monthly Expiry series than the weekly Expiry series\. Further, primarily this Strategy is strived to be initiated as a net Premium Debit Strategy \(*i\.e\. with more Premium debit on the Long leg on farther Expiry series, than the Premium credit collected on the Short leg on closer Expiry series*\)\.

If the trend for the expected holding time \(i\.e\. until the earlier Expiry date of the Short leg\) appears to be mildly bullish, then this Strategy is created on the CE side i\.e\. as a __Call \(Long\) Diagonal Spread__\. However, if the trend for the expected holding time \(i\.e\. until the earlier Expiry date of the Short leg\) appears to be mildly bearish, then this Strategy is created on the PE side i\.e\. as a __Put \(Long\) Diagonal Spread__\. 

Thus, __this Strategy is mainly played to benefit from the expected mild bullish or mild bearish movement in the underlying__, during the expected holding time\. However, one must bear in mind that the PE Short side is relatively riskier than CE Short side, because, when the underlying falls, the volatility too usually rises which causes PEs to rise in their premium value much higher than rise in CE premium when the underlying rises upwardly\. Thus, PE side Strategy must only be implemented when markets are not in downtrend, and are suitable to be implemented when the underlying is in uptrend\.

Having said above, if the trend  for the targeted Expiry Day is not certain but is expected to be either mildly bullish or mildly bearish, then this Strategy can also be created on both CE & PE side in equal quantity \(i\.e\. maintaining original ratios\)\. 

Besides, playing this Strategy for positional holding, this Strategy can also be safely played out in intraday to benefit from expected momentum during the day, by initiating the trade legs of this Diagonal Long Spread Strategy on weekly Expiry series as a Credit Spread \(i\.e\. *with less Premium debit on the Long leg on farther Expiry series, than the Premium credit collected on the Short leg on closer Expiry series*\)\. If the momentum is expected to be bullish during the day, then this Strategy can be initiated on the PE side as a Net Credit Spread; and if the momentum is expected to be bearish during the day, then this Strategy can be initiated on the CE side as a Net Credit Spread\.

All relevant details regarding this Strategy, in respect of its deployment as a positional trade, for both CE side \(suitable for mild bullish until Expiry\) and for PE side \(suitable for mild bearish until Expiry\), are discussed separately in the Table below\. Here we would be discussing this Strategy play for positional holding, on weekly Expiry series, however, the same logic would also apply for monthly Expiry series if created to play a longer duration of trend\. Also, we have discussed about playing this Strategy to benefit from intraday momentum, in the Additional Notes section given below\.

__Additional Notes on the Strategy:__

1. This Strategy may also be initiated in equal quantities, on both CE side & PE side\. Such construct of Strategy makes it akin to Iron Condor Strategy, but this Strategy is better than Iron Condor as the Long legs are on farther Expiry Series in this Strategy \(*whereas in conventional Iron Condor, Long legs are also initiated on Far OTMs of same Expiry series and are therefore more prone to Theta decay of Expiry*\)\. However, both CE & PE side Strategy may be initiated only when the broader trend of the underlying is convincingly bullish \(*i\.e when price is trading above 20 SMA on Daily TF etc\.*\)\. PE Short side Strategy should not be initiated alone or along with CE side Strategy, if the underlying is broadly in downtrend, because if the downtrend gets into strong bearish momentum, then the PE side Strategy would cause this Strategy to generate big losses\. Safety point in case of PE side Strategy that must be adhered is that: as soon as PE Short leg appears to become an ATM on closing basis, either Counter Adjustments must be initiated or the Strategy must be exited by taking a stop loss\.
2. Further, if underlying remains extremely rangebound along with low VIX of 11\-12, then both CE side & PE side Strategy, may not yield a proper return / profitability on the Strategy\. Thus, both side Strategy may be considered in high VIX zone \(around 18\-20\) so as to get a large room and high premium credits for the Short legs on both CE side & PE side\.
3. It may also be noted that instead of attempting to initiate this Strategy at the start of every week, the best approach would be initiate this Strategy at the right opportunity i\.e\. when the underlying takes a mild bullish move anytime during the current week and adds decent premium value to Far OTM Strikes, thus offering a good opportunity to Short such Far OTM CEs for the primary leg of CE side Strategy \(where Short Strike is above a decent major Resistance level\)\. Thus, instead of Shorting Far OTM CEs available at decent premium at the  start of the current week regularly on routine basis, try to Short CEs which are much higher/ deep OTM offering same/higher premium due to bullish move during the week\. Likewise, for the PE side Strategy, instead of Shorting Far OTM PEs available at decent premium at the  start of the current week regularly on routine basis, try to Short PEs which are much lower/ deep OTM offering same/higher premium due to bearish move during the week\. Following this opportunistic approach would be much safer and rewarding\.
4. Also, it can be explored that instead of initiating this Strategy on current week Expiry series, the primary leg of CE Short leg \(or PE Short leg as the case may be\) may be initiated on the next week Expiry series \(or even, next\-to\-next week Expiry series\) in order to receive decent premium value and a higher Far OTM Strike much above the major Resistance level \(or below the major Support level for PE Short leg\); and accordingly the CE Long leg \(or PE Long leg as the case may be\) may be initiated on the subsequently next Expiry series after the next week Expiry series \(or next\-to\-next week Expiry series, as the case may be\)\. This way a large room for the stop loss/ BE area can be achieved without compromising on the premium value on the Short leg\.
5. When VIX is above 18, then the Short leg must be initiated at even Far OTM Strikes \(*as even farther OTMs will have higher premium value for the Short leg in higher VIX*\), thereby, avoiding the Stop Loss situation due to volatile market on account of increase in VIX\. Further, when VIX is above 18 then higher premium for Short leg may be targeted in the current week Expiry series, but if VIX is below 18 then the Short leg of this strategy may be initiated in next week Expiry series and the Long leg in next subsequent weekly Expiry series \(*i\.e\. one weekly Expiry series ahead of the Expiry series at which Short leg is initiated*\)\.
6. This Strategy, as explained in the above Table is made as a net premium Debit Strategy, but this Strategy may also be made as a net premium Credit Strategy \(*i\.e\. the premium debit incurred on Long leg would be less than the premium credit collected on the Short leg*\)\. Net premium Credit Strategy helps capture profit in downward trend by playing this Strategy on the CE side; and to capture profit in uptrend by playing this Strategy on the PE Side\.
7. If net premium Credit Strategy on CE side is initiated to play downward trend, then there will be no Downside Risk on the CE Side, but it may expose the Strategy to relatively higher Upside Risk\. This is because: \(a\) if the underlying keeps falling, then the premium on the CE Short leg would soon get exhausted, while there will be some premium left on the CE Long leg; thereby generating profit on the Strategy \(*thus no Downside Risk in CE side Credit Strategy\)*; \(b\) if the underlying keeps rising, then the higher negative Delta on the CE Short leg would generate more loss than the profit on CE Long leg due to lower positive Delta on CE Long leg \(*thus increasing Upside Risk, especially if underlying breaches the CE Short leg Strike on sustained basis anytime before Expiry Expiry*\)\.

Likewise, if net premium Credit Strategy on PE side is initiated to play upward trend, then there will be no Upside Risk on the PE Side, but it may expose the Strategy to relatively higher Downside Risk\. This is because: \(a\) if the underlying keeps rising, then the premium on the PE Short leg would soon get exhausted, while there will be some premium left on the PE Long leg; thereby generating profit on the Strategy \(*thus no Upside Risk in PE side Credit Strategy\)*; \(b\) if the underlying keeps falling, then the higher positive Delta on the PE Short leg would generate more loss than the profit on PE Long leg due to lower negative Delta on PE Long leg \(*thus increasing Downside Risk, especially if underlying breaches the PE Short leg Strike on sustained basis anytime before Expiry*\)\.

1. However, it is advisable to play this Strategy as a net premium debit Strategy on CE side if trend is mild bullish; and as a net premium debit Strategy on PE side if trend is mild bearish\. This is because, in a net premium debit Strategy, the Long leg is not too Far OTM \(*as compared to when initiated in a net premium credit Strategy*\), which in turns helps to generate profit on the CE Long leg due to bullish move in the underlying and on the PE long leg due to bearish move in the underlying\. Thus, it can be summarised here that:

- For mild bullish move in the underlying: Initiate CE side Strategy as net premium debit Strategy;
- For strong downtrend move in the underlying: Initiate CE side Strategy as net premium credit Strategy \(for intraday or positional\);
- For mild bearish move in the underlying: Initiate PE side Strategy as net premium debit Strategy;
- For strong uptrend move in the underlying: Initiate PE side Strategy as net premium credit Strategy \(for intraday or positional\)\.

1. If for CE side Strategy, mild bullish trend as originally expected appears to turn super bullish, then instead of same quantity on Short leg and Long leg, you may increase 1 Lot on Long leg against every 3 Lots on Short leg\. This ratio may be maintained in order to mitigate any potential loss due to Upside Risk on CE side Strategy on account of super bullish trend\.

Similarly, If for PE side Strategy, mild bearish trend as originally expected appears to turn super bearish, then instead of same quantity on Short leg and Long leg, you may increase 2 Lot on Long leg against every 3 Lots on Short leg\. This ratio may be maintained in order to mitigate any potential loss due to Downside Risk on PE side Strategy on account of super bearish trend\.

1. This Strategy may also be used to play strong momentum trends for intraday / positional\. For bullish momentum PE side Credit Spread Strategy can be used and for bearish trend CE side Credit Spread Strategy can be used\.
2. During creation of this Strategy, it must be checked for Nifty Options that the Long leg on next Expiry series \(which is 150 point away Strike from targeted Short leg\) is not having premium lesser than the targeted Short leg\. If Short leg premium is available at X Rs\. and the premium of next week’s Long leg Strike \(which is 150 away from the Short leg\) is less than X Rs\., then the Strategy must not be executed until the premium of such Long leg is trading at a premium value higher than the targeted Short leg\. Because, such discounted premium on next Expiry series may indicate extensive oversold position and the CE side premium may significantly rise due to upward movement in the underlying \(*which also causes adjustment of discounted premium at appropriate levels*\)\.  

__Options Behaviour Toofani Hedge: Diagonal Long Call Spread Strategy__

- This Strategy is devised to capture the Theta decay of fast approaching current Expiry, in Far OTMs of Current Week Expiry\. Accordingly, in this Strategy, CE Short primary leg being created on Current Week Expiry faces severe Theta impact as the Expiry draws near, while the CE Long hedged leg being initiated on the Next week Expiry, is not much affected on account of Theta\. Further, the Strategy targets to also generate profit from the mild\-bullish movement in the underlying on the CE Long leg by Expiry of the Short leg\. Thus, if the mild\-bullish move as expected sustains and CE Short Strike expires as an OTM on its Expiry, then the Strategy generate profit on Short leg due to Theta impact and also on the Long leg due to Delta impact\.
- In this Strategy, the premium credit collected on CE Short leg is usually slightly lower than the premium debit incurred on the CE Long\. Thus, this Strategy is a net debit Strategy and the amount of net debit incurred \(*i\.e\. aggregate premium credit collected on CE Short leg – total premium debit incurred on CE Long leg*\) could be the potential max loss in this Strategy if the underlying keeps falling \(__Downward Risk Level__\)\. Thus, it is important to ensure that if the trend gets downward, then this Strategy must be exited before premium credit collected on CE Short leg gets exhausted due to the steep down move in the underlying\. 
- But if the underlying starts trending with strong bullish momentum \(*against the mild bullish move as originally expected*\), then also this Strategy could yield substantial loss, because the CE Short leg would become deep ITM and its premium would rise significantly, which the profit generated on the CE Long would not be able to absorb, if the underlying has crossed beyond the Breakeven level of CE Short leg and trend seems to continue in uptrend\. Thus, it is important to ensure that if the trend gets super bullish, such that the CE Short Strike can be breached by the underlying on closing basis \(__Upside Risk Level__\), then this Strategy must be exited before premium of the CE Short leg becomes too high if the CE Short Strike appears to become an ITM by more than ATM – 2 by Expiry of CE Short leg\.    
- When this Strategy is created on the CE side, CE Short would generally have a higher negative Delta on aggregate basis, than the positive Delta on CE Long \(*i\.e\. if underlying starts falling, then* *CE Short will generate more profit than loss generated by CE Long*\)\. Therefore, if immediately upon creation of this Strategy, the underlying starts falling, then owing to __*net negative Delta position*__ __*on this CE side Strategy*__, this Strategy would start showing profit\. But if the underlying starts rising up with mild uptrend, then this Strategy may show some minor virtual loss due to higher negative Delta on CE Shorts \(*which gets set\-off gradually on account of Theta impact, as Expiry of the Short leg  approaches closer*\)\. Further, if after this Strategy is initiated, there arrives a strong bullish momentum, then this Strategy may pose higher loss \(*especially, if momentum appears to make the CE Short Strike as an ITM or cross\-over above the BE Strike of this Strategy*\), due to net negative Delta on this CE side Strategy\.
- Also, if bullish momentum of limited extent arrives after 2\.30pm on Expiry Day \(of the Short leg\), then CE Long position will get tremendously benefited due to addition of premium, but mild bullish momentum will not much negatively impact the CE Short leg as it is still on Far OTMs of current expiring week\. Far OTMs will not be able to retain any addition of premium due to mild bullish momentum due to extreme Theta impact on Far OTMs on Expiry Day after 2\.30pm\.
- When this Strategy is created on the CE side, a mild bullish move during the holding period or a mild gapup on Expiry Day opening, yields profit on the CE Long hedged leg; and so long the CE Short leg is still an OTM atleast 3 or 4 Strikes away from ATM on the Expiry Day opening, the CE Short leg too will yield profit due to Theta impact of overnight decay\.
- If the underlying keeps trending downward during the holding period or makes huge gapdown on or before Expiry Day, then CE Short leg would generate more profit than loss on CE Long leg due to CE Short leg being on higher negative Delta on aggregate basis than the positive Delta on CE Long\. Consequently, to the extent of aggregate premium credit received on the CE Short leg, this Strategy will remain in profit or no\-profit\-no\-loss situation\. Thus, in case the underlying seems to be in a downtrend during the holding period such that almost all the premium credit collected on CE Short leg is almost exhausted \(*i\.e\. premium of CE Short leg is close to becoming zero*\), then this Strategy may be exited with minor profit/loss, as the case may be on or before the Expiry\.
- In case of a big gapup / strong uptrend during the holding period before Expiry, the CE Short leg being on higher negative Delta than the CE Long leg, the CE Short would generate more loss than the profit generated on CE Long, thereby resulting losses on this Strategy, especially when the underlying breaches the CE Short Strike and sustains and moves even higher and expire as an ITM by more than ATM\-2\. In the event of loss on account of such huge gapup / uptrend before Expiry, some loss may be attempted to be mitigated by initiating Counter Adjustments\.
- If this Strategy is held to continue playing it for the full Expiry Day and the Strategy is not exited immediately on Expiry day opening, and then if during the Expiry Day:
- there arrives a strong upward momentum \(*so much so that it appears that it may likely cross\-over above the BE level of the CE Short leg*\), then this Strategy may generate significant loss due to being net negative Delta impact on CE side\. Thus, in such situation it would be prudent to immediately square\-off this Strategy as soon as the price seems to breach and sustain above the major Resistance level on Expiry Day\. 
- there arrives a downward move, then this Strategy would generate some profit, as it is net negative Delta on CE side, until the aggregate premium credit collected on CE Shorts is exhausted \(*because the CE Short leg becomes even deeper OTM*, *during downward move*\)\. Therefore, in this situation, as soon as the downtrend seems to be sustaining and the premium collected on CE Short leg is almost about to get exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because, if the downtrend continues after premium credit of CE Short leg is exhausted, then the balance premium debit \(*i\.e\. aggregate premium credit collected on CE Short – premium debit paid in total for the CE Long*\) would start generating max loss on this Strategy\. Further, if the downfall arrives with momentum or the downtrend arrives around 2\.30pm or thereafter on the Expiry Day, then the Delta value of CE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta positive on the CE side\. And as soon as the net Delta position of this Strategy turns positive, any further downmove would start causing loss in the Strategy\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes positive, if the downtrend seems to sustain and continue during the Expiry Day\.

*Note: It is pertinent to note that on Expiry Day, as soon as Far OTM CE Options reduces significantly in their premium value resulting in its LTP of 3 or so, either due to fast downtrend \(LTP of CE option gets reduced when underlying falls\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)*

- there remains a mild bullish trend throughout the Expiry Day, which does not seem to cross over above the major Resistance level \(above which the CE Short leg was initiated\) and expires near that Resistance level, then a maximum profit situation emerges, because CE Short leg expires worthless as Far OTM thereby yielding entire aggregate premium credit as profit; and the CE Long leg also generates profit due to continuation of mild bullish trend during the week or before the Expiry\. In this situation after around 1\.30pm on Expiry Day, the Far OTM CE Short leg would lose its LTP to severe Theta decay, by virtue of belonging to the Current Week Expiry \(*inspite of the mild bullish move in the underlying, because mild bullish move will not be able to negatively impact the decay being caused by Theta of Expiry Day*\) and consequently its Delta value would become negligible / zero, thereby resulting this Strategy into a net Delta positive Strategy \(*owing to CE Long leg, whose Delta value remains intact, as it does not get impacted by Theta decay, by virtue of belonging to farther Expiry*\)\.
- the underlying remains rangebound throughout the Expiry Day, then also this Strategy would yield profit as CE Short leg on closer Expiry series would get severely impacted due to Expiry decay, while CE Long leg of farther Expiry series faces much less Theta decay, hence net profitable situation\.    

__Toofani Hedge: Diagonal Long Call Spread Strategy__

__\(Positional view: Mild Bullish until Expiry Day\)__

__*Requisite Technical Conditions for Toofani Hedge: Diagonal Long Call Spread Strategy*:__

- Major trend \(*like on Daily & Weekly TF*\) must be bullish\.
- Trend appears to be mild bullish on positional basis until the Expiry of the Short leg of the Strategy\.
- Identify major Resistance level \(*viz\. 20 SMA / Pivot Point / Upper Bollinger Band / previous resistance trendline on daily / weekly TF*\)\. CE Shorts must be initiated at a Strike above such major Resistance level on Spot chart\.
- This Strategy should be avoided if the Volatility is expected to rise due to unfolding of some news or event\. The Strategy may be initiated when the Volatility rise has stopped\.
- If at the time of initiating this Strategy, the price of the underlying is hovering or closes near some major Resistance level \(*on hrly or daily TF*\), then the underlying may likely take a gapup in order to cross\-over above the said Resistance level\. Therefore, in such situations, the primary leg for CE Shorts must be initiated higher than the next higher major Resistance level\. Idea here is that the underlying must not cross above the major Resistance level on Expiry day\.

*Note: Major Resistance levels are crossed over upwardly, either by way of a sustained gapup or a bullish supercandle on Daily  TF \(i\.e\. a very bullish move in intraday, resulting in a big green supercandle on Daily TF\)\.*

__*Points for initiating* *for Toofani Hedge: Diagonal Long Call Spread Strategy*:__

A trader must initiate trade legs of this Strategy, after analysing the \(i\) expected movement in the underlying; \(ii\) current state of VIX and its expected move; \(iii\) availability of Premium Credit for the Short leg; and \(iv\) major Resistance level\.

When the premium in the Current Week is low or the underlying is close to targeted Resistance zone, then instead of initiating CE Short leg on Current Week, Next Week can be used \(*as it will offer good premium and large room from risk perspective*\)\. Accordingly, the CE Long leg would be initiated on the subsequent Expiry series \(*i\.e\. Next\-to\-Next Weekly Expiry series*\)\. Also, if the situation requires, then even Short leg can be initiated on Current Month Expiry and Long leg on First Week Expiry series of Next Month \(or even Next Month Expiry series\)\. Logic is that:

1. Short  leg must get decent Premium Credit\. So, if VIX is low, then we must move to a farther Expiry series in order to find decent Premium Credit for the short leg at a safe distance;
2. Short  leg must be Far OTM Strike which is above some major Resistance level, which the underlying is not expected to breach on the upside by the Expiry of the Short leg;
3. Premium debit of the Long leg must be only slightly higher than the premium Credit collected on the Short leg; and
4. The Delta value of the Long leg must be around or slightly lower \(*preferably higher*\) than the Delta value of the Short leg\.  Thus, if Short leg is initiated on Current Month Expiry series, and Long leg is targeted to be initiated on the Next Month Expiry \(*in order to avoid Theta impact on the Long leg*\), then the Delta value of such Long Strike \(*keeping in mind the requirement of slightly higher Premium debit than premium credit on Short leg*\) may be too low than that of the CE Short leg\. Thus, in such case, it would be advisable to initiate Long leg on the First Week Expiry series of Next Month \(instead of Next Month Expiry series\)\. 
5. Idea here is to maintain a balance between Short leg & Long leg in terms of both premium difference and Delta difference\. Premium difference between Short & Long leg must not be greater than 20 points and so long the premium difference is optimal then the Strategy may be initiated either as net credit or a debit Spread \(*but preferably a debit Spread*\)\. Likewise, Delta difference between the Short & Long leg must not be much on single Lot basis, wherein Long leg may be on lower Delta than Short leg \(*but preferably if Long leg can be on same or higher Delta than Short leg, without disturbing the net premium difference between the Short & Long leg*\)\.  

Having said above, it does not really matter much if the Strategy is initiated as Net premium Debit or Net Premium Credit Strategy, so long the net premium difference between the Short and Long leg is not more than 10\-20 point and the Delta difference is also not much at inception between the Short and Long leg\. __However, since, virtual loss situation is relatively better controlled in a Net Debit Spread Strategy \(*with less premium credit on Short leg and higher premium debit incurred on Long leg*\) in case the underlying remains mildly bullish as expected, therefore, this Strategy must be targeted to be deployed preferably as a Net Debit Spread\. __

__*Other Points for initiating* *for Toofani Hedge: Diagonal Long Call Spread Strategy*__:

- This Strategy must not be deployed on a regular basis, unless the above\-mentioned requirements are satisfied\.
- When VIX is hovering below 15, then atleast 300\-500 points away Far OTM CE Short must be ensured in case of Nifty or FinNifty from the Spot; and atleast 700\-800 points away Far OTM CE Short Strike in case of BankNifty from Spot\.  However, when VIX is between 16 to 20 level, then it would be advisable to consider atleast 600\-700 point away OTM CE Strike \(from Spot\) for Short leg in case of Nifty & FinNifty; and atleast 1000\-1200 points away Far OTM CE Short Strike in case of BankNifty from Spot\. In order to maintain aforesaid Strike distance, considering the level of VIX, farther Expiry series \(*viz Next Week or Next\-to\-Next Week or even Current Month Expiry*\) may be considered for the Short leg; and accordingly, immediately subsequent Week Expiry series may be considered for the Long leg\.  

__Significance of Strike / Delta values in Toofani Hedge: Diagonal Long Call Spread Strategy__

__*Strike Selection in Toofani Hedge: Diagonal Long Call Spread Strategy*__:

- One must be careful to not select a Strike for initiating CE Short leg of the Strategy, which is closer to ATM \(or which can likely become an ITM on Expiry\), even if lucrative Premiums are available in near OTM CEs\.
- Always target CE Short leg Strike selection which is well beyond/ higher than any major Resistance level \(*which gives a comfort that the underlying would not breach that Resistance level by Expiry of the CE Short leg*\), thereby, ensuring that the CE Short leg would expire worthless as OTM\.
- In BankNifty Current Week Options, atleast 65 to 75 premium value per Lot, is decent, for initiating CE Short leg\. In Nifty Current Week Options, 25 to 35 premium value per Lot, is decent, for initiating CE Short leg\. However, it must strived for to collect atleast more than 100 premium credit per Lot on BankNifty \(even if a farther Expiry series has to be selected for the same\)\.
- It need to be ensured for the CE Long leg that its premium value is not too high from the premium credit collected on CE Short leg\. A net premium debit of not more than 10\-20 Rs per Lot must be ensured for creating this Strategy on Nifty or FinNifty Options and not more than 20\-30 Rs per Lot for BankNifty Options\.

__*Delta fluctuations in Toofani Hedge: Diagonal Long Call Spread Strategy*:__

- Since, in this Strategy the CE Shorts are at a higher Delta than Long CE, the effective Delta on the overall Strategy would be negative, which implies that if soon after initiating this Strategy, the underlying would trend on the upside, then the Strategy would exhibit virtual loss and if the underlying moves in downtrend then the Strategy would exhibit profit\.
- If after initiating the Strategy, the underlying moves in a downtrend with momentum, then so long the effective Delta position is negative on the Strategy, downward move in the underlying would generate profit on the Strategy\. But once, the steep downward move in the underlying causes quick and substantial loss of the premium value of the CE Short leg, then the negative Delta position on the overall Strategy turns net positive Delta Strategy *\(as the Delta value of CE Short leg gets negligible and CE Long legs’ Delta value turns the overall Strategy into net Delta positive CE side Strategy\)*\. As soon as this CE side Strategy turns net Delta positive, then any further downward move in the underlying would start causing loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the downward move further continues \(Downward Risk\)\.
- However, after the overnight decay, the net negative Delta position on the overall Strategy would reduce\. Thus, after overnight decay i\.e\. on the Expiry Day \(of the CE Short leg\) if the underlying moves in uptrend then the effective virtual loss would be relatively lesser\.
- But if the uptrend occurs with strong momentum, anytime during the holding period or even on the first half of the Expiry day of CE Short leg i\.e\. before considerable decay on the Far OTM CE Short leg premium has occurred, the overall Strategy would exhibit strong virtual loss due to overall negative Delta impact on the Strategy\. As soon as the CE Short leg Strike appears likely to become an ITM, then any further upward move in the underlying would start exhibiting heavy loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the upward move further continues \(Upward Risk\)\.
- However, if the uptrend arrives on Expiry day of the CE Short leg, after considerable decay to the premium on the CE Short leg \(*i\.e\. when the premium is almost about to become zero, and is hovering around 3 or 4 Rs\. per Lot*\) then the effective Delta on the overall Strategy would turn positive, and in such situation any upmove in the underlying would exhibit higher profits on the Strategy\.

__Target and Stop\-Loss in Toofani Hedge: Diagonal Long Call Spread Strategy__

__*Target Toofani Hedge: Diagonal Long Call Spread Strategy*:__

There can be following situations basis which the targets on this Strategy that may be aimed for, as part of the trade plan, on this Toofani Hedge: Diagonal Long Call Spread Strategy:

1. Target on opening of the Expiry Day: If the underlying has been mildly bullish during the holding period and upon opening of the market on the Expiry day \(of the CE Short leg\) trading session, if the underlying opens almost near the close of the previous day or takes a gap\-up but opens at a reasonable distance below the major Resistance level \(such that the CE Short Strike is about 2 to 4 CE OTM Strikes from ATM on opening\), then this Strategy would generate a decent profit\. In such event it is likely that both CE Long leg \(*due to gap\-up*\) and CE Short leg \(*due to overnight decay*\) would generate profit upon such opening on the Expiry Day\. A trader can book such a profit, upon opening on the Expiry Day\.
2. Target towards the end of the the Expiry Day: This trade can also be held till the end of the Expiry Day of the CE Short leg\. In such event the maximum reward would be generated if the CE Short leg closes as an ATM or very near OTM \(ATM \+ 1 or so\) on Expiry as CE Long would generate profit due to mild bullish move in  the underlying and CE Short leg would generate profit as would expire worthless as ATM or OTM\. However, if the underlying remains in a strong downward trend during the holding period or on Expiry Day of the CE Short leg, then the target should be to exit the trade as soon as the premium on the CE Short leg is almost close to becoming zero due to the continuous downtrend on Expiry Day \(*i\.e\. when the net Delta position in the Strategy turns positive*\)\. It must be borne in mind that this trade should not be further continued after premium on the CE Short leg is close to turning zero \(*i\.e\. when the net Delta position in the Strategy turns positive*\), as CE Long leg would then cause such loss due to downtrend which may eat up the profits generated on the CE Short leg due to intraday downtrend of the Expiry Day\. Further, if: 

- after the CE Short leg premium is close to becoming zero due to strong downtrend, during the holding period, and thereafter the underlying takes a reversal towards the uptrend during the current week itself anytime before Expiry, then arrival of uptrend momentum during the holding period may again turn the trade towards targeting the  profit from a mild bullish move in the underlying as was originally expected\. Thus, if the trend changes towards mild bullish during the holding period itself, then one can explore two options: \(i\) the same trade may be held till Expiry to benefit from the trend reversal on the upside; and \(ii\) the strong downward move in the underlying during the holding period would make the CE Long leg a very Far OTM Strike on farther Expiry series, therefore trend reversal on the mild bullish side may not make much premium addition on the CE Long leg\. Thus, in such a situation it may be prudent to exit from the current trade and to wait for the bullish momentum to continue upto a particular Resistance level, and then a fresh trade for the closer Expiry series may be re\-initiated, thereby increasing the possibility of generating relatively more profit than to continue the same old trade originally created; or 
- after the CE Short leg premium is close to becoming zero due to strong downtrend, during the Expiry day \(of the CE Short leg\), and thereafter the underlying takes a reversal towards the uptrend after 2pm or so on the Expiry day itself, then it may be advisable to hold the trade, as the arrival of uptrend momentum during the Expiry Day after a strong downtrend until 2pm, may not add much premium on the CE Short leg \(*due to Expiry Day Theta impact*\) but the premium would get added on the CE Long leg \(*as it is on farther Expiry series*\), thereby, generating relatively more profit by the close of the Expiry Day \(so long the uptrend does not breach the CE Short leg Strike\)\.

__Stop Loss & Risk Management, in Toofani Hedge: Diagonal Long Call Spread Strategy:__

1. Stop Loss in case of Upside Risk:  In case of Upside Risk, if the underlying is expected to close on the Expiry Day on the upside, such that the CE Short leg on Expiry may end up beyond 2nd Strike level ITM \(i\.e\. ATM–2 CE Strike\) or even deeper ITM CE, then it may be advisable to take stop loss when the CE Short leg becomes an ATM and sustains at that level and seems likely to end up being an ITM\. However, if the uptrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by CE Short leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM PEs of same Expiry series as that of the CE Short leg; or \(ii\) initiating Counter Adjustments through Long CEs on not\-so\-deep\-OTMs \(upto ATM\+2 CEs\) of same Expiry series as that of the CE Short leg or subsequent Expiry series\. But if there is another strong Resistance level just above the CE Short leg Strike then \(a\) either, a chance may be taken for reversal of the underlying on the downside so as to check if the CE Short leg may not remain an ITM deeper than one Strike Level from ATM by close of Expiry; or \(b\) Counter Adjustments by Shorting additional slightly Far OTM CEs of same Expiry series \(as that of the original CE Short leg\) may be initiated\.
2. Stop Loss in case of Downside Risk:  In case of Downside Risk, if the underlying is expected to close on the Expiry Day on the downside after a huge gapdown or strong downtrend during the holding period, such that the CE Short leg during the holding period has already lost almost all its premium immediately due to the gapdown / steep downtrend, and the underlying is expected to fall even beyond during the remainder of the holding period \(i\.e\. until Expiry Day of the CE Short leg\), then it may be advisable to immediately exit from this trade at minor profit / loss, as CE Long leg would then cause further loss due to continued downtrend during the Expiry Day \(*due to net Delta negative situation on the Strategy turning to net positive Delta*\)\. However, if the downtrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by CE Long leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM CEs of same Expiry series \(*as that of the original CE Short leg*\); or \(ii\) initiating Counter Adjustments through Long PEs on not\-so\-deep\-OTMs \(upto ATM\-2 PEs\) of same Expiry series as that of the original CE Short leg \(or even subsequent Expiry series\) may be initiated\.
3. Volatility Spike: If after the trade is initiated  and immediately thereafter there is sudden volatility spike, then the premium on the CE Short leg would start increasing more than the premium on CE Long leg \(*as this Strategy is net Vega negative at inception*\)\. Therefore, if there seems to be an uncontrolled volatility spike, then it may be advisable to immediately exit the Strategy at minor loss / profit and re\-initiate the Strategy when the volatility spike has stopped\. Volatility crash would be suitable for the Strategy not volatility spike\. However, if the volatility spike does not seem to be too high, and the underlying appears to not breach the major Resistance level by Expiry of the CE Short leg, then temporary volatility spike should not pose any threat to this Strategy\. 

__Adjustments in Toofani Hedge: Diagonal Long Call Spread Strategy__

__*Adjustments in Toofani Hedge: Diagonal Long Call Spread Strategy \(if trade does not go as per plan\)*__:

Adjustments for Upside Risk, in Toofani Hedge: Diagonal Long Call Spread Strategy: If the trend becomes super bullish and the major Resistance level is likely to be breached by the underlying during the holding period i\.e\. any time before Expiry of the CE Short leg on closing basis, then the Strategy may yield loss\. This Upside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM PEs, of same Expiry series as that of the CE Short leg, in double the quantity than the CE Short leg\. If, however sufficient premium value is not available in the same Expiry PEs \(ATM or OTM\), then even subsequent Expiry series Far OTM PEs may be considered below some major Support level \(as applicable for relevant Expiry series, basis selection of PEs\)\. The additional premium credit received on shorting these PEs would help absorb some loss on the CE Short leg due to strong bullish momentum making the CE Short Strike an ITM\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.
- If there seems to be a strong uptrend, then additional near __OTM CEs can be bought \(Long CE\) of same Expiry series as that of original Long CEs__, besides Long CE already on the hedged leg\. The additional CEs can be ATM or near OTMs, with such quantities such  that the Delta value of all Long CEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of CE Short position, so as to generate profit on this Strategy on account of super bullish momentum\. All Long CEs on this Strategy, with higher Delta value on aggregate basis than the CE Short leg, should generate more profit and help cover losses in the CE Short primary leg\. However, buying additional CEs will add additional debit positions, therefore, this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. Further, these Long CEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on CE Long unless bullish momentum is super strong and swift \(i\.e\. when strong momentum can outrun the negative impact of volatility crash\)\.
- Instead of: Shorting naked PEs and incurring risk if underlying again reverses on the bearish side or initiating Long naked CEs and running a risk of cessation of upward momentum, as explained above to counter adjust CE side Upside Risk, one can also mitigate the Upside Risk by initiating fresh Bull CE Debit Spread in subsequent Expiry series \(*i\.e\. Long Far OTM CE and Short even farther OTM CE Strike of same Expiry series*\)\. This Bull CE Debit Spread may be initiated on double the quantity than the original quantity on this Diagonal Spread Strategy\.

Adjustments for Downside Risk, in Toofani Hedge: Diagonal Long Call Spread Strategy: If the underlying is likely to get in strong downtrend even after the premium on CE Short leg is close to zero due to downward momentum, then the Strategy may yield loss, as the Long CE leg would generate further loss to the maximum extent of net premium debit position on the Strategy\. This Downside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM CEs, of current Expiry series, in such quantity so as to receive sufficient premium credit on these additional CE Shorts in order to absorb the net premium debit on the Strategy\. The additional premium credit received on these Short CEs would help absorb the loss caused by the CE Long leg to the extent of net premium debit on the original Strategy\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.
- If there seems to be a strong downtrend, then near __OTM PEs can be bought \(Long PE\) of subsequent Expiry series__\. These Long PEs can be ATM or near OTMs, with reasonable quantities which should generate profit due to strong downtrend sufficient to absorb the max loss situation on the original Strategy\. Idea here should be that the Delta value of all Long PEs on aggregate basis should be higher than the aggregate Delta value  on CE Long position, so as to generate profit on this Strategy on account of super bearish momentum\. All Long PEs on this Strategy, with higher Delta value on aggregate basis than the CE Long leg, should generate more profit and help cover max loss situation on the original Strategy\. However, buying additional PEs will add additional debit positions, therefore, this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. Further, these Long PEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on PE Long unless bearish momentum is super strong and swift\.

__Impact of Different Market Situations on Toofani Hedge: Diagonal Long Call Spread Strategy__

__If trade goes as per plan, in Toofani Hedge: Diagonal Long Call Spread Strategy__: If there occurs a mild uptrend / gapups during the holding period or even if the mild uptrend continues in intraday during the Expiry Day of the CE Short leg, but the underlying does not seem to breach the CE Short leg Strike on the upside by its Expiry, then the  Strategy may be continued for the relevant target\. 

__If underlying becomes sideways, in Toofani Hedge: Diagonal Long Call Spread Strategy__: If the trend gets rangebound until Expiry then the Strategy may be held until the premium on the CE Short leg is almost close to zero\. However, if volatility anytime during the holding period until Expiry of the CE Short leg, is crashing down, then the Strategy should be attempted to be exited as soon as the premium on CE Short leg is close to zero\. There may not be any point to hold the Strategy any longer after premium on CE Short leg is almost exhausted, because volatility crash would also cause depletion of premium on the CE Long leg, thus adversely affecting the net profit situation on this Strategy\.  

__If trade does not go as per plan, in Toofani Hedge: Diagonal Long Call Spread Strategy__: If it appears that there may  occur: 

1. an Upside Risk situation \(*i\.e\. the underlying is likely to breach and sustain the major Resistance level basis which CE Short leg was initiated*\) any time during the holding period even just before Expiry of the CE Short leg; or 
2. a Downside Risk situation \(*i\.e\. the underlying is likely to get in strong downtrend even after the premium on CE Short leg is close to zero due to downward momentum*\) any time during the holding period even just before Expiry of the CE Short leg,

__Merits & Demerits of Toofani Hedge: Diagonal Long Call Spread Strategy__

__*Benefits of Toofani Hedge: Diagonal Long Call Spread Strategy*:__

- Theta decay \(*between start of the Strategy until Expiry of the Short leg*\) in Far OTMs is a sure thing due to Options behaviour\. Thus, playing this Strategy to harness profit from Expiry decay makes it a high probability Strategy, except unless huge gapup / strong uptrend makes the Far OTM CE Short Strike an ITM on or before Expiry \(*thereby ruining the Theta decay impact by a huge Delta move due to big gapup or strong uptrend*\)\. Having said this, huge gapups / strong uptrend of such magnitude that it can convert such a Far OTM CE into a deep ITM is a seldom event \(i\.e\. about once or twice in 6 times\)\. Moreover, in this Strategy, CE Short leg is properly hedged with CE Long leg of Next Week Expiry \(*which has Delta value not much less than the aggregate Delta value of CE Short leg at inception; but has much less Theta impact as compared to the CE Short leg*\)\. Thus, this Strategy offers a good winning probability\. 
- This Strategy gives a decent range between the Upside Risk and the Downside Risk \(*as explained above*\), for the movement of the underlying, in order to generate profit on this Strategy, within a span of  the holding period\.
- Not only when the market opens mild bullish on Expiry Day, but also when market opens at the same level where it closed on the previous day to Expiry, this Strategy would yield profit on opening of Expiry Day \(*as CE Short leg on closer Expiry series would get severely impacted due to Overnight Expiry decay, while CE Long leg on farther Expiry faces much less Theta decay, hence net profitable situation*\)\. 
- Further, if the underlying appears to be rangebound during the holding period until Expiry or is expected to remain mildly bullish \(without breaching the major Resistance\), then this Strategy may also be held until complete Expiry to reap full benefit of Theta decay of Expiry on CE Short leg\. 
- In case there occurs a huge gapup or strong bullish move during the week before Expiry, which causes Far OTM CE Shorts to become deep ITM and thereby causing loss in the Strategy, then certain risk mitigating Counter Adjustments can be initiated in order to cut down the loss on this Strategy\.
- If there is Volatility crash during the current week before Expiry, then this Strategy may yield profit, as it is a net negative Vega strategy\.

__*Demerits of Toofani Hedge: Diagonal Long Call Spread Strategy*__:

- This Strategy has both Upside Risk as well as Downside Risk\. While, this Strategy offers a decent range for the movement of the underlying, between the two aforesaid risk levels, during the current week movement in the underlying until Expiry of CE Short leg\. However, there may occur huge volatility with big swings on either side during the holding period and especially during the Expiry Day \(of Short leg\)\. Thus, a watchful eye on the trade is a must, with clarity on the stop loss area\. Therefore, to play this Strategy safely, it is best deploy it to reap benefit from the overnight Expiry decay \(*i\.e to book profits on Expiry Day opening itself*\) and avoid holding for full Expiry Day unless there is conviction about the trend for the Expiry day on technical basis\. 
- If a strong upward momentum arrives after initiating this Strategy anytime during the holding period, then the positions on both the legs may have to be exited \(*as it is usually a net negative Delta Strategy on the CE side, at inception*\); and this Strategy may be re\-initiated after the bullish momentum ceases at suitable next higher, major Resistance level\.
- In case of huge gapups/ strong uptrend during the holding period until the Expiry Day \(of Short leg\), CE Short leg may end up being a deep ITM, and the higher negative Delta on CE Short leg may generate much higher loss than the profit generated on CE Long\. A huge Delta move, due to a big gapup / strong uptrend, can ruin the expected Theta impact on CE Shorts, and may instead cause a big loss on the Strategy \(*which is a net negative Delta Strategy on the CE side*\)\. While, the loss generated on this Strategy on account of a big gapup / strong uptrend, may be attempted to be mitigated though Counter Adjustments \(*i\.e\. by way of selling Far OTM PEs on Expiry Day*\), but practically sometimes it may get little complicated\.
- Generally, when VIX is below 15, it may become difficult to find good premium for the CE Short leg at reasonably Far OTM \(above major Resistance level\) consequently the overall target profit on the Strategy might substantially reduce\. Further, initiating CE Shorts below major Resistance or near to ATM may be very risky and must be avoided\. Thus, this risk must be avoided by initiating the trades only when the conditions already discussed above are satisfied \(*if need be, by moving on to farther Expiry series for the Short leg*\)\.
- This Strategy is essentially a CE Debit Spread \(*but implemented like a Diagonal Spread*\), involving higher premium debit on CE Long than the premium credit collected on the CE Short leg, thereby making this Strategy a net premium debit Strategy\.
- In this Strategy, premium credit collected on the CE Short leg on aggregate basis is usually slightly lower than the premium debit incurred on the CE Long leg\. Therefore, if there arrives a big fall, the loss that this Strategy would be able to absorb will be to the extent of premium credit collected on CE Short leg\. But if the fall continues, after the premium credit gets exhausted, then the net premium debit on the Strategy \(*i\.e extra premium paid on CE Long than premium credit collected on CE Short leg*\) will cause the maximum loss on this Strategy \(*explained below*\)\. Therefore, when it appears that the downtrend is going to continue and the premium credit is almost getting exhausted then Counter Adjustments must be initiated to mitigate the max loss situation\.

__Breakeven Strike \(BE\)* *Toofani Hedge: Diagonal Long Call Spread Strategy, its Calculation and Payoff Chart__

__*Breakeven Strike \(BE\) in Toofani Hedge: Diagonal Long Call Spread Strategy, from Expiry perspective*__:

__*BE for Upside Risk, in Toofani Hedge: Diagonal Long Call Spread Strategy:*__

<__start__> From Expiry perspective, the BE Strike for protection from the Upside Risk on this Strategy will be: __\[CE Short Strike \+ Premium collected per Lot\] __<__end__>

<__start__> To illustrate, we can look at the given Example, in which CE Short Strike is 34000 and the Premium collected per Lot on Short leg is 75\. Thus, BE will be: 34000\+75= 34075\.

Now, if BankNifty rises up and slightly breaches the BE Strike level of 34075 on closing basis on Expiry Day, by say 50 or 100 points, then on Expiry 34000 CE Short Strike would become a near ITM\. Thus, if CE Short leg becomes a near ITM \(upto 100 or 150 points deep from ATM\) on Expiry, after breaching the BE on the upside, then on close of Expiry session the CE Short Strike’s Premium would be equivalent to its Intrinsic Value \(*which means that upon Expiry: difference between ATM and the ITM CE Strike level, will be the Intrinsic Value or Final Premium Value of the CE Short leg*\)\. Consequently, the difference between the __Final Premium Value of the CE Short leg \(per Lot\) on Expiry – Premium credit of 75 \(per Lot\) collected at the time of initiating the Strategy__, will be the per Lot basis loss on the CE Short leg \(__Loss__ __on CE Short Leg__\)\. But at the same time, because the underlying has risen much higher, the CE Long leg of the Strategy would have also generated some profit \(__Profit on CE Long Leg__\) which will to some extent set\-off the loss caused on CE Short leg by virtue of it becoming an ITM on Expiry\.

Thus, the maximum loss caused due to the Upside Risk on Call  Side Strategy shall be: __\[Loss on CE Short Leg – Profit on CE Long Leg\]__\. If the CE Short leg becomes a near ITM on Expiry, then usually the loss on the Strategy will not be much on per Lot basis \(*but on heavy volume it may percolate to be a big number, especially if CE Short leg turns into an ITM which is deeper beyond ATM\-2 CE Strike on Expiry*\)\.

But if as a result of huge gapup or strong bullish momentum, the CE Short leg becomes a deep ITM, then basis the above calculations, the Upside Risk may be significantly higher \(*especially on heavy volume*\)\. Thus, it is advisable that in order to avoid the Upside Risk, the Strategy must be carefully watched for appearance of any strong bullish momentum; and if such momentum seems to arrive anytime during the holding period or anytime before Expiry, then this Strategy must be either immediately exited or Counter Adjustments must be initiated\. <__end__>

__*BE for Downside Risk, in Toofani Hedge: Diagonal Long Call Spread Strategy:*__

If a strong downside move arrives, which seems to be sustaining \(with little chance of reversal on the upside\), and the premium collected on CE Short leg gets almost exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the downtrend continues after premium credit of CE Short leg is exhausted, then the balance premium debit on this Strategy \(*i\.e\. aggregate premium credit collected on CE Short – premium debit paid in total for the CE Long*\) would start generating max loss on this Strategy i\.e\. the Downside Risk would get triggered after exhaustion of the premium credit of the CE Short leg\. 

<__start__>Thus, net Premium Debit on per Lot basis is the BE for the Downside Risk on the short leg i\.e\. 

__BE for Downside Risk: CE Short Strike – Net Premium Debit on the Strategy __<__end__>

<__start__> To illustrate, we can look at the given Example, in which premium collected on CE Short Strike of 34000 is 75 per Lot and the Premium paid on CE Long leg of 34500 is 95 per Lot\. Therefore, the net Premium Debit will be: 95\-75 = 20 per Lot basis\. Thus, if the Premium of the CE Long leg gets reduced to around 75 per Lot, due to the downtrend, then this Strategy must be exited so as to avoid losing the balance 20 per Lot left on CE Long leg, if the downtrend is expected to sustain and continue\. Thus, the BE for the Downside Risk shall be the net Premium Debit of Rs 20 per Lot on the Strategy\.

Further, if the downfall arrives with momentum anytime during the holding period or the downtrend arrives around 2\.30pm or thereafter on the Expiry Day, then the Delta value of CE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta positive on the CE side\. And as soon as the net Delta position of this Strategy turns positive, any further downmove would start causing loss in the Strategy on account of the Downside Risk\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes positive, if the downtrend seems to sustain and continue during the holding period  or on the Expiry Day\.

__Payoff for Toofani Hedge: Diagonal Long Call Spread Strategy__

__<img68>__

<__end__>

<__end__>

__Profit & Loss Scenario in Toofani Hedge: Diagonal Long Call Spread Strategy, and its Calculations__

__*Loss scenario in Toofani Hedge: Diagonal Long Call Spread Strategy, from Expiry perspective*:__

<__start__> This Strategy has both Upside Risk \(*if the upward BE Strike is breached by the underlying by Expiry*\) and Downside Risk \(*if the downward BE Strike is breached by the underlying by Expiry*\)\.

__Profit scenario in Toofani Hedge: Diagonal Long Call Spread Strategy, from Expiry perspective __:

There is no fixed reward situation on this Strategy, as it will depend if the underlying during the holding period remains in a range or takes a mild\-bullish move \(and sometimes even in the instance of mild\-bearish move in the underlying\)\. The profit may be generated in this Strategy in the following situations:

- If the underlying closes within a range during the holding period, then this Strategy should generate profit, as the CE Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the Short leg; and the CE Long leg even if loses its premium value by Expiry of the CE Short leg then also its loss would not be higher than the profit incurred on the CE Short leg\.
- If the underlying closes higher but does not breach the CE Short Strike on the upside, then also this Strategy should generate profit, as the CE Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the CE Short leg; and the CE Long leg would also generate some profit due to mild\-bullish movement in the underlying\. This situation is called the neckline expiry and generates the max profit on the Strategy\. 

However, in such situation also, sometimes the CE Long leg may generate loss if the mild bullish move was after much up & down movement or after very slow progression causing erosion in the premium value of the CE Long leg\. Then in such situation also the loss incurred on the CE Long would be lesser than the total profit generated on the CE Short leg\)\.

- If the underlying gets slightly bearish by Expiry of the CE Short leg \(*as against the original mild\-bullish move*\), then also this Strategy may generate profit, as the Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the CE Short leg; and the CE Long leg may lose its premium value but its loss would not be higher than the profit accrued on the CE Short leg\.

Additionally, since the overall Strategy is negative Vega, therefore slight fall in Volatility may also help to generate overall profit in the Strategy\.

<__end__>

__Toofani Hedge: Diagonal Long Call Spread Strategy: Its Trade Legs & Objective__

__*Trade legs of Toofani Hedge: Diagonal Long Call Spread Strategy*__:

- Short Far OTM CEs of Current Week Expiry \(*primary leg*\); and
- Long Far OTM CEs of Next Week Expiry \(*hedged leg*\) having premium value slightly higher than the premium credit collected on the Short leg \(*premium debit on Long leg should not exceed by more than 10\-30 points than the premium on the CE Short primary leg*\)\.

The quantities in the primary and the hedged leg shall be same\. However, since CE Long leg has more premium debit than the CE Short leg, therefore, it is a net debit Strategy*\.*

Further, the CEs on the primary and the hedged leg  are of different Expiry series \(*i\.e\. Short position must pertain to closer Expiry and Long position must pertain to farther Expiry*\), but both must be Options of the same underlying\. Thus, it is a Diagonal Spread, as the Expiry series of Short & Long leg are not only different, but are also on different Strikes\.

The CE Short leg must always be on closer Expiry series and the Long CE leg on subsequently farther Expiry series\. However, depending upon the availability of Premium credit for the Short leg, either Current Week Expiry may be selected or even Next Week or even Next\-to\-Next Week Expiry or even Current Month Expiry Series\. Accordingly, basis the Expiry series of the CE Short, CE Long must be initiated on subsequent farther Expiry series \(*i\.e\. if for Short leg Current Week Expiry selected is then Long leg would be on Next Week Expiry series; and if Short leg is initiated on Next week Expiry then Long leg would be on Next\-to\-Next Week Expiry; and if Short leg is initiated on Next\-to\-Next Week Expiry then the Long leg would be on subsequent week to the Short leg Expiry series and so on*\)\.

Therefore, since in this Strategy, the Long leg is always on the farther Expiry series, than the Short leg, this is a Diagonal Long Spread\.

__*Objective in Toofani Hedge: Diagonal Long Call Spread Strategy*__:

Objective is to profit on the CE Short leg from the fast and strong decay caused due to Theta impact on Far OTMs of closer Expiry series, due to approaching Expiry of the Short leg initiated on closer Expiry series\.

Further, this trade is targeted to be held positionally until the Expiry Day of the Short leg, so as to reap profit on the Short leg from the Theta impact of Expiry\. However, since CE Long position is initiated on farther Expiry series, therefore, there is very low Theta impact on its premium \(thus, less decay\) as compared to the Theta impact on closer Expiry series\. Thus, the Strategy intends to yield profit  from the variance in the Theta impact on Short leg and Long leg\. 

Besides, the Theta impact factor in this Strategy as aforesaid, this Strategy \(*as a Net Premium Debit Strategy*\) also expects that the CE Long leg will generate profit benefitting from the mild bullish move in the underlying until the Expiry of the CE Short leg\. Accordingly, if the underlying remains in mild uptrend during the holding period \(i\.e, before the Expiry day of the Short leg\), then the CE Long on the hedged leg also generates some profit until the Expiry Day of the Short leg, due to favourable Delta move in CE Long on the bullish side\. 

Thus, this Strategy intends to generate profit in the following situations:

1. If the underlying moves as expected with a mild\-bullish trend until the Expiry of the Short leg and does not breach the Short Strike level by its Expiry, then to yield profit on the Short leg to the extent of total Premium Credit collected on the Short leg due to Theta impact \(*as short leg expires as OTM*\)\. Besides, the said mild\-bullish move in the underlying also generates profit on the CE Long leg\. Thus, both legs generate profit in this situation\.
2. If the underlying remains within a range until the Expiry of the Short leg and keeps fluctuating within the range during the holding period, then there will be premium erosion in both CE Short leg and CE Long leg\. However, due to higher Theta on Short leg \(*by virtue of it being on a closer Expiry series than the Long leg*\), Short leg will generate more profit than the loss incurred on Long leg \(*due to premium erosion caused by expansion and erosion in the Time Value due to up & down rangebound movement in the underlying*\)\. Thus, the Strategy would still generate some profit in this situation\.
3. Also, if the underlying become extremely bearish until the Expiry of the Short leg, then the max loss can occur to the extent of the premium debit incurred on the Strategy\. Thus, this Strategy has limited downside risk\.

However, there is unlimited potential risk on the upside \(*i\.e\. if underlying gets super bullish breaching*\); thus, the trade legs of this Strategy are initiated at much higher level than the major Resistance level, so as to lower the potential upside risk\.

__<start> Example of *Toofani Hedge: Diagonal Long Call Spread Strategy*:__

- *Sell BankNifty 34000 Far OTM CE \(Current Week\) at Rs\. 75 \(primary leg\); and*
- *Buy BankNifty 34500 Far OTM CE \(Next Week\) at a premium of Rs\. 95 \(hedged leg\)*

*Quantity of CE Short and CE Long leg would be  equal \(i\.e\. 1:1 ratio\)\.*

*Note that CE Short leg is higher than the Daily TF Resistance of 33,800 and nearly 700 points away from the Spot\. *

*This is made as a net Debit Spread where CE Long has higher premium value than the CE Short leg\. Further, note that the aforesaid trade position maintains a net premium debit of not more than 20 points per Lot\. Debit Spread has been initiated as objective here is to play mild\-bullish view on the underlying, by Expiry of CE Short leg*\. __<end>__

__Options Behaviour* *in* *Toofani Hedge: Diagonal Put Long Spread Strategy__

- This Strategy is devised to capture the Theta decay of fast approaching current Expiry, in Far OTMs of Current Week Expiry\. Accordingly, in this Strategy, PE Short primary leg being created on Current Week Expiry faces severe Theta impact as the Expiry draws near, while the PE Long hedged leg being initiated on the Next week Expiry, is not much affected on account of Theta\. Further, the Strategy targets to also generate profit from the mild\-bearish movement in the underlying on the PE Long leg by Expiry of the Short leg\. Thus, if the mild\-bearish move as expected sustains and PE Short Strike expires as an OTM on its Expiry, then the Strategy generate profit on Short leg due to Theta impact and also on the Long leg due to Delta impact\.
- In this Strategy, the premium credit collected on PE Short leg is usually slightly lower than the premium debit incurred on the PE Long\. Thus, this Strategy is a net debit Strategy and the amount of net debit incurred \(*i\.e\. aggregate premium credit collected on PE Short leg – total premium debit incurred on PE Long leg*\) could be the potential max loss in this Strategy if the underlying keeps rising \(__Upside Risk Level__\)\. Thus, it is important to ensure that if the trend gets upward, then this Strategy must be exited before premium credit collected on PE Short leg gets exhausted due to the steep up move in the underlying\.
- But if the underlying starts trending with strong bearish momentum \(*against the mild bearish move as originally expected*\), then also this Strategy could yield substantial loss, because the PE Short leg would become deep ITM and its premium would rise significantly, which the profit generated on the PE Long would not be able to absorb, if the underlying has crossed below the Breakeven level of PE Short leg and trend seems to continue in the downtrend\. Thus, it is important to ensure that if the trend gets super bearish, such that the PE Short Strike can be breached by the underlying on closing basis \(__Downward Risk Level__\), then this Strategy must be exited before premium of the PE Short leg becomes too high as the PE Short Strike appears to become an ITM by more than ATM \+ 2 by Expiry of PE Short leg\.
- In order that this Strategy does not cause loss, it is important to keep watch that both the Upside Risk and Downside Risk is protected\.
- When this Strategy is created on the PE side, PE Short would generally have a higher positive Delta on aggregate basis, than the negative Delta on PE Long \(*i\.e\. if underlying starts rising upwards,* *then* *PE Short will generate more profit than loss on PE Long*\)\. Therefore, if immediately upon creation of this Strategy, the underlying starts rising, then owing to __*net positive Delta position*__ __*on this PE side Strategy*__, this Strategy would start showing profit\. But if the underlying starts falling down with mild downtrend, then this Strategy may show some minor virtual loss due to higher positive Delta on PE Shorts \(*which gets set\-off gradually on account of Theta, as Expiry of the Short leg  approaches closer*\)\. Further, if after this Strategy is initiated, there arrives a strong bearish momentum, then this Strategy may pose higher loss \(*especially, if momentum appears to make the PE Short Strike as an ITM or cross\-over below the BE Strike of this Strategy*\), due to net positive Delta on this PE side Strategy\.
- Also, if bearish momentum of limited extent arrives after 2\.30pm on Expiry Day \(of the Short leg\), then PE Long position will get tremendously benefited due to addition of premium, but mild bearish momentum will not much negatively impact the PE Short leg as it is still on Far OTMs of current expiring week\. Far OTMs will not be able to retain any addition of premium due to mild bearish momentum due to extreme Theta impact on Far OTMs on Expiry Day after 2\.30pm\.
- When this Strategy is created on the PE side, a mild bearish move during the holding period or a mild gapdown on Expiry Day opening, yields profit on the PE Long hedged leg; and so long the PE Short leg is still an OTM atleast 3 or 4 Strikes away from ATM on the Expiry Day opening, the PE Short leg too will yield profit due to Theta impact of overnight decay\.
- If the underlying keeps trending upward during the holding period or makes huge gapup on or before Expiry Day, then PE Short leg would generate more profit than loss on PE Long leg due to PE Short leg being on higher Delta on aggregate basis than the Delta on PE Long\. Consequently, to the extent of aggregate premium credit received on the PE Short leg, this Strategy will remain in profit or no\-profit\-no\-loss situation\. Thus, in case the underlying seems to be in an uptrend during the holding period such that almost all the premium credit collected on PE Short leg is almost exhausted \(*i\.e\. premium of PE Short leg is close to becoming zero*\), then this Strategy may be exited with minor profit/loss, as the case may be on or before the Expiry\.
- In case of a big gapdown / strong downtrend during the holding period before Expiry, the PE Short leg being on higher positive Delta than the negative Delta on PE Long leg, the PE Short would generate more loss than the profit generated on PE Long, thereby resulting losses on this Strategy, especially when the underlying breaches the PE Short Strike and sustains and moves even lower and expire as an ITM by more than ATM\+2\. In the event of loss on account of such huge gapdown / downtrend before Expiry, some loss may be attempted to be mitigated by initiating Counter Adjustments\.
- there arrives a strong downward momentum \(*so much so that it appears that it may likely cross\-over below the BE level of the PE Short leg*\), then this Strategy may generate significant loss due to being net positive Delta impact on PE side\. Thus, in such situation it would be prudent to immediately square\-off this Strategy as soon as the price seems to breach and sustain below the major Support level on Expiry Day\. 
- there arrives an upward move, then this Strategy would generate some profit, as it is net positive Delta on PE side, until the aggregate premium credit collected on PE Shorts is exhausted \(*because the PE Short leg becomes even deeper OTM, during upward move*\)\. Therefore, in this situation, as soon as the uptrend seems to be sustaining and the premium collected on PE Short leg is almost about to get exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because, if the uptrend continues after premium credit of PE Short leg is exhausted, then the balance premium debit \(*i\.e\. aggregate premium credit collected on PE Short – premium debit paid in total for the PE Long*\) would start generating max loss on this Strategy\. Further, if the uptrend arrives with momentum or the uptrend arrives around 2\.30pm or thereafter on the Expiry Day, then the Delta value of PE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta negative on the PE side\. And as soon as the net Delta position of this Strategy turns negative, any further upmove would start causing loss in the Strategy\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes negative, if the uptrend seems to sustain and continue during the Expiry Day\.

- there remains a mild bearish trend throughout the Expiry Day, which does not seem to cross over below the major Support level \(below which the PE Short leg was initiated\) and expires near that Support level, then a maximum profit situation emerges, because PE Short leg expires worthless as Far OTM thereby yielding entire aggregate premium credit as profit; and the PE Long leg also generates profit due to continuation of mild bearish trend during the week or before the Expiry\. In this situation after around 1\.30pm on Expiry Day, the Far OTM PE Short leg would lose its LTP to severe Theta decay, by virtue of belonging to the Current Week Expiry \(*inspite of the mild bearish move in the underlying, because mild bearish move will not be able to negatively impact the decay being caused by Theta of Expiry Day*\) and consequently its Delta value would become negligible / zero, thereby resulting this Strategy into a net Delta negative Strategy \(*owing to PE Long leg, whose Delta value remains intact, as it does not get impacted by Theta decay, by virtue of belonging to farther Expiry*\)\.
- the underlying remains rangebound throughout the Expiry Day, then also this Strategy would yield profit as PE Short leg on closer Expiry series would get severely impacted due to Expiry decay, while PE Long leg of farther Expiry series faces much less Theta decay, hence net profitable situation\.

__Toofani Hedge: Diagonal Put Long Spread Strategy__

__\(Positional view: Mild Bearish until Expiry Day\)__

__*Requisite Technical Conditions, for Toofani Hedge: Diagonal Put Long Spread Strategy*:__

- Major trend \(*like on Daily & Weekly TF*\) must be bullish to mild bearish\. If the said major trend is bearish then this Strategy on the PE side must be avoided\.
- Trend appears to be mild bearish on positional basis until the Expiry of the Short leg of the Strategy\.
- Identify major Support level \(*viz\. 20 SMA / Pivot Point / Lower Bollinger Band / previous support trendline on daily / weekly TF*\)\. PE Shorts must be initiated at a Strike below such major Support level on Spot chart\.
- If at the time of initiating this Strategy, the price of the underlying is hovering or closes near some major Support level \(*on hrly or daily TF*\), then the underlying may likely take a gapdown on Expiry day in order to cross\-over below the said Support level\. Therefore, in such situations, the primary leg for PE Shorts must be initiated lower than the next lower major Support level\. Idea here is that the underlying must not cross below the major Support level on Expiry day\.

*Note: Major Support levels are crossed over downwardly, either by way of a sustained gapdown or a bearish supercandle on Daily TF \(i\.e\. a very bearish move in intraday, resulting in a big red supercandle on Daily TF\)\.*

__*Points for initiating* *Toofani Hedge: Diagonal Put Long Spread Strategy*:__

A trader must initiate trade legs of this Strategy, after analysing the \(i\) expected movement in the underlying; \(ii\) current state of VIX and its expected move; \(iii\) availability of Premium Credit for the Short leg; and \(iv\) major Support level\.

When the premium in the Current Week is low or the underlying is close to targeted Support zone, then instead of initiating PE Short leg on Current Week, Next Week can be used \(*as it will offer good premium and large room from risk perspective*\)\. Accordingly, the PE Long leg would be initiated on the subsequent Expiry series \(*i\.e\. Next\-to\-Next Weekly Expiry series*\)\. Also, if the situation requires, then even Short leg can be initiated on Current Month Expiry and Long leg on First Week Expiry series of Next Month \(or even Next Month Expiry series\)\. Logic is that:

4. The Delta value of the Long leg must be around or slightly lower \(*preferably higher*\) than the Delta value of the Short leg\.  Thus, if Short leg is initiated on Current Month Expiry series, and Long leg is targeted to be initiated on the Next Month Expiry \(*in order to avoid Theta impact on the Long leg*\), then the Delta value of such Long Strike \(*keeping in mind the requirement of slightly higher Premium debit than premium credit on Short leg*\) may be too low than that of the CE Short leg\. Thus, in such case, it would be advisable to initiate Long leg on the First Week Expiry series of Next Month \(instead of Next Month Expiry series\)\.
5. Idea here is to maintain a balance between Short leg & Long leg in terms of both premium difference and Delta difference\. Premium difference between Short & Long leg must not be greater than 20 points and so long the premium difference is optimal then the Strategy may be initiated either as net credit or a debit Spread \(*but preferably a debit Spread*\)\. Likewise, Delta difference between the Short & Long leg must not be much on single Lot basis, wherein Long leg may be on lower Delta than Short leg \(*but preferably if Long leg can be on same or higher Delta than Short leg, without disturbing the net premium difference between the Short & Long leg*\)\. 

Having said above, it does not really matter much if the Strategy is initiated as Net premium Debit or Net Premium Credit Strategy, so long the net premium difference between the Short and Long leg is not more than 10\-20 point and the Delta difference is also not much at inception between the Short and Long leg\. __However, since, virtual loss situation is relatively better controlled in a Net Debit Spread Strategy \(*with less premium credit on Short leg and higher premium debit incurred on Long leg*\) in case the underlying remains mildly bearish as expected, therefore, this Strategy must be targeted to be deployed preferably as a Net Debit Spread\.__

__*Other Points for initiating* *Toofani Hedge: Diagonal Put Long Spread Strategy*__:

- When VIX is hovering below 15, then atleast 400\-600 points away Far OTM PE Short must be ensured in case of Nifty or FinNifty from the Spot; and atleast 800\-1000 points away Far OTM PE Short Strike in case of BankNifty from Spot\.  However, when VIX is between 16 to 20 level, then it would be advisable to consider atleast 700\-800 point away OTM PE Strike \(from Spot\) for Short leg in case of Nifty & FinNifty; and atleast 1200\-1400 points away Far OTM PE Short Strike in case of BankNifty from Spot\. In order to maintain aforesaid Strike distance, considering the level of VIX, farther Expiry series \(*viz Next Week or Next\-to\-Next Week or even Current Month Expiry*\) may be considered for the Short leg; and accordingly, immediately subsequent Week Expiry series may be considered for the Long leg\.

__Significance of Strike / Delta values in Toofani Hedge: Diagonal Put Long Spread Strategy__

__*Strike Selection in Toofani Hedge: Diagonal Put Long Spread Strategy*__:

- One must be careful to not select a Strike for initiating PE Short leg of the Strategy, which is closer to ATM \(or which can likely become an ITM on Expiry\), even if lucrative Premiums are available in near OTM PEs\.
- Always target PE Short leg Strike selection which is much lower than any major Support level \(*which gives a comfort that the underlying would not breach that Support level by Expiry of the PE Short leg*\), thereby, ensuring that the PE Short leg would expire worthless as OTM\.
- In BankNifty Current Week Options, atleast 65 to 75 premium value per Lot, is decent, for initiating PE Short leg\. In Nifty Current Week Options, 25 to 35 premium value per Lot, is decent, for initiating PE Short leg\. However, it must strived for to collect atleast more than 100 premium credit per Lot on BankNifty \(even if a farther Expiry series has to be selected for the same\)\.
- It need to be ensured for the PE Long leg that its premium value is not too high from the premium credit collected on PE Short leg\. A net premium debit of not more than 10\-20 Rs per Lot must be ensured for creating this Strategy on Nifty or FinNifty Options and not more than 20\-30 Rs per Lot for BankNifty Options\.

__*Delta fluctuations in Toofani Hedge: Diagonal Put Long Spread Strategy*:__

- Since, in this Strategy  the PE Shorts are at a higher Delta than Long PE, the effective Delta on the overall Strategy would be positive, which implies that if soon after initiating this Strategy, the underlying would trend on the downside, then the Strategy would exhibit virtual loss and if the underlying moves in uptrend then the Strategy would exhibit profit\.
- If after initiating the Strategy, the underlying moves in an uptrend with momentum, then so long the effective Delta position is positive on the Strategy, upward move in the underlying would generate profit on the Strategy\. But once, the steep upward move in the underlying causes quick and substantial loss of the premium value of the PE Short leg, then the positive Delta position on the overall Strategy turns net negative Delta Strategy *\(as the Delta value of PE Short leg gets negligible and PE Long legs’ Delta value turns the overall Strategy into net Delta negative PE side Strategy\)*\. As soon as this PE side Strategy turns net Delta negative, then any further upward move in the underlying would start causing loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the upward move further continues \(Upward Risk\)\.
- However, after the overnight decay, the net positive Delta position on the overall Strategy would reduce\. Thus, after overnight decay i\.e\. on the Expiry Day \(of the PE Short leg\)  if the underlying moves in downtrend then the effective virtual loss would be relatively lesser\.
- But if the downtrend occurs with strong momentum, anytime during the holding period or even on the Expiry day of PE Short leg  i\.e\. before considerable decay on the Far OTM PE Short leg premium has occurred, the overall Strategy would exhibit strong virtual loss due to overall positive Delta impact on the Strategy\. As soon as the PE Short leg Strike appears likely to become an ITM, then any further downward move in the underlying would start exhibiting heavy loss on the overall Strategy\.  This situation should put the Strategy on alert for Stop Loss/ Counter Adjustments if the downward move further continues \(Downward Risk\)\.
- However, if the downtrend arrives on Expiry day of the PE Short leg, after considerable decay to the premium on the PE Short leg \(*i\.e\. when the premium is almost about to become zero, and is hovering around 3 or 4 Rs\. per Lot*\) then the effective Delta on the overall Strategy would turn negative, and in such situation any downmove in the underlying would exhibit higher profits on the Strategy\.

__Target and Stop Loss in Toofani Hedge: Diagonal Put Long Spread Strategy__

__*Target in Toofani Hedge: Diagonal Put Long Spread Strategy*:__

There can be following situations basis which the targets on this Strategy that may be aimed for, as part of the trade plan, on this Toofani Hedge: Diagonal Put Long Spread Strategy:

1. Target on opening of the Expiry Day: If the underlying has been mildly bearish during the holding period and upon opening of the market on the Expiry day \(of the PE Short leg\) trading session,  if the underlying opens almost near  the close of the previous day or takes a gap\-down but opens at a reasonable distance above the major Support level \(such that the PE Short Strike is about 2 to 4 PE OTM Strikes from ATM on opening\), then this Strategy would generate a decent profit\. In such event it is likely that both PE Long leg \(*due to gap down*\) and PE Short leg \(*due to overnight decay*\) would generate profit upon such opening on the Expiry Day\. A trader can book such a profit, upon opening on the Expiry Day\.
2. Target towards the end of the the Expiry Day: This trade can also be continued from the start of the current week till the end of the Expiry Day of the PE Short leg\. In such event the maximum reward would be generated if the PE Short leg closes as an ATM or very near OTM \(ATM – 1 or so\) on Expiry as PE Long would generate profit due to mild bearish move in  the underlying and PE Short leg would generate profit as would expire worthless as ATM or OTM\. However, if the underlying remains in a strong upward trend during the holding period or on Expiry Day of the PE Short leg, then the target should be to exit the trade as soon as the premium on the PE Short leg is almost close to becoming zero due to the continuous uptrend on Expiry Day \(*i\.e\. when the net Delta position in the Strategy turns negative*\)\. It must be borne in mind that this trade should not be further continued after premium on the PE Short leg is close to turning zero \(*i\.e\. when the net Delta position in the Strategy turns negative*\), as PE Long leg would then cause such loss due to uptrend which may eat up the profits generated on the PE Short leg due to intraday uptrend of the Expiry Day\. Further, if 

- After the PE Short leg premium is close to becoming zero due to strong uptrend, during the holding period, and thereafter the underlying takes a reversal towards the downtrend during the current week itself anytime before Expiry, then arrival of downtrend momentum during the holding period may again turn the trade towards targeting the  profit from a mild bearish move in the underlying as was originally expected\. Thus, if the trend changes towards mild bearish during the holding period itself, then one can explore two options: \(i\) the same trade may be held till Expiry to benefit from the trend reversal on the downside; and \(ii\) the strong upward move in the underlying during the holding period would make the PE Long leg a very Far OTM Strike on farther  Expiry series, therefore trend reversal on the mild bearish side may not make much premium addition on the PE Long leg\. Thus, in such a situation it may be prudent to exit from the current trade and to wait for the bearish momentum to continue upto a particular Support level, and then a fresh trade for the closer Expiry series may be re\-initiated, thereby increasing the possibility of generating relatively more profit than to continue the same old trade originally created; or
- after the PE Short leg premium is close to becoming zero due to strong uptrend, during the Expiry day \(of the PE Short leg\), and thereafter the underlying takes a reversal towards the downtrend after 2pm or so on the Expiry day itself, then it may be advisable to hold the trade, as the arrival of downtrend momentum during the Expiry Day after a strong downtrend until 2pm,may not add much premium on the PE Short leg \(*due to Expiry Day Theta impact*\) but the premium would get added on the PE Long leg \(*as it is on farther Expiry series*\), thereby, generating relatively more profit by the close of the Expiry Day \(so long the downtrend does not breach the PE Short leg Strike\)\.

__*Stop Loss & Risk Management, in Toofani Hedge: Diagonal Put Long Spread Strategy*:__

1. Stop Loss in case of Downside Risk:  In case of Downside Risk, if the underlying is expected to close on the Expiry Day on the downside, such that the PE Short leg on Expiry may end up beyond 2nd Strike level ITM \(i\.e\. ATM\+2 PE Strike\) or even deeper ITM PE, then it may be advisable to take stop loss when the PE Short leg becomes an ATM and sustains at that level and seems likely to end up being an ITM\. However, if the downtrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by PE Short leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM CEs of same Expiry series as that of the PE Short leg; or \(ii\) initiating Counter Adjustments through Long PEs on not\-so\-deep\-OTMs \(upto ATM\-2 PEs\) of same Expiry series as that of the PE Short leg or subsequent Expiry series\. But if there is another strong Support level just below the PE Short leg Strike then \(a\)ither, a chance may be taken for reversal of the underlying on the upside so as to check if the PE Short leg may not remain an ITM deeper than one Strike Level from ATM by close of Expiry; or \(b\) Counter Adjustments by Shorting additional slightly Far OTM PEs of same Expiry series \(as that of the original PE Short leg\) may be initiated\.
2. Stop Loss in case of Upside Risk:  In case of Upside Risk, if the underlying is expected to close on the Expiry Day on the upside after a huge gapup or strong uptrend during the holding period, such that the PE Short leg during the holding period has already lost almost all its premium immediately due to the gapup / steep uptrend, and the underlying is expected to rise even beyond during the remainder of the  holding period \(i\.e\. until Expiry Day of the PE Short leg\), then it may be advisable to immediately exit from this trade at minor profit / loss, as PE Long leg would then cause further loss due to continued uptrend during the Expiry Day \(*due to net Delta positive situation on the Strategy turning to net negative Delta*\)\. However, if the uptrend is expected to sustain and even become strong then any loss incurred on the Strategy \(*due to loss caused by PE Long leg*\) may be attempted to be recovered, by \(i\) either, initiating Counter Adjustments by Shorting ATM PEs of same Expiry series \(*as that of the original PE Short leg*\); or \(ii\) initiating Counter Adjustments through Long CEs on not\-so\-deep\-OTMs \(upto ATM\+2 CEs\) of same Expiry series as that of the original PE Short leg \(or even subsequent Expiry series\) may be initiated\.
3. Volatility Spike: If after the trade is initiated and immediately thereafter there is sudden volatility spike, then the premium on the PE Short leg would start increasing more than the premium on PE Long leg \(*as this Strategy is net Vega negative at inception*\)\. Therefore, if there seems to be an uncontrolled volatility spike, then it may be advisable to immediately exit the Strategy at minor loss / profit and re\-initiate the Strategy when the volatility spike has stopped\. Volatility crash would be suitable for the Strategy not volatility spike\. However, if the volatility spike does not seem to be too high, and the underlying appears to not breach the major Support level by Expiry of the PE Short leg, then temporary volatility spike should not pose any threat to this Strategy\.

__Adjustments in Toofani Hedge: Diagonal Put Long Spread Strategy__

__*Adjustments in Toofani Hedge: Diagonal Put Long Spread Strategy \(if trade does not go as per plan\)*__:

Adjustments for Downside Risk, in Toofani Hedge: Diagonal Put Long Spread Strategy: If the trend becomes super bearish and the major Support level is likely to be breached by the underlying during the holding period i\.e\. any time before Expiry of the PE Short leg on closing basis, then the Strategy may yield loss\. This Downside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM CEs, of current same Expiry series as that of the PE Short leg, in double the quantity than the PE Short leg\. If, however sufficient premium value is not available in the same Expiry CEs \(ATM or OTM\), then even subsequent Expiry series Far OTM CEs may be considered above some major Resistance level \(as applicable for  relevant Expiry series, basis selection of CEs\)\. The additional premium credit received on shorting these CEs would help absorb some loss on the PE Short leg due to strong bearish momentum making the PE Short Strike an ITM\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.
- If there seems to be a strong downtrend, then additional near __OTM PEs can be bought \(Long PE\) of same Expiry series as that of original Long PEs__, besides Long PE already on the hedged leg\. The additional PEs can be ATM or near OTMs, with such quantities such that the Delta value of all Long PEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of PE Short position, so as to generate profit on this Strategy on account of super bearish momentum\. All Long PEs on this Strategy, with higher Delta value on aggregate basis than the PE Short leg, should generate more profit and help cover losses in the PE Short primary leg\. However, buying additional PEs will add additional debit positions, therefore, this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. Further, these Long PEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on PE Long unless bearish momentum is super strong and swift \(i\.e\. when strong momentum can outrun the negative impact of volatility crash\)\.
- Instead of: Shorting naked CEs and incurring risk if underlying again reverses on the bullish side or initiating Long naked PEs and running a risk of cessation of downward momentum, as explained above to counter adjust PE side Downside Risk, one can also mitigate the Downside Risk by initiating fresh Bear PE Debit Spread in subsequent Expiry series \(*i\.e\. Long Far OTM PE and Short even farther OTM PE Strike of same Expiry series*\)\. This Bear PE Debit Spread may be initiated on double the quantity than the original quantity on this diagonal Spread Strategy\.

Adjustments for Upside Risk, in Toofani Hedge: Diagonal Put Long Spread Strategy: If the underlying is likely to get in strong uptrend even after the premium on PE Short leg is close to zero due to upward momentum, then the Strategy may yield loss, as the Long PE leg would generate further loss to the maximum extent of net premium debit position on the Strategy\. This Upside Risk situation  may be handled by considering following adjustments to the Strategy:

- Counter Adjustment method can be implemented by shorting \(selling\) ATM PEs, of current Expiry series, in such quantity so as to receive sufficient premium credit on these additional PE Shorts in order to absorb the net premium debit on the Strategy\. The additional premium credit received on these Short PEs would help absorb the loss caused by the PE Long leg to the extent of net premium debit on the original Strategy\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.
- If there seems to be a strong uptrend, then near __OTM CEs can be bought \(Long CE\) of subsequent Expiry series__\. These Long CEs can be ATM or near OTMs, with reasonable quantities which should generate profit due to strong uptrend sufficient to absorb the max loss situation on the original Strategy\. Idea here should be that the Delta value of all Long CEs on aggregate basis should be higher than the aggregate Delta value  on PE Long position, so as to generate profit on this Strategy on account of super bullish momentum\. All Long CEs on this Strategy, with higher Delta value on aggregate basis than the PE Long leg, should generate more profit and help cover max loss situation on the original Strategy\. However, buying additional CEs will add additional debit positions, therefore, this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. Further, these Long CEs should only be initiated if volatility is not in a falling state, as volatility crash may adversely impact profitability on CE Long unless bullish momentum is super strong and swift\.

__Impact of Different Market Situations on Toofani Hedge: Diagonal Put Long Spread Strategy__

__If trade goes as per plan, in Toofani Hedge: Diagonal Put Long Spread Strategy__:

If there occurs a mild downtrend / gapdown during the holding period or even if the mild downtrend continues in intraday during the Expiry Day of the PE Short leg, but the underlying does not seem to breach the PE Short leg Strike on the downside by its Expiry, then the  Strategy may be continued for the relevant target\.

__If underlying becomes sideways, in Toofani Hedge: Diagonal Put Long Spread Strategy__: If the trend gets rangebound until Expiry then the Strategy may be held until the premium on the PE Short leg is almost close to zero\. However, if volatility anytime during the holding period until Expiry of the PE Short leg, is crashing down, then the Strategy should be attempted to be exited as soon as the premium on PE Short leg is close to zero\. There may not be any point to hold the Strategy any longer after premium on PE Short leg is almost exhausted, because volatility crash would also cause depletion of premium on the PE Long leg, thus adversely affecting the net profit situation on this Strategy\.

__If trade does not go as per plan, in Toofani Hedge: Diagonal Put Long Spread Strategy__: If it appears that there may  occur: 

1. a Downside Risk situation \(*i\.e\. the underlying is likely to breach and sustain the major Support level basis which PE Short leg was initiated*\) any time during the holding period even just before Expiry of the PE Short leg; or 
2. an Upside Risk situation \(*i\.e\. the underlying is likely to get in strong uptrend even after the premium on PE Short leg is close to zero due to upward momentum*\) any time during the holding period even just before Expiry of the PE Short leg,

__Merits & Demerits of Toofani Hedge: Diagonal Put Long Spread Strategy__

__*Benefits of Toofani Hedge: Diagonal Put Long Spread Strategy*:__

- Theta decay \(*between start of the Strategy until Expiry of the Short leg*\) in Far OTMs is a sure thing due to Options behaviour\. Thus, playing this Strategy to harness profit from Expiry decay makes it a high probability Strategy, except unless huge gapdown / strong downtrend makes the Far OTM PE Short Strike an ITM on or before Expiry \(*thereby ruining the Theta decay impact by a huge Delta move due to big gapdown or strong downtrend*\)\. Having said this, huge gapdowns / strong downtrend of such magnitude that it can convert such a Far OTM PE into a deep ITM is a seldom event \(i\.e\. about once or twice in 6 times\)\. Moreover, in this Strategy, PE Short leg is properly hedged with PE Long leg of Next Week Expiry \(*which has Delta value not much less than the aggregate Delta value of PE Short leg at inception; but has much less Theta impact as compared to the PE Short leg*\)\. Thus, this Strategy offers a good winning probability\.
- This Strategy gives a decent range between the Downside Risk and the Upside Risk \(*as explained above*\), for the movement of the underlying, in order to generate profit on this Strategy, within a span of the holding period\.  
- Not only when the market opens mild bearish on Expiry Day, but also when market opens at the same level where it closed on the previous day to expiry, this Strategy would yield profit on opening of Expiry Day \(*as PE Short leg on closer Expiry series  would get severely impacted due to Overnight Expiry decay, while PE Long leg on farther Expiry faces much less Theta decay, hence net profitable situation*\)\.
- Further, if the underlying appears to be rangebound during the holding period until Expiry or is expected to remain mildly bearish \(without breaching the major Support\), then this Strategy may also be held until complete Expiry to reap full benefit of Theta decay of Expiry on PE Short leg\.
- In case there occurs a huge gapdown or strong bearish move during the week before Expiry, which causes Far OTM PE Shorts to become deep ITM and thereby causing loss in the Strategy, then certain risk mitigating Counter Adjustments can be initiated in order to cut down the loss on this Strategy\.
- If there is Volatility crash during the current week before Expiry, then this Strategy may yield profit, as it is a net negative Vega strategy \(*as explained above*\)\.

__*Demerits of Toofani Hedge: Diagonal Put Long Spread Strategy*__:

- This Strategy has both Downside Risk as well as Upside Risk\. While, this Strategy offers a decent range for the movement of the underlying, between the two aforesaid risk levels, during the current week movement in the underlying until Expiry of PE Short leg\. However, there may occur  huge volatility with big swings on either side during the holding period and especially during the Expiry Day \(of Short leg\)\. Thus, a watchful eye on the trade is a must, with clarity on the stop loss area\. Therefore, to play this Strategy safely, it is best deploy it to reap benefit from the overnight Expiry decay \(*i\.e to book profits on Expiry Day opening itself*\) and avoid holding for full Expiry Day unless there is conviction about the trend for the Expiry day on technical basis\.
- If a strong downward momentum arrives after initiating this Strategy anytime during the  holding period, then the positions on both the legs may have to be exited \(*as it is usually a net positive Delta Strategy on the PE side, at inception*\); and this Strategy may be re\-initiated after the bearish momentum ceases at suitable next lower, major Support level\.
- In case of huge gapdown / strong uptrend during the holding period until the Expiry Day \(of Short leg\), PE Short leg may end up being a deep ITM, and the higher positive Delta  on PE Short leg may generate much higher loss than the profit generated on PE Long\. A huge Delta move, due to a big gapdown / strong downtrend, can ruin the expected Theta impact on PE Shorts, and may instead cause a big loss on the Strategy \(*which is a net positive Delta Strategy on the PE side*\)\. While, the loss generated on this Strategy on account of a big gapdown / strong downtrend, may be attempted to be mitigated though Counter Adjustments \(*i\.e\. by way of selling Far OTM CEs on Expiry Day*\), but practically sometimes it may get little complicated\.
- Generally, when VIX is below 15, it may become difficult to find good premium for the PE Short leg at reasonably Far OTM \(below major Support level\) and consequently the overall target profit on the Strategy might substantially reduce\. Further, initiating PE Shorts above major Support or near to ATM may be very risky and must be avoided\. Thus, this risk must be avoided by initiating the trades only when the conditions already discussed above are satisfied \(*if need be, by moving on to farther Expiry series for the Short leg*\)\.
- This Strategy is essentially a PE Debit Spread \(*but implemented like a Diagonal Spread*\), involving higher premium debit on PE Long than the premium credit collected on the PE Short leg, thereby making this Strategy a net premium debit Strategy\.
- In this Strategy, premium credit collected on the PE Short leg on aggregate basis is usually slightly lower than the premium debit incurred on the PE Long leg\. Therefore, if there arrives a big upmove/ gapup, the loss that this Strategy would be able to absorb will be to the extent of premium credit collected on PE Short leg\. But if the uptrend continues, after the premium credit gets exhausted, then the net premium debit on the Strategy \(*i\.e extra premium paid on* *PE Long* *than premium credit collected on PE Short leg*\) will cause the maximum loss on this Strategy \(*explained below*\)\. Therefore, when it appears that the uptrend is going to continue and the premium credit is almost getting exhausted then Counter Adjustments \(*as explained below*\) must be initiated to mitigate the max loss situation\.
- Implementation of this Strategy on PE side is more riskier than on the CE side, because, in case of severe gapdown / downtrend, the VIX usually rises significantly and the pace with which PE rises is mostly much steeper than the rise of CE in an uptrend\. Therefore, since this Strategy is a net Vega and net positive Delta Strategy, any steep downmove / gapdown may cause this Strategy on the PE side to generate big loss \(than usually observed if the CE side Strategy gets hit with a huge gapup/ upmove\)\. Thus, PE side must be implemented, during broadly bullish trends on Daily TF, so as to avoid getting impacted with unlimited Downside Risk in an overall bearish market\.

__Breakeven Strike \(BE\) in Toofani Hedge: Diagonal Put Long Spread Strategy, its Calculation and Payoff Chart__

__*Breakeven Strike \(BE\) in Toofani Hedge: Diagonal Put Long Spread Strategy, from Expiry perspective*: __

As mentioned, that this Strategy has both Downside Risk Level and Upside Risk Level\. 

__*BE for Downside Risk, in Toofani Hedge: Diagonal Put Long Spread Strategy:*__

<__start__> From Expiry perspective, the BE Strike for protection from the Downside Risk on this Strategy will be: __\[PE Short Strike \- Premium collected per Lot\]__\. <__end__>

<__start__>  To illustrate, we can look at the given Example, in which PE Short Strike is 32500 and the Premium collected per Lot on Short leg is 70\. Thus, BE will be: 32500 \- 70= 32430\.

Now, if BankNifty slides down and slightly breaches the BE Strike level of 32430 on closing basis on Expiry Day, by say 50 or 100 points, then on Expiry 32500 PE Short Strike would become a near ITM\. Thus, if PE Short leg becomes a near ITM \(upto 100 or 150 points\) on Expiry, after breaching the BE on the downside, then on close of Expiry session the PE Short Strike’s Premium would be equivalent to its Intrinsic Value \(*which means that upon Expiry: difference between ITM PE Strike level and the ATM, will be the Intrinsic Value or Final Premium Value of the PE Short leg*\)\. Consequently, the difference between the __Final__ __Premium Value of the PE Short leg \(per Lot\) on Expiry – Premium credit of 70 \(per Lot\) collected at the time of initiating the Strategy__, will be the per Lot basis loss on the PE Short leg \(__Loss__ __on PE Short Leg__\)\. But at the same time, because the underlying has fallen much lower, the PE Long leg of the Strategy would have also generated some profit \(__Profit on PE Long Leg__\) which will to some extent set\-off the loss caused on PE Short leg by virtue of it becoming an ITM on Expiry\.

But if as a result of huge gapdown or strong bearish momentum, the PE Short leg becomes a deep ITM, then basis the above calculations, the Downside Risk may be significantly higher \(*especially on heavy volume*\)\. Thus, it is advisable that in order to avoid the Downside Risk, the Strategy must be carefully watched for appearance of any strong bearish momentum; and if such momentum seems to arrive anytime during the holding period  or anytime before Expiry, then this Strategy must be either immediately exited or Counter Adjustments \(*as explained below*\) must be initiated\. <__end__>

__*BE for Upside Risk, in Toofani Hedge: Diagonal Put Long Spread Strategy:*__

<__start__> If a strong upside move arrives, which seems to be sustaining \(with little chance of reversal on the downside\), and the premium collected on PE Short leg gets almost exhausted \(i\.e\. their LTP going down below 4 or so\), then this Strategy must be squared\-off with minor profit/loss, as the case may be\. Because if the uptrend continues after premium credit of PE Short leg is exhausted, then the balance premium debit on this Strategy \(*i\.e\. aggregate premium credit collected on PE Short – premium debit paid in total for the PE Long*\) would start generating max loss on this Strategy i\.e\. the Upside Risk would get triggered after exhaustion of the premium credit of the PE Short leg\. Thus, net Premium Debit on per Lot basis is the BE for the Upside Risk for the Upside Risk on the Short leg i\.e\. 

__BE for Upside Risk: PE Short Strike \+ Net Premium Debit on the Strategy__\. <__end__>

<__start__> To illustrate, we can look at the given Example, in which premium collected on PE Short Strike of 32500 is 70 per Lot and the Premium paid on PE Long leg of 32000 is 90 per Lot\. Therefore, the net Premium Debit will be: 90\-70 = 20 per Lot basis\. Thus, if the Premium of the PE Long leg gets reduced to around 70 per Lot, due to the uptrend, then this Strategy must be exited so as to avoid losing the balance 20 per Lot left on PE Long leg, if the uptrend is expected to sustain and continue\. Thus, the BE for the Upside Risk shall be the net Premium Debit of Rs\. 20 per Lot on the Strategy\.

Further, if the upmove arrives with momentum anytime during the holding period or the uptrend arrives around 2\.30pm or thereafter on the Expiry Day, then the Delta value of PE Short leg would soon become negligible, and the net Delta position of this Strategy would then become net Delta negative on the PE side\. And as soon as the net Delta position of this Strategy turns negative, any further upmove would start causing loss in the Strategy on account of the Upside Risk\. Therefore, the net Delta position on this Strategy must be checked and this Strategy must be exited before \(or as soon as\) the net Delta position on this Strategy becomes negative, if the uptrend seems to sustain and continue during the holding period or on the Expiry Day\.

*Note: It is pertinent to note that on Expiry Day, as soon as Far OTM PE Options reduces significantly in their premium value resulting in its LTP of 3 or so, either due to fast uptrend \(LTP of PE option gets reduced when underlying rises\) or due to severe Theta decay impact of Expiry Day, then its Delta value becomes zero or negligible \(and therefore does not count\)\.*

Thus, for the Upside Risk, BE level shall be: As soon as the premium credit collected on the PE Short Leg is about to get exhausted due to upward move of the underlying; and the upward move seems to sustain and may even continue, then this Strategy must be exited or relevant Adjustments to mitigate loss on the Strategy, on account of Upside Risk, may be initiated\. <__end__>

__Payoff for Toofani Hedge: Diagonal Put Long Spread Strategy__

__<img69>__

__<end>__

__<end>__

__Profit & Loss in Toofani Hedge: Diagonal Put Long Spread Strategy, and its Calculations__

__*Loss scenario in Toofani Hedge: Diagonal Put Long Spread Strategy,  from Expiry perspective*:__

This Strategy has both Downside Risk \(*if the downward BE Strike is breached by the underlying by Expiry*\) and Upside Risk \(*if the upward BE Strike is breached by the underlying by Expiry*\), as already discussed\.

- Due to the Upside Risk, Max Loss shall be: Net Premium debit on the Strategy i\.e\. __\[aggregate Premium credit collected on PE Short – total Premium debit paid for the PE Long\]__\. <__end__>

__*Profit scenario in Toofani Hedge: Diagonal Put Long Spread Strategy, from Expiry perspective*__:

There is no fixed reward situation on this Strategy, as it will depend if the underlying during the holding period remains in a range or takes a mild\-bearish move \(and sometimes even in the instance of mild\-bullish move in the underlying\)\. The profit may be generated in this Strategy in the following situations:

- If the underlying closes within a range during the holding period, then this Strategy should generate profit, as the PE Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the PE Short leg; and the PE Long leg even if loses its premium value by Expiry of the PE Short leg then also its loss would not be higher than the profit incurred on the PE Short leg\.
- If the underlying closes lower but does not breach the PE Short Strike on the downside, then also this Strategy should generate profit, as the PE Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the PE Short leg; and the PE Long leg would also generate some profit due to mild\-bearish movement in the underlying\. This situation is called the neckline expiry and generates the max profit on the Strategy\. 

However, in such situation also, sometimes the PE Long leg may also generate loss if the mild bearish move was after much up & down movement or after very slow progression causing erosion in the premium value of the PE Long leg\. Then in such situation also the loss incurred on the PE Long would be lesser than the total profit generated on the PE Short leg\)\.

- If the underlying gets slightly bullish by Expiry of the PE Short leg \(*as against the original mild\-bearish move*\), then also this Strategy may generate profit, as the PE Short leg would expire worthless as OTM and generate profit to the maximum extent of the premium credit collected on the PE Short leg; and the PE Long leg may lose its premium value but its loss would not be higher than the profit accrued on the PE Short leg\.

__<end>__

__Toofani Hedge: Diagonal Put Long Spread Strategy: Its Trade Legs & Objective__

__*Trade legs in Toofani Hedge: Diagonal Put Long Spread Strategy*__:

- Short Far OTM PEs of Current Week Expiry \(*primary leg*\)
- Long Far OTM PEs of Next Week Expiry \(*hedged leg*\) having premium value slightly higher than the premium credit collected on the Short leg \(*premium debit on Long leg should not exceed by more than 10\-30 points than the premium on the PE Short primary leg*\)\.

The quantities in the primary and the hedged leg shall be same\. However, since PE Long leg has more premium debit than the PE Short leg, therefore, it is a net debit Strategy*\.*

Further, the PEs on the primary and the hedged leg  are of different Expiry series \(*i\.e\. Short position must pertain to closer Expiry and Long position must pertain to farther Expiry*\), but both must be Options of the same underlying\. Thus, it is a Diagonal Spread, as the Expiry series of Short & Long leg not only different, but are also on different Strikes\.

__*Objective in Toofani Hedge: Diagonal Put Long Spread Strategy*__:

Objective is to profit on the PE Short leg from the fast and strong decay caused due to Theta impact on Far OTMs closer Expiry series, due to approaching Expiry of the Short leg initiated on closer Expiry series\.

Further, this trade is targeted to be held positionally until the Expiry Day of the Short leg, so as to reap profit on the Short leg from the Theta impact of Expiry\. However, since PE Long position is initiated on farther Expiry series, therefore, there is very low Theta impact on its premium \(thus, less decay\) as compared to the Theta impact on closer Expiry series\. Thus, the Strategy intends to yield profit  from the variance in the Theta impact on Short leg and Long leg\. 

Besides, the Theta impact factor in this Strategy as aforesaid, this Strategy \(*as a Net Premium Debit Strategy*\) also expects that the PE Long leg will generate profit benefitting from the mild bearish move in the underlying until the Expiry of the PE Short leg\. Accordingly, if the underlying remains in mild downtrend during the holding period \(i\.e, before the Expiry day of the Short leg\), then the PE Long on the hedged leg also generates some profit until the Expiry Day of the Short leg, due to favourable Delta move in PE Long on the bearish side\. 

1. If the underlying moves as expected with a mild\-bearish trend until the Expiry of the Short leg and does not breach the Short Strike level by its Expiry, then to yield profit on the Short leg to the extent of total Premium Credit collected on the Short leg due to Theta impact \(*as short leg expires as OTM*\)\. Besides, the said mild\-bearish move in the underlying also generates profit on the PE Long leg\. Thus, both legs generate profit in this situation\.
2. If the underlying remains within a range until the Expiry of the Short leg and keeps fluctuating within the range during the holding period, then there will be premium erosion in both PE Short leg and PE Long leg\. However, due to higher Theta on Short leg \(*by virtue of it being on a closer Expiry series than the Long leg*\), Short leg will generate more profit than the loss incurred on Long leg \(*due to premium erosion caused by expansion and erosion in the Time Value due to up & down rangebound movement in the underlying*\)\. Thus, the Strategy would still generate some profit in this situation\.
3. Also, if the underlying become extremely bullish until the Expiry of the Short leg, then the max loss can occur to the extent of the premium debit incurred on the Strategy\. Thus, this Strategy has limited upside risk\.

However, there is unlimited potential risk on the downside \(*i\.e\. if underlying gets super bearish*\); thus, the trade legs of this Strategy are initiated at much lower level than the major Support level, so as to lower the potential downside risk\.

__<start> *Example of Toofani Hedge: Diagonal Put Long Spread Strategy*: __

- *Sell BankNifty 32500 Far OTM PE \(Current Week\) at Rs\. 70 \(primary leg\); and*
- *Buy BankNifty 32000 Far OTM PE \(Next Week\) at a premium of Rs\. 90 \(hedged leg\)*

*Note that PE Short leg is lower than the Daily TF Support of 32,800 and nearly 800 points away from the Spot\.*

*This is made as a net Debit Spread where PE Long has higher premium value than the PE Short leg\. Further, note that the aforesaid trade position maintains a net premium debit of not more than 20 points per Lot\. Debit Spread has been initiated as objective here is to play mild\-bearish view on the underlying, by Expiry of PE Short leg\.* __<end>__

__A–19 STRATEGY:* *A Long Calendar Spread \- A General Introduction__

__\(*A Long Calendar Spread: For Positional Trade*\)__

__This Strategy is relatively high probability trade design, than a conventional Calendar Spread Strategy__\.

This A\-19 Strategy has been designed as a Long Calendar Spread \(comprising of ATM Short leg on closer Expiry series than the ATM Long leg\) and is to be played as a positional trade for a rangebound market \(*i\.e\. when the underlying is expected to remain with a defined range, and is not trending in either direction*\)\. 

This Strategy has been designed to get benefitted from erosion in the Time Value of Short Options, due to up & down movement in the underlying within the defined range\. This Strategy is most suitable when VIX is hovering in a higher level like 18 or 20 \(or more\), as high Premium credit can be received for the Options Short leg\. Further, this Strategy also generates high & quick profit, if VIX is in a falling state, because in due to volatility crash the Short Options position suffers speedy erosion in their Time Value irrespective of intermittent movement in the underlying\.

Further, this Strategy is played with Short Options and Long Options position\. The idea behind this hedge design is that due to rangebound movement in the underlying or due to volatility crash, the Short options positions would generate more & quick profit than loss \(or sometimes minor profit\) on the Long Options leg\. Keeping the aforesaid factors in mind, it is important that this Strategy is initiated when the underlying is somewhere in between the defined range and not at Resistance or Support levels\.

Accordingly, when the view on the underlying is sideways\-to\-mild bullish, we can play the limited uptrend / rangebound movement in the underlying through this A\-19 Strategy on the CE side: Shorting ATM Call Options \(the __primary __ __leg__\) of a closer Expiry Series \(eg: Current Week Expiry or Next  Week Expiry\)\. Further, this primary leg is hedged with a Long ATM CE Options position \(the __hedged leg__\) of a farther Expiry Series \(eg: Current Month Expiry or Next Month Expiry\)\. Further, the primary leg and the hedged leg have the same number of Lots \(*i\.e\. the quantity is in the ratio of 1:1 in terms of Lots/ quantity*\), on the same underlying but on different Expiry series and at ATM Strike\. Thus, this Strategy is a __Call Calendar \(Long\) Spread Strategy__\. It is an example of Horizontal Spread\.

Likewise, when the view on the underlying is sideways\-to\-mild bearish, we can play the limited downtrend / rangebound movement in the underlying through this A\-19 Strategy on the PE side: Shorting ATM Put Options \(the __primary __ __leg__\) of a closer Expiry Series \(eg: Current Week Expiry or Next  Week Expiry\)\. Further, this primary leg is hedged with a Long ATM PE Options position \(the __hedged leg__\) of a farther Expiry Series \(eg: Current Month Expiry or Next Month Expiry\)\. Further, the primary leg and the hedged leg have the same number of Lots \(*i\.e\. the quantity is in the ratio of 1:1 in terms of Lots/ quantity*\), on the same underlying but on different Expiry series and at ATM Strike\. Thus, this Strategy is a __Put__ __Calendar \(Long\) Spread Strategy__\. It is an example of Horizontal Spread\.

In this A\-19 Calendar Spread, Long ATM Options of farther Expiry has more premium than the Short ATM Options of near Expiry, therefore making this Strategy a net Premium Debit Strategy\. It must however be ensured for this Strategy that the premium credit received on the Short leg is atleast 60% of the premium paid on the Long leg\.

This Strategy when initiated on BankNifty Options, is likely to yield better returns than when initiated on Nifty Options, because BankNifty is more volatile Index and therefore its Options have high IV \(*Implied Volatility*\) and accordingly high Premium\. Thus, the Short leg of A\-19 Strategy should have relatively higher Premium Credit, which would in\-turn generate a higher return\.

__Merits & Demerits in A\-19 Strategy \(Call Calendar \(Long\) Spread\)__

__*Demerits in A\-19 Strategy \(Call Calendar \(Long\) Spread\)*__:

- This Spread strategy will be suitable for a sideways to mild bullish move of the underlying\. Extreme bullish or bearish move in the underlying may cause loss on the Strategy\.

__*Benefits in A\-19 Strategy \(Call Calendar \(Long\) Spread\)*:__

- If there is a bearish move in the underlying, then too this Strategy would likely be profitable because CE Short leg would lose its premium by its Expiry, but the CE Long would have some premium left on the Expiry day of the CE Short leg\. However, if due to extreme bearish move the CE Long leg lose its premium   substantially, then the Strategy may incur max loss to the extent of Net Premium debit paid on the overall Strategy\.
- Thus, in A\-19 we get a range like in a Calendar Spread Strategy, within which if the underlying closes on Expiry, then the Strategy yield profit\. This makes it akin to Short Straddle \(*except that A\-19 Calendar Spread is a Net Premium Debit Strategy with limited loss on either side, whereas Short Straddle is a Net Premium Credit Strategy with  unlimited risk on either side*\)\.

__A\-19 Strategy__

__Call Calendar \(Long\) Spread__

__Requisite Technical parameters for A\-19 Strategy \(Call Calendar \(Long\) Spread\):__

This Strategy is initiated when the underlying is rangebound and is not expected to make a breakout / breakdown\.

The range of an underlying can be determined basis Daily timeframe of Weekly timeframe, like: \(i\) upper Bollinger band on the higher side and 20 SMA on the lower side; or \(ii\) between 20 SMA on the upper side and lower Bollinger band on the lower side; or \(iii\) between two horizontal trendlines, etc\.

__Point of Initiating the A\-19 Strategy \(Call Calendar \(Long\) Spread\): __

When the underlying is expected to remain rangebound to mild bullish, then this A\-19 Strategy on CE side can be initiated, but only when the underlying is trading somewhere in between the defined range and not at Resistance or Support levels of the range so identified\.

__Impact of Different Market Situations in A\-19 Strategy __

__\(Call Calendar \(Long\) Spread\)__

__If trade goes as per plan and underlying remains rangebound, during A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

__If trade goes as per plan with limited bullish move, during A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

__If trade goes as per plan with limited bearish move, during A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

If the underlying remains limited bearish, with underlying closing above the downside Breakeven Strike of the Strategy, then the CE Short will expire as an OTM yielding its entire Premium Credit as profit; but the CE Long leg will generate less loss due to relatively less erosion in its Time Value by virtue of being on a farther Expiry series\. Thus, the Strategy would generate profit on overall basis

__If trade does not go as per plan, during A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

- If the underlying gets into extreme downtrend \(or huge gapdown\), then the CE Short leg will generate profit due to erosion in its premium value, may be to the maximum extent of premium credit received on the CE Short leg\. However, the CE Long will generate limited loss to the extent of Premium paid\. However, since, the overall Strategy is a Net Premium debit Strategy, therefore, in case of extreme bearish move in the underlying \(*crossing below the downside Breakeven Strike of the Strategy*\), the overall Strategy my yield Max Loss to the extent of the Net Premium debit incurred on the Strategy\. This Max Loss situation may be mitigated by making certain adjustments\.

__Options Behaviour in A\-19 Strategy \(Call Calendar \(Long\) Spread\)__

- Since, intention on this Strategy is to generate profit out of faster Theta decay on CE Short leg, therefore it must be targeted that sufficient Premium value Credit is received on the CE Short leg\. Sufficient premium value credit would be available on the CE Short leg when VIX is higher \(*especially above 20*\) or when this Strategy is initiated on a volatile underlying like BankNifty\.
- Further, it must be ensured that CE Short primary leg has atleast 60% or more Premium Credit received, out of the total Premium debit incurred on the CE Long hedged leg\. Higher the Premium Credit on the Short leg, lower the risk / Max Loss on the Strategy, because the Max Loss would be the Net Premium Debit incurred on the overall Strategy\. This Max Loss situation would arise in case of extreme bearish move the, because of which, the CE Short premium gets zero and CE Long extra premium value \(*i\.e\. over and above the premium credit value on CE Short*\) would also tend to erode due to extreme bearish move in the underlying, before the Expiry of the CE Short primary leg\. 
- This Strategy is designed for a rangebound underlying to mild bullish move in the underlying, such that the underlying is not expected to breach the Breakeven Strike\(s\) of the Strategy, to reap Profit on the Strategy\.
- Slight rise in Volatility may not adversely impact this Strategy, as slight rise in Volatility would be favourable to the CE Long leg\. Further, slight rise in Volatility may adversely impact the CE Short leg, however, if the underlying by Expiry remains between the Breakeven Strike\(s\)  of the Strategy then CE Short leg would also generate some profit due to erosion in its Time Value by its Expiry \(*thereby nullifying the adverse impact of rise in its premium value due to slight rise in Volatility*\) as it becomes zero when it expires as an OTM\)\. 

__Adjustments  in A\-19 Strategy \(Call Calendar \(Long\) Spread\)__

__*Adjustments, if the underlying gets into a downward trend and A\-19 Strategy \(Call Calendar \(Long\) Spread\) does not go as per plan*__:

This A\-19 Strategy \(Call Calendar \(Long\) Spread\) is a Debit Calendar Spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on hedged leg and the Premium collected in the primary leg*\) could be the max loss on the Strategy from Expiry perspective \(*i\.e\. expiry of the CE Short leg*\), in case of a huge gapdown / bearish momentum trend in the underlying\. 

__*Adjustments*, *if the underlying gets into super bullish momentum and the limited bullish move in A\-19 Strategy \(Call Calendar \(Long\) Spread\) does not go as per plan*__:

The original Call Calendar Spread Strategy is basically adopted to benefit from Theta decay on the Short leg initiated on closer Expiry series\. However, if the underlying gets in a strong bullish momentum or makes a huge gapup, then the hedged leg of CE Long will generate profit\. But with the underlying rising fast, the primary CE Short leg will generate loss, which if by its Expiry crosses above the Breakeven Strike of the hedged leg, then the CE Short position will become an ITM\. Even though the CE Long may also become an ITM in case of such huge bullish momentum in the underlying, but overall the strategy may yield some loss\.

Having said above, the loss situation on the Strategy, which may arise due to a strong momentum bullish move in the underlying can be mitigated by making following adjustments: \(i\) Long CE; or \(ii\) Short PE\. These adjustments are explained below:

__Breakeven Strike Level in A\-19 Strategy \(Call Calendar \(Long\) Spread\): Its Calculation & Payoff Chart__

__*Breakeven Strike in A\-19 Strategy \(Call Calendar \(Long\) Spread\), from Expiry perspective*:__

This A\-19 Strategy has an upside BE Strike and a downside BE Strike\. These BE Strikes can be  tentatively determined applying the following logic:

- \[The BE Level for the CE Short leg, would be: CE Short Strike \+ Premium Credit of CE Short leg\]\. Thus, if the underlying reaches upto this BE Strike level of CE Short leg on the upside, then CE Long leg \(*being on the same Strike*\) would also rise by about same points equivalent to the Premium Credit of the CE Short leg\. Thus, effectively, on the upside the loss from Expiry perspective would not happen at the CE Short leg’s BE Strike, but slightly more than twice the Premium Credit collected on the Short leg\. 

<__start__>Therefore, the BE Strike on the upper side of the Strategy can be tentatively calculated with the following formula:

__BE Strike on the upside for this Strategy = __CE Short Strike \+ \(2 x Premium Credit of the CE Short\) <__end__>

- If the underlying takes a downward move, then the CE Short leg would cover the loss to the maximum extent of the Premium Credit collected on the CE Short leg, from Expiry perspective\. So, we can say that the \[BE Strike of the Strategy on the downside can be atleast: CE Short Strike *–* Premium Credit of CE Short leg\]\. 

<__start__>Therefore, the BE Strike on the lower side  of the Strategy can be tentatively calculated with the following formula:

__BE Strike on the downside for this Strategy = __\[CE Short Strike *–* Premium Credit of the CE Short\] <__end__>

Actual BE Strike on the lower side may get even smaller than that as determined from the above formula, because the CE Long leg may generate more loss \(*as CE Long leg may be on a higher positive Delta by virtue of being on higher Expiry*\)\. Further, Volatility squeeze may slightly reduce the BE Strike Level on the lower side for this Strategy\.  

- __BE Strike on the upside for this Strategy = __CE Short Strike \+ \(2 x Premium Credit of the CE Short\)
- __BE Strike on the downside for this Strategy = __CE Short Strike *–* Premium Credit of the CE Short\. 

Thus, from Expiry perspective \(*i\.e\. Expiry of the CE Short leg, which is on closer Expiry than CE Long*\), if the underlying closes between the upside BE Strike and the downside BE Strike, then this Strategy would yield profit\. <__end__>

<__start__> In the given example, where the trade legs of the A\-19 Strategy \(Call Calendar \(Long\) Spread\) are:

- Nifty 1 Lot Short CE ATM 17200 \(*at a premium of Rs\. 223 per Lot*\) April 6th Current Week Expiry
- Nifty 1 Lot long CE ATM 17200 \(at a premium of Rs\. 356 per Lot\) of April Current Month Expiry

Then, BE Strike of the Strategy on the upside would be atleast: 17200\+\(2x223\) = 17646 CE; and

BE Strike of the Strategy on the downside would be approx: 17200\-223 = 16977 CE <__end__>

__Payoff for A\-19 Strategy \(Call Calendar \(Long\) Spread\)__

<__end__>

<__end__>

__Loss Scenario in A\-19 Strategy \(Call Calendar \(Long\) Spread\), and its Calculation__

__*Loss in A\-19 Strategy \(Call Calendar \(Long\) Spread\), from Expiry perspective*: __

__Max Loss on A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

<__start__> In the given example, where the trade legs of A\-19 Strategy \(Call Calendar \(Long\) Spread\) are:

*Net premium debit incurred = premium paid – premium credit received = 356–223 = 133 per Lot\.* 

Thus, Max Loss in this Strategy, on Expiry of the CE Short leg, would be Rs\. 133 per quantity \(*i\.e\. for Nifty Rs\. 133 x 50 = Rs\. 6500 per Lot*\) when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\. <__end__>

<__end__>

__Profit Scenario in A\-19 Strategy \(Call Calendar \(Long\) Spread\), and its Calculation__

__*Profit in A\-19 Strategy \(Call Calendar \(Long\) Spread\)*:__

__Max Profit in A\-19 Strategy \(Call Calendar \(Long\) Spread\)__: Maximum profit is generated in this Strategy when the underlying closes by Expiry at \(or near\) the CE Short Strike of this Strategy\.

__Profit Level on overall A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

__Profit Zone\(s\) in in A\-19 Strategy \(Call Calendar \(Long\) Spread\):__

\(i\)  If the underlying by Expiry closes  between the downside Breakeven Strike and CE Short Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards CE Short Strike, higher will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the CE Short Strike on Expiry, then limited max profit will be realised on this Strategy\. However, if the underlying crosses beyond the BE Strike on the downside, then limited loss may be incurred\.

\(ii\) If the underlying by Expiry closes between the CE Short Strike and upside Breakeven Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards BE Strike on the upside, lower will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the CE Short Strike on Expiry, then limited max profit will be realised on this Strategy\.  However, if the underlying crosses beyond the BE Strike on the upside, then limited loss may be incurred on Expiry of the Short leg in this Strategy\.

<__end__>

__A\-19 Strategy \(Call Calendar \(Long\) Spread\): Its Trade Legs & Objective__

__*Trade legs in A\-19 Strategy \(Call Calendar \(Long\) Spread\)*__:

CE Long leg being on farther Expiry series will have more Premium than the closer Expiry series CE Short, thus making it a __Net Debit Strategy__\. It need to be ensured that the Premium credit on Short leg must be atleast 60% of the Premium debit incurred on the Long leg\.

*Note: If this Strategy is initiated within 1st week of a calendar month, then Short leg can be on Current Week or Next Week Options; and Long leg can be on Current Month Expiry series\. However, if this Strategy is being planned for execution after 1st week of a calendar month then Short leg can be on Current Week or Next Week Options; but Long leg will be on Next Month Expiry series\.*

__<start> Example of A\-19 Strategy \(Call Calendar \(Long\) Spread\): __

If in March last week:

- Nifty Spot is at: 17100
- Nifty March Futures is at: 17200
- Nifty ATM is at: 17200

Then, for this Strategy:

- Nifty 1 Lot Long CE ATM 17200 \(at a premium of Rs\. 356 per Lot\) of April Current Month Expiry

*\[Net premium debit incurred = premium paid – premium credit received\] = 356–223 = 133 per Lot\.*

*However, if for the Short leg, Next Week Expiry CE ATM \(eg: April 13th Next Week\) is selected \(instead of Current Week 6th April ATM CE\), then the premium credit received on the Short leg would be Rs\. 275 per Lot i\.e\. even higher than Current Week ATM CE available at Rs\. 223 per Lot\. Therefore, the Net premium debit incurred on the Strategy would be even less \(356\-275 = Rs\. 81 per Lot\), thus the Max Loss would also be less\. *

*It must be ensured that CE Short leg has atleast 60% premium credit, out of the total premium debit incurred on the CE Long leg\. *__<end>__

__Objective of A\-19 Strategy \(Call Calendar \(Long\) Spread\)__:

Objective is to play rangebound to  mild bullish view through Shorting ATM CEs of near Expiry \(*Current Week or Next Week Expiry*\) as the primary leg;  and buying ATM CEs of farther Expiry series \(*Current Month or Next Month Expiry*\) as the hedged leg\.   

In this Strategy profit is targeted mainly on the CE Short primary leg \(*which on higher Theta due to closer Expiry*\), which will generate profit due to faster  erosion in Time Value \(than CE Long leg\) due to mild  bullish or rangebound movement in the underlying\. This would be because CE Short leg has a closer Expiry than CE Long leg\.

__Merits & Demerits of A\-19 Strategy \(Put Calendar \(Long\) Spread\)__

__*Demerits of A\-19 Strategy \(Put Calendar \(Long\) Spread\)*__:

- This Spread strategy will be suitable for a sideways to mild bearish move of the underlying\. Extreme bearish or bullish move in the underlying may cause loss on the Strategy\.

__*Benefits of A\-19 Strategy \(Put Calendar \(Long\) Spread\)*:__

- If there is a bullish move in the underlying, then too this Strategy would likely be profitable because PE Short leg would lose its premium by its Expiry, but the PE Long would have some premium left on the Expiry day of the PE Short leg\. However, if due to extreme bullish move the PE Long leg lose its premium   substantially, then the Strategy may incur max loss to the extent of Net Premium debit paid on the overall Strategy\.

__A\-19 Strategy: PE Side__

__Put Calendar \(Long\) Spread__

__*Requisite Technical parameters for A\-19 Strategy \(Put Calendar \(Long\) Spread\)*__:

__*Point of initiating A\-19 Strategy \(Put Calendar \(Long\) Spread\)*: __

When the underlying is expected to remain rangebound to mild bearish, then this A\-19 Strategy on PE side can be initiated, but only when the underlying is trading somewhere in between the defined range and not at Resistance or Support levels of the range so identified\.

__Impact of different Market Situations in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__

__If trade goes as per plan and underlying remains rangebound, during A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

__If trade goes as per plan with limited bearish move, during A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

__If trade goes as per plan with limited bullish move, during A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

__If trade does not go as per plan, in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

- If the underlying gets into extreme uptrend \(or huge gapup\), then the PE Short leg will generate profit due to erosion in its premium value, may be to the maximum extent of premium credit received on the PE Short leg\. However, the PE Long will generate limited loss to the extent of Premium paid\. However, since, the overall Strategy is a Net Premium debit Strategy, therefore, in case of extreme bullish move in the underlying \(*crossing above the upside Breakeven Strike of the Strategy*\), the overall Strategy my yield Max Loss to the extent of the Net Premium debit incurred on the Strategy\. This Max Loss situation may be mitigated by making certain adjustments\.

__Options Behaviour in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__

- Since, intention on this Strategy is to generate profit out of faster Theta decay on PE Short leg, therefore it must be targeted that sufficient Premium value Credit is received on the PE Short leg\. Sufficient premium value credit would be available on the PE Short leg when VIX is higher \(*especially above 20*\) or when this Strategy is initiated on a volatile underlying like BankNifty\.
- Further, it must be ensured that PE Short primary leg has atleast 60% or more Premium Credit received, out of the total Premium debit incurred on the PE Long hedged leg\. Higher the Premium Credit on the Short leg, lower the risk / Max Loss on the Strategy, because the Max Loss would be the Net Premium Debit incurred on the overall Strategy\. This Max Loss situation would arise in case of extreme bullish move because of which, the PE Short premium gets zero and PE Long extra premium value \(*i\.e\. over and above the premium credit value on PE Short*\) would also tend to erode due to extreme bullish move in the underlying, before the Expiry of the PE Short primary leg\. 
- This Strategy is designed for a rangebound underlying to mild bearish move in the underlying, such that the underlying is not expected to breach the Breakeven Strike\(s\) of the Strategy , to reap Profit on the Strategy\.
- In case of mild bearish move of the underlying, the primary leg generates profit due to erosion in its Time Value with approaching Expiry; and the hedged leg generates profits due to mild bearish move\. However, in case of extreme gapdown or bearish move below the downside Breakeven Strike of the Strategy, both PE short leg and PE Long leg may become an ITM and both would rise in their premium value and the Strategy may yield some loss and may require adjustments to be made\. However, in this situation, the PE short leg even if it becomes an ITM, would have some Time Value left \(*which may be lost on its Expiry, thus reducing the final premium value of the PE Short Strike*\)\.
- Slight rise in Volatility may not adversely impact this Strategy, as slight rise in Volatility would be favourable to the PE Long leg\. Further, slight rise in Volatility may adversely impact the PE Short leg, however, if the underlying by Expiry remains between the Breakeven Strike\(s\)  of the Strategy then PE Short leg would also generate some profit due to erosion in its Time Value by its Expiry \(*thereby nullifying the adverse impact of rise in its premium value due to slight rise in Volatility*\) as it becomes zero when it expires as an OTM\. 

__Adjustments in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__

__*Adjustments, if the underlying gets into an upward trend and A\-19 Strategy \(Put Calendar \(Long\) Spread\) does not go as per plan*__:

This strategy is a Debit Calendar Spread, therefore, the Net Premium \(*i\.e\. the difference between the Premium paid on hedged leg and the Premium collected in the primary leg*\) could be the max loss on the Strategy from Expiry perspective \(*i\.e\. expiry of the PE Short leg*\), in case of a huge gapup / bullish momentum trend in the underlying\. 

__*Adjustments*, *if the underlying gets into super bearish momentum and the limited bearish move in A\-19 Strategy \(Put Calendar \(Long\) Spread\) does not go as per plan*__:

The original Put Calendar Spread Strategy is basically adopted to benefit from Theta decay on the Short leg initiated on closer Expiry series\. However, if the underlying gets in a strong bearish momentum or makes a huge gapdown, then the hedged leg of PE Long will generate profit\. But with the underlying falling fast, the primary PE Short leg will generate loss, which if by its Expiry crosses below the Breakeven Strike of the hedged leg, then the PE Short position will become an ITM\. Even though the PE Long may also become an ITM in case of such huge bearish momentum in the underlying, but overall the strategy may yield some loss\.

Having said above, the loss situation on the Strategy, which may arise due to a strong momentum bearish move in the underlying can be mitigated by making following adjustments: \(i\) Long PE; or \(ii\) Short CE\. These adjustments are explained below:

__Breakeven Strike  in A\-19 Strategy \(Put Calendar \(Long\) Spread\), and its Calculation & Payoff Chart__

__*Breakeven Strike in A\-19 Strategy \(Put Calendar \(Long\) Spread\), from Expiry perspective*:__

- \[The BE Level for the PE Short leg, would be: PE Short Strike  *– *Premium Credit of PE Short leg\]\. Thus, if the underlying reaches upto this BE Strike level of PE Short leg on the downside, then PE Long leg \(*being on the same Strike*\) would also rise by about same points equivalent to the Premium Credit of the PE Short leg\. Thus, effectively, on the downside the loss from Expiry perspective would not happen at the PE Short leg’s BE Strike, but slightly more than twice the Premium Credit collected on the Short leg\. 

<__start__>Therefore, the BE Strike on the lower side of the Strategy can be tentatively calculated with the following formula:

__BE Strike on the downside for this Strategy = __PE Short Strike *–* \(2 x Premium Credit of the PE Short\) <__end__>

- If the underlying takes an upward move, then the PE Short leg would cover the loss to the maximum extent of the Premium Credit collected on the PE Short leg, from Expiry perspective\. So, we can say that the \[BE Strike of the Strategy on the upside can be atleast: PE Short Strike \+ Premium Credit of PE Short leg\]\. 

<__start__> Therefore, the BE Strike on the upper side  of the Strategy can be tentatively calculated with the following formula:

__BE Strike on the upside for this Strategy = __\[PE Short Strike \+ Premium Credit of the PE Short\] <__end__>

      Actual BE Strike on the upper side may get even smaller than that as determined from the above formula, because the PE Long leg may generate more loss \(*as PE Long leg may be on a higher negative Delta by virtue of being on higher Expiry*\)\. Further, Volatility squeeze may slightly reduce the BE Strike Level on the upper side for this Strategy\.  

Thus, from Expiry perspective \(*i\.e\. Expiry of the PE Short leg, which is on closer Expiry than PE Long*\), if the underlying closes between the upside BE Strike and the downside BE Strike, then this Strategy would yield profit\. <__end__>

<__start__> In the given example, where the trade legs of A\-19 Strategy \(Put Calendar \(Long\) Spread\) are:

- BankNifty 1 Lot Short PE ATM 39800 \(*at a premium of Rs\. 800 per Lot*\) April 6th Current Week Expiry
- BankNifty 1 Lot long PE ATM 39800 \(at a premium of Rs\. 1020 per Lot\) of April Current Month Expiry

Then, BE Strike of the Strategy on the downside would be atleast: 39800*–*\(2x800\) = 38200 PE; and

BE Strike of the Strategy on the upside would be: 39800\+800 = 40600 PE <__end__>

__Payoff for A\-19 Strategy \(Put Calendar \(Long\) Spread\)__

<__img51__>

<__end__>

<__end__>

__Loss Scenario in A\-19 Strategy \(Put Calendar \(Long\) Spread\), and its Calculation__

__*Loss in A\-19 Strategy \(Put Calendar \(Long\) Spread\), from Expiry perspective*:__

__Max Loss A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

<__start__> In the given example, where the trade legs of the Strategy are:

*Net premium debit incurred = premium paid – premium credit received = 1020–800 = 220 per Lot\.*

Thus, Max Loss in this Strategy, on Expiry of the PE Short leg, would be Rs\. 220 per quantity \(*i\.e\. for BankNifty Rs\. 220 x 25 = Rs\. 5500 per Lot*\) when the underlying closes by Expiry beyond the Breakeven Strikes \(*on either side*\)\. 

*Note: BankNifty’s F&O Lot size used to be 25, which has been changed to 15 with effect from July 2023\. While discussing this Strategy, we have used erstwhile BankNifty with Lot size of 25\. Now, given that the Lot size has been reduced, appropriate changes to the quantity of BankNifty Options for the purposes of this Strategy are recommended, and this Strategy is recommended to be accordingly read, understood and implemented wherever relevant\. *<__end__>

<__end__>

__Profit Scenario in A\-19 Strategy \(Put Calendar \(Long\) Spread\), and its Calculations__

__*Profit in A\-19 Strategy \(Put Calendar \(Long\) Spread\)*:__

__Max Profit in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__: Maximum profit is generated in this Strategy when the underlying closes by Expiry at \(or near\) the PE Short Strike of this Strategy\.

__Profit Level on overall A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

__Profit Zone\(s\) in A\-19 Strategy \(Put Calendar \(Long\) Spread\):__

\(ii\)	If the underlying by Expiry closes between the PE Short Strike and upside Breakeven Strike, then some profit would be generated on this Strategy\. Higher the underlying closes  towards BE Strike on the upside, lower will be the profit generated on this Strategy\. If the underlying closes at \(or near\) the PE Short Strike on Expiry, then limited max profit will be realised on this Strategy\.  However, if the underlying crosses beyond the BE Strike on the upside, then limited loss may be incurred on Expiry of the Short leg in this Strategy\.

<__end__>

__A\-19 Strategy \(Put Calendar \(Long\) Spread\): Its Trade Legs & Objective__

__*Trade legs in A\-19 Strategy \(Put Calendar \(Long\) Spread\)*:__

PE Long leg being on farther Expiry series will have more Premium than the closer Expiry series PE Short, thus making it a __Net Debit Strategy__\. It need to be ensured that the Premium credit on Short leg must be atleast 60% of the Premium debit incurred on the Long leg\.

__<start> Example of A\-19 Strategy \(Put Calendar \(Long\) Spread\): __

- BankNifty Spot is at: 39600
- BankNifty March Futures is at: 39835
- BankNifty ATM is at: 39800

- BankNifty 1 Lot Long PE ATM 39800 \(at a premium of Rs\. 1020 per Lot\) of April Current Month Expiry

*However, if for the Short leg, Next Week Expiry PE ATM \(eg: April 13th Next Week\) is selected \(instead of Current Week 6th April ATM PE\), then the premium credit received on the Short leg would be Rs\. 920 per Lot i\.e\. even higher than Current Week ATM PE available at Rs\.880 per Lot\. Therefore, the Net premium debit incurred on the Strategy would be even less \(1020\-920 = Rs\. 100 per Lot\), thus the Max Loss would also be less\.*

*It must be ensured that PE Short leg has atleast 60% premium credit, out of the total premium debit incurred on the PE Long leg\. <*__end__*>*

__Objective in A\-19 Strategy \(Put Calendar \(Long\) Spread\)__:

Objective is to play rangebound to mild bearish view through Shorting ATM PEs of near Expiry \(*Current Week or Next Week Expiry*\) as the primary leg;  and buying ATM PEs of farther Expiry series \(*Current Month or Next Month Expiry*\) as the hedged leg\.   

__Futures Hedge Strategy: Form Momentum Play \- A General Introduction__

__This Strategy is a low risk and high return trade design for strong momentum play, much better than Vertical Debit Spreads__\.

This Strategy has been designed to play only trending / momentum market\. This Strategy can be deployed for both uptrending market and down\-trending market, expected to move with momentum\. Futures Hedge is far better strategy to be used to play trending market, instead of playing the trend through Bull CE Spread or Bear PE Spread\. 

This Strategy can be deployed to play an intraday trend or positional trend on visible on higher time frame \(like Daily or Weekly time frame\)\. Also, this Strategy can be deployed to play momentum on either side on the Expiry day\. Options behaviour on Expiry day and other days, is different\. Hence, this Strategy for intraday & positional trades, as well as to play momentum on Expiry day,

__Options Behaviour of Futures Hedge Strategy \(for trading bullish momentum\):__

- This strategy is mainly devised to capture the upward trend and thus taking a bet on high Delta value, thus deploying Futures Long \(*Futures have highest Delta of 1*\)\.
- The difference in the Delta values, between the primary leg \(*Futures, having Delta of 1*\) and the hedged leg \(*ITM PE, having Delta of around 0\.70*\) will maintain the net profit situation, if the trend continues as per plan\.
- If there is strong conviction for the bullish momentum, then ITM PE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bullish momentum is not very sure, then ITM PE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on PE, more stronger and lasting bullish momentum would be required to generate higher profitability \(*as deeper the ITM PE, higher will be its negative Delta and larger the Breakeven*\)\.
- However, higher Time Value in ITM PE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bullish move in the underlying*\)\. And if the Time Value in ITM PE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bullish move in the underlying*\)\.
- In case of a strong speedy upward movement, Futures Long leg will generate super profit, and the hedged leg will also swifty move from being an ITM initially to becoming OTM, thereby moving from higher Delta PE to lower Delta PE\. This move from higher Delta PE towards lower Delta PE will cause the effect of generating lesser losses on the PE hedged leg with continuation of the uptrend in the underlying\. Consequently, as the upward momentum continues, the net profit generated between the primary leg and hedged leg in the Strategy also becomes better and better\.
- While primary leg, being Futures, it is not subject to Theta decay\. However, the hedged leg comprising of Long PE, even though ITM, but is still subject to decay on 25% of Time Value comprised in its Premium value\. Thus, a longer time for the upward momentum to arrive, would unnecessarily cause loss on to the ITM PE leg due to decay of Time Value from the Premium of this Option\. Thus, a quick and strong upward momentum is what is desired in this Strategy to yield more profit\.
- Even though ITM PE is subject to decay, but the decay will be slow, as it is an ITM\. Moreover, since, the primary leg being Futures is not subject to decay, the overall Theta impact on this Strategy as a whole is quite less\.
- Since, the hedged leg is an ITM PE with about 0\.70 Delta value \(*which is less compared to Futures with Delta of 1*\), therefore, in case of reversal towards the bearish side, Futures will generate more loss than the profit generated by ITM PE\. However, if the bearish reversal continues, then the ITM PE will  keep becoming deeper ITM, and consequently will keep generating more profits as it gets deeper in the money due to shifting from lower Delta ITM PE of 0\.70 towards a deeper ITM PE with Delta of 1\. The downfall if further continues, then the ITM PE leg will become a deep ITM with almost 100% Intrinsic Value, and thereon any loss generated by Futures in the primary leg on account of continuous fall in the underlying, will be fully set\-off by the ITM PE \(which will act like synthetic Futures\) on the hedged leg\.
- Thus, even though in case of reversal towards the bearish side, Futures will generate more loss than the profit generated by ITM PE, the overall loss on this Strategy is pre\-defined to a limited loss\. Thus, this Strategy has a limited downside risk\.
- In the event, the upward trend continues with momentum, the Futures will keep generating profit \(with Delta value of 1\), and the ITM PE will generate fewer losses as it moves from higher Delta to lower Delta due to strong and fast upward move in the underlying, consequently making this Strategy an unlimited reward strategy with limited downside risk\.

__Futures Hedge Strategy: For Bullish Momentum Trade__

__\(*Can be used for Positional and Intraday trading of bullish momentum in the Underlying*\)__

__Requisite Technical Conditions, for Futures Hedge Strategy \(for trading Bullish Momentum\):__

- For positional trading: when price seems to be reversing upwardly from major Support Area\. *Eg: Near lower Bollinger Band, on Weekly / Daily TF; or Near 20 SMA, on Weekly / Daily TF etc\.\.*
- For intraday trading: when price seems to be reversing from major Support Area for intraday purposes\. *Eg: Near lower Bollinger Band, on Hourly  / Daily TF; or Near 20 SMA, on Hourly / Daily TF; or Near Hourly/ Daily TF Pivot acting as support etc*\.
- Price is observed to be turning uptrend from Demand zone / oversold zone\.
- If Futures starts trading in Discount than the Spot value by atleast 20\-30 points, then the underlying may be expected to get bullish\. If this phenomenon is observed in current Month Futures, then it can be used for Intraday or BTST/ STBT trade until the Futures gets to its usual / reasonable LTP value than Spot\.
- If deep ITM CE starts trading in Discount \(*i\.e\. its LTP is lower than its Intrinsic Value by atleast 20\-30 points, from both Spot value and relevant Futures of the same Expiry series to which the ITM CE belong*\)\. If this phenomenon is observed in current week Expiry, then it can be used for Intraday or BTST trade; and if the same is observed in Next Month Expiry Options or Far Month Expiry Options, then the underlying may be expected to get strongly bullish on positional basis in next 3 to 7 days\.  * *
- Trend appears to be bullish with momentum\.

__Point of initiating Futures Hedge Strategy, for trading Bullish Momentum:__

Only near Support level, i\.e\. this Strategy to be initiated, only when price action confirms reversal on the upside, after taking support from the major Support level\.

Entry at the Support level, will keep the stop loss smaller, i\.e\. if the uptrend as expected fails and the underlying slips down the Support level and sustains, then stop loss may be taken or adjustment may be considered\.

__Objective in Futures Hedge Strategy \(for trading Bullish Momentum\)__:

Objective is to profit from the fast and strong trend in the upward direction starting from the major Support level, by using Futures Long position \(*Delta of 1*\) as the primary leg \(*which will also not be subject to decay in case of positional trade*\)\.

To cover the loss situation in the event of reversal towards bearish side, the hedged leg will have a Long  ITM PE position \(*with around 75% Intrinsic Value, thereby having a Delta of around 0\.65 or so*\), which will be subject to less decay for being an ITM\.

If there is strong conviction for the bullish momentum, then ITM PE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bullish momentum is not very sure, then ITM PE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on PE, more stronger and lasting bullish momentum would be required to generate higher profitability \(*as deeper the ITM PE, higher will be its negative Delta and also larger the Breakeven*\)\. 

Also, higher the Intrinsic Value in PE, lesser will be the max loss situation; and lower Intrinsic Value of ITM PE would increase the max loss situation on the Strategy\.

__Adjustments in Futures Hedge Strategy \(for bullish momentum\)__

__Adjustments in Futures Hedge Strategy \(for bullish momentum\), if trade does not go as per plan__:

If the trend reverses, then the following adjustments can be considered:

- __*If trend reverses to sideways: *__In case the trend gets sideways, then Counter Adjustment method can be implemented by shorting \(selling\) Far OTM CEs, with an aggregate premium equivalent to atleast the aggregate Time Value comprised in the ITM PEs on the hedged leg\. This is done to cover for the max loss situation on this Strategy\.
- __*If trend reverses to bearish: *__In case the trend gets towards bearish side, then Counter Adjustment method can be implemented to play bearish trend through \(i\) Long PE; or \(ii\) Short CE\. These adjustments are discussed below\.

1. If there seems to be a trending downtrend, then additional __PEs can be bought \(Long PE\)__, besides ITM PE already on the hedged leg\. The additional PEs can be near OTMs with no Delta value of no less than 0\.45 or near ITMs\. Idea here should be that the Delta value of all PEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of Futures Long position, so as to generate profit on this Strategy on account of the reversal towards bearish momentum\. All Long PEs on this Strategy, with higher Delta value on aggregate basis than the Futures Long position, should generate more profit and help cover losses in the Futures Long primary leg\. However, buying additional PEs to play reversal on the bearish side will add additional debit positions, therefore, this PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\.
2. If there seems to be a slow downtrend, then __Far__ __OTM CEs can be sold \(Short CE\)__\. These Far OTM CE Short positions must have aggregate premium credit greater than the Time Value comprised in the ITM PE on the hedged leg\. These additional CE Short will help cover losses that may be incurred in the Futures primary leg as the downtrend continues, and to fully bail out this Strategy from the potential max loss situation on the original Strategy\. These Far OTM CEs must be sold \(CE Short\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.

__Target and Stop Loss in Futures Hedge Strategy__

__\(for bullish momentum\)__

__Target in Futures Hedge Strategy \(for bullish momentum\):__

While, this Strategy has an unlimited profit potential on the upside, however, the rule of trading is to not lose the profits that accrue on your profitable trades\. Thus, as part of prudent trade practice of profit booking, the target for profit booking on this Strategy must be the next Resistance level\. Exit this Strategy and book your profits near to the next Resistance level\.

These Resistance levels can be upper bollinger band from 20 SMA; or 20 SMA from lower Bollinger band; or lower pivot to next higher pivot \(on D TF or Hrly TF etc\.\)\.

This Strategy can be afresh initiated if the underlying breaches upwardly the Resistance level \(*near to which profit booking was made*\) and sustains, and there appears to  be continuation of the bullish momentum even above this Resistance level\. Entry point for the fresh trade would be near this Resistance level, once the bullish trend momentum is confirmed to be continuing after it breaches and sustains above the said Resistance level \(*as this resistance level once breached and sustained by the price, then becomes the next Support level, hence a fresh entry point for the Strategy*\)\.

__Stop Loss in Futures Hedge Strategy \(for bullish momentum\):__

Best stop loss area is just below the Support level i\.e\. when the price fails to make an upmove from the Support level \(*where the entry is planned for this Strategy*\) and falls below the said Support level and sustains\. Once, it is confirmed that the price has breached and fallen below the Support level and has sustained \(and thus may likely not become/remain bullish, as was expected\), then this Strategy may be exited booking loss\. Further, if the trend is confirmed to be not bullish anymore, but appears to have reversed on the bearish side, then Futures Hedge for the bearish side can be considered to be played out as a fresh Strategy\.

__Profit scenario in Futures Hedge Strategy \(for bullish momentum\)__

__*Profit in Futures Hedge Strategy \(for bullish momentum\), from Expiry perspective*__:

If the underlying keeps moving upwardly, and the Futures’ Buy primary leg crosses above the Breakeven Strike and keeps trending higher, then this Strategy would generate unlimited reward on the upside from Expiry perspective\. 

<__start__> __Example of Profit scenario in Futures Hedge Strategy \(for trading bullish momentum\):__

- *Buy Nifty Futures \(Feb Month\) at 17950 \(primary leg\); and*
- *Buy Nifty 18350 PE \(Feb Month\) at a premium of Rs\. 545 \(hedged leg\)*

*In the above\-mentioned example, Nifty Futures must cross above 17950 \(buy price of Futures\) \+ 545 \(buy premium of Nifty 18350 ITM PE\) i\.e\. 18495, before Expiry of Feb Month, to generate profit from Expiry perspective\. Higher the Futures would move with momentum, above this BE of 18495, higher would be the profit on this Strategy*\.

*Thus, if Nifty Futures crosses above the BE level of 18495 and keeps trending higher with momentum beyond the said BE level, then this Strategy would generate unlimited profit situation as the Futures trends higher and higher, from Expiry perspective\. *<__end__>

__Calculation of profit in Futures Hedge Strategy \(for trading bullish momentum\) on Expiry__:

<__start__> If the underlying turns bullish and closes at Expiry higher than the BE Strike Level, then the profit on Expiry will be:

- \[Futures’ final LTP on Expiry\]

__*Minus*__

- \[Futures buying price \+ PE Long buying Premium\] <__end__>

__Futures Hedge Strategy \(for bullish momentum\) in Different Market Situations__

__If Futures Hedge Strategy \(for bullish momentum\), goes as per plan__:

As Futures goes higher, Futures Long primary leg will generate profit\. Higher the Futures goes, unlimited profit is generated\. But with Futures going higher, the hedged PE Long on the hedged leg will generate loss \(*because the LTP of PE will fall due to underlying going upward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\. But as the Futures position keeps going higher quickly with strong momentum, the net profitability increases because ITM PE would generate lesser and lesser loss \(*due to shifting of ITM PE to deeper and deeper OTM*\) as the underlying moves higher and higher, while the Futures Long leg continues to generate profit at the Delta of 1\.

__If underlying becomes sideways, during Futures Hedge Strategy \(initiated for bullish momentum\)__:

If the underlying keeps fluctuating in a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the ITM PE on the hedged leg would generate loss due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in loss in both primary and hedged leg\. But the good thing about this Strategy is that the maximum loss is pre\-determined and the maximum loss that may occur, as explained above, shall be to the maximum extent of the Time Value comprised in the premium value of the ITM PE\. However, once, it becomes clear that the bullish trend \(as originally expected\) has failed, then this Strategy may be exited by taking a stop loss or if possible at cost or some adjustments may be implemented\. In case the trend becomes sideways then certain simple adjustments can be made in order to cover for the potential losses on the original Strategy deployed\. These adjustments are discussed below\.

__If Futures Hedge Strategy \(for bullish momentum\), does not go as per plan__:

Underlying starts falling, then Futures Long primary leg will generate loss\. Lower the Futures fall, unlimited loss may be incurred on the primary leg\. But with Futures falling down, the hedged PE Long position on the hedged leg will generate profit because this PE will get deeper and deeper into ITM \(*shifting from lower Delta ITM PE of 0\.70 towards higher Delta value*\) with the fall of the underlying\. Thus, the PE Long hedged leg will protect the loss in Futures Long primary leg\. 

However, if the Futures keep falling even further, then the ITM PE will  keep becoming deeper ITM, and eventually the ITM PE leg will become deepest ITM with almost 100% Intrinsic Value\. From this point on, if the fall in the underlying continues, then any loss generated by Futures in the primary leg on account of continuous fall in the underlying, will be fully set\-off by the ITM PE \(which will act like Synthetic Futures\) on the hedged leg\. Consequently, in this Strategy, if the trend fully reverses towards the bearish side, the overall loss on this Strategy is limited\. 

While, this Strategy offers the advantage of a limited loss, but when this Strategy is played on with huge volume, even the limited loss situation, by virtue of large volume may pose a bigger quantum of loss on the Strategy\. This loss situation may however be dealt with, by making a few simple adjustments, in order to mitigate the loss on this Strategy\.

__Significance & Impact of Strike Price/ Delta value in Futures Hedge Strategy \(for bullish momentum\)__

__Strike / Delta value in Futures Hedge Strategy \(for bullish momentum\)__:

- Primary leg comprising of Futures Long has Delta value of 1
- Hedged leg comprising of ITM PE Long with about 75% Intrinsic Value is likely to have a Delta value of around 0\.70 

The Delta difference between the primary leg and the hedged leg will help maintain a reasonable control on the limited loss scenario and unlimited profit situation in this Strategy\.

__Selection of Option Strike for hedged leg in Futures Hedge Strategy \(for bullish momentum\)__:

Selection of Option Strike  is pretty straight forward in this Strategy, i\.e\. Futures Long for the primary leg and an ITM PE Long with around 75% Intrinsic Value for the hedged leg\.

If there is strong conviction for the bullish momentum, then ITM PE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bullish momentum is not very sure, then ITM PE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on PE, stronger and more lasting  bullish momentum would be required to generate higher profitability \(*as deeper the ITM PE, higher will be its negative Delta*\)\. Also, higher the Intrinsic Value in PE, lesser will be the max loss situation; and lower Intrinsic Value of ITM PE would increase the max loss situation on the Strategy, as explained below\.

Also, Futures’ Long primary leg can be replaced with Synthetic Futures i\.e\. ITM CE with almost 100% Intrinsic Value in order to avoid MTM requirements \(if trade does not go as per plan\)\. Such Synthetic Futures may be available on Monthly Expiry and/or Weekly Expiry Options \(as may be applicable\)\. However, if Synthetic Futures \(on CE side\) of Weekly Expiry are used instead of Futures Long for the primary leg, then obviously the holding time of this Strategy would be less \(unless the primary leg is replaced/ roll\-over time and again with subsequent weekly Expiry series before the expiry of current Weekly expiry series\)\.

Further, it must be borne in mind that such deep ITM CE \(S*ynthetic Futures*\) may not be liquid \(especially in case of Stock Options\), owing to which a higher  buying price/premium may be paid \(*due to a higher Ask Price than the LTP*\) for such ITM CE; and also at the time of exiting from such deep ITM CE position, some haircut on the profit may need to be absorbed \(*due to a lower Bid Price than the LTP*\)\. This situation in such deep ITM CEs \(by virtue of it being illiquid\), from the perspective of this Strategy especially when played out with huge volumes, may lead to compromising on a higher buy price at the time of entry and then to absorb some haircut from the profits at the time of exiting from this position\.

__Merits and demerits of Futures Hedge Strategy \(for trading bullish momentum\)__

__Benefits of Futures Hedge Strategy \(for trading bullish momentum\):__

- This is a very suitable Strategy for a very bullish trend in the underlying, as it gives phenomenally high return if the bullish momentum is quick and strong\. It is a better Strategy to play bullish momentum than Bull CE Spread\.
- This Strategy is a limited risk and unlimited reward Strategy\. On Expiry basis, this Strategy has a pre\-defined loss estimate, but unlimited profit potential if the uptrend continues with momentum\. 
- This Strategy can be initiated at reasonably low margin\. One Lot may cost around Rs\. 50,000 or so\. Therefore, a confirmed bullish trend can be played through this Strategy in good volume\.
- Futures’ Long primary leg can be replaced with Synthetic Futures i\.e\. ITM CE with almost 100% Intrinsic Value in order to avoid MTM requirements if trade does not go as per plan \(*in which case, Futures Long will pose more loss than profit on the PE Long hedged leg*\)\. However, such deep ITM CE \(S*ynthetic Futures*\) may not be liquid \(especially in case of Stock Options\)\. 
- This Strategy works even better when the Volatility is high / rising \(VIX above 18 or so\), as PE Long hedged leg will be relatively less impacted on account of Theta\.

__Demerits of Futures Hedge Strategy \(for trading bullish momentum\)__:

- This Strategy will not be profitable in a mild bullish trend \(and also if the trend reverses on the bearish side\)\. In case of mild bullish/ slow uptrend, the decay on ITM PE hedged leg, due to Theta impact or price fluctuations in a range for a longer time, may generate more loss than the profit generated on the Future Long primary leg\.
- In case of reversal of the trend on the bearish side, the Futures Long primary leg would start generating more loss than the profit generated on the PE Long hedged leg \(*due to Delta difference between the primary leg and the hedged leg*\), requiring more capital to provide for MTM losses\.
- Falling Volatility may cause erosion of the Premium value of the PE Long hedged leg \(*due to erosion of Time Value as a result of volatility squeeze*\), thereby generating loss on the PE Long hedged leg\.
- Long PE hedged leg may start generating steeper losses as it would approach its Expiry, due to Theta impact\. Hence, this Strategy must be exited reasonably before Expiry \(*viz\. *10 days before Expiry day\), and a fresh position may be created in fresh subsequent Expiry series\.

__Breakeven \(BE\) Level in Futures Hedge Strategy \(for trading bullish momentum\), from Expiry perspective__:

__<start> BE \(*above which profit will generate, from Expiry perspective*\):__ Futures buy price \+ PE buy price \(i\.e\. primary leg’s buy price \+ hedged leg’s buy price\) __<end>__

*Therefore, in this bullish Strategy, in order to be profitable from Expiry perspective, Futures price must cross\-over the premium paid \(debit\) for buying PE Long for the hedged leg, before Expiry\.*

__<start> __<a id="_Hlk160380348"></a>__Example of Futures Hedge Strategy \(for trading bullish momentum\):__

- *Intrinsic Value of 18350 ITM PE = \[18350 \- 17950\] = 400*
- *Thus, the Intrinsic Value comprised in the premium value of Rs\. 545 of 18350 ITM PE is 400 i\.e\. around 73% \(and the balance 27% i\.e\. 145 is the Time Value\)\.*

*Now, in the above\-mentioned example, Nifty Futures must cross above 17950 \(buy price of Futures\) \+ 545 \(buy premium of Nifty 18350 ITM PE\) i\.e\. 18495, before Expiry of Feb Month, to generate profit from Expiry perspective\. Higher the Futures would move with momentum, above this BE of 18495, higher would be the profit on this Strategy*\. __<end>__

It must be noted that, higher Time Value in ITM PE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bullish move in the underlying*\)\. And if the Time Value in ITM PE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bullish move in the underlying*\)\.

*<*__start__*>*

__Payoff for the Futures Hedge Strategy \(for bullish side momentum\):__

*<*__img64__*>*

*<*__end__*>*

__Payoff for the Futures Hedge Strategy \(for bullish side momentum\)__

__Loss scenario in Futures Hedge Strategy \(for bullish momentum\)__

__*Loss in Futures Hedge Strategy \(for bullish momentum\), from Expiry perspective*:__

__Max Loss scenario in Futures Hedge Strategy \(for bullish momentum\)__: If the underlying by Expiry closes below the PE Long Strike, then there would be limited max loss incurred on this Strategy\.

__Calculation of Max Loss in Futures Hedge Strategy \(for bullish momentum\)__:

<__start__> Max Loss for this Strategy is calculated as the: 

- \[*PE Strike – Futures buying price*\] 

- \[*premium at which PE Strike is bought*\]

__This max loss in effect is the Time Value of PE Long leg, basis the initiated positions\. __<__end__>

<__start__> __Example of Max Loss calculation in Futures Hedge Strategy \(for trading bullish momentum\):__

In the above mentioned example, the Time Value comprised in the 18350 ITM PE is 145, therefore the Max Loss in the above example for 1 Lot \(i\.e\. 50 qty\) of Nifty is: 145 x 50 = Rs\. 7,250 

Also, higher the Intrinsic Value in PE, lesser will be the max loss situation; and lower Intrinsic Value of ITM PE would increase the max loss situation on the Strategy\. <__end__>

__Loss Starting Level in Futures Hedge Strategy \(for trading bullish momentum\)__:

Loss will be incurred on this Strategy if the underlying by Expiry closes below the Breakeven Strike of the Strategy\.

__Loss Zone in Futures Hedge Strategy \(for trading bullish momentum\)__:

Loss would occur in this Strategy, if the underlying closes by Expiry below the BE Strike; and max loss would accrue if the underlying closes below the PE Long Strike\. 

Therefore, if the underlying closes between the BE Strike and the PE Long Strike, then loss would occur, but the total loss amount would be lower if the underlying closes towards / closer to the BE Strike; and the loss will be higher if the underlying closes towards/closer to the PE Long Strike\.

__Trade legs in Futures Hedge Strategy \(for trading Bullish Momentum\)__:

- Long ITM PE with about 75% Intrinsic Value \(*hedged leg*\)

*Note*:* * *Instead of buying Futures, you may consider buying Synthetic Futures \(i\.e\. deep ITM CE with Intrinsic Value almost 100%\)\. This Synthetic Future can be bought in current month Expiry series or Weekly Expiry\. Weekly Options however may require to be rolled\-over in case of positional trades\. This deep ITM CE may not be liquid at the time of buying, hence, Basket Order/ Market Order may not work\. Thus, use Limit Order to initiate trades\. Also, bear in mind that, if the strategy goes as per plan, then this Synthetic Futures \(deep ITM CE\) will move even more deep in the money and therefore would become even more illiquid\. Thus at the time of exiting this position of Synthetic Futures, some profits may have to be sacrificed, as when this Long ITM CE position will be attempted to be sold in order to square\-off, the available  bid price by the buyers may be too less than the LTP due to being an illiquid instrument\. So, these Synthetic Futures may be used for a shorter duration / intraday trades, for Futures Hedge Strategy purposes\.*

Both primary leg and the hedged leg will have same Lots quantity of Futures and PEs, respectively\. Further, the Futures position and the PE Options will be of the same Expiry series and same underlying\.

Because the primary leg is properly hedged, margin requirement in this strategy will be quite less, and thus good volumes are possible on this Strategy\. However, extra capital must be ensured in the trading account in order to meet the MTM requirements if the bullish momentum does not immediately arrive \(or if the trend reverses on bearish side\)\.

__<start> Example of Futures Hedge Strategy \(for trading Bullish Momentum\):__

- Buy Nifty Futures \(Feb Month\) at 17950 \(*primary leg*\); and
- Buy Nifty 18350 PE \(Feb Month\) at a premium of Rs\. 545 \(*hedged leg*\)

*Nifty Spot is at 17850 \(Jan 25th\)\. But since, Options travel with Futures price until Expiry day, therefore, Intrinsic Value calculation will be done basis the Futures price, as given below:*

- Intrinsic Value of 18350 ITM PE = \[18350 \- 17950\] = 400
- Thus, the Intrinsic Value comprised in the premium value of Rs\. 545 of 18350 ITM PE is 400 i\.e\. around 73% \(*and the balance 27% i\.e\. 145 is the Time Value*\)\.
- The Delta value of 18350 ITM PE is around 0\.70 \(*as per the Options Chain*\)\.
- Further, since, 18350 ITM PE is next month’s Expiry, its Theta value is \-4\.3 \(as per Options Chain\)\. Hence, ample time before decay impact increases\. __<end>__

__Options Behaviour in Futures Hedge Strategy \(for trading Bearish Momentum\):__

- This strategy is mainly devised to capture the downward trend and thus taking a bet on high Delta value, thus deploying Futures Short \(*Futures have highest Delta of 1*\)\.
- The difference in the Delta values, between the primary leg \(*Futures, having Delta of 1*\) and the hedged leg \(*ITM CE, having Delta of around 0\.70*\) will maintain the net profit situation, if the trend continues as per plan\.
- If there is strong conviction for the bearish momentum, then ITM CE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bearish momentum is not very sure, then ITM CE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on CE, more stronger and lasting bearish momentum would be required to generate higher profitability \(*as deeper the ITM CE, higher will be its positive Delta and larger the Breakeven*\)\.
- However, higher Time Value in ITM CE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bearish move in the underlying*\)\. And if the Time Value in ITM CE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bearish move in the underlying*\)\. 
- In case of a strong speedy downward movement, Futures Short leg will generate super profit, and the hedged leg will also swifty move from being an ITM initially to becoming OTM, thereby moving from higher Delta CE to lower Delta CE\. This move from higher Delta CE towards lower Delta CE will cause the effect of generating lesser losses on the CE hedged leg with continuation of the downtrend in the underlying\. Consequently, as the downward momentum continues, the net profit generated between the primary leg and hedged leg in the Strategy also becomes better and better\.
- While primary leg, being Futures, it is not subject to Theta decay\. However, the hedged leg comprising of Long CE, even though ITM, but is still subject to decay on 25% of Time Value comprised in its Premium value\. Thus, a longer time for the downward momentum to arrive, would unnecessarily cause loss on to the ITM CE leg due to decay of Time Value from the Premium of this Option\. Thus, a quick and strong downward momentum is what is desired in this Strategy to yield more profit\.
- Even though ITM CE is subject to decay, but the decay will be slow, as it is an ITM\. Moreover, since, the primary leg being Futures is not subject to decay, the overall Theta impact on this Strategy as a whole is quite less\.
- Since, the hedged leg is an ITM CE with about 0\.70 Delta value \(*which is less compared to Futures with Delta of 1*\), therefore, in case of reversal towards the bullish side, Futures will generate more loss than the profit generated by ITM CE\. However, if the bullish reversal continues, then the ITM CE will  keep becoming deeper ITM, and consequently will keep generating more profits as it gets deeper in the money due to shifting from lower Delta CE of 0\.70 towards a deeper ITM CE with Delta of 1\. The upward trend if further continues, then the ITM CE leg will become a deep ITM with almost 100% Intrinsic Value, and thereon any loss generated by Futures in the primary leg on account of continuous upward move of the underlying, will be fully set\-off by the ITM CE \(which will act like synthetic Futures\) on the hedged leg\.
- Thus, even though in case of reversal towards the bullish side, Futures will generate more loss than the profit generated by ITM CE, the overall loss on this Strategy is pre\-defined to a limited loss\. Thus, this Strategy has a limited risk\.
- In the event, the downward trend continues with momentum, the Futures will keep generating profit \(with Delta value of 1\), and the ITM CE will generate fewer losses as it moves from higher Delta CE to lower Delta CE due to strong and fast downward move in the underlying, consequently making this Strategy an unlimited reward strategy with limited risk\.

__Futures Hedge Strategy: For Trading Bearish Momentum __

__\(*Can be used for Positional and Intraday trading of bearish momentum in the Underlying*\)__

__Requisite Technical Conditions suitable for Futures Hedge Strategy \(for trading Bearish Momentum\):__

- For positional trading: when price seems to be reversing downwardly from major Resistance Area\. *Eg: Near upper Bollinger Band, on Weekly / Daily TF; or Near 20 SMA, on Weekly / Daily TF\. *
- For intraday trading: when price seems to be reversing from major Resistance Area\. *Eg: Near upper Bollinger Band, on Hourly / Daily TF; or Near 20 SMA on Hourly / Daily TF; or Near Hourly/ Daily TF Pivot acting as resistance etc\.*
- Price is observed to be turning in downtrend from Supply zone / overbought zone\.
- If Futures starts trading with excessively high LTP than the Spot value \(i\.e\. by atleast 100 points in case of Nifty and more than 200 points in case of BankNifty\), then the underlying may be expected to get bearish\. If this phenomenon is observed in current Month Futures, then it can be used for Intraday or STBT/BTST trade until the Futures gets to its usual / reasonable LTP value than Spot\.
- If deep ITM PE starts trading in Discount \(*i\.e\. its LTP is lower than its Intrinsic Value by atleast 20\-30 points, from both Spot value and relevant Futures of the same Expiry series to which the ITM PE belong*\)\. If this phenomenon is observed in current week Expiry, then it can be used for Intraday or BTST trade; and if the same is observed in Next Month Expiry Options or Far Month Expiry Options, then the underlying may be expected to get strongly bearish on positional basis in next 3 to 7 days\.
- Trend appears to be bearish with momentum\.

__Point of initiating Futures Hedge Strategy \(for trading Bearish Momentum\):__

Only near Resistance level, i\.e\. this Strategy to be initiated, only when price action confirms reversal on the downside, after being resisted at the major Resistance level\.

Entry at the Resistance level, will keep the stop loss smaller, i\.e\. if the mild downtrend as expected fails and the underlying moves higher up the Resistance level and sustains, then stop loss may be taken or adjustment may be considered\.

__Objective in Futures Hedge Strategy \(for trading Bearish Momentum\)__:

Objective is to profit from the fast and strong trend in the downward direction starting from the major Support level, by using Futures Short position \(*Delta of 1*\) as the primary leg \(*which will also not be subject to decay in case of positional trade*\)\.

To cover the loss situation in the event of reversal towards bullish side, the hedged leg will have a Long  ITM CE position \(*with around 75% Intrinsic Value, thereby having a Delta of around 0\.65 or so*\), which will be subject to less decay for being an ITM\.

If there is strong conviction for the bearish momentum, then ITM CE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bearish momentum is not very sure, then ITM CE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on CE, more stronger and lasting bearish momentum would be required to generate higher profitability \(*as deeper the ITM CE, higher will be its positive Delta and also larger the Breakeven*\)\. 

Also, higher the Intrinsic Value in CE, lesser will be the max loss situation; and lower Intrinsic Value of ITM CE would increase the max loss situation on the Strategy, as explained below\. 

__Adjustments in Futures Hedge Bearish Strategy \(if trade does not go as per plan\)__:

__*If trend reverses to sideways: *__In case the trend gets sideways, then Counter Adjustment method can be implemented by shorting \(selling\) Far OTM PEs, with an aggregate premium equivalent to atleast the aggregate Time Value comprised in the ITM CEs on the hedged leg\. This is done to cover for the max loss situation on this Strategy\.

__*If trend reverses to bullish: *__In case the trend gets towards bullish side, then Counter Adjustment method can be implemented to play bullish trend through \(i\) Long CE; or \(ii\) Short PE\. These adjustments are discussed below\.

1. If there seems to be a trending uptrend, then additional __CEs can be bought \(Long CE\)__, besides ITM CE already on the hedged leg\. The additional CEs can be near OTMs with no Delta value of no less than 0\.45 or near ITMs\. Idea here should be that the Delta value of all CEs on aggregate basis should be higher than the aggregate Delta value  on the primary leg comprising of Futures Short position, so as to generate profit on this Strategy on account of the reversal towards bullish momentum\. All Long CEs on this Strategy, with higher Delta value on aggregate basis than the Futures Short position, should generate more profit and help cover losses in the Futures Short primary leg\. However, buying additional CEs to play reversal on the bullish side will add additional debit positions, therefore, this CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\.
2. If there seems to be a slow upward move, then __Far__ __OTM PEs can be sold \(Short PE\)__\. These Far OTM PE Short positions must have aggregate premium credit greater than the Time Value comprised in the ITM CE on the hedged leg\. These additional PE Short will help cover losses that may be incurred in the Futures primary leg as the uptrend continues, and to fully bail out this Strategy from the potential max loss situation on the original Strategy\. These Far OTM PEs must be sold \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.

__Target and Stop Loss in Futures Hedge Strategy __

__\(for trading Bearish Momentum\)__

__Target on this Strategy in Futures Hedge Strategy \(for trading Bearish Momentum\):__

While, this Strategy has an unlimited profit potential on the downside, however, the rule of trading is to not lose the profits that accrue on your profitable trades\. Thus, as part of prudent trade practice of profit booking, the target for profit booking on this Strategy must be the next Support level\. Exit this Strategy and book your profits near to the next Support level\.

These Support levels can be lower Bollinger\-band from 20 SMA; or 20 SMA from upper Bollinger band; or higher pivot to next lower pivot \(on D TF or Hrly TF etc\.\)\.

This Strategy can be afresh initiated if the underlying breaches downwardly the Support level \(*near to which profit booking was made*\) and sustains, and there appears to  be continuation of the bearish momentum even below this Support level\. Entry point for the fresh trade would be near this Support level, once the bearish trend momentum is confirmed to be continuing after it breaches and sustains below the said Support level \(*as this support level once breached and sustained by the price, then becomes the next Resistance level, hence a fresh entry point for the Strategy*\)\.

__Stop Loss in Futures Hedge Strategy \(for trading Bearish Momentum\):__

Best stop loss area is just above the Resistance level i\.e\. when the price fails to make downmove from the Resistance level \(*where the entry is planned for this Strategy*\) and shoots up higher the said Resistance level and sustains\. Once, it is confirmed that the price has breached and shot up above the Resistance level and has sustained \(and thus may likely not become/remain bearish, as was expected\), then this Strategy may be exited booking loss\. Further, if the trend is confirmed to be not bearish anymore, but appears to have reversed on the bullish side, then Futures Hedge for the bullish side can be considered to be played out as a fresh Strategy\.

__Profit scenario in Futures Hedge Strategy \(for trading Bearish Momentum\), and its Calculations__

__Profit in Futures Hedge Strategy \(for trading Bearish Momentum\), from Expiry perspective__:

If the underlying keeps moving downwardly, and the Futures’ Short primary leg crosses down below the Breakeven Strike and keeps trending lower, then this Strategy would generate unlimited reward on the downside from Expiry perspective\. 

<__start__> __Example of Futures Hedge Strategy \(for trading Bearish Momentum\):__

- *Sell Nifty Futures \(Feb Month\) at 17950 \(primary leg\); and*
- *Buy Nifty 17550 CE \(Feb Month\) at a premium of Rs\. 545 \(hedged leg\)*
- *Intrinsic Value of 17550 ITM CE = \[17950 \- 17550\] = 400*
- *Thus, the Intrinsic Value comprised in the premium value of Rs\. 545 of 17550 ITM CE is 400 i\.e\. around 73% \(and the balance 27% i\.e\. 145 is the Time Value\)\.*

*In the above\-mentioned example, Nifty Futures must cross below 17950 \(buy price of Futures\) \- 545 \(buy premium of Nifty 17550 ITM CE\) i\.e\. 17405, before Expiry of Feb Month, to generate profit from Expiry perspective\. Lower the Futures would move with momentum, below this BE of 17405, higher would be the profit on this Strategy\.*

*Thus, here, if Nifty Futures crosses below the BE level of 17405 and keeps trending lower with momentum beyond the said BE level, then this Strategy would generate unlimited profit situation as the Futures trends lower and lower, from Expiry perspective*\. <__end__>

__Calculation of profit in Futures Hedge Strategy \(for trading Bearish Momentum\), on Expiry__:

If the underlying turns bearish and closes at Expiry lower than the BE Strike Level, then the profit on Expiry will be:

- \[Futures selling price \- CE Long buying Premium\] 

- \[Futures’ final LTP on Expiry\] <__end__>

__Payoff for the Futures Hedge\- Bearish Strategy:__

__<img65>__

__<end>__

__Impact of Different Market Situation on Futures Hedge Strategy \(for trading bearish momentum\)__

__If trade goes as per plan, in Futures Hedge Strategy \(for trading bearish momentum\)__:

As Futures goes lower, Futures Short primary leg will generate profit\. Lower the Futures goes, unlimited profit is generated\. But with Futures going lower, the hedged CE Long on the hedged leg will generate loss \(*because the LTP of CE will fall due to underlying going downward*\)\. However, the Delta difference between the primary leg and hedged leg will bring the net position in profit\. But as the Futures position keeps going lower quickly with strong momentum, the net profitability increases because ITM CE would generate lesser and lesser loss \(*due to shifting of ITM CE to deeper and deeper OTM*\) as the underlying moves lower and lower, while the Futures Short leg continues to generate profit at the Delta of 1\.

__If underlying becomes sideways, in Futures Hedge Strategy \(for trading bearish momentum\)__:

If the underlying keeps fluctuating in a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the ITM CE on the hedged leg would generate loss due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in loss in both primary and hedged leg\. But the good thing about this Strategy is that the maximum loss is pre\-determined and the maximum loss that may occur, as explained above, shall be to the maximum extent of the Time Value comprised in the premium value of the ITM CE\. However, once, it becomes clear that the bearish trend \(as originally expected\) has failed, then this Strategy may be exited by taking a stop loss or if possible at cost or some adjustments may be implemented\. In case the trend becomes sideways then certain simple adjustments can be made in order to cover for the potential losses on the original Strategy deployed\. These adjustments are discussed below\.

__If trade does not go as per plan in Futures Hedge Strategy \(for trading bearish momentum\)__:

Underlying starts rising upward, then Futures Short primary leg will generate loss\. Higher the Futures rise, unlimited loss may be incurred on the primary leg\. But with Futures LTP rising up, the hedged CE Long position on the hedged leg will generate profit because this CE will get deeper and deeper into ITM \(*shifting from lower Delta ITM CE of 0\.70 towards higher Delta value*\) with the rise of the underlying\. Thus, the CE Long hedged leg will protect the loss in Futures Short primary leg\. 

However, if the Futures keep rising upwardly even further, then the ITM CE will  keep becoming deeper ITM, and eventually the ITM CE leg will become deepest ITM with almost 100% Intrinsic Value\. From this point on, if the upward move in the underlying continues, then any loss generated by Futures in the primary leg on account of continuous rise in the underlying, will be fully set\-off by the ITM CE \(which will act like Synthetic Futures\) on the hedged leg\. Consequently, in this Strategy, if the trend fully reverses towards the bullish side, the overall loss on this Strategy is limited\.

__Significance & Impact of Strike / Delta value in Futures Hedge Strategy \(for trading bearish momentum\)__

__Strike / Delta value in Futures Hedge Strategy \(for trading bearish momentum\)__:

- Primary leg comprising of Futures Short has Delta value of 1
- Hedged leg comprising of ITM CE Long with about 75% Intrinsic Value is likely to have a Delta value of around 0\.70 

__Selection of Option Strike for hedged leg in Futures Hedge Strategy \(for trading bearish momentum\)__:

Selection of Option Strike  is pretty straight forward in this Strategy, i\.e\. Futures Short for the primary leg and an ITM CE Long with around 75% Intrinsic Value for the hedged leg\.

If there is strong conviction for the bearish momentum, then ITM CE can be selected with even 70% Intrinsic Value\. And in case arrival of strong bearish momentum is not very sure, then ITM CE with slightly higher Intrinsic Value \(*viz\. 80%*\) can be selected\. Higher the Intrinsic Value on CE, more stronger and lasting bearish momentum would be required to generate higher profitability \(*as deeper the ITM CE, higher will be its positive Delta*\)\. Also, higher the Intrinsic Value in CE, lesser will be the max loss situation; and lower Intrinsic Value of ITM CE would increase the max loss situation on the Strategy, as explained below\.

Also, Futures’ Short primary leg can be replaced with Synthetic Futures i\.e\. ITM PE with almost 100% Intrinsic Value in order to avoid MTM requirements \(if trade does not go as per plan\)\. Such Synthetic Futures may be available on Monthly Expiry and/or Weekly Expiry Options  \(as may be applicable\)\. However, if Synthetic Futures  \(on PE side\)of Weekly Expiry are used instead of Futures Short for the primary leg, then obviously the holding time of this Strategy would be less \(unless the primary leg is replaced/ roll\-over time and again with subsequent weekly Expiry series before the expiry of current Weekly expiry series\)\.

Further, it must be borne in mind that such deep ITM PE \(S*ynthetic Futures*\) may not be liquid \(especially in case of Stock Options\), owing to which a higher  buying price/premium may be paid \(*due to a higher Ask Price than the LTP*\) for such ITM PE; and also at the time of exiting from such deep ITM PE position, some haircut on the profit may need to be absorbed \(*due to a lower Bid Price than the LTP*\)\. This situation in such deep ITM PEs \(by virtue of it being illiquid\), from the perspective of this Strategy especially when played out with huge volumes, may lead to compromising on a higher buy price at the time of entry and then to absorb some haircut from the profits at the time of exiting from this position\.

__Merits & Demerits of Futures Hedge \(for trading bearish momentum\)__

__Benefits of Futures Hedge \(for trading bearish momentum\):__

- This is a very suitable Strategy for a very bearish trend in the underlying, as it gives phenomenally high return if the bearish momentum is quick and strong\. It is a better Strategy to play bearish momentum than Bear PE Spread\.
- This Strategy is a limited risk and unlimited reward Strategy\. On Expiry basis, this Strategy has a pre\-defined loss estimate, but unlimited profit potential if the downtrend continues with momentum\. 
- This Strategy can be initiated at reasonably low margin\. One Lot may cost around Rs\. 50,000 or so\. Therefore, a confirmed bearish trend can be played through this Strategy in good volume\.
- Futures’ Short primary leg can be replaced with Synthetic Futures i\.e\. ITM PE with almost 100% Intrinsic Value in order to avoid MTM requirements if trade does not go as per plan \(*in which case, Futures Short will pose more loss than profit on the CE Long hedged leg*\)\. However, such deep ITM PE \(S*ynthetic Futures*\) may not be liquid \(especially in case of Stock Options\)\. 
- This Strategy works even better when the Volatility is high / rising \(VIX above 18 or so\), as CE Long hedged leg will be relatively less impacted on account of Theta\.

__Demerits of Futures Hedge \(for trading bearish momentum\)__:

- This Strategy will not be profitable in a mild bearish trend \(and also if the trend reverses on the bullish side\)\. In case of mild bearish/ slow downtrend, the decay on ITM CE hedged leg, due to Theta impact or price fluctuations in a range for a longer time, may generate more loss than the profit generated on the Future Short primary leg\.
- In case of reversal of the trend on the bullish side, the Futures Short primary leg would start generating more loss than the profit generated on the CE Long hedged leg \(*due to Delta difference between the primary leg and the hedged leg*\), requiring more capital to provide for MTM losses\.
- Falling Volatility may cause erosion of the Premium value of the CE Long hedged leg \(*due to erosion of Time Value as a result of volatility squeeze*\), thereby generating loss on the CE Long hedged leg\.
- Long CE hedged leg may start generating steeper losses as it would approach its Expiry, due to Theta impact\. Hence, this Strategy must be exited reasonably before Expiry \(*viz\. *10 days before Expiry day\), and a fresh position may be created in fresh subsequent Expiry series\.

__Breakeven \(BE\) in Futures Hedge Strategy \(for bearish momentum\), its Calculations & Payoff Chart__

__Breakeven \(BE\) in Futures Hedge Strategy \(for bearish momentum\), from Expiry perspective__:

__<start> BE \(*below which profit will generate, from Expiry perspective*\):__ Futures sell price \- CE buy price \(i\.e\. primary leg’s sell price \- hedged leg’s buy price\) __<end>__

Therefore, in this bearish Strategy, in order to be profitable from Expiry perspective, Futures price must go down below and cross\-over the premium paid \(debit\) for buying CE Long for the hedged leg, before Expiry\.

__<start> Example of Futures Hedge Strategy \(for trading Bearish Momentum\):__

- Sell Nifty Futures \(Feb Month\) at 17950 \(*primary leg*\); and
- Buy Nifty 17550 CE \(Feb Month\) at a premium of Rs\. 545 \(*hedged leg*\)

*Intrinsic Value calculation will be done basis the Futures price, as given below:*

- *Thus, the Intrinsic Value comprised in the premium value of Rs\. 545 of 17550 ITM CE is 400 i\.e\. around 73% \(and the balance 27% i\.e\. 145 is the Time Value\)*\.

*In the above\-mentioned example, Nifty Futures must cross below 17950 \(buy price of Futures\) \- 545 \(buy premium of Nifty 17550 ITM CE\) i\.e\. 17405, before Expiry of Feb Month, to generate profit from Expiry perspective\. Lower the Futures would move with momentum, below this BE of 17405, higher would be the profit on this Strategy*\. __<end>__

It must be noted that, higher Time Value in ITM CE leg would increase the max loss on the trade but the breakeven for profit would be shorter \(*i\.e\. requiring less longer bearish move in the underlying*\)\. And if the Time Value in ITM CE leg is kept low then the max loss on the trade would also be low but the breakeven for profit would get longer \(*requiring much longer bearish move in the underlying*\)\.

__<end>__

__<end>__

__Loss scenario in Futures Hedge Strategy \(for trading Bearish Momentum\), and its Calculations__

__*Loss in Futures Hedge Strategy \(for trading Bearish Momentum\), from Expiry perspective*:__

__Max Loss scenario in Futures Hedge Strategy \(for trading Bearish Momentum\)__: If the underlying by Expiry closes above  the CE Long Strike, then there would be limited max loss incurred on this Strategy\.

__Calculation of Max Loss in Futures Hedge Strategy \(for trading Bearish Momentum\)__:

- \[*Futures selling price – CE Strike*\] 

- \[*premium at which CE Strike is bought*\]

__This max loss in effect is the Time Value of CE Long leg, basis the initiated positions\. __<__end__>

*In the above\-mentioned example, the Time Value comprised in the 17550 ITM CE is 145, therefore the Max Loss in the above example for 1 Lot \(i\.e\. 50 qty\) of Nifty is: 145 x 50 = Rs\. 7,250* 

Also, higher the Intrinsic Value in CE, lesser will be the max loss situation; and lower Intrinsic Value of ITM CE would increase the max loss situation on the Strategy\. <__end__>

__Loss Starting Level in Futures Hedge Strategy \(for trading Bearish Momentum\)__:

__Loss Zone in Futures Hedge Strategy \(for trading Bearish Momentum\)__:

Loss would occur in this Strategy, if the underlying closes by Expiry above the BE Strike; and max loss would accrue if the underlying closes above the CE Long Strike\. 

Therefore, if the underlying closes between the BE Strike and the CE Long Strike, then loss would occur, but the total loss amount would be lower if the underlying closes towards / closer to the BE Strike; and the loss will be higher if the underlying closes towards/closer to the CE Long Strike\.

__<end>__

__Trade legs of Futures Hedge Strategy \(for trading Bearish Momentum\)__:

- Long ITM CE with about 75% Intrinsic Value \(*hedged leg*\)

*Note:  Instead of selling Futures, you may consider buying Synthetic Futures \(i\.e\. deep ITM PE with Intrinsic Value almost 100%\)\. This Synthetic Future can be bought in current month Expiry series or Weekly Expiry\. Weekly Options however may require to be rolled\-over in case of positional trades\. This deep ITM PE may not be liquid at the time of buying, hence, Basket Order/ Market Order may not work\. Thus, use Limit Order to initiate trades\. Also, bear in mind that, if the strategy goes as per plan, then this Synthetic Futures \(deep ITM PE\) will move even more deep in the money and therefore would become even more illiquid\. Thus at the time of exiting this position of Synthetic Futures, some profits may have to be sacrificed, as when this Long ITM PE position will be attempted to be sold in order to square\-off, the available  bid price by the buyers may be too less than the LTP due to being an illiquid instrument\. So, these Synthetic Futures may be used for a shorter duration / intraday trades, for Futures Hedge Strategy purposes*

Both primary leg and the hedged leg will have same Lots quantity of Futures and CEs, respectively\. Further, the Futures position and the CE Options will be of the same Expiry series and same underlying\.

*Because the primary leg is properly hedged, margin requirement in this strategy will be quite less, and thus good volumes are possible on this Strategy\. However, extra capital must be ensured in the trading account in order to meet the MTM requirements if the bearish momentum does not immediately arrive \(or if the trend reverses on bullish side\)\.*

Intrinsic Value of 17550 ITM CE = \[17950 \- 17550\] = 400

Thus, the Intrinsic Value comprised in the premium value of Rs\. 545 of 17550 ITM CE is 400 i\.e\. around 73% \(*and the balance 27% i\.e\. 145 is the Time Value*\)\.

The Delta value of 17550 ITM CE is around 0\.70 \(*as per the Options Chain*\)\.

Further, since, 17550 ITM CE is next month’s Expiry, its Theta value is \-4\.3 \(as per Options Chain\)\. Hence, ample time before decay impact increases\. __<end>__

__Identification of Liquid Far OTM for Shorting:__

The next step is to target suitable Far OTM Option of such new born Far Month Expiry series for that particular asset/Indices\. which are liquid \(or atleast relatively liquid\)\. 

Now, whether or not liquidity on the Far OTMs of such Far Month Expiry series is available, can be determined by examining the difference between the prevailing Bid Price and the Ask Price of any particular Strike Option\. If the difference between the Bid Price and the Ask Price of any given Options is not in decimal but in single or two digits, then it signifies that such Options are not liquid\. 

*Note:* *The marketdepth  of any Strike Option, will show both Bid Price and Ask Price\. Also, liquidity can be determined at any Strike Option by looking at the Bid Price and Ask Price, available on the Options Chain of such new born Far Month Expiry series\. Options Chain maintained by certain brokers also distinctly marks out illiquid Strike Option on their Options Chain itself\.*

Problem with illiquid Far OTM Option is that: the difference between their Bid Price and Ask Price would be too high; which in turn may lead to following complications: either \(i\) the broker may not allow Shorting such liquid Far OTMs; or \(ii\) Shorting of such Far OTMs would be available at a relatively lower Bid Price \(*which may cause a trader to, therefore, place his Ask Price for taking Short position on such Far OTM, at a lower premium than the LTP, so as to match the prevailing Bid Price being offered by the buyers on that Strike Option*\)\. 

Having said this, certain kind of Far OTM Strikes, like the following:

- Strike Prices which end with atleast “000” \(*triple zero figure*\) in case of a five\-digit Strike Price *viz\. 14000, 17000, 18000, 32000, 38000 etc\.; or*
- Strike Prices which end with atleast “00” \(*double* *zero figure*\) in case of a four\-digit Strike Price *viz\. 1000, 1200, 1500, 1800, etc\.; or*
- Strike Prices which end with atleast “0” \(*one zero figure*\) in case of three\-digit Strike Price *viz\. 100, 120, 180, 320, 350, 400 etc\.,*

are likely to exhibit less differences between their Bid Price and Ask price, as visible on their marketwatch or Options Chain of Far Month Expiry series, and are relatively liquid far OTMs than other Far OTMs\. Such liquid Far OTMs must be targeted for Shorting to play the current trend\.

__SHORT OPTIONS STRATEGY__

__*To benefit from fast erosion of huge premium credit*__

- As soon as the fresh Far Month’s Expiry series becomes available for trading \(*immediately within few days, after expiry of Current Month Options*\), the Far OTMs of such Expiry series are found to have exorbitantly high Premium values\. These high Premium values in the Far OTMs can be observed in the Options Chain of this fresh Next Month Expiry series\. This phenomenon of Far OTMs carrying high premium value is due to the fact that as soon as a new Far Month Expiry series is born, the Far OTMs have excessive Time Value in their LTP \(in case of BankNifty, about 900 to 1500 per Lot\)\. If the VIX is high, like above 18 or so, then even higher premium value would be found on such Far OTMs\. 
- However, within 7\-10 days after such fresh Far Months’ Options becomes available for trading, the Far OTMs of such Expiry series, loose their Premium value by more than 40\-50% \(*due to erosion of excessive Time value from their premium value*\)\.  If the trend is bullish, then Far OTM PEs would loose their Premium value significantly; and if the trend is bearish, then Far OTM CEs would lose their Premium value significantly\. Also, if the underlying remain rangebound during this time period, then too such Far OTMs would lose their excessive Time Value and result in excessive loss in their premium value\. For example: if a BankNifty Far OTM has about a premium value of about 900 to 1500 per Lot, then we may expect erosion to the tune of about 300 to 400 per Lot within 7\-10 days, if the trend remains intact or the underlying remains rangebound\. Thus, a huge premium profit can be generated through premium credits of this magnitude and speed of erosion in their Time Value\. 

We should be able to understand, how can we quickly establish the current trend of the underlying, and decide whether to Short Far OTM CEs or Far OTM PEs of the newly born Far Month Expiry series\.

__Shorting Far OTM \(Naked\):__

Therefore, as mentioned above, few days after the new born Far Month Expiry series Options starts becoming available for trading \(i\.e\. after expiry of the Current Month Expiry series\), those Far OTMs \(*ending with “000” or “00” sorts*\), may be used for Shorting to play the relevant applicable trend \(*i\.e\. Short Far OTM PEs for playing bullish trend; and Short Far OTM CEs for playing bearish trend*\)\. 

Even such Far OTMs may not be perfectly liquid \(*i\.e\. having difference in more than decimals between their Bid price and Ask Price*\), therefore, such Short positions on these Far OTM can not be initiated on “Market Order”\. We will have to initiate the Short position using “Limit Order” basis the Bid Price available on that Strike at the time of creating position\. In this situation, even if we get a premium credit slightly lower than the prevailing LTP, but on standalone basis the premium value on such Far OTMs are anyways exorbitant\. Thus, even if we are able to take Short position on such Far OTMs at a premium credit \(i\.e\. Ask Price\) lesser than the LTP, the premium credit collected is still a great deal\.

Basis the trend, we may use these Far OTMs on Far Month Expiry series, as naked trading positions on Short CEs / Short PEs, as the case may be; or we can create a hedge Strategy to mitigate any loss from Short position in case of sudden gapup/ gapdown in opposite direction or trend reversal\. We can consider following hedge positions to play the Far Month Shorts\.

__Shorting Far OTM with Hedge:__

In order to mitigate / cover up any loss on the Short leg initiated on Far OTM Strike of newly born Far Month Expiry series, we can consider simultaneously initiating a Long position on Next Month Expiry series \(*i\.e\. closer Expiry series than Far Month Expiry series*\), in the following manner:

- if the trend is bearish, and a Far OTM CE on Far Month Expiry series is Short, then we can initiate a Long CE on Far OTM Strike of Next Month Expiry series\. Here, we can ensure that the Delta value of CE Long leg is same or slightly less than the Delta value of CE Short leg\. Further, same quantity of CE Long must be initiated, as initiated on CE Short leg\.
- if the trend is bullish, and a Far OTM PE on Far Month Expiry series is Short, then we can initiate a Long PE on Far OTM Strike of Next Month Expiry series\. Here, we can ensure that the Delta value of PE Long leg is same or slightly less than the Delta value of PE Short leg\. Further, same quantity of PE Long must be initiated, as initiated on PE Short leg\.

Here it must be noted that: just like Far OTMs of Far Month Expiry series, even the Far OTM Strikes of Next Month Expiry series \(*on which we plan to initiate Long positions, to hedge the Short leg*\) may not be perfectly liquid\. Therefore, we may have to initiate both Short position as well as the Long position using “Limit Order” instead of “Market Order”\. For initiating Long Options position, we will have to place the buy order \(*i\.e\. our Bid Price*\) using “Limit Order” basis the Ask Price available on that Strike at the time of creating position\. In this situation, we must try to ensure that we do not pay too high a price than the prevailing LTP on that Strike\.

Thus, through this hedged  Strategy, we can initiate large volumes to primarily profit from Shorting the Far OTM of the newly born Far Month Expiry series\. If the trend continues in the direction of the Strategy or remains rangebound, then overall the Strategy would yield good profit within a short span of time\. However, if the trend reverses with huge momentum or gapup / gapdown, then the Long leg would help mitigate the loss on the Short leg\.

__Trend Identification Through freshly born Far OTMs:__

As soon as the __Futures__ of the underlying asset/Indices for the __fresh Far Month Expiry series is born__ \(*immediately, after expiry of Current Month Futures*\), we have to place the AVWAP \(*Anchored VWAP indicator*\) on the first candle of the Futures of this Far Month Expiry series\. After the AVWAP is so placed on the Futures Chart of the relevant asset/Indices, and it is observed that:

- the first 2\-3 candles on daily TimeFrame of this newly born Far Month Expiry series of Futures, closes below the aforesaid AVWAP, then it is indicative that the __trend of the relevant underlying is bearish__;
- the first 2\-3 candles on daily TimeFrame of this newly born Far Month Expiry series of Futures, closes above the aforesaid AVWAP, then it is indicative that the __trend of the relevant underlying is bullish\.__

Accordingly, as per aforesaid trend identification: 

- if the trend is bearish \(*i\.e\. Futures price of new born Far Month Expiry series, consecutively closes below its born AVWAP*\), then: Shorting Far OTM CEs of such newly born Far Month Expiry series may be considered for trading; and
- if the trend is bullish \(*i\.e\. Futures price of new born Far Month Expiry series, consecutively closes above its born AVWAP*\), then: Shorting Far OTM PEs of such newly born Far Month Expiry series may be considered for trading\.

__Advanced Covered Call & Advanced Covered Put Strategy \- A General Introduction__

__This Strategy, is relatively safer than a conventional Covered Call or Covered Put, especially for positional trades__\.

In a general Covered Call and Covered Put Strategy \(*as discussed in the previous Chapter*\), we deploy Futures  position in the primary leg basis our main view on the underlying, and hedge the same with a hedged leg comprising of Short ATM / ITM Options with equal quantity as that of on the primary leg\. The hedged leg provides a cover to a maximum extent of Premium credit received on the Options Short hedged leg, in case the view goes wrong and the primary leg starts to generate loss\.  This aspect of limited coverage in a regular Covered Call /Put Strategy is a big drawback\. This drawback of regular Covered Call/ Put Strategy is mitigated to some extent in this version of Advanced covered Call and Advance Covered Put Strategy\. 

- Thus, in __Advanced Covered Call Strategy__, if we have a bullish view then we will first initiate a regular Covered Call position, i\.e\. Long in Futures \(the __primary leg__\) and a hedged leg with a bearish view by Shorting ITM CE \(the __hedged leg__\)\. Both the primary leg and the hedged leg of the aforesaid regular covered Call would be of same quantity on the Current Month Expiry\. After aforesaid regular Covered Call is initiated, in order to reduce the margin requirement for initiating Covered Call in large volume and to mitigate the drawback of a regular Covered Call \(i\.e\. of limited risk coverage through Shorting ITM CE\), we additionally initiate \(i\) Long Far OTM PE \(*which is atleast 2000 point away from ATM in case of BankNifty Options, having LTP of Rs 75 or less per Lot basis*\), with same quantity and on same Current Month Expiry as that on the aforesaid regular Covered Call; and \(ii\)  Far OTM Bear PE Debit Spread \(*which is atleast 1500 point away from ATM in case of BankNifty Options*\), with around 40% to 50% quantity than that of the aforesaid regular Covered Call leg, but the Spread must be on Next Month Expiry with 1000 point difference; and \(iii\) Long Far OTM PE of Current / Next Week Expiry \(*having LTP of Rs\. 5 or less per Lot basis for BankNifty Options*\), with same quantity as that on the aforesaid regular Covered Call\.
- Likewise, in __Advanced Covered Put Strategy__, if we have a bearish view then we will first initiate a regular Covered Put position, i\.e\. Short in Futures \(the __primary leg__\) and a hedged leg with a bullish view by Shorting ITM PE \(the __hedged leg__\)\. Both the primary leg and the hedged leg of the aforesaid regular Covered Put would be of same quantity on the Current Month Expiry\. After aforesaid regular Covered Put is initiated, in order to reduce the margin requirement for initiating Covered Put in large volume and to mitigate the drawback of a regular Covered Put  \(i\.e\. of limited risk coverage through Shorting ITM PE\), we additionally initiate \(i\) Long Far OTM CE \(*which is atleast 2000 point away from ATM in case of BankNifty Options, having LTP of Rs 75 or less per Lot basis*\), with same quantity and on same Current Month Expiry as that on the aforesaid regular Covered Put; and \(ii\)  Far OTM Bull CE Debit Spread \(*which is atleast 1500 point away from ATM in case of BankNifty Options*\), with around 40% to 50% quantity than that of the aforesaid regular Covered Put leg, but the Spread must be on Next Month Expiry with 1000 point difference; and \(iii\) Long Far OTM CE of Current / Next Week Expiry \(*having LTP of Rs\. 5 or less per Lot basis on BankNifty Options*\), with same quantity as that on the aforesaid regular Covered Put\.

__Breakeven Strike in Advanced Covered Call Strategy, its Calculation __

__*Breakeven Strike in Advanced Covered Call Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*__:

<__start__> Trade Legs of Advanced Covered Call, for reference:

Leg1: Long Futures 10 Lot __Current Month __Expiry \(*primary leg*\); and

Leg2: Short CE 10 Lot __Current Month__ Expiry \(*hedged leg*\); and

Leg3: Long Far OTM PE 10 Lot __Current Month__ Expiry; and 

Leg4: Long Far OTM PE 10 Lot __Current / Next Week__ Expiry \(*this helps to reduce margin*\); and

Leg5: Bear PE Debit Spread \(*with 1000 point difference*\) on Far OTM PEs of __Next Month__ Expiry, i\.e\.:

- Long Far OTM ‘X Strike’ PE 4\-5 Lots
- Short Even Far OTM ‘X\-1000 Strike’ PE 4\-5 Lots 

*Note: The quantity on the Trade Legs is only for explanation purpose\. Lower or higher quantity can also be deployed on the Strategy, however, the ratios between different legs must be maintained\.*

*Leg 1 & 2 is the regular Covered Call\. This regular Covered Call is made up into an Advanced Covered Call by initiating Leg 3 & 5 \(which primarily helps mitigate the loss in the event of a huge sudden gapdown / reversal on the downward side\)\. Leg 4 along with Leg 3 helps to reduce the margin on the regular Covered Call\. *<__end__>

Now, in a typical Covered Call Strategy \(i\.e\. with only Leg 1 & 2\), so long the underlying keeps moving higher upto or beyond the CE Short leg Strike, this Strategy would be in profit\. 

However, if the underlying starts falling, then Futures Long primary leg would start generating loss and CE Short leg would start generating profit\. The CE Short leg can generate profit to the maximum extent of Premium credit received\. Therefore, from Expiry perspective, if the underlying reverses and starts falling, then Futures’ Long primary leg would start giving unlimited loss; and CE Short hedged leg would be able to cover the losses incurred on Futures Long primary leg to the maximum extent of the Premium Credit received on the CE Short position\. 

<__start__> Accordingly, the Breakeven Strike on regular Covered Call \(i\.e\. Leg 1 & 2\), below which if the Futures primary leg falls loss would be incurred = __Futures Buying Price – Premium credit received on CE Short leg__ <__end__>

Further, in Advanced Covered Call Strategy, since Leg 3 & 5 are additionally initiated to further cover the risk in case of a sudden huge gapdown / reversal on the downward side, therefore, the Breakeven Strike beyond which loss area would begin if the Futures price slip, gets further expanded due to addition of Leg 3 & 5 as part of this Advanced Covered Call Strategy \(*as these Leg 3 & 5 generates profit if there is a gapdown / steep downward reversal, hence help absorb loss on the regular Covered Call legs of 1 & 2*\)\.

__Advanced Covered Call Strategy: Its Trade Legs and Objective__

__This Strategy, is relatively safer than a conventional Covered Call, especially for positional trades__\.

In a general Covered Call Strategy \(*as discussed in the previous Chapter*\), we deploy Futures  position in the primary leg basis our main view on the underlying, and hedge the same with a hedged leg comprising of Short ATM / ITM Options with equal quantity as that of on the primary leg\. The hedged leg provides a cover to a maximum extent of Premium credit received on the Options Short hedged leg, in case the view goes wrong and the primary leg starts to generate loss\.  This aspect of limited coverage in a regular Covered Call Strategy is a big drawback\. This drawback of regular Covered Call Strategy is mitigated to some extent in this version of Advanced Covered Call Strategy\. 

Thus, in <a id="_Hlk160048671"></a>__Advanced Covered Call Strategy__, if we have a bullish view then we will first initiate a regular Covered Call position, i\.e\. Long in Futures \(the __primary leg__\) and a hedged leg with a bearish view by Shorting ITM CE \(the __hedged leg__\)\. Both the primary leg and the hedged leg of the aforesaid regular covered Call would be of same quantity on the Current Month Expiry\. After aforesaid regular Covered Call is initiated, in order to reduce the margin requirement for initiating Covered Call in large volume and to mitigate the drawback of a regular Covered Call \(i\.e\. of limited risk coverage through Shorting ITM CE\), we additionally initiate \(i\) Long Far OTM PE \(*which is atleast 2000 point away from ATM in case of BankNifty Options, having LTP of Rs 75 or less per Lot basis*\), with same quantity and on same Current Month Expiry as that on the aforesaid regular Covered Call; and \(ii\)  Far OTM Bear PE Debit Spread \(*which is atleast 1500 point away from ATM in case of BankNifty Options*\), with around 40% to 50% quantity than that of the aforesaid regular Covered Call leg, but the Spread must be on Next Month Expiry with 1000 point difference; and \(iii\) Long Far OTM PE of Current / Next Week Expiry \(*having LTP of Rs\. 5 or less per Lot basis for BankNifty Options*\), with same quantity as that on the aforesaid regular Covered Call\.

__Trade Legs in Advanced Covered Call Strategy__:

*Leg 1 & 2 is the regular Covered Call\. This regular Covered Call is made up into an Advanced Covered Call by initiating Leg 3 & 5 \(which primarily helps mitigate the loss in the event of a huge sudden gapdown / reversal on the downward side\)\. Leg 4 along with Leg 3 helps to reduce the margin on the regular Covered Call\.* 

When VIX is high \(above 20\), then for the hedged leg ITM CE can be Shorted; and when VIX is very low \(around 11 or so\), then ATM CE can be Shorted for the hedged leg\. <__end__>

__Objective in Advanced Covered Call Strategy__:

A regular Covered Call is a limited profit, and unlimited loss Strategy\. The limited profit is generated in case of rangebound\-to\-mild bullish move in the underlying; and an unlimited loss may occur in case of a huge gapdown / downward move in the underlying\. 

Typically, in a regular Covered Call, ITM/ ATM Short CE mitigates the risk / loss on the primary leg in the event of reversal on downward direction of the underlying, only to the maximum extent of the Premium credit received on the Short CE leg\. Any further downward move in the underlying after exhaustion of the Premium credit of CE Short leg, exposes the regular Covered Call to an unlimited loss situation\.

This unlimited loss situation of regular Covered Call is converted into a pre\-defined max loss situation in Advanced Covered Call Strategy\. Thus, the Advanced Covered Call Strategy has been designed with the objective to overcome the drawback of regular Covered Call, with respect to the unlimited loss situation in case of a big gapdown / downward move in the underlying\.

This Strategy helps enlarge the area for the occurrence of loss, further to some extent, in the event of sudden huge gapdown / reversal on the downward direction\. This is loss mitigation is done by initiating: \(i\) a Far OTM naked PE with same quantity in same Month Expiry; and \(ii\) half quantity Far OTM Bear PE Debit Spread on Next Month Expiry\.

__<start> Example of Advanced Covered Call Strategy: __

In the last week of April:

1. Long BankNifty Futures 42372 __May, 20 Lot__
2. Short BankNifty 42200 ITM CE __May, 20 Lot__ \(@ Premium of Rs\.700 per Lot\)
3. Long BankNifty 40200 Far OTM PE __May, 20 Lot__ \(@ Premium of Rs\.74 per Lot\)
4. Long BankNifty 39700 Far OTM PE __Apr, 20 Lot__ \(@ Premium of Rs\. 4 per Lot\)
5. Bear PE Debit Spread in Next Month Expiry: 

- Long BankNifty 40000 Far OTM PE __June, 8 Lot__ \(@ Premium of Rs\.300 per Lot\)
- Short BankNifty 35000 Far OTM PE __June, 8 Lot__ \(@ Premium of Rs\.150 per Lot\) __<end>__

__Profit & Loss in Advanced Covered Call Strategy, and its Calculations__

__*Max Loss in Advanced Covered Call Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*:__

In a typical regular Covered Call Strategy, below the Breakeven Strike Price level, there could be unlimited loss, if the underlying keeps slipping down below the Breakeven Strike Price level of the primary leg\.

*<*__start__*> For Example: If Nifty Futures is at 17000 and a Covered Call Strategy is initiated with the following legs:*

*Nifty Futures Long 17000 & Nifty ATM CE 17000 Short at Rs\. 200 Premium, then the Breakeven level would be: 17000 – 200 = 16800\. Thus, from Expiry perspective, if the underlying slips below 16800, then this Covered Call Strategy would yield loss\. Lower the underlying trends by Expiry below the said Breakeven level, greater the loss incurred on this Strategy\.  *

However, due to addition of Leg 3 & 5 in this Advanced Covered Call Strategy, not only the Breakeven Strike gets expanded for the loss area to begin in case of a sudden huge gapdown / reversal on the downward side, but also from the Expiry perspective, the Max Loss gets curtailed to a large extent and pre\-defined \(*as against the unlimited Max Loss situation on a regular Covered Call Strategy*\)\. *<*__end__*>*

__*Max Reward in Advanced Covered Call Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*__:

In a typical regular Covered Call Strategy, the maximum reward would be generated, if by Expiry the Futures closes at or higher than the CE Short Strike on the hedged leg\. In this situation, maximum reward would occur because the Futures’ Long leg would generate profit due to the upward move and the CE Short leg too would generate profit due to erosion in its Time Value\. However, this Max Reward situation is limited\.

Thus, this maximum reward situation can be targeted on the regular Covered Call strategy when the view is rangebound\-to\-mildly bullish on the underlying\.

But, since, in Advanced Covered Call Strategy, the main objective is to mitigate the risk of  potential loss due to sudden huge gapdown/ strong reversal on the downside, therefore, addition of Leg 3 & 5 as part of this Strategy, also results in further limiting the profit potential / Max Reward potential due to mild bullish move in the underlying \(*as compared to a typical regular Covered Call Strategy*\) to an extent of entire premium debit incurred on Leg 3 & 5 \(*i\.e\. naked PE leg and Bear PE Spread leg*\)\.

__Options Behaviour and Delta values in Advanced Covered Call Strategy__

__*Options behaviour in Advanced Covered Call Strategy*__:

The mild bullish move in the underlying would yield limited Max Reward situation on the Strategy\. However, introduction of Leg 3 & 5 as risk mitigants \(*to expand risk coverage in case of unexpected gapdown / big fall in the underlying*\) as part of this Advanced Covered Call Strategy also further reduces the limited Max Reward situation by the maximum extent of net premium debits incurred on Leg 3 & 5 of this Strategy\.

Leg 3 is a naked PE Long which is chosen as a very Far OTM, so that the net premium debit incurred \(which results in reducing the Max Reward potential\) is kept reasonably low\. Further, this Leg is aimed to help in margin reduction \(so that large volume can be played\) and also to help mitigate the loss on the regular Covered Call legs in case of a sudden gapdown/ big fall in the underlying\.

Likewise, Leg 5 is a Bear Put Debit Spread on Next Month Expiry, which is again chosen as a very Far OTM Spread, so that the net premium debit incurred \(*which results in further reducing the Max Reward potential*\) is kept reasonably low\. Also, Leg 5 is introduced at almost 40% to 50% quantity than that of the quantity on the regular Covered Call Leg \(i\.e\. Leg 1 & 2\), so as to keep the net premium incurred as low on the Spread, and also so that the Net positive Delta position of the overall Strategy remains inclined positive \(*to meet the objective to benefit from bullish / mild bullish move in the underlying*\)\. This Spread is aimed to help mitigate the loss on the regular Covered Call legs in case of a sudden gapdown/ big fall in the underlying \(*thereby supplementing Leg 3*\)\. 

Further, the Spread is initiated on the Next Month Expiry, so as to dilute the impact of Theta due to holding time of this Strategy on positional basis\. The benefit of Next Month Expiry will be that if there is a rise and then a fall in the underlying, then inspite of such erratic movement in the underlying, the loss of premium would be negligible if the underlying comes back to the same Strike price \(*unlike in current Month Expiry where the Options would loose significant premium values  due to up & down movement in the underlying, even if the underlying comes back at the same Strike price from where it rose and slipped back*\)\.

Lastly, Leg 4 comprises of Long on Current Week / Next Week Far OTMs, which are deployed with the sole intention of causing further margin reduction, which will help take large quantities of trading positions, should the view is backed with strong conviction that the underlying is mildly bullish\. Intention is to not pay a higher premium to initiate these Long positions \(*as these will mostly likely expire worthless on its weekly Expiry*\)\. Hence, these Longs should be initiated by paying not more than Rs\. 2\-4 premium per Lot\. Accordingly, if this premium is available on Next Week Expiry then the Long may be initiated on the Far OTM PEs of Next Week Expiry, else Current Week PEs must be explored\. 

If the trading positions are planned to be held longer, then the Leg 4 need to be repeated \(i\.e\.* by initiating fresh Longs on Far OTM PEs on a fresh Weekly Expiry, before Expiry of the Current Weekly Options*\)\. Fresh Far OTM PEs for Leg 4 must be initiated just before Expiry of the existing Current Weekly Options \(*so that the margin reduction planned through these Long PEs are not disturbed*\)\.

__*Delta values in Advanced Covered Call Strategy*__:

- Leg 1 comprises of: Futures Long  having positive Delta value of 1 \(*per Lot basis*\)
- Leg 2 comprises of: CE Short initiated with a negative Delta value of 0\.5 to 0\.6, per Lot basis \(*0\.5 Delta is of ATM and 0\.6 Delta is of near ITM*\)
- Leg 3 comprises of: Naked Far OTM PE Long with a negative Delta value of 0\.05 to 0\.07 per Lot basis
- Leg 5 comprises of: Bear PE Debit Spread with a net negative Delta value 0\.10 to 0\.12 per Lot basis\.

Thus, effectively in Advanced Covered Call Strategy, the net Delta on overall Strategy is majorly positive \(*due to Futures Long position*\)\. The Delta difference between the positive Delta on the Futures primary leg and the negative Delta on all other Legs of the Strategy, maintains overall inclination of this Strategy toward bullish/mild bullish side\. Thus, upward move in the underlying would generate profit on overall basis on the Strategy upto a pre\-defined and limited Max Reward level, while fall in the underlying would exhibit loss \(*which from Expiry perspective is safe until the Breakeven Strike level*\)\. Any further fall in the underlying beyond the Breakeven Strike by Expiry of the Futures leg, may yield a pre\-defined and limited Max Loss situation\.

__Impact of Different Market Situations on Advanced Covered Call Strategy__

__*If trade goes as per plan, in Advanced Covered Call Strategy*__:

If the underlying is bullish / mild bullish, then the Futures Long primary leg will generate profit\. But with Future going higher, the hedged CE Short leg will generate loss \(*because the LTP of CE Short leg will rise due to underlying going upward*\)\. 

Further, Leg 3 & 5 \(i\.e\. Long PE and Bear PE Spread\) also starts giving loss, to the maximum extent of the net Premium debit incurred on these legs\. 

However, due to the net Delta position on the overall Strategy being net positive, therefore, the Strategy would yield the limited reward, applicable on the Strategy in case of mild bullish to bullish move on the underlying*\.*

__*If underlying becomes sideways, during Advanced Covered Call Strategy*__:

However, if the underlying keeps fluctuating in  a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the hedged leg of CE Short would generate profit due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in profit in both primary and hedged leg\. 

However, in such a situation, Leg 3 & 5 \(i\.e\. Long PE and Bear PE Spread\) may start giving loss, to the maximum extent of the net Premium debit incurred on these legs\. Thus, the profit generated on CE Short leg due to Theta impact may get partially set\-off with the Premium erosion on the Long PE, and also there would be some Premium erosion on the Bear PE Spread due to rangebound fluctuations \(*however, in the Spread the Premium erosion would be relatively less, as it is on Next Month Expiry series*\)\. 

Accordingly, overall in a rangebound situation, the Strategy may yield profit if Futures primary leg is profitable, but if the Futures primary leg yields loss then the overall Strategy may yield some minor profit / loss, from Expiry perspective\.

__*If trade does not go as per plan, in Advanced Covered Call Strategy*__:

However, if Futures starts falling, then Futures Long primary leg will generate loss\. Lower the Futures falls, unlimited loss may be incurred on the primary leg\. But with Futures falling down, the hedged CE Short leg will generate limited profit to the extent of Premium received on the Short position\. Further, this Strategy has Leg 3 & 5 \(i\.e\. Long PE and Bear PE Spread\) to mitigate the downside risk\. Thus, the CE Short hedged leg, Long PE and Bear PE Spread, all these legs will protect the loss in Futures Long primary leg\. 

If the Futures keeps falling even further then the Premium collected on CE Short leg will get exhausted and Futures Long primary leg will start incurring losses, which may be  further mitigated by Leg 3 & 5 to some extent\. But since the overall Strategy is on a positive Delta \(essentially due to Futures Long primary leg\), therefore, Leg 2, 3 & 5 will be able to mitigate the loss on the Futures Long primary leg to a limited extent upto the Breakeven Strike, beyond which  the Strategy may get exposed to pre\-defined Max Loss situation, and certain  adjustments may need to be made to cover for potential loss on the Strategy\.

__Adjustments in Advanced Covered Call Strategy__

__*Adjustments in Advanced Covered Call Strategy \(if trade does not go as per plan\)*__:

Now, since, Leg 2, 3 & 5 will be able to cover the losses arising in the primary leg to a limited extent upto the Breakeven level; and if the Futures keep falling beyond the Breakeven level then in order to mitigate the pre\-defined Max Loss situation, the following adjustments may be considered: \(i\) initiate more naked Long PEs or more Bear PE Debit Spread positions; or \(ii\) initiate more Short CE positions\. These adjustments are discussed below\.

1. If there seems to be a trending downtrend, then naked __PEs of Next Month Expiry series can be bought \(Long PE\)__\. These PEs must be at some Near OTM Strike\. These additional PEs will overcome the limitation of limited downside protection offered by the already existing Leg 2, 3 & 5; and this fresh PE Long at Near OTM position will take care of bearish trend if it continues\. Buying PEs to protect the downside risk in this Strategy will add a debit position, therefore this naked PE Long should only be prudent to initiate only if there is strong momentum for the downward direction\. Depending upon the momentum in the downtrend, such quantity of fresh Near OTM PEs should be added, so that the overall Delta on the Strategy turns negative, so as to suitably cover the losses in Futures Long position, in case of continuation of strong downtrend\. Such quantity of Long PEs should generate more profit and help cover losses in the Futures Long primary leg, during continuation of bearish momentum\. 

Further, if the bearish momentum is not very sure to last or sustain, then instead of naked Long PEs as mentioned above, suitable number of __Bear PE Debit Spread on Next Month Expiry __can also be initiated at fresh Near OTM strikes\. This Spread will be in addition to the Spread already existing on Leg 5, but these fresh Spread positions will be on Near OTM Strikes\. This Spread must be initiated with such quantity, so as to effectively turn the overall Delta position of the Strategy on negative Delta, so as to generate profit on the continued bearish trend and set\-off the loss on the Futures Long primary leg\.

1. If there seems to be a slow downtrend / rangebound situation, then naked __OTM CEs can be sold \(Short CE\) of Current Month Expiry__\. If not enough Premium is available on current Month Expiry then Far OTM CEs of even next Month Expiry series can also be added\. These additional CE Short positions will help cover further losses that may be incurred in the Futures Long primary leg as the downtrend continues, to the extent of Premium received by selling these additional CEs\. These Far OTM CEs can be sold \(CE Short\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This CE Short will help cover the loss generated on the Futures Long primary leg\. These fresh CE Short positions must be initiated with such quantity, so as to effectively turn the overall Delta position of the Strategy on negative Delta, so as to generate profit on the continued bearish trend and set\-off the loss on the Futures Long primary leg\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements will also have to be met\. The margin requirement for these CE Shorts can be reduced by initiating equal quantity of Far OTM CE Long on Current Week Expiry with a nominal premium value of Rs\. 1 to Rs 4 \(*as was done in Leg 4 of the Strategy*\)\.

__Merits & Demerits of Advanced Covered Call Strategy__

__*Demerits of Advanced Covered Call Strategy*__:

- Buying Futures and Shorting Options, both require huge margin and MTM issues\. This can be dealt with by buying Far OTM PEs with same quantity and Expiry, as that of the Futures leg\. 
- Low Volatility may not offer good premium for Shorting CEs for the hedged leg, thereby reducing the loss area/ Breakeven Strike upon reversal besides low Premium as profit from Theta decay in case of rangebound movement in the underlying\. 
- Since, this trade involves deployment of Futures, therefore, the brokerage would be higher, like about Rs\. 300 per Lot\.
- This Strategy helps enlarge the area for the occurrence of loss, further to some extent only \(*in the event of sudden huge gapdown / reversal on the downward direction*\), but a continuous fall beyond the Breakeven Strike of this Strategy would generate loss situation in this Strategy\.
- The Limited Max Reward situation  on this Strategy gets further curtailed \(as compared to regular Covered Call\) to the maximum extent of net premium debits incurred over and above the regular Covered Call legs\.

__*Benefits of Advanced Covered Call Strategy*:__

- This is a very suitable Strategy for a mild bullish to rangebound underlying  \(as the CE Short hedged leg too may generate profit due to Theta impact\)\.
- This Strategy overcomes the drawback of regular Covered Call, in which the ITM/ ATM Short CE mitigates the risk / loss on the primary leg in the event of reversal on downward direction of the underlying, only to the maximum extent of the Premium credit received on the Short CE leg\.
- This Strategy curtails the unlimited Max Loss situation of regular Covered Call into a pre\-defined Max Loss situation\. 
- This Strategy therefore generates profit if the underlying remains bullish until Expiry, or even when the underlying gets rangebound\. And if the underlying reverses downwardly, then also this Strategy is capable of mitigating risk/loss on bearish side to a some more extent\.
- This Strategy helps enlarge the area for the occurrence of loss, further to some extent only \(*in the event of sudden huge gapdown / reversal on the downward direction*\), and a continuous fall beyond the Breakeven Strike of this Strategy would generate a pre\-defined Max Loss in this Strategy\.
- This Strategy is suitable when the Volatility is relatively low, like between 10\-14 range\.
- However, when the Volatility is relatively very high \(like 20 or more\), then also this Strategy can be deployed, in which case CE Shorts for the hedged leg can be initiated at suitable OTM Strikes with good Premium, instead of Shorting ATM, if the underlying seems to be in a range\.

__Breakeven Strike in Advanced Covered Put Strategy, and its Calculation__

__*Breakeven Strike in Advanced Covered Put Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*__:

__<start>__*Trade Legs in Advanced Covered Put Strategy, for reference*:

Leg1: Short Futures 10 Lot Current Month Expiry \(*primary leg*\); and

Leg2: Short PE 10 Lot __Current Month__ Expiry \(*hedged leg*\); and

Leg3: Long Far OTM CE 10 Lot __Current Month__ Expiry; and

Leg4: Long Far OTM CE 10 Lot __Current / Next Week__ Expiry \(*this helps to reduce margin*\); and

Leg5: Bull CE Debit Spread \(*with 1000 point difference*\) on Far OTM CEs of __Next Month__ Expiry, i\.e\.:

- Long Far OTM ‘X Strike’ CE 4\-5 Lots
- Short Even Far OTM ‘X\+1000 Strike’ CE 4\-5 Lots 

*Leg 1 & 2 is the regular Covered Put\. This regular Covered Put is made up into an Advanced Covered Call Put by initiating Leg 3 & 5 \(which primarily helps mitigate the loss in the event of a huge sudden gapup / reversal on the upward side\)\. Leg 4 along with Leg 3 helps to reduce the margin on the regular Covered Put\.* __<end>__

Now, in a typical Covered Put Strategy \(i\.e\. with only Leg 1 & 2\), so long the underlying keeps moving lower upto or beyond the PE Short leg Strike, this Strategy would be in profit\. 

However, if the underlying starts rising higher, then Futures Short primary leg would start generating loss and PE Short leg would start generating profit\. The PE Short leg can generate profit to the maximum extent of Premium credit received\. 

Therefore, from Expiry perspective, if the underlying reverses and starts rising higher, then Futures’ Short primary leg would start giving unlimited loss; and PE Short hedged leg would be able to cover the losses incurred on Futures Short primary leg to the maximum extent of the Premium Credit received on the PE Short position\. 

<__start__> Accordingly, the Breakeven Strike on regular Covered Put  \(i\.e\. Leg 1 & 2\), above which if the Futures primary leg rises loss would be incurred, would be = __Futures Short Price \+ Premium credit received on PE Short leg__\. <__end__>

Further, in Advanced Covered Put Strategy, since Leg 3 & 5 are additionally initiated to further cover the risk in case of a sudden huge gapup / reversal on the upward side, therefore, the Breakeven Strike beyond which loss area would begin if the Futures price rises upward, gets further expanded due to addition of Leg 3 & 5 as part of this Advanced Covered Put Strategy \(*as these Leg 3 & 5 generates profit if there is a gapup / steep upward reversal, hence help absorb loss on the regular Covered Put legs of 1 & 2*\)\.

__Advanced Covered Put Strategy: Its Trade Legs and Objective__

__This Strategy, is relatively safer than a conventional Covered Put, especially for positional trades__\.

In a general Covered Put Strategy, we deploy Futures  position in the primary leg basis our main view on the underlying, and hedge the same with a hedged leg comprising of Short ATM / ITM Options with equal quantity as that of on the primary leg\. The hedged leg provides a cover to a maximum extent of Premium credit received on the Options Short hedged leg, in case the view goes wrong and the primary leg starts to generate loss\.  This aspect of limited coverage in a regular Covered Put Strategy is a big drawback\. This drawback of regular Covered Put Strategy is mitigated to some extent in this version of Advanced Covered Put Strategy\. 

In __Advanced Covered Put Strategy__, if we have a bearish view then we will first initiate a regular Covered Put position, i\.e\. Short in Futures \(the __primary leg__\) and a hedged leg with a bullish view by Shorting ITM PE \(the __hedged leg__\)\. Both the primary leg and the hedged leg of the aforesaid regular Covered Put would be of same quantity on the Current Month Expiry\. After aforesaid regular Covered Put is initiated, in order to reduce the margin requirement for initiating Covered Put in large volume and to mitigate the drawback of a regular Covered Put  \(i\.e\. of limited risk coverage through Shorting ITM PE\), we additionally initiate \(i\) Long Far OTM CE \(*which is atleast 2000 point away from ATM in case of BankNifty Options, having LTP of Rs 75 or less per Lot basis*\), with same quantity and on same Current Month Expiry as that on the aforesaid regular Covered Put; and \(ii\)  Far OTM Bull CE Debit Spread \(*which is atleast 1500 point away from ATM in case of BankNifty Options*\), with around 40% to 50% quantity than that of the aforesaid regular Covered Put leg, but the Spread must be on Next Month Expiry with 1000 point difference; and \(iii\) Long Far OTM CE of Current / Next Week Expiry \(*having LTP of Rs\. 5 or less per Lot basis on BankNifty Options*\), with same quantity as that on the aforesaid regular Covered Put\.

__Trade Legs in Advanced Covered Put Strategy__:

Leg 1 & 2 is the regular Covered Put\. This regular Covered Put is made up into an Advanced Covered Call Put by initiating Leg 3 & 5 \(which primarily helps mitigate the loss in the event of a huge sudden gapup / reversal on the upward side\)\. Leg 4 along with Leg 3 helps to reduce the margin on the regular Covered Put\. 

When VIX is high \(above 20\), then for the hedged leg ITM PE can be Shorted; and when VIX is very low \(around 11 or so\), then ATM PE can be Shorted for the hedged leg\. __<end>__

__Objective in Advanced Covered Put Strategy__:

A regular Covered Put is a limited profit, and unlimited loss Strategy\. The limited profit is generated in case of rangebound\-to\-mild bearish move in the underlying; and an unlimited loss may occur in case of a huge gapup / upward move in the underlying\. 

Typically, in a regular Covered Put, ITM/ ATM Short PE mitigates the risk / loss on the primary leg in the event of reversal on upward direction of the underlying, only to the maximum extent of the Premium credit received on the Short PE leg\. Any further upward move in the underlying after exhaustion of the premium credit of PE Short leg, exposes the regular Covered Put to an unlimited loss situation\.

This unlimited loss situation of regular Covered Put is converted into a pre\-defined max loss situation in Advanced Covered Put Strategy\. Thus, the Advanced Covered Put Strategy has been designed with the objective to overcome the drawback of regular Covered Put, with respect to the unlimited loss situation in case of a big gapup/ upward move in the underlying\. 

This Strategy helps enlarge the area for the occurrence of loss, further to some extent, in the event of sudden huge gapup / reversal on the upward direction\. This loss mitigation is done by initiating \(i\) a Far OTM naked CE with same quantity in same Month Expiry; and \(ii\) half quantity Far OTM Bull CE Debit Spread on Next Month Expiry\.

__<start> Example of Advanced Covered Put Strategy:__ 

Leg1: Short BankNifty Futures 42372 __May, 20 Lot__

Leg2: Short BankNifty 42400 ITM PE __May, 20 Lot__ \(@ Premium of Rs\.713 per Lot\)

Leg3: Long BankNifty 44500 Far OTM CE __May, 20 Lot__ \(@ Premium of Rs\.74\.2 per Lot\)

Leg4: Long BankNifty 44500 Far OTM CE __Apr, 20 Lot__ \(@ Premium of Rs\. 4\.1 per Lot\)

Leg5: Bull CE Debit Spread in Next Month Expiry:

- Long BankNifty 44000 Far OTM CE __June, 8 Lot__ \(@ Premium of Rs\.373\.2 per Lot\)
- Short BankNifty 45000 Far OTM CE __June, 8 Lot__ \(@ Premium of Rs\.169\.5 per Lot\) __<end>__

__Profit & Loss in Advanced Covered Put Strategy, and its Calculations__

Trade Legs in Advanced Covered Put Strategy, for reference:

__*Max Loss in Advanced Covered Put Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*:__

In a typical regular Covered Call Strategy, above the Breakeven Strike Price level, there could be unlimited loss in this Strategy if the underlying keeps rising higher above the Breakeven Strike Price level of the primary leg\.

*<*__start__*> For Example: If Nifty Futures is at 17000 and a Covered Put Strategy is initiated with the following legs:*

*Nifty Futures Sell 17000 & Nifty ITM PE 17100 Short at Rs\. 250 Premium, then the Breakeven level would be: 17000 \+ 250 = 17250\. Thus, from Expiry perspective, if the underlying is found trending above 17250 strike, then this Covered Put Strategy would yield loss\. Higher the underlying trends by Expiry above the said Breakeven level, greater the loss incurred on this Strategy\. <*__end__*>*

However, due to addition of Leg 3 & 5 in this Advanced Covered Put Strategy, not only the Breakeven Strike gets expanded for the loss area to begin in case of a sudden huge gapup / reversal on the upward side, but also from the Expiry perspective, the Max Loss gets curtailed to a large extent and pre\-defined \(*as against the unlimited Max Loss situation on a regular Covered Put Strategy*\)\.

__*Max Reward in Advanced Covered Put Strategy, from Expiry perspective \(i\.e\. Expiry of the Futures leg\)*__:

In a typical regular Covered Put Strategy, the maximum reward would be generated in this Strategy, if by Expiry the Futures closes at or lower than the PE Short Strike on the hedged leg\. In this situation, maximum reward would occur because the Futures’ Short leg would generate profit due to the downward move and the PE Short leg too would generate profit due to erosion in its Time Value\. However, this Max Reward situation is limited\.

Thus, this maximum reward situation can be targeted on this regular Covered Put Strategy when the view is rangebound\-to\-mildly bearish on the underlying\.

But, since, in Advanced Covered Put Strategy, the main objective is to mitigate the risk of  potential loss due to sudden huge gapup/ strong reversal on the upside, therefore, addition of Leg 3 & 5 as part of this Strategy, also results in further limiting the profit potential / Max Reward potential due to mild bearish move in the underlying \(*as compared to a typical regular Covered Put Strategy*\) to an extent of entire premium debit incurred on Leg 3 & 5 \(*i\.e\. naked CE leg and Bull CE Spread leg*\)\.

__Options Behaviour and Delta values in Advanced Covered Put Strategy__

__*Options behaviour in Advanced Covered Put Strategy*__:

The mild bearish move in the underlying would yield limited Max Reward situation on the Strategy\. However, introduction of Leg 3 & 5 as risk mitigants \(*to expand risk coverage in case of unexpected gapup / big rise in the underlying*\) as part of this Advanced Covered Put Strategy also further reduces the limited Max Reward situation by the maximum extent of net premium debits incurred on Leg 3 & 5 of this Strategy\.

Leg 3 is a naked CE Long which is chosen as a very Far OTM, so that the net premium debit incurred \(which results in reducing the Max Reward potential\) is kept reasonably low\. Further, this Leg is aimed to help in margin reduction \(so that large volume can be played\) and also to help mitigate the loss on the regular Covered Put legs in case of a sudden gapup/ big rise in the underlying\.

Likewise, Leg 5 is a Bull Call Debit Spread on Next Month Expiry, which is again chosen as a very Far OTM Spread, so that the net premium debit incurred \(*which results in further reducing the Max Reward potential*\) is kept reasonably low\. Also, Leg 5 is introduced at almost 40% to 50% quantity than that of the quantity on the regular Covered Put Leg \(i\.e\. Leg 1 & 2\), so as to keep the net premium incurred as low on the Spread, and also so that the Net negative Delta position of the overall Strategy remains inclined negative \(*to meet the objective to benefit from bearish / mild bearish move in the underlying*\)\. This Spread is aimed to help mitigate the loss on the regular Covered Put legs in case of a sudden gapup/ big rise in the underlying \(*thereby supplementing Leg 3*\)\. 

Further, the Spread is initiated on the Next Month Expiry, so as to dilute the impact of Theta due to holding time of this Strategy on positional basis\. The benefit of Next Month Expiry will be that if there is a fall and then a rise in the underlying, then inspite of such erratic movement in the underlying, the loss of premium would be negligible if the underlying comes back to the same Strike price \(*unlike in current Month Expiry where the Options would loose significant premium values  due to up & down movement in the underlying, even if the underlying comes back at the same Strike price from where it slipped and revert back*\)\.

Lastly, Leg 4 comprises of Long on Current Week / Next Week Far OTMs, which are deployed with the sole intention of causing further margin reduction, which will help take large quantities of trading positions, should the view is backed with strong conviction that the underlying is mildly bearish\. Intention is to not pay a higher premium to initiate these Long positions \(*as these will mostly likely expire worthless on its weekly Expiry*\)\. Hence, these Longs should be initiated by paying not more than Rs\. 2\-4 premium per Lot\. Accordingly, if this premium is available on Next Week Expiry then the Long may be initiated on the Far OTM CEs of Next Week Expiry, else Current Week CEs must be explored\. 

If the trading positions are planned to be held longer, then the Leg 4 need to be repeated \(i\.e\.* by initiating fresh Longs on Far OTM CEs on a fresh Weekly Expiry, before Expiry of the Current Weekly Options*\)\. Fresh Far OTM CEs for Leg 4 must be initiated just before Expiry of the existing Current Weekly Options \(*so that the margin reduction planned through these Long CEs are not disturbed*\)\.

__<start> Delta value in Advanced Covered Put Strategy__:

- Leg 1 comprises of: Futures Short having negative Delta value of 1 \(*per Lot basis*\)
- Leg 2 comprises of: PE Short initiated with a positive Delta value of 0\.5 to 0\.6, per Lot basis \(*0\.5 Delta is of ATM and 0\.6 Delta is of near ITM*\)
- Leg 3 comprises of: Naked Far OTM CE Long with a positive Delta value of 0\.05 to 0\.07 per Lot basis
- Leg 5 comprises of: Bull CE Debit Spread with a net positive Delta value 0\.10 to 0\.12 per Lot basis\. __<end>__

Thus, effectively in Advanced Covered Put Strategy, the net Delta on overall Strategy is majorly negative \(*due to Futures Short position*\)\. The Delta difference between the negative Delta on the Futures primary leg and the positive Delta on all other Legs of the Strategy, maintains overall inclination of this Strategy toward bearish/mild bearish side\. Thus, downward move in the underlying would generate profit on overall basis on the Strategy upto a pre\-defined and limited Max Reward level, while rise in the underlying would exhibit loss \(*which from Expiry perspective is safe until the Breakeven Strike level*\)\. Any further uprise in the underlying beyond the Breakeven Strike by Expiry of the Futures leg\. may yield a pre\-defined and limited Max Loss situation\.

__Impact of Different Market Situations on Advanced Covered Put Strategy__

__*If trade goes as per plan, in Advanced Covered Put Strategy*__:

If the underlying is bearish / mild bearish, then the Futures Short primary leg will generate profit\. But with Future going lower, the hedged PE Short leg will generate loss \(*because the LTP of PE Short leg will rise due to underlying going downward*\)\. 

Further, Leg 3 & 5 \(i\.e\. Long CE and Bull CE Spread\) also starts giving loss, to the maximum extent of the net Premium debit incurred on these legs\. 

However, due to the net Delta position on the overall Strategy being net negative, therefore, therefore, the Strategy would yield the limited reward, applicable on the Strategy in case of mild bearish to bearish move on the underlying \(*discussed above*\)\.

__*If underlying becomes sideways, during Advanced Covered Put Strategy*__:

However, if the underlying keeps fluctuating in  a range, then the primary leg \(being Futures position\) will not get impacted with Theta; but the hedged leg of PE Short would generate profit due to rangebound fluctuations in the underlying as well as due to Theta impact with passage of time\. This situation may likely result in profit in both primary and hedged leg\. 

However, in such a situation, Leg 3 & 5 \(i\.e\. Long CE and Bull CE Spread\) may also start giving loss, to the maximum extent of the net Premium debit incurred on these legs\. Thus, the profit generated on PE Short leg due to Theta impact may get partially set\-off with the Premium erosion on the Long CE, and also there would be some Premium erosion on the Bull CE Spread due to rangebound fluctuations \(*however, in the Spread the Premium erosion would be relatively less, as it is on Next Month Expiry series*\)\.

__*If trade does not go as per plan, in Advanced Covered Put Strategy*__:

However, if Futures starts rising upward, then Futures Short primary leg will generate loss\. Higher the Futures rise, unlimited loss may be incurred on the primary leg\. But with Futures rising up, the hedged PE Short leg will generate limited profit to the extent of Premium received on the Short position\. Further, this Strategy has Leg 3 & 5 \(i\.e\. Long CE and Bull CE Spread\) to mitigate the upside risk\. Thus, the PE Short hedged leg, Long CE and Bull CE Spread, all these legs will protect the loss in Futures Short primary leg\.

If the Futures keeps rising higher even further then the Premium collected on PE Short leg will get exhausted and Futures Short primary leg will start incurring losses, which may be  further mitigated by Leg 3 & 5 to some extent\. But since the overall Strategy is on a negative Delta \(essentially due to Futures Short primary leg\), therefore, Leg 2, 3 & 5 will be able to mitigate the loss on the Futures Short primary leg to a limited extent upto the Breakeven Strike, beyond which  the Strategy may get exposed to pre\-defined Max Loss situation, and certain  adjustments may need to be made to cover for potential loss on the Strategy\.

__Adjustments in Advanced Covered Put Strategy__

__*Adjustments in Advanced Covered Put Strategy \(if trade does not go as per plan\)*__:

Since, Leg 2, 3 & 5 will be able to cover the losses arising in the primary leg to a limited extent upto the Breakeven level; and if the Futures keep rising upwards beyond the Breakeven level then in order to mitigate the pre\-defined Max Loss situation, the following adjustments may be considered: \(i\) initiate more naked Long CEs or more Bull CE Debit Spread positions; or \(ii\) initiate more Short PE positions\. These adjustments are discussed below\.

1. If there seems to be a trending uptrend, then naked __CEs of Next Month Expiry series can be bought \(Long CE\)__\. These CEs must be at some Near OTM Strike\. These additional CEs will overcome the limitation of limited upside protection offered by the already existing Leg 2, 3 & 5; and this fresh CE Long at Near OTM position will take care of bullish trend if it continues\. Buying CEs to protect the upside risk in this Strategy will add a debit position, therefore this naked CE Long should only be prudent to initiate only if there is strong momentum for the upward direction\. Depending upon the momentum in the uptrend, such quantity of fresh Near OTM CEs should be added, so that the overall Delta on the Strategy turns positive, so as to suitably cover the losses in Futures Short position, in case of continuation of strong uptrend\. Such quantity of Long CEs should generate more profit and help cover losses in the Futures Short primary leg, during continuation of bullish momentum

Further, if the bullish momentum is not very sure to last or sustain, then instead of naked Long CEs as mentioned above, suitable number of __Bull CE Debit Spread on Next Month Expiry __can also be initiated at fresh Near OTM strikes\. This Spread will be in addition to the Spread already existing on Leg 5, but these fresh Spread positions will be on Near OTM Strikes\. This Spread must be initiated with such quantity, so as to effectively turn the overall Delta position of the Strategy on positive Delta, so as to generate profit on the continued bullish trend and set\-off the loss on the Futures Short primary leg\.

1. If there seems to be a slow uptrend / rangebound situation, then naked __OTM PEs can be sold \(Short PE\)__\. __of Current Month Expiry__\. If not enough Premium is available on current Month Expiry then Far OTM CEs of even Next Month Expiry series can also be added\. These additional PE Short positions will help cover further losses that may be incurred in the Futures Short primary leg as the uptrend continues, to the extent of Premium received by selling this additional PEs\. These Far OTM PEs can be sold \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full Premium at which Short is initiated as profit\. This PE Short will help cover the loss generated on the Futures Short primary leg\. These fresh PE Short positions must be initiated with such quantity, so as to effectively turn the overall Delta position of the Strategy on positive Delta, so as to generate profit on the continued bullish trend and set\-off the loss on the Futures Short primary leg\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements will also have to be met\. The margin requirement for these PE Shorts can be reduced by initiating equal quantity of Far OTM PE Long on Current Week Expiry with a nominal premium value of Rs\. 1 to Rs 4 \(*as was done in Leg 4 of the Strategy*\)\.

__Merits & Demerits of Advanced Covered Put Strategy__

__*Demerits of Advanced Covered Put Strategy*__:

- Shorting Futures and Shorting Options, both require huge margin and MTM issues\. This can be dealt with by buying Far OTM CEs with same quantity and Expiry, as that of the Futures leg\.
- Low Volatility may not offer good premium for Shorting PEs for the hedged leg, thereby reducing the loss area/ Breakeven Strike upon reversal besides low Premium as profit from Theta decay in case of rangebound movement in the underlying\.
- This Strategy helps enlarge the area for the occurrence of loss, further to some extent only \(*in the event of sudden huge gapup / reversal on the upward direction*\), but a continuous rise beyond the Breakeven Strike of this Strategy would generate loss situation in this Strategy\.
- The Limited Max Reward situation  on this Strategy gets further curtailed \(as compared to regular Covered Put\) to the maximum extent of net premium debits incurred over and above the regular Covered Put legs\.

__*Benefits of Advanced Covered Put Strategy*:__

- This is a very suitable Strategy for a mild bearish to rangebound underlying \(as the PE Short hedged leg too may generate profit due to Theta impact\)\.
- This Strategy overcomes the drawback of regular Covered Put, in which the ITM/ ATM Short PE mitigates the risk / loss on the primary leg in the event of reversal on upward direction of the underlying, only to the maximum extent of the Premium credit received on the Short PE leg\.
- This Strategy curtails the unlimited Max Loss situation of regular Covered Put into a pre\-defined Max Loss situation\. 
- This Strategy therefore generates profit if the underlying remains bearish until Expiry, or even when the underlying gets rangebound\. And if the underlying reverses upwardly, then also this Strategy is capable of mitigating risk/loss on bullish side to a some more extent\.
- This Strategy helps enlarge the area for the occurrence of loss, further to some extent only \(*in the event of sudden huge gapup / reversal on the upward direction*\), and a continuous rise beyond the Breakeven Strike of this Strategy would generate a pre\-defined Max Loss in this Strategy\.
- However, when the Volatility is relatively very high \(like 20 or more\), then also this Strategy can be deployed, in which case PE Shorts for the hedged leg can be initiated at suitable OTM Strikes with good Premium, instead of Shorting ATM, if the underlying seems to be in a range\.

__Hedge\-17 Strategy: Based on Nifty & BankNifty Movement \- A General Introduction__

__This Strategy is a unique, much safer and high probability trade design, which is designed to play the difference between the strength of Nifty and BankNifty Indices__\.

This Strategy is designed to take advantage of an expected mild bullish/ mild bearish move, followed by a reversal \(*like a V shaped move*\)\. This strategy is deployed to be implemented when the underlying is neither at Resistance nor at Support zone, but somewhere in between, and is expected to close within a mid\-range, even though it may intermittent directional move, but it will retrace\.

For example: 

1. when the underlying is in a downtrend, and the underlying price is between Support & Resistance zone and is expected to make a mild\-bullish move on the upside upto a Resistance level, and then retrace from that Resistance to close somewhere between the point from where it started and the Resistance zone, making an ‘__Inverted V__’ __shape__ \(i\.e\. __Mid\-Range Bullish__\); or
2. when the underlying is in an uptrend, and the underlying price is between Support & Resistance zone and is expected to make a mild\-bearish move on the downside upto a particular Support level, and then bounce from that Support to close somewhere between the point from where it started and the Support zone, making a ‘__V__’ __shape__ \(i\.e\. __Mid\-Range Bearish__\)

This Strategy is designed to take the advantage of Option buying and selling, employs ITM & OTM as well as attempts to exploit the benefits in the movement of the Nifty & BankNifty Indices\. Primarily, in this hedge Strategy, idea is to devour the Premium on the BankNifty OTM Options and to hedge the same with a Synthetic Futures in Nifty as well as Vertical Debit Spread on Nifty\. 

Hedge\-17 works very nicely in a low VIX situation, when VIX level is below 15\.

This Strategy can be designed to play both Mid\-Range Bullish move \(*on CE side Strategy*\) and Mid\-Range Bearish move \(*on PE side Strategy*\)  in  the underlying\.

__Options Behaviour and Strike Selection in Hedge\-17 \(Mild\-bearish\) Strategy__

__*Options Behaviour in Hedge\-17 \(Mild\-bearish\) Strategy*:__

- BankNifty OTM PE of near Support level, on Next Week Expiry series, is selected so as to receive max premium credit, as the target is that by Next Week Expiry BankNifty PE Short leg would expire as an OTM thus giving full profit from this PE Short leg\. Higher premium will also give a large room for the risk area / Breakeven for this PE Short leg on the downside, from Expiry perspective\. Because, BankNifty is more volatile than Nifty, therefore, this PE Short leg is created on BankNifty to appropriate more premium credit\.
- However, in order to cover loss situation  on BankNifty PE Short leg, __in the event BankNifty gets bearish__ crossing below the Support level upto the Breakeven Strike of PE Short leg, the Long leg on Nifty ITM PE \(*nearly Synthetic Futures with max 80 points Time Value*\) and Bear PE Spread on Nifty will suitably cover the loss arising in BankNifty PE Short leg\. Infact, ITM PE Long leg carrying almost 99% Intrinsic Value would even rise more than the loss generated by PE Short leg, and the Bear PE Spread on Nifty provides further profit due to fall in Nifty\.
- However, __if BankNifty becomes super bearish, __then upto the Breakeven Strike of BankNifty PE Short leg, the Nifty ITM PE Long leg and the Bear PE Spread on Nifty will cover for loss in BankNifty, but if BankNifty gets trending lower and lower beyond the BE Strike on PE Short leg of BankNifty, then Nifty Bear PE Spread beyond its max profit will not yield further profit and therefore ITM PE Long leg on Nifty may not be sufficient to cover for all the loss that may arise on BankNifty PE Short leg\. This situation will require making some adjustments to the Strategy \(*as explained below*\)\. Note: Max Reward on Bear PE Spread can be calculated as the \[difference between the primary leg Strike and the hedged leg Strike\] __*minus*__ \[Net Premium paid i\.e\. difference between the Premium paid on the primary leg and the Premium received on the hedged leg\]
- __In the event, BankNifty & Nifty becomes mild bullish__, then BankNifty PE Short leg being an OTM will generate more profit than loss in ITM PE Long leg of Nifty \(*as it carries 99% Intrinsic Value*\), also the pre\-defined loss on Nifty Bear PE Spread would also be such which will get covered by the profit generated on the BankNifty PE Short leg\. Thus, in mild bullish trend too, this Strategy must yield profit\.
- However, __in the event, BankNifty & Nifty becomes super bullish__, such that Nifty ITM PE Long leg becomes an OTM, then the entire premium debit incurred on ITM PE Long leg would get set\-off to the extent of premium credit received on BankNifty PE Short leg, but the Nifty Bear PE Spread in such situation will generate max loss \(to the extent of net premium debit incurred on the Spread\)\. Thus, in such extreme bullish situation, the Strategy may yield max loss to the extent of max loss on the Nifty Spread \(*besides any net premium debit between BankNifty PE Short leg and Nifty ITM PE Long leg*\), which can be recovered by making certain adjustments \(*as explained below*\)\. As mentioned, it is advisable to ensure that there is not much difference between the premium credit collected on BankNifty CE Short leg and Nifty ITM CE Long leg\. Preferably, ensure that there is more premium credit on the BankNifty CE Short leg\.

__*Strike Selection in Hedge\-17 \(Mild\-bearish\) Strategy*__:

BankNifty OTM PE Short leg must be initiated of some immediate Support level on Daily TF \(*viz\. some trendline support  / pivot / moving average etc\.*\), whose premium should be more or less equal to the Nifty ITM PE which is having almost 99% Intrinsic Value \(*with Time Value not exceeding 80 points per Lot*\)\.

For Nifty Bear PE Spread, PE Long should be an OTM at some immediate Support level on Daily TF \(*viz\. some trendline support / pivot / moving average etc\.*\); and the PE Short leg can be selected which is about 200 points away from PE Long leg of the Spread \(*thus ensuring that the net premium debit is not more than 30\-40 Rs  per Lot*\)\.

__Hedge\-17: Mid\-Range Bearish Strategy \(Mild Bearish\)__

__\(for Positional / Intraday\)__

__Requisite Technical Conditions for Hedge\-17: Mild\-Bearish Strategy:__

When the underlying is broadly in an uptrend \(*like price is above 20 & 50 SMA in daily TF*\):\-

- For positional trading: when price is neither near Support nor Resistance, but somewhere in between, and can either move downwardly upto a major Support level or may rise upwardly\. *Eg: Between* *20 SMA and Lower Bollinger Band on Daily TF etc\.*
- For intraday trading: when price seems to move downwardly upto a major Support level and then bounce back from the Support level\. *Eg: From lower Bollinger band on Hrly TF towards 20 SMA on Hourly TF or some Support level on Daily TF like Pivot support, and then  rise back from such Support level in intraday etc*\.
- In case of arbitrage condition between Nifty & BankNifty: When BankNifty seems to be strong \(*i\.e\. rising upwardly*/ *bullish*\) and Nifty seems to be weak \(*i\.e\.  bearish */*sideways*\), in intraday or positional basis\.

__Point of initiating Hedge\-17: Mild\-Bearish Strategy:__

- For Positional: When price is between any major Resistance & Support level on Daily TF, and assurance is that the underlying will not cross\-below the Support level by Expiry of the Options employed for positional trade; or when BankNifty is bullish & Nifty is bearish / sideways on  positional basis\.
- For Intraday: When price is between any major Resistance & Support level on Daily / Hrly TF, and assurance is that the underlying will not cross\-below the Support level on Hrly TF in intraday; or when BankNifty is bullish & Nifty is bearish / sideways in intraday basis\.

__Adjustments in Hedge\-17 \(mild Bearish\) Strategy, if trade does not go as per plan__

If the mid\-range is broken by the BankNifty & Nifty, then the following adjustments can be considered:

- __*If trend gets super\-bearish for BankNifty & Nifty: *__If BankNifty gets super\-bearish, such that Nifty PE Spread has reached its max profit level, then ITM PE Long on Nifty would not suffice to cover for the loss incurred on OTM PE Short leg of BankNifty\. In such situation, first of all the Nifty PE Spread profit and ITM PE leg on Nifty must be booked and then immediately, following Counter Adjustment method can be implemented: 

1. by shorting \(selling\) Far OTM CEs of BankNifty, of same Expiry Series \(or subsequent series, if no decent premium value available on same Expiry series or closer Expiry series\), of atleast double the quantity as that of the existing PE Short quantity\. But this approach will be to cover for the loss on PE Short leg, if bearish trend is not so strong or appear to soon halt due to approaching some next Major Support level\. Further, in this adjustment, Far OTM CEs must be sold \(CE Short\) above some major Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs gives immediate profit due to bearish/ mild bearish move in BankNifty\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\. Profits generated on these CEs must be booked as and when received and then again fresh CEs must be sold;
2. however, if the trend seems to be a continued bearish in BankNifty trending with strong momentum, then it would be advisable to initiate Counter Adjustments through Long PE in ITM BankNifty \(pertaining to Expiry series, subsequent to the one to which PE Short belongs\), such that this PE Long leg must be on higher Delta on aggregate basis than the existing PE Short leg\. Initiating such PE Long position in BankNifty will change the naked PE Short leg on BankNifty to a kind of  Debit Diagonal Spread \(*i\.e\.* *on different Strikes & Expiry*\)\. This will help cover the loss incurred on the BankNifty PE Short leg; or
3. if the trend in Nifty seems to be a continued bearish trending with strong momentum, then a fresh ITM PE \(Synthetic Futures\) on Nifty and another fresh Bear PE Spread on Nifty, can be initiated \(*just the same way, original Nifty legs were initiated to hedge BankNifty leg*\)\. Fresh Nifty PE Spread must be again of some major Support level\.

- __*If trend in BankNifty & Nifty becomes super\-bullish:* __If BankNifty & Nifty gets super\-bullish, such that ITM PE on Nifty becomes OTM and BankNifty PE Short premium is almost about to get exhausted, then in order to avoid the max loss situation \(*to a max extent of max loss in the Nifty PE Spread*\), Counter Adjustment can be initiated by initiating far OTM fresh PE Short positions in BankNifty with aggregate premium credit atleast sufficient to cover for the max loss on existing Nifty PE Spread\. These Far OTM PEs must be sold \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.
- __*If trend in BankNifty becomes bearish but Nifty becomes bullish: *__In this situation \(which quite rarely lasts\), the Strategy may give loss in both BankNifty PE Short leg, as well as Nifty ITM PE & Nifty PE Spread\. If this situation seems to last by Expiry, then the following Counter Adjustments can be implemented:

1. Initiate ITM PE Long on BanknIfty \(pertaining to Expiry series, subsequent to the one to which PE Short belongs\), in same quantity as the PE Short leg, such that this PE Long leg must be on higher Delta on aggregate basis than the existing PE Short leg\. Initiating such PE Long position in BankNifty will change the naked PE Short leg on BankNifty to a Debit Diagonal Spread \(*i\.e\.* *on different Strikes & Expiry*\)\. This will help cover the loss incurred on the BankNifty PE Short leg, due to bearish move in the BankNifty; and
2. Simultaneously with \(i\) above, Nifty OTM PE Short with such quantity so as to receive premium credit atleast equivalent to the aggregate of \(a\) premium debit on Nifty ITM PE Long leg; and \(b\) the net premium debit on Nifty PE Spread\. OTM PE Short leg on Nifty can be initiated  on same Expiry series as that of Nifty PE Spread \(and if premium on same Expiry is not available, then even Expiry series subsequent to the one to which Nifty PE Spread belongs, can also be used\)\. These Far OTM PEs must be sold \(PE Short\) below the Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\.

Further, if Nifty seems to be extremely bullish with strong momentum, then a few CE Long OTMs can also be added to take additional advantage of bullish move in Nifty \(besides aforesaid PE Short\)\. These OTM CE Long on Nifty can be initiated  on Expiry series, subsequent to the one to which Nifty PE Spread belongs\. Also, instead of naked OTM CE Long, Nifty Bull CE Spread can also be initiated on double the quantity than the Nifty PE Spread \(besides, OTM PE Short leg on Nifty\)\.

__Impact of Different Market Situations on Hedge\-17 \(Mild\-bearish\) Strategy__

__If trade goes as per plan, in Hedge\-17 \(Mild\-bearish\) Strategy__:

If Nifty is bearish and BankNifty is bullish/ sideways, then this Strategy would yield great profit\.

Further, if both Nifty and BankNifty remains within the mid\-range and do not break the range on either side until Expiry, then too this Strategy would yield profit\.

__If Nifty becomes bullish and BankNifty becomes bearish, in Hedge\-17 \(Mild\-bearish\) Strategy__:

If Nifty becomes bullish and BankNifty becomes bearish, then the Nifty ITM PE and Nifty Bear PE Spread may not be able to suitably cover for the loss incurred on the OTM PE Short leg on BankNifty\. However, usually it is observed that occasionally even if Nifty gets bullish and BankNifty gets bearish, then soon there is a reversal of this strength between BankNifty and Nifty \(*i\.e\. soon Nifty would get bearish and BankNifty would get bullish*\)\. Therefore, this Strategy by Expiry should normally adjust itself as per the aforesaid reversal of strength pattern demonstrated/ followed usually by Nifty and BankNifty\. However, if Nifty continuously remains bullish and BankNifty continuously remains bearish, then this Strategy may need some adjustments\.

__If BankNifty & Nifty gets super\-bearish and thus trade does not go as per plan, in Hedge\-17 \(Mild\-bearish\) Strategy__:

If BankNifty gets super\-bearish, such that Nifty Bear PE Spread has reached its max profit level, then ITM PE Long on Nifty would not suffice to cover for the loss incurred on OTM PE Short leg of BankNifty\. In such situation, some adjustments would need to be made on this Strategy\.

__If BankNifty & Nifty gets super\-bullish and thus trade does not go as per plan, in Hedge\-17 \(Mild\-bearish\) Strategy__:

If BankNifty and Nifty gets super\-bullish, such that Nifty ITM PE Long leg becomes an OTM and its entire premium debit appears to gets set\-off from the premium credit collected on BankNifty OTM PE Short leg, then this Strategy may incur max loss to an extent of pre\-calculated max loss on the Nifty Bear PE Spread\. In such situation, some adjustments would need to be made on this Strategy\.

__Merits & Demerits of Hedge\-17\(Mild\-Bearish\) Strategy__

__Benefits of Hedge\-17 \(Mild\-Bearish\) Strategy:__

- This is a very suitable Strategy for a mid\-range Mild Bearish move in the Nifty & BankNifty\. The V shape move in Nifty & BankNifty \(*i\.e\. downwardly upto Support level move and then bounce back*\) help generate max profit in this Strategy, due to max erosion in the premium of the BankNifty PE Short leg on account of such V shape move in BankNifty\.
- In case of super bearish move in the BankNifty, the ITM PE Long leg and Bear PE Spread suitably covers the loss situation on the PE Short leg on BankNifty\.
- In case of mild bullish move in BankNifty & Nifty, the BankNifty PE Short leg would yield profit on the Strategy due to  higher erosion in the premium value of OTM PE Short leg \(*than erosion in the Nifty ITM PE or Bear PE Spread*\)\.
- In case of super bullish move in BankNifty & Nifty, the BankNifty PE Short leg would suitably cover for the loss in the ITM PE Long and Bear PE Spread in Nifty, due to  higher erosion in the premium value of OTM PE Short leg, so long Nifty ITM PE Long leg is an ITM \(*as by Expiry, there will be some Intrinsic Value left in this Nifty PE*\)\.
- Thus, this Strategy can be played safely in case of mild\-bearish to mild bullish move for good profit\. But will not yield too much loss in case of super bearish & super bullish movement in the underlying\. Which can be adjusted to save the overall Strategy from loss\.
- Falling Volatility is very suitable for this Strategy, as OTM PE Short leg would get impacted by falling Volatility and experience faster erosion in its premium value \(than Synthetic ITM PE Long leg on Nifty\), thus causing very good profit on the Strategy\.

__Demerits of Hedge\-17 \(Mild\-Bearish\) Strategy__:

- This Strategy may incur loss \(and need adjustments\) in case the trend becomes super bearish or super bullish, breaking the mid\-range with strong momentum\.
- Rising Volatility would not be suitable for this Strategy, as rising volatility would cause addition of the Premium value on the BankNifty PE Short leg, thereby showing virtual loss on the overall Strategy\. However, if the underlying remain within the mid\-range by Expiry, inspite of rise in Volatility, then ultimately the Strategy would yield profit \(*as all the excess Time Value which got added to the BankNifty PE Short leg would eventually become zero, if the Strike expires as an OTM*\)\.
- Because BankNifty PE Short is the only Short position on BankNifty, therefore, margin requirement in this Strategy would be more \(as applicable on naked PE Short leg\)\. This margin requirement can be reduced by buying same quantity of current week far OTM PE Long at the time of initiating Short on Next Week BankNifty OTM PE\. However, just before expiry of the current week, Far OTM PE on the subsequent Expiry series would be required to be initiated in order to replace the PE Long on current week \(due to Expiry of Current Week\)\. Further, the BankNifty PE Short leg would remain subject to MTM requirements, hence some spare capital must be ensured in this Strategy\.

__Breakeven \(BE\) in Hedge\-17 \(Mild bearish\) Strategy__

__*Breakeven \(BE\) in Hedge\-17 \(Mild bearish\) Strategy, from Expiry perspective*__:

- __BE \(*below* *which loss will generate, from Expiry perspective, on the downside*\):__ If BankNifty breaks the mid\-range zone on the downside, trending below the Support level, then loss situation may arise after BankNifty PE Short Strike \- Premium credit collected on PE Short leg\. 

Therefore, in case of BankNifty gets super bearish such that the Nifty PE Spread has achieved its max profit level, then if BankNifty seems to keep trending downwardly, then adjustments will have to be undertaken to cover for loss on the BankNifty PE Short leg\.

- __BE \(*above which loss will generate, from Expiry perspective, on the upside*\):__ If BankNifty breaks the mid\-range zone on the upside, trending beyond the Resistance level, then loss situation may arise after Intrinsic Value in Nifty ITM PE leg gets lower than the max loss on Nifty Bear PE Spread\. Therefore, if the uptrend keeps continuing such that the Intrinsic Value in Nifty ITM PE leg gets lower than the max loss on the Nifty PE Spread, then adjustments will have to be undertaken to cover for potential max loss on the Nifty PE Spread\.

__Profit & Loss in Hedge\-17 \(mild bearish\) Strategy__

__*Max Loss in Hedge\-17 \(mild bearish\) Strategy,*__* *__*from Expiry perspective*:__

Max Loss on the downside will arise if the BankNifty gets super bearish and Nifty has reached its max profit on the Nifty PE Spread leg, then depending on the further downside momentum in BankNifty, this Strategy may accordingly incur max loss situation \(*as ITM PE leg on Nifty alone would not suffice to cover loss situation on BankNifty OTM PE Short leg on account of further continued downward move*\)\.

On the upside, Max Loss will be more or less to the extent of max loss on the Nifty PE Spread leg, because if the BankNifty and Nifty gets super bullish then entire premium paid on the ITM PE on Nifty will get set\-off with the premium credit received on the BankNifty PE Short leg, therefore, in this situation the precalculated max loss on the Nifty PE Spread \(*which the net premium debit on the Nifty PE Spread, per Lot basis*\) will be the max loss on this Strategy\.

__*Max Reward* *in Hedge\-17 \(mild bearish\) Strategy,*__* *__*from Expiry perspective*__:

Max reward will be fetched in this Strategy if Nifty is bearish, but BankNifty is bullish or sideways – because both Nifty ITM PE and Nifty Bear PE Spread will reap profit and due to the bullish/sideways move in BankNifty even the BankNifty PE Short leg would also generate profit – thus giving rise to max reward situation\.

Also, otherwise if both the Nifty & BankNifty remains mid\-range and do not break the range, then BankNifty will exhibit good profit due to erosion in its Time Value as it is an OTM, whereas the ITM PE on Nifty and the Nifty PE Spread will not exhibit much overall loss in premium, thus generating profit on the Strategy\.

__Target and Stop Loss on Hedge\-17 \(Mild Bearish\) Strategy__

__*Target Hedge\-17 \(Mild Bearish\) Strategy*:__

Max reward will be fetched in this Strategy if Nifty is bearish, but BankNifty is bullish or sideways\. Thus, if Nifty Bear PE Spread generates decent profit, then this profit must be booked and the balance positions i\.e\. BankNifty PE Short leg and Nifty ITM PE Long leg can be retained upto Expiry\. This way max reward can be booked on this Strategy\.

However, all 4 legs of the Strategy can also be held uptill Expiry if both Nifty and BankNifty appears to remain within the mid\-range and do not break the range on either side\.

__*Stop Loss in Hedge\-17 \(Mild Bearish\) Strategy*:__

If the Nifty & BankNifty gets super bearish, such that Nifty Bear PE Spread has reached its precalculated max profit levels, then this Strategy may require adjustments / else Stop loss situation arises\.

If the Nifty & BankNifty gets super bullish, such that Nifty ITM PE becomes an OTM and its entire premium is almost getting set\-off from the premium on the BankNifty PE Short leg, then this Strategy may require some adjustments to cover for the max

loss situation on the Strategy \(*which is the pre\-calculated max loss on Nifty Bear PE Spread*\) / else Stop loss situation arises\.

__Hedge\-17: Mild\-Bearish Strategy: Its Trade Legs & Objective__

__Trade Legs in Hedge\-17: Mild\-Bearish Strategy:__

In this Strategy, there are following 4 legs:

1. BankNifty Short OTM PE: 2 Lots \(*primary leg*\)
2. Nifty Long Synthetic Futures ITM PE: 1 Lot \(*hedged leg*\)
3. Nifty Long OTM PE: 1 Lot  \(*primary leg*\)
4. Nifty Short OTM PE: 1 Lot \(*hedged leg*\)

- All aforesaid 4 legs would be of Next Week Expiry series
- BankNifty OTM PE mentioned at \(i\) above, must be at the Support level which BankNifty is not expected to cross beyond on the downside by the Expiry of the relevant Options 
- Nifty Synthetic Futures ITM PE mentioned at \(ii\) above, must have 99% Intrinsic Value with Time Value not more than 60\-80 points
- The premium credit collected on BankNifty PE Short leg should be kept almost equal to the total premium debit paid for Long Nifty ITM PE\. This calculation will ensure the max loss on the Strategy, due to super bullish move in Nifty & BankNifty, equivalent to the max loss in Nifty Bear PE Spread\. 
- Nifty Long OTM PE mentioned at \(iii\) above, must be at the Support level which Nifty is not expected to cross beyond on the downside by the Expiry of the relevant Options
- Nifty OTM Long & Short leg, mentioned at \(iii\) & \(iv\), are the legs of Bear PE Debit Spread \(*with Nifty Short OTM PE, 2 Strikes lower than the PE Long primary leg of the Spread*\)\.
- 2 Lots of BankNifty need to be used so as to equate it with 1 Lot of Nifty\. Consequently, equal quantities must be there in all 4 legs\.
- Note: BankNifty’s F&O Lot size used to be 25, which has been changed to 15 with effect from July 2023\. While discussing this Strategy, we have used erstwhile BankNifty with Lot size of 25\. Now, given that the Lot size has been reduced, appropriate changes to the quantity of BankNifty Options for the purposes of this Strategy are recommended, and this Strategy is recommended to be accordingly read, understood and implemented wherever relevant\.

__<start> Example of Hedge\-17: Mild\-Bearish Strategy:__

- *Nifty Spot is currently at 15850 & Nifty Futures at 15875*
- *BankNifty Spot is currently at 33,300 & BankNifty Futures at 33,400*
- *Nifty Support at 15200*
- *BankNifty Resistance at 32400*

*Basis aforesaid, following trade positions can be created in Next Week Expiry series of Nifty & BankNifty:*

1. *BankNifty Short 32400 OTM PE: 200 qty @ Rs\. 550 per Lot \(primary leg\)*
2. *Nifty Long 16200 Synthetic Futures ITM PE: 200 qty @ Rs\. 530 per Lot \(hedged leg\)*
3. *Nifty Long 15200 OTM PE: 200 qty @ Rs\. 80 per Lot \(primary leg\)*
4. *Nifty Short 15000 OTM PE: 200 qty @ Rs\. 50 per Lot \(hedged leg\)*

*The premium on BankNifty PE Short leg and Nifty ITM PE Long leg, must be more or less same\.* __<end>__

__Objective in Hedge\-17: Mild\-Bearish Strategy__:

Objective is to profit from the premium decay on the BankNifty PE Short leg and to benefit on the Nifty Bear PE Spread from the mild bearish move\. 

- If BankNifty gets bearish beyond Support: The loss situation in the BankNifty PE Short leg due to bearish move in BankNifty, gets covered with the hedged positions of \(i\) Nifty Synthetic Futures \(*ITM PE with almost 99% Intrinsic Value*\); and \(ii\) Nifty Bear PE Spread\. However, if BankNifty gets super bearish crossing beyond its Breakeven level on the downside, then this Strategy may need Adjustments\.
- If Nifty is bearish and BankNifty is bullish/sideways: Also, if Nifty is bearish and BankNifty is bullish/sideways, then Nifty ITM PE and Nifty Bear PE Spread will generate profit  due to bearish move in Nifty; and BankNifty OTM PE will also generate profit due to bullish/ sideways move in BankNifty\.
- If both Nifty & BankNifty gets bullish: Then BankNifty PE Short leg will show decay more and will help cover loss in the Nifty Bear PE Spread and Nifty Synthetic Futures \(ITM PE\)\.

__Options Behaviour and Strike Selection in Hedge\-17 \(Mild\-bullish\) Strategy__

__*Options Behaviour in Hedge\-17 \(Mid\-Range Bullish\) Strategy:*__

- BankNifty OTM CE of near Resistance level, on Next Week Expiry series, is selected so as to receive max premium credit, as the target is that by Next Week Expiry BankNifty CE Short leg would expire as an OTM thus giving full profit from this CE Short leg on the upside\. Higher premium will also give a large room for the risk area / Breakeven for this CE Short leg, from Expiry perspective\. Because, BankNifty is more volatile than Nifty, therefore, this CE Short leg is created on BankNifty to appropriate more premium credit\.
- However, in order to cover loss situation  on BankNifty CE Short leg, __in the event BankNifty gets bullish__ crossing beyond the Resistance level upto the Breakeven Strike of CE Short leg, the Long leg on Nifty ITM CE \(*nearly Synthetic Futures with max 80 points Time Value*\) and Bull CE Spread on Nifty will suitably cover the loss arising in BankNifty CE Short leg\. Infact, ITM CE Long leg carrying almost 99% Intrinsic Value would even rise more than the loss generated by CE Short leg, and the Bull CE Spread on Nifty provides further profit due to rise in Nifty\.
- However, __if BankNifty becomes super bullish, __then upto the Breakeven Strike of BankNifty CE Short leg, the Nifty ITM CE Long leg and the Bull CE Spread on Nifty will cover for loss in BankNifty, but if BankNifty gets trending higher and higher beyond the BE Strike on CE Short leg of BankNifty, then Nifty Bull CE Spread beyond its max profit will not yield further profit and therefore ITM CE Long leg on Nifty may not be sufficient to cover for all the loss that may arise on BankNifty CE Short leg\. This situation will require making some adjustments to the Strategy \(*as explained below*\)\. Note: Max Reward on Bull CE Spread can be calculated as the \[difference between the primary leg Strike and the hedged leg Strike\] __*minus*__ \[Net Premium paid i\.e\. difference between the Premium paid on the primary leg and the Premium received on the hedged leg\]
- __In the event, BankNifty & Nifty becomes mild bearish__, then BankNifty CE Short leg being an OTM will generate more profit than loss in ITM CE Long leg of Nifty \(*as it carries 99% Intrinsic Value*\), also the pre\-defined loss on Nifty Bull CE Spread would also be such which will get covered by the profit generated on the BankNifty CE Short leg\. Thus, in mild bearish trend too, this Strategy must yield profit\.
- However, __in the event, BankNifty & Nifty becomes super bearish__, such that Nifty ITM CE Long leg becomes an OTM, then the entire premium debit incurred on ITM CE Long leg would get set\-off to the extent of premium credit received on BankNifty CE Short leg, but the Nifty Bull CE Spread in such situation will generate max loss \(to the extent of net premium debit incurred on the Spread\)\. Thus, in such extreme bearish situation, the Strategy may yield max loss to the extent of max loss on the Nifty Spread \(*besides any net premium debit between BankNifty CE Short leg and Nifty ITM CE Long leg*\), which can be recovered by making certain adjustments \(*as explained below*\)\. As mentioned, it is advisable to ensure that there is not much difference between the premium credit collected on BankNifty CE Short leg and Nifty ITM CE Long leg\. Preferably, ensure that there is more premium credit on the BankNifty CE Short leg\.

__*Strike Selection in Hedge\-17 \(Mid\-Range Bullish\) Strategy*__:

BankNifty OTM CE Short leg must be initiated of some immediate Resistance level on Daily TF \(*viz\. some trendline resistance / pivot / moving average etc\.*\), whose premium should be more or less equal to the Nifty ITM CE which is having almost 99% Intrinsic Value \(*with Time Value not exceeding 80 points per Lot*\)\.

For Nifty Bull CE Spread, CE Long should be an OTM at some immediate Resistance level on Daily TF \(*viz\. some trendline resistance / pivot / moving average etc\.*\); and the CE Short leg can be selected which is about 200 points away from CE Long leg of the Spread \(*thus ensuring that the net premium debit is not more than 30\-40 Rs  per Lot*\)\.

__Hedge\-17: Mid\-Range Bullish Strategy__

__Requisite Technical Conditions, for Hedge\-17: Mid\-Range Bullish Strategy:__

When the underlying is broadly in a downtrend \(*like price is below 20 & 50 SMA in daily TF*\):\-

- For positional trading: when price is neither near Support nor Resistance, but somewhere in between, and can either move upwardly upto a major Resistance level or may fall downward\. *Eg: Between* *20 SMA and Upper Bollinger Band on Daily TF etc\.*
- For intraday trading: when price seems to move upwardly upto a major Resistance level and then fall back from the Resistance level\. *Eg: From 20 SMA on Hourly TF towards upper Bollinger band on Hrly TF or some Resistance level on Daily TF like Pivot resistance, and then fall back from such Resistance level in intraday etc*\.
- In case of arbitrage condition between Nifty & BankNifty: When Nifty seems to be strong \(*i\.e\. rising upwardly*/ *bullish*\) and BankNifty seems to be weak \(*i\.e\.  bearish */*sideways*\), in intraday or positional basis\.

__Point of initiating Hedge\-17: Mid\-Range Bullish Strategy:__

- For Positional: When price is between any major Resistance & Support level on Daily TF, and assurance is that the underlying will not cross\-above the Resistance level by Expiry of the Options employed for positional trade; or when Nifty is bullish & BankNifty is bearish / sideways on positional basis\.
- For Intraday: When price is between any major Resistance & Support level on Daily / Hrly TF, and assurance is that the underlying will not cross\-above the Resistance level on Hrly TF in intraday; or when Nifty is bullish & BankNifty is bearish / sideways in intraday basis\.

__Adjustments in Hedge\-17 \(Mild Bullish\) Strategy, if trade does not go as per plan__:

- __*If trend gets super\-bullish for BankNifty & Nifty: *__If BankNifty gets super\-bullish, such that Nifty CE Spread has reached its max profit level, then ITM CE Long on Nifty would not suffice to cover for the loss incurred on OTM CE Short leg of BankNifty\. In such situation, first of all the Nifty CE Spread profit and ITM CE leg on Nifty must be booked and then immediately, following Counter Adjustment method can be implemented: 

1. by shorting \(selling\) Far OTM PEs of BankNifty, of same Expiry Series \(or subsequent series, if no decent premium value available on same Expiry series or closer Expiry series\), of atleast double the quantity as that of the existing CE Short quantity\. But this approach will be to cover for the loss on CE Short leg, if bullish trend is not so strong or appear to soon halt due to approaching some next Major Resistance level\. Further, in this adjustment, Far OTM PEs must be sold \(PE Short\) below some major Support area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards downtrend\. Idea in this adjustment is to pick up suitable Far OTM PEs for Shorting, such that this Far OTM PEs gives immediate profit due to bullish/ mild bullish move in BankNifty\. However, selling additional PEs will require higher margin / capital to Short PEs and MTM requirements may also have to be met\. Profits generated on these PEs must be booked as and when received and then again fresh PEs must be sold;
2. however, if the trend seems to be a continued bullish in BankNifty trending with strong momentum, then it would be advisable to initiate Counter Adjustments through Long CE in ITM BankNifty \(pertaining to Expiry series, subsequent to the one to which CE Short belongs\), such that this CE Long leg must be on higher Delta on aggregate basis than the existing CE Short leg\. Initiating such CE Long position in BankNifty will change the naked CE Short leg on BankNifty to a kind of  Debit Diagonal Spread \(*i\.e\.* *on different Strikes & Expiry*\)\. This will help cover the loss incurred on the BankNifty CE Short leg; or
3. if the trend in Nifty seems to be a continued bullish trending with strong momentum, then a fresh ITM CE \(Synthetic Futures\) on Nifty and another fresh Bull CE Spread on Nifty, can be initiated \(*just the same way, original Nifty legs were initiated to hedge BankNifty leg*\)\. Fresh Nifty CE Spread must be again of some major Resistance level\.

- __*If trend in BankNifty & Nifty becomes super\-bearish: *__If BankNifty & Nifty gets super\-bearish, such that ITM CE on Nifty becomes OTM and BankNifty CE Short premium is almost about to get exhausted, then in order to avoid the max loss situation \(*to a max extent of max loss in the Nifty CE Spread*\), Counter Adjustment can be initiated by initiating far OTM fresh CE Short positions in BankNifty with aggregate premium credit atleast sufficient to cover for the max loss on existing Nifty CE Spread\. These Far OTM CEs must be sold \(CE Short\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.
- __*If trend in BankNifty becomes bullish but Nifty becomes bearish: *__In this situation \(which quite rarely lasts\), the Strategy may give loss in both BankNifty CE Short leg, as well as Nifty ITM CE & Nifty CE Spread\. If this situation seems to last by Expiry, then the following Counter Adjustments can be implemented:

1. Initiate ITM CE Long on BanknIfty \(pertaining to Expiry series, subsequent to the one to which CE Short belongs\), in same quantity as the CE Short leg, such that this CE Long leg must be on higher Delta on aggregate basis than the existing CE Short leg\. Initiating such CE Long position in BankNifty will change the naked CE Short leg on BankNifty to a Debit Diagonal Spread \(*i\.e\. on different Strikes & Expiry series*\)\. This will help cover the loss incurred on the BankNifty CE Short leg, due to bullish move in the BankNifty; and
2. Simultaneously with \(i\) above, Nifty OTM CE Short with such quantity so as to receive premium credit atleast equivalent to the aggregate of \(a\) premium debit on Nifty ITM CE Long leg; and \(b\) the net premium debit on Nifty CE Spread\. OTM CE Short leg on Nifty can be initiated  on same Expiry series as that of Nifty CE Spread \(and if premium on same Expiry is not available, then even Expiry series subsequent to the one to which Nifty CE Spread belongs, can also be used\)\. These Far OTM CEs must be sold \(CE Short\) above the Resistance area of the underlying, which is expected not to be breached by the underlying by Expiry in case of a reversal towards uptrend\. Idea in this adjustment is to pick up suitable Far OTM CEs for Shorting, such that this Far OTM CEs expires worthless as an OTM on Expiry thereby giving full premium at which Short is initiated as profit\. However, selling additional CEs will require higher margin / capital to Short CEs and MTM requirements may also have to be met\.

Further, if Nifty seems to be extremely bearish with strong momentum, then a few PE Long OTMs can also be added to take additional advantage of bearish move in Nifty \(besides aforesaid CE Short\)\. These OTM PE Long on Nifty can be initiated  on Expiry series, subsequent to the one to which Nifty CE Spread belongs\. Also, instead of naked OTM PE Long, Nifty Bear PE Spread can also be initiated on double the quantity than the Nifty CE Spread \(besides, OTM CE Short leg on Nifty\)\.

__Impact of Different Market Situations on Hedge\-17 \(Mild Bullish\) Strategy__

__If trade goes as per plan, in Hedge\-17 \(Mild Bullish\) Strategy__:

If Nifty is bullish and BankNifty is bearish/ sideways, then this Strategy would yield great profit\.

__If Nifty becomes bearish and BankNifty becomes bullish, in Hedge\-17 \(Mild Bullish\) Strategy__:

If Nifty becomes bearish and BankNifty becomes bullish, then the Nifty ITM CE and Nifty Bull CE Spread may not be able to suitably cover for the loss incurred on the OTM CE Short leg on BankNifty\. However, usually it is observed that occasionally even if Nifty gets bearish and BankNifty gets bullish, then soon there is a reversal of this strength between BankNifty and Nifty \(*i\.e\. soon Nifty would get bullish and BankNifty would get bearish*\)\. Therefore, this Strategy by Expiry should normally adjust itself as per the aforesaid reversal of strength pattern demonstrated/ followed usually by Nifty and BankNifty\. However, if Nifty continuously remains bearish and BankNifty continuously remains bullish, then this Strategy may need some adjustments\.

__If BankNifty & Nifty gets super\-bullish and thus trade does not go as per plan, in Hedge\-17 \(Mild Bullish\) Strategy__:

If BankNifty gets super\-bullish, such that Nifty Spread has reached its max profit level, then ITM CE Long on Nifty would not suffice to cover for the loss incurred on OTM CE Short leg of BankNifty\.

__If BankNifty & Nifty gets super\-bearish and thus trade does not go as per plan, in Hedge\-17 \(Mild Bullish\) Strategy__:

If BankNifty and Nifty gets super\-bearish, such that Nifty ITM CE Long leg becomes an OTM and its entire premium debit appears to gets set\-off from the premium credit collected on BankNifty OTM CE Short leg, then this Strategy may incur max loss to an extent of pre\-calculated max loss on the Nifty Bull CE Spread\.

__Merits & Demerits of Hedge\-17 \(Mild\-Bullish\) Strategy__

__Benefits of Hedge\-17 \(Mild\-Bullish\) Strategy:__

- This is a very suitable Strategy for a mid\-range Mild Bullish move in the Nifty & BankNifty\. The inverted\-V shape move in Nifty & BankNifty \(*i\.e\. upwardly upto Resistance level move and then retracement*\) help generate max profit in this Strategy, due to max erosion in the premium of the BankNifty CE Short leg on account of such inverted\-V shape move in BankNifty\.
- In case of super bullish move in the BankNifty, the ITM CE Long leg and Bull CE Spread suitably covers the loss situation on the CE Short leg on BankNifty\.
- In case of mild bearish move in BankNifty & Nifty, the BankNifty CE Short leg would yield profit on the Strategy due to  higher erosion in the premium value of OTM CE Short leg \(*than erosion in the Nifty ITM CE or Bull CE Spread*\)\.
- In case of super bearish move in BankNifty & Nifty, the BankNifty CE Short leg would suitably cover for the loss in the ITM CE Long and Bull CE Spread in Nifty, due to  higher erosion in the premium value of OTM CE Short leg, so long Nifty ITM CE Long leg is an ITM \(*as by Expiry, there will be some Intrinsic Value left in this Nifty CE*\)\.
- Thus, this Strategy can be played safely in case of mild\-bullish to mild bearish move for good profit\. But will not yield too much loss in case of super bullish & super bearish movement in the underlying\. Which can be adjusted to save the overall Strategy from loss\.
- Falling Volatility is very suitable for this Strategy, as OTM CE Short leg would get impacted by falling Volatility and experience faster erosion in its premium value \(than Synthetic ITM CE Long leg on Nifty\), thus causing very good profit on the Strategy\.

__Demerits of Hedge\-17 \(Mild\-Bullish\) Strategy__:

- This Strategy may incur loss \(and need adjustments\) in case the trend becomes super bullish or super bearish, breaking the mid\-range with strong momentum\.
- Rising Volatility would not be suitable for this Strategy, as rising volatility would cause addition of the Premium value on the BankNifty CE Short leg, thereby showing virtual loss on the overall Strategy\. However, if the underlying remain within the mid\-range by Expiry, inspite of rise in Volatility, then ultimately the Strategy would yield profit \(*as all the excess Time Value which got added to the BankNifty CE Short leg would eventually become zero, if the Strike expires as an OTM*\)\.
- Because BankNifty CE Short is the only Short position on BankNifty, therefore, margin requirement in this Strategy would be more \(as applicable on naked CE Short leg\)\. This margin requirement can be reduced by buying same quantity of current week far OTM CE Long at the time of initiating Short on Next Week BankNifty OTM CE\. However, just before expiry of the current week, Far OTM CE on the subsequent Expiry series would be required to be initiated in order to replace the CE Long on current week \(due to Expiry of Current Week\)\. Further, the BankNifty CE Short leg would remain subject to MTM requirements, hence some spare capital must be ensured in this Strategy\.

__Breakeven \(BE\) in Hedge 17 \(Mild Bullish\) Strategy__

__*Breakeven \(BE\) in Hedge 17 \(Mild Bullish\) Strategy, from Expiry perspective*__:

- __BE \(*above which loss will generate, from Expiry perspective, on the upside*\):__ If BankNifty breaks the mid\-range zone on the upside, trending beyond the Resistance level, then loss situation may arise after BankNifty CE Short Strike \+ Premium credit collected on CE Short leg\. 

Therefore, in case of BankNifty gets super bullish such that the Nifty CE Spread has achieved its max profit level, then if BankNifty seems to keep trending upwardly, then adjustments will have to be undertaken to cover for loss on the BankNifty CE Short leg\.

- __BE \(*below* *which loss will generate, from Expiry perspective, on the downside*\):__ If BankNifty breaks the mid\-range zone on the downside, trending beyond the Support level, then loss situation may arise after Intrinsic Value in Nifty ITM CE leg gets lower than the max loss on Nifty Bull CE Spread\. Therefore, if the downward trend keeps continuing such that the Intrinsic Value in Nifty ITM CE leg gets lower than the max loss on the Nifty CE Spread, then adjustments will have to be undertaken to cover for potential max loss on the Nifty CE Spread\.

__Profit & Loss in Hedge\-17 \(Mild Bullish\) Strategy__

__*Max Loss in Hedge\-17 \(Mild Bullish\) Strategy, from Expiry perspective*:__

Max Loss on the upside will arise if the BankNifty gets super bullish and Nifty has reached its max profit on the Nifty CE Spread leg, then depending on the further upside momentum in BankNifty, this Strategy may accordingly incur max loss situation \(*as ITM CE leg on Nifty alone would not suffice to cover loss situation on BankNifty OTM CE Short leg on account of further continued upward move*\)\.

On the downside, Max Loss will be more or less to the extent of max loss on the Nifty CE Spread leg, because if the BankNifty and Nifty gets super bearish then entire premium paid on the ITM CE on Nifty will get set\-off with the premium credit received on the BankNifty CE Short leg, therefore, in this situation the precalculated max loss on the Nifty CE Spread \(*which the net premium debit on the Nifty CE Spread, per Lot basis*\) will be the max loss on this Strategy\.

__*Max Reward in Hedge\-17 \(Mild Bullish\) Strategy, from Expiry perspective*__:

Max reward will be fetched in this Strategy if Nifty is bullish, but BankNifty is bearish or sideways – because both Nifty ITM CE and Nifty Bull CE Spread will reap profit and due to the bearish/sideways move in BankNifty even the BankNifty CE Short leg would also generate profit – thus giving rise to max reward situation\.

Also, otherwise if both the Nifty & BankNifty remains mid\-range and do not break the range, then BankNifty will exhibit good profit due to erosion in its Time Value as it is an OTM, whereas the ITM CE on Nifty and the Nifty CE Spread will not exhibit much overall loss in premium, thus generating profit on the Strategy\. 

__Target and Stop Loss in Hedge\-17 \(Mild Bullish\) Strategy__

__Target in Hedge\-17 \(Mild Bullish\) Strategy:__

Max reward will be fetched in this Strategy if Nifty is bullish, but BankNifty is bearish or sideways\. Thus, if Nifty Bull CE Spread generates decent profit, then this profit must be booked and the balance positions i\.e\. BankNifty CE Short leg and Nifty ITM CE Long leg can be retained upto Expiry\. This way max reward can be booked on this Strategy\.

However, all 4 legs of the Strategy can also be held uptill Expiry if both Nifty and BankNifty appears to remain within the mid\-range and do not break the range on either side\. 

__Stop Loss in Hedge\-17 \(Mild Bullish\) Strategy:__

If the Nifty & BankNifty gets super bullish, such that Nifty Bull CE Spread has reached its precalculated max profit levels, then this Strategy may require adjustments / else Stop loss situation arises\.

If the Nifty & BankNifty gets super bearish, such that Nifty ITM CE becomes an OTM and its entire premium is almost getting set\-off from the premium on the BankNifty CE Short leg, then this Strategy may require some adjustments to cover for the max loss situation on the Strategy \(*which is the pre\-calculated max loss on Nifty Bull CE Spread*\) / else Stop loss situation arises\.

__Hedge\-17: Mid\-Range Bullish Strategy: Its Trade Legs & Objective__

__Trade Legs in Hedge\-17: Mid\-Range Bullish Strategy:__

1. BankNifty Short OTM CE: 2 Lots \(*primary leg*\)
2. Nifty Long Synthetic Futures ITM CE: 1 Lot \(*hedged leg*\)
3. Nifty Long OTM CE: 1 Lot  \(*primary leg*\)
4. Nifty Short OTM CE: 1 Lot \(*hedged leg*\)

- BankNifty OTM CE mentioned at \(i\) above, must be at the Resistance level which BankNifty is not expected to cross beyond on the upside by the Expiry of the relevant Options 
- Nifty Synthetic Futures ITM CE mentioned at \(ii\) above, must have 99% Intrinsic Value with Time Value not more than 60\-80 points
- The premium credit collected on BankNifty CE Short leg should be kept almost equal to the total premium debit paid for Long Nifty ITM CE\. This calculation will ensure the max loss on the Strategy, due to super bearish move in Nifty & BankNifty, equivalent to the max loss in Nifty Bull CE Spread\. 
- Nifty Long OTM CE mentioned at \(iii\) above, must be at the Resistance level which Nifty is not expected to cross beyond on the upside by the Expiry of the relevant Options
- Nifty OTM Long & Short leg, mentioned at \(iii\) & \(iv\), are the legs of Bull CE Debit Spread \(*with Nifty Short OTM CE, 2 Strikes higher than the CE Long primary leg of the Spread*\)\.
- *Note: BankNifty’s F&O Lot size used to be 25, which has been changed to 15 with effect from July 2023\. While discussing this Strategy, we have used erstwhile BankNifty with Lot size of 25\. Now, given that the Lot size has been reduced, appropriate changes to the quantity of BankNifty Options for the purposes of this Strategy are recommended, and this Strategy is recommended to be accordingly read, understood and implemented wherever relevant\.*

__<start> Example of Hedge\-17 \(Mid\-Range Bullish\) Strategy:__

- Nifty Spot is currently at 15850 & Nifty Futures at 15875
- BankNifty Spot is currently at 33,300 & BankNifty Futures at 33,400
- Nifty Resistance at 16400
- BankNifty Resistance at 34000

Basis aforesaid, following trade positions can be created in Next Week Expiry series of Nifty & BankNifty:

1. BankNifty Short 34000 OTM CE: 200 qty @ Rs\. 550 per Lot \(*primary leg*\)
2. Nifty Long 15500 Synthetic Futures ITM CE: 200 qty @ Rs\. 520 per Lot \(*hedged leg*\)
3. Nifty Long 16400 OTM CE: 200 qty @ Rs\. 50 per Lot \(*primary leg*\)
4. Nifty Short 16600 OTM CE: 200 qty @ Rs\. 20 per Lot \(*hedged leg*\)

The premium on BankNifty CE Short leg and Nifty ITM CE Long leg, must be more or less same\. __<end>__

__Objective in Hedge\-17 \(Mid\-Range Bullish\) Strategy__:

Objective is to profit from the premium decay on the BankNifty CE Short leg and to benefit on the Nifty Bull CE Spread from the mild bullish move\. 

- If BankNifty gets bullish beyond Resistance: The loss situation in the BankNifty CE Short leg due to bullish move in BankNifty, gets covered with the hedged positions of \(i\) Nifty Synthetic Futures \(*ITM CE with almost 99% Intrinsic Value*\); and \(ii\) Nifty Bull CE Spread\. However, if BankNifty gets super bullish crossing beyond its Breakeven level on the upside, then this Strategy may need Adjustments\.
- If Nifty is bullish and BankNifty is bearish/sideways: Also, if Nifty is bullish and BankNifty is bearish/sideways, then Nifty ITM CE and Nifty Bull CE Spread will generate profit  due to bullish move in Nifty; and BankNifty OTM CE will also generate profit due to bearish/ sideways move in BankNifty\.
- If both Nifty & BankNifty gets bearish: Then BankNifty CE Short leg will show decay more and will help cover loss in the Nifty Bull CE Spread and Nifty Synthetic Futures \(ITM CE\)\.

__Initiating Long position in Stone\-age Options:__

In order to reap the aforesaid benefits associated with a Stone\-age Option, the following Strategies/ trading positions \(with Stop Loss and possible Adjustments\) can be planned:

__\[1\] * *Bullish momentum expected:__ 

When the view on Nifty or BankNifty is that a strong lasting momentum on the upside may come within next 20 days or so, then naked Long CE on such Far OTM Stone\-age Option may be initiated\. The Stone\-age Option shall be selected for the trading position as already explained above in the context of Nifty and BankNifty Options\.

1. __Stop Loss__: Technically, if on the Chart of the relevant Stone\-age CE Option, two candles on daily TF closes below the candle on which Long position was initiated\.

We can also set a stop loss on total Premium loss basis on relevant Stoneage CE Option, such as 50% or more Premium loss\.

When aforesaid situation occurs, we may either take Stop loss on the naked Long position on Stone\-age CE and book the loss; or we can consider following adjustment\.

1. __Adjustment__: When the Stop loss event occurs, consider Shorting CE Options of same Expiry series \(as that of CE Long\) in such quantity so as to collect a total Premium Credit of atleast equal to \(or more\) Premium value paid for buying the CE Option\. This Short CE Strike must be higher than some major Resistance level or a higher Strike than the CE Long Strike\.

__\[2\]   	Bearish momentum expected:__ 

When the view on Nifty or BankNifty is that a strong lasting momentum on the downside may come within next 20 days or so, then naked Long PE on such Far OTM Stone\-age Option may be initiated\. The Stone\-age Option shall be selected for the trading position as already explained above in the context of Nifty and BankNifty Options\.

1. __Stop Loss__: Technically, if on the Chart of the relevant Stone\-age PE Option, two candles on daily TF closes below the candle on which Long position was initiated\.

We can also set a stop loss on total Premium loss basis on relevant Stoneage PE Option, such as 50% or more Premium loss\.

When aforesaid situation occurs, we may either take Stop loss on the naked Long position on Stone\-age PE and book the loss; or we can consider following adjustment\.

1. __Adjustment__: When the Stop loss event occurs, consider Shorting PE Options of same Expiry series \(as that of PE Long\) in such quantity so as to collect a total Premium Credit of atleast equal to \(or more\) Premium value paid for buying the PE Option\. This Short PE Strike must be lower than some major Support level or a lower Strike than the PE Long Strike\.

__\[3\]   	Non\-directional view on expected   momentum__:

When there is global event or national event likely to unfold, basis which our view on Nifty or BankNifty is that a strong lasting momentum may come within next 20 days or so, but it is not sure that on which side the momentum would arrive, then in such situation both naked Long CE and naked Long PE trading positions may be initiated in equal quantities employing Stone\-age Options on both sides\. It will be a Long Strangle position on Stone\-age Options on both sides on same Expiry series and with same quantity\.

__*Stop Loss on CE Option*__: Technically, if on the Chart of the relevant Stone\-age CE Option, two candles on daily TF closes below the candle on which Long position was initiated\.

__*Stop Loss on PE Option*__: Technically, if on the Chart of the relevant Stone\-age PE Option, two candles on daily TF closes below the candle on which Long position was initiated\.

The Adjustments as mentioned in respect of CE & PE, shall apply as follows:

	__*Adjustment in respect of CE*__: When the Stop loss event occurs, consider Shorting CE Options of same Expiry series \(as that of CE Long\) in such quantity so as to collect a total Premium Credit of atleast equal to \(or more\) Premium value paid for buying the CE Option\. This Short CE Strike must be higher than some major Resistance level or a higher Strike than the CE Long Strike\.

__*	Adjustment in respect of PE*__: When the Stop loss event occurs, consider Shorting PE Options of same Expiry series \(as that of PE Long\) in such quantity so as to collect a total Premium Credit of atleast equal to \(or more\) Premium value paid for buying the PE Option\. This Short PE Strike must be lower than some major Support level or a lower Strike than the PE Long Strike\.

__\[4\] 	Playing from Overbought Levels:__

Typically, Nifty every year makes a correction of about 5% to 12%, and sometimes also slips down to 17% in a year; and in rare case in 4\-5 years’ time period, Nifty may even fall down upto 38% in a year from the top it made\. Mostly, Nifty makes a correction of 5% to 12% on year\-on\-year basis\. Further, since BankNifty has common Stocks with Nifty \(to the extent of its 25% composition of Nifty\), therefore, a fall in Nifty usually also results in a fall in BankNifty\. 

Thus, we can explore an overbought zone in Nifty and BankNifty on technical basis \(*like RSI on daily TF exceeding 90; or on Weekly / Monthly TF RSI exceeding 88 level etc\.*\), and initiate a Long PE position employing Stone\-age PE Option\.

__*Adjustment in respect of PE*__: When the Stop loss event occurs, consider Shorting PE Options of same Expiry series \(as that of PE Long\) in such quantity so as to collect a total Premium Credit of atleast equal to \(or more\) Premium value paid for buying the PE Option\. This Short PE Strike must be lower than some major Support level or a lower Strike than the PE Long Strike\.

Thus, using the peculiar characteristics of Stone\-age Options we can attempt to exploit the Unlimited profit potential associated with Long Options trading position, at a very low purchasing cost and undertaking much lower risk than in usual Long Options positions\. 

These Stone\-age Options based Long play is a must in the arsenal of an Options trader\.

__LONG OPTIONS PLAY THROUGH 'STONE\-AGE OPTIONS’ ON POSITIONAL BASIS__

We know that buying an Option has a limited risk and an unlimited reward potential\. However, in order to have a profit situation on our buying position in Options, primarily the following favourable factors must be present:

1. there must be strong momentum in the trend favouring the relevant Options \(*i\.e\. an strong uptrend in case of a CE Long position and a strong downtrend to benefit on the PE Long position*\);
2. the momentum favouring the relevant Options must arrive not too late after initiating the Long position;
3. the Volatility must not be in a falling state i\.e\. either the volatility must be static or in a rising state, but in a falling state \(barring minor / regular fluctuations\);
4. the relevant Options must be in the Most Impacted Radius Zone \(i\.e\. where the effect of momentum is strongly experienced by the Options of certain Strike Prices above or below the ATM Strike\);
5. from Expiry perspective, the Option must expire as an ITM with final premium value higher than the buying price\.

Thus, existence of these factors are essential for a Long Options position to generate profit\. These factors have already been explained in detail in Volume I of the Book\. 

Now, there are many Conventional Strategies  like Long Straddle and Long Strangle to play even non\-directional expected strong momentum on either side\. However, the biggest hurdle in a Long Options position is time decay i\.e\. the impact of Theta on Options if the expected momentum does not arrive quickly\. In such cases, with passage of time, the Long Options position gradually keep losing its Premium value and even if the momentum does arrive after much decay has already occurred \(bringing the Premium value much lesser than the buying price\), then even the favourable momentum may not suffice to bring such Long Options position into profit situation\.

One possible solution to the aforesaid problem with Long options, can be to select an Options for initiating Long position with greater number of days to its Expiry\. Farther the Expiry series for such Options, slower will be the impact of Theta \(time decay\) on such Options\. However, farther Expiry we go, higher the Premium we need to pay for the same Strike\. So, therefore, we need a solution to both the problems, i\.e\., of being able to get an Option with lower Theta impact and yet it must not be costly in terms of its buying price\. The solution to the aforesaid problems, is offered by __Stone\-age Options__\.

Let us understand what are Stone\-age Options, and how we can employ them for a safe play of Long Options without incurring higher Premium cost\.

These Stone\-age Options have already been discussed in Volume I of the Book\.

As the name suggests, Stone\-age Option is an Option which is like a stone i\.e\. it exhibits the property of very slow decay in its Premium value, even with a relatively longer holding time\. These Stone\-age Options are actually Far OTMs of Next Month Expiry series\. Here, we will discuss the Long Options play on Stone\-age Options, only in the context of Nifty and BankNifty\.

__Stone\-age Options in Nifty and BankNifty:__

In respect of BankNifty, Far OTM Options with a Premium value between 60 to 80, in Next Month Expiry series will qualify as Stone\-age Options for BankNifty\. Similarly, Far OTM Options with a Premium value between 30 to 40, in Next Month Expiry series will qualify as Stone\-age Options for Nifty\. 

These Options are used by big hedge funds/ Option players to take hedging positions against their primary trading positions and generally experience low Theta until they are almost a week apart from becoming a Current Month Expiry series \(from their Next Month Expiry series status\)\.

__*<*start*> For example*__*: In the month of say, March:*

- *between March 1st until about March 23rd: *Stone\-age* Option would be found in April Month Expiry series\. Therefore, in this case, a Far OTM CE or PE Options with a Premium value of around Rs\. 30\-40 in Nifty April Month Expiry series would qualify as a *Stone\-age* Option\. Likewise, Far OTM CE or PE Options with a Premium value of around Rs\. 60\-80 in BankNifty April Month Expiry series would qualify as a *Stone\-age* Option; and*
- *after March 23rd: For the purpose of selection of *Stone\-age* Option, Next\-to\-Next Month expiry series will be treated as Next Month Expiry \(as the Current Month Expiry series is soon about to get lapse; and the Next Month Expiry series in a week’s time would become Current Month Expiry series\)\. Thus, when only about a week or so is left in the current month Expiry, we will look for *Stone\-age* Options in Next\-to\-Next Month Expiry series*\. *Accordingly, in the said example, *Stone\-age* Option should be looked for in May Month Expiry series instead of April expiry series\. Therefore, in this case, a Far OTM CE or PE Options with a Premium value of around Rs\. 30\-40 per Lot in Nifty May Month Expiry series would qualify as a *Stone\-age* Option\. Likewise, Far OTM CE or PE Options with a Premium value of around Rs\. 60\-80 per Lot in BankNifty May Month Expiry series would qualify as a *Stone\-age* Option\. *__*<*end*>*__

Thus, by now we know the process of identification of Stone\-age Options in Nifty and BankNifty Options\. Let us, therefore, proceed to understand more closely what are the benefits of selecting Stone\-age Options for initiating Long Options trading position, especially where the holding time is relatively longer\. 

1. __*Minimal erosion in Premium value*__*: *Stone\-age Options are relatively least affected with erosion in its Premium value, even if there is a huge gap\-up / gap\-down or huge 1000 point around movement in the underlying or if the underlying keep hovering in a range for about good 20 days or so\. This makes it attractive from buying perspective, because, a trader will not lose much on its Long position on such Options, if the expected trend arrives late or doesnot arrive or infact even if the trend arrives in an opposite direction \(which is not favourable to the Options on which Long trading position is created\)\. Maximum erosion in its Premium value may occur to an extent of about 50% from its buying price, from such events over a period of more than 10\-15 days holding time\. Thus, these Stone\-age Options can be held for a relatively longer holding period\.

Having understood the precise benefits associated with initiating Long positions in Stone\-age Options for a longer holding time, let us now understand how should we play the expected trend making use of Stone\-age Options and what are the possible risk mitigants that can be employed\.

__Introduction: Adjustments to Trade__

As discussed, we must first identify the trend and then accordingly plan the trade and execute the trade through designing a suitable Strategy to play the trend\. 

But trading is a game of probability, in which a trader analyses the market information and plans a trade basis his knowledge & skill, for an outcome which seems relatively more probable to him\. Having said this, the truth of the matter is, that the market may surprise a trader more than often\. There are various factors which are not within the control of a trader after he has initiated his trade\. There can be sudden events & announcements, which cannot be factored by any trader howsoever well informed and abreast with information relevant to the markets\. There is always an overnight risk on positional trades from any untoward developments\. There can also be sudden change in the price governing factors such as demand & supply, volatility, interest rates, besides many other factors which can cause disruptions and throw challenges on to a running trade, and may cause loss on such trading positions, which would obviously lead to capital depletion\.  

It is therefore imperative for every trader to understand the possible ways by which a trader can bring down his losses and protect his trading capital, if the analysis basis which he initiated trading positions, goes wrong\. At what point, a trader can conclude, that now his trading position is not going as he planned, is a matter of technical analysis\. But once, it has been concluded that the trend has reversed and the running positions are / will not go as envisaged, then the trader must plan to mitigate the potential losses in the running trade positions\. Mitigation of loss in the running F&O positions, is done by initiating suitable Long and/or Short positions in same or other F&O instruments, in the direction of reversal or basis the then prevailing market situation\. Thus, initiating fresh positions in suitable F&O instruments in order to mitigate or outrun the losses in the running trading positions is generally referred to as the __Adjustments to trade__\.

__Significance of Options for carrying Adjustments in F&O trade__:

Options are a dynamic instrument\. Besides using them for riding a trend or hedging a trading position, the Options can also be employed to make suitable adjustments to the losing positions originally initiated whether through Futures or through Options or both\.

Let us focus here on the thought process basis which we can consider making appropriate adjustments to trade, keeping in mind the then prevailing market conditions, broadly, through initiating suitable Long and/or Short positions in Options, with the sole objective of mitigating the losses on the running F&O trading positions\. Obviously, since, adjustments to trade requires executing fresh Long and/ or Short positions in Options, it requires extra capital deployment by the trader in addition to what is already deployed in the running trading positions\. A trader must therefore spare reasonable amount from his capital to make these adjustments, should the need arise\. Ideally, at any given point in time, a trader must not deploy more than 40% of his capital unless he is seasoned trader and has sufficient backup capital\.   

The objective here is to learn about the various factors which a trader must bear in mind while deciding to carry out Adjustments to trade; and not necessarily to follow exactly the same methodologies which are discussed on this platform\. Let us therefore focus on the various factors being discussed here in the context of Adjustments to trade under different market situations and trend reversal\.

__Adjustments through F&O of same Underlying:__

This type of adjustment mode is pretty straightforward in terms of choice of the underlying F&O instruments, for employing them as adjustments to the running trading positions\. That is: if the original trading positions were initiated employing Nifty’s F&O instruments to play out a bullish trend on Nifty index, and subsequently if there is a reversal of the trend in Nifty on the bearish side, then we would contemplate making adjustments to the running bullish trading positions/ Strategy on Nifty, by employing F&O instruments pertaining to Nifty \(and not any other underlying\), in order to play out the new trend of Nifty, with the objective to mitigate the losses arising on the running bullish positions on Nifty F&O instruments \(originally initiated\)\.

Now, whenever there arises the need to make adjustments to the running F&O trading positions, the possible adjustments broadly speaking which may be made, can be categorised into the following two categories:

1. Adjustments through countering the original trading position; and
2. Adjustments through pyramiding\. 

__Summary points in respect of Counter Adjustment and Adjustment through Pyramiding__

Following conclusions concerning adjustments to trade, can be drawn:

- Adjustments may be required in the original positions/ Strategy, once the original trend has reversed or is no more valid\.
- Adjustments to the original trade, can be done broadly in two ways: \(i\) Counter Adjustments \(ii\) Adjustments through Pyramiding\.
- Counter Adjustment positions are initiated in the direction of the new trend/ reversed trend, by employing Long Options or Short Options\. Main objective in this type of Adjustment is to mitigate losses in the original trade positions, through Delta play \(*by initiating higher Delta positions on the Counter Adjustments than the original trade/Strategy*\), i\.e\. by countering the losses in original trade by playing the direction of the new / reversed trend with Delta advantageous positions initiated on Counter Adjustment positions over Delta position on original Strategy/ trade\. Theta impact on Premium credits collected on Short Options positions initiated as Counter Adjustments are also harnessed to mitigate loss on the original Strategy/trade positions\.
- Position in Adjustments through Pyramiding are initiated in the direction of the original trend, by employing Short Options\.  Main objective in this type of Adjustment is to mitigate losses in the original trade positions, through collecting Premium credits by initiating Short positions on those Options which are getting Premium appreciation due to trending underlying \(i\.e\. *CE Short when underlying is rising; and PE Short when underlying is falling*\), and to eventually get benefited on account of Theta impact on Premium credits collected on such Short Options positions initiated in pyramidal fashion\.
- Adjustments through Pyramiding are relatively riskier than Counter Adjustments, as the former is in opposite direction of the new/reversed trend\. Therefore, Adjustments through Pyramiding must be initiated only when the intensity of momentum and level of resistance/ support convincingly meets the criterion of Adjustments through Pyramiding discussed above\. Also, Adjustments through Pyramiding must be implemented only when the Expiry is near and the relevant Resistance / Support zone is strong to not let the underlying breach the relevant Resistance/ Support zone, as the case may be\.
- These Adjustments can be implemented through naked Options positions or by implementing suitable hedged Strategies\. However, much larger quantities would be needed for Adjustments through hedged positions rather than naked positions\.
- If Volatility is in rising state then Adjustments involving Long Options must be considered; and if Volatility is in falling state then Adjustments through Short Options may be considered\.
- Adjustments employing Short positions \(especially naked Shorts\) would require higher capital, and may have MTM consequences\.

__Possible ways of Adjustments:__

Let us now discuss the possible ways in which adjustments to the running positions can be made\.

__Objective of Adjustments:__

The basic premise in an Adjustment to trade is to mitigate the potential loss after reversal of the main trend \(basis which the original Strategy was initiated\)\. The original Strategy are usually either a Debit Strategy or a Credit Strategy, from expiry perspective\. The objective to carry out adjustments to these original Debit Strategy or Credit Strategy are as follows:

- In a Debit Strategy, adjustments are primarily targeted to recover the potential limited loss of Premium paid on the Strategy, in the unlikely event of the underlying not being able to cross\-over the Breakeven Strike level of the Debit Strategy; and 
- In a Credit Strategy, adjustments are primarily targeted to mitigate the unlimited loss situation that may arise if the underlying starts trending beyond the Breakeven Strike of the Credit Strategy\.  

This is the primary objective in adjustments to trade depending on whether the Strategy deployed is a Debit or a Credit Strategy\.

__Type of Adjustments:__

Broadly, there can be two ways by which adjustments to a losing position can be considered\. These are as follows:

1. Adjustment through F&O instruments pertaining to different underlying
2. Adjustment through F&O instruments pertaining to same underlying

Both these aforesaid types of adjustments to running trading positions are discussed below\.

__Adjustments through F&O of different Underlying:__

This type of adjustment is done by employing F&O instruments of an underlying which moves in directly inverse corelation to the underlying pertaining to which F&O positions are currently running in losses\. For example: *Nifty may have an inverse relationship with Gold\. Thus, if bullish positions/ Strategy was initiated on Nifty through F&O instruments pertaining to Nifty, and the Nifty trend reverses on the bearish side then a bullish positions may be initiated on Gold through its F&O instruments*\. *Idea here is to absorb the losses on the bullish positions initiated on Nifty, by initiating fresh bullish positions on Gold F&O instruments \(either naked or hedged, depending upon our view on the movement in Gold prices\)\.*

Thus, in the above example, adjustments involved initiating fresh positions on Gold F&O instruments on the bullish side, in order to curtail / outrun the losses on the bullish Strategy initiated on Nifty originally\. The bullish position on Gold F&O instruments, may need to be initiated on atleast double the quantity than the Nifty bullish trading positions \(as originally initiated\) so as to suitably outrun / absorb the losses in the Nifty positions\.

However, the drawback of employing this kind of Strategy are two folds: \(i\) the other second underlying may not necessarily go in inverse direction of the first underlying on which original trading positions were initiated, due to changed market dynamics, geopolitical and economical tussle; and \(ii\) the second underlying \(which is being contemplated for initiating positions as adjustments\) may not give a sound technical go\-ahead to play out the trend in the opposite direction to the first underlying on which original positions were initiated\. Thus, such adjustments may have to be carefully weighed before putting into effect merely on the reasoning that the underlyings have historically demonstrated trends in opposite directions\.

Let us know explore adjustments initiated on the same underlying on which the original trading positions were initiated\.

__Adjustments through Pyramiding__

Contrary to Counter Adjustments discussed above, adjustments through pyramiding are done by initiating positions in the direction of the original trend \(i\.e\. *not following the trend reversal*\)\. However, this type of adjustment is only deployed when:

1. the reversal is a trending one but upto a limited extent \(i\.e\. would maximum last upto a strong resistance level on the upside or to a strong support level on the downside\); and 
2. Expiry is not far\. 

The idea / objective behind this type of adjustment is to capture high Premium Far OTM Options \(which gets benefited from the trend reversal\) for shorting, and eventually deriving profit from their decay due to approaching/ not\-so\-far Expiry\. __This adjustment may be done only by deploying naked Short Options positions \(*preferably*\) or Credit hedged Strategies \(*in large quantities*\)__\.

Thus, this type of adjustments can be deployed in case of following situations: 

1. __Mild\-Bearish Trending Reversal__: When a bullish / mild bullish trend was being played out through a Strategy, and there arrives a mild\-bearish reversal, which is expected to not trend below a strong support level as per the technical analysis by the approaching Expiry of the F&O instruments involved in the original Strategy\.
2. __Mild\-Bullish Trending Reversal__: When a bearish / mild bearish trend was being played out through a Strategy, and there arrives a mild\-bullish reversal, which is expected to not trend above a strong resistance level as per the technical analysis by the approaching Expiry of the F&O instruments involved in the original Strategy\.

__The significance of Adjustments through pyramiding is that it can be used only for trending reversals which can be reasonably expected to trend to limited extent and not beyond\. __

__Further, this kind of Adjustment would be best suited for: __

- __original Strategies/positions which are exposed to a defined / limited loss; or __
- __for original Strategies/ positions which are exposed to unlimited loss and the trend reversal is almost absolutely confirmed to be of a limited extent \(i\.e\. would not  breach the relevant resistance/ support level, as the case may be\) and for a temporary time\.__

__Also, this Adjustment must be considered, when Volatility is not in a rising state__; __and Expiry is quite near__\.

__*Additionally following points must be taken care in a practical trade in relation to implement Adjustments through Pyramiding:*__

- *Short Options positions in the aforementioned Adjustments must be of the current Expiry series, so as to get benefit of the increasing Theta impact due to approaching Expiry\. The Short Options for these Adjustments must be of the same Expiry series as that of the closer Expiry series in the original Strategy\.*
- *Short Options positions, as part of these Adjustments, must be initiated at such far OTM Strikes, which are reasonably expected to expire worthless as OTM by Expiry, i\.e\. CE Shorts must be above the upper resistance level where the underlying is not expected to cross by Expiry and the PE Shorts must be below the lower support level where the underlying is not expected to cross by Expiry\.*
- *These Adjustments involving Short Options positions may require huge capital and compliance towards MTM requirements\.*
- *These Adjustments may be implemented through naked Short Options positions or through relevant hedged credit Strategies\. However, hedged credit strategies will require relatively much larger quantities than the naked Short positions, to collect good amount of Premium Credit through Pyramiding\.*
- *Ensure that Volatility is not in rising state\.*

__Pyramiding in Mild\-Bullish Trend Reversal__

If an original position / Strategy was initiated to play bearish trend but the trend has reversed to mild\-bullish side which is expected to remain mild\-bullish only upto a strong resistance level on the upside, then adjustments through pyramiding would be done by shorting Far OTM CEs above the strong resistance level, as it gets a higher Premium value from the reversal on the bullish side\. Further, in this adjustment, more quantity is shorted on even higher Strikes as the mild\-bullish reversal keeps approaching towards the resistance level\. 

__<start> Example__: if Nifty ATM is at 17000 and a Bear PE Debit Spread Strategy was initiated expecting Nifty to trend lower; but the Nifty reverses and becomes bullish and starts trending upward \(*causing CE Premiums to rise and PE Premiums to fall, thereby causing loss in the original Strategy*\) and there seems to be a strong resistance level at 18000 CE, above which the Nifty is not expected to rise further up by Expiry \(which is not too far from the time of trend reversal\), then we can consider shorting CE Options as they get benefited with higher Premium as the underlying starts approaching 18000 resistance level\.  Thus, we can consider shorting: 

- Far OTM 18200 CE 2 Lots at Rs\. 120 per Lot \(when its Premium rises from Rs\. 95 to Rs 120\) as Nifty starts its upward move from 17000; and 
- thereafter, can short 3 or 4 lots of 18300 CE at Rs\. 100 per Lot \(when its Premium rises from 75 Rs\. to Rs\. 100\) as Nifty rises above 17600; and 
- thereafter, can short 5 or 6 lots of 18500 CE at Rs\. 75 per Lot \(when its Premium rises from 50 Rs\. to Rs\. 75\) as Nifty further rises above 17800 towards 18000 resistance level\. 

Idea here is that the Nifty will respect the strong resistance level of 18000 and will not rise above that level by approaching Expiry, which is close\-by\. Approach in this adjustment is to keep shorting more quantity of CEs at higher Strikes above the resistance level of 18000, when they get benefited with relatively higher Premium \(than these Strikes had earlier\)\. If our technical view is correct, then the Nifty will respect the strong resistance level of 18000 and the rise in Premium values of CE will not happen once Nifty reaches upto 18000 level and sustains\. Infact, as the Nifty sustains at 18000 level and remains there or closes lower at Expiry, these CE Shorts initiated as part of adjustments through pyramiding, will start showing profit due to cessation of upward momentum and Theta effect of approaching Expiry\. Thus, all these CEs which were shorted \(taking benefit of higher Premiums due to mild\-bullish trend reversal\) will expire worthless as OTM by Expiry, thereby yielding profit to the extent of Premium credit received on these Short CEs\. This profit on Premium credit from CE Shorts are targeted to mitigate the potential loss on the original Bear PE Spread Strategy\. __<end>__

The benefit of this adjustment is: \(a\) to be able to take benefit of collecting higher Premium due to the momentum; \(b\) shorts are targeted at Far OTM Strikes above strong resistance levels; \(c\) since these adjustments collects Premium at higher Strike levels, it helps to increase the Breakeven Strike much above the resistance level; \(d\) to get benefited from Theta decay due to close\-by Expiry\.

However, having said above, there is a potent risk in this type of adjustment\. The risk is: if the upward momentum does not stop at the resistance level and rises up even higher breaching the Breakeven Strikes of all these CE Shorts taken collectively\. Since, the adjustments involves shorting Options or credit strategy, therefore, in case the momentum breaches the resistance level and the Breakeven Strike levels, then it may lead to an unlimited loss situation on these adjustments, besides loss on the original Strategy\.This unlimited loss situation can be contained by deploying  equal number of CE Long at even higher Strike than the CE Short Strike \(*thus, converting naked CE Shorts into CE Credit Spread*\)\.  While, these hedged positions may contain the unlimited loss to some extent, but this should  be initiated when the bullish momentum appears to be not very strong\. However, if the bullish trend appears to be continuing and strong then instead of initiating CE Long at higher Strikes than CE Short, it will be prudent to initiate CE Long on lower Strike than CE Shorts in equal quantity \(*thus, converting naked CE Shorts in to Bull CE Spread*\)\. Since, the original Strategy was towards bearish side, therefore large quantities for Bull CE Spread may need to be deployed as part of these adjustments in order to sufficiently mitigate the loss on the original Strategy due to trend reversal on the bullish side\.

Therefore, this adjustment, to play out the mild\-bullish trending reversal so as to curtail/mitigate the loss on the original bearish/mild bearish Strategy, should be considered only if there is a strong conviction on the resistance level on the upside to remain intact by Expiry\.

__Illustrations of Pyramiding upon Mild Bullish Trend Reversals:__

Basis the aforementioned factors, the following table will indicatively explain the Adjustments through Pyramiding in Mild\-Bullish trend reversal situations:

__<start> Table__:

“__Original Strategy/ positions: \(naked / hedged\)__”: “Bearish / Mild Bearish”, “__Trend Reversal:__”: “Mild\-Bullish momentum”, “__Selection of Strike levels for Adjustments through Pyramiding:__”: “Idea is to benefit by Shorting the Option whose Premium would be on rise due to trend reversal\. In this case of trend reversal toward bullish momentum, we will target Shorting CEs above the resistance level \(above which we do not expect the underlying to rise by the approaching relevant Expiry of the instruments in the original Strategy\)\. \\n We will keep adding larger quantity of Short CEs at higher Strikes \(above the resistance level and at even higher Strikes than the Strike at which CE Shorts were initiated  previously as part of adjustments through pyramiding\), as their Premium rises due to trending reversal toward bullish momentum\. Thus, it can be implemented in the following manner: \(i\) few quantities of CE Short at Strike above the resistance level; \(ii\) then, more quantities of CE Short above the resistance level and at even higher Strikes than the previous CE Short Strike; \(iii\) then, even more quantities of CE Short above the resistance level and at even higher Strikes than the previous two CE Short Strikes; and so on\.”

“__Original Strategy/ positions: \(naked / hedged\)__”: “Rangebound”, “__Trend Reversal:__”: “Mild\-Bullish momentum with range Breakout”, “__Selection of Strike levels for Adjustments through Pyramiding:__”: “Idea is to benefit by Shorting the Option whose Premium would be on rise due to trend reversal\. In this case of trend reversal toward bullish momentum, we will target Shorting CEs above the resistance level \(above which we do not expect the underlying to rise by the approaching relevant Expiry of the instruments in the original Strategy\)\. \\n We will keep adding larger quantity of Short CEs at higher Strikes \(above the resistance level and at even higher Strikes than the Strike at which CE Shorts were initiated  previously as part of adjustments through pyramiding\), as their Premium rises due to trending reversal toward bullish momentum\. Thus, it can be implemented in the following manner: \(i\) few quantities of CE Short at Strike above the resistance level; \(ii\) then, more quantities of CE Short above the resistance level and at even higher Strikes than the previous CE Short Strike; \(iii\) then, even more quantities of CE Short above the resistance level and at even higher Strikes than the previous two CE Short Strikes; and so on\.” __<end>__

__Pyramiding in Mild\-Bearish Trend Reversal__

If an original position / Strategy was initiated to play bullish trend but the trend has reversed to mild\-bearish which is expected to remain mild\-bearish only upto a strong support level on the downside, then adjustments through pyramiding would be done by shorting Far OTM PEs below the strong support level, as it gets a higher Premium value from the reversal on the bearish side\. Further, in this adjustment, more quantity is shorted on even lower Strikes as the mild\-bearish reversal keeps approaching towards the support level\. 

__<start> Example: __For example: if Nifty ATM is at 17000 and a Bull CE Debit Spread Strategy was initiated expecting Nifty to trend higher; but the Nifty reverses and becomes mild\-bearish and starts trending downward \(*causing PE Premiums to rise and CE Premiums to fall, thereby causing loss in the original Strategy*\) and there seems to be a strong support level at 16000 PE below which the Nifty is not expected to slip by Expiry \(which is not too far from the time of trend reversal\), then we can consider shorting PE Options as they get benefited with higher Premium as the underlying starts approaching 16000 support level\.  Thus, we can consider shorting: 

- Far OTM 15800 PE 2 Lots at Rs\. 100 per Lot \(when its Premium rises from Rs\. 50 to Rs 100\) as Nifty starts its downward move below 17000; and 
- thereafter, can short 3 or 4 lots of 15600 PE at Rs\. 85 per Lot \(when its Premium rises from 45 Rs\. to Rs\. 85\) as Nifty slides below 16500; and 
- thereafter, can short 5 or 6 lots of 15400 PE at Rs\. 65 per Lot \(when its Premium rises from 25 Rs\. to Rs\. 65\) as Nifty slides below 16200 towards the support level of 16000\. 

Idea here is that the Nifty will respect the strong support level of 16000 and will not slip below that level by approaching Expiry, which is close\-by\. Approach in this adjustment is to keep shorting more quantity of PEs at lower Strikes below the support level of 16000, when they get benefited with relatively higher Premium \(than these Strikes had earlier\)\. If our technical view is correct, then the Nifty will respect the strong support level of 16000 and the rise in Premium values of PE will not happen once Nifty slides down to 16000 level and sustains\. Infact, as the Nifty sustains at 16000 level and remains there or closes higher at Expiry, these PE Shorts initiated as part of adjustments through pyramiding, will start showing profit due to cessation of downward momentum and Theta effect of approaching Expiry\. Thus, all these PEs which were shorted \(taking benefit of higher Premiums due to mild\-bearish trend reversal\) will expire worthless as OTM by Expiry, thereby yielding profit to the extent of Premium credit received on these Short PEs\. This profit on Premium credit from PE Shorts are targeted to mitigate the potential loss on the original Bull CE Spread Strategy\. __<end>__

The benefit of this adjustment is: \(a\) to be able to take benefit of collecting higher Premium due to the momentum; \(b\) shorts are targeted at Far OTM Strikes below strong support levels; \(c\) since these adjustments collects Premium at lower Strike levels, it helps to increase the Breakeven Strike much below the support level; \(d\) to get benefited from Theta decay due to close\-by Expiry\.

However, having said above, there is a potent risk in this type of adjustment\. The risk is: if the downward momentum does not stop at the support level and slides down breaching the Breakeven Strikes of all these PE Shorts taken collectively\. Since, the adjustments involves shorting Options or credit strategy, therefore, in case the momentum breaks the support level on the downside and also breaches the Breakeven Strike levels, then it may lead to an unlimited loss situation on these adjustments, besides loss on the original Strategy\. This unlimited loss situation can be contained by deploying  equal number of PE Long at even lower Strike than the PE Short Strike \(*thus, converting naked PE Shorts into PE Credit Spread*\)\.  While, these hedged positions may contain the unlimited loss to some extent, but this should  be initiated when the bearish momentum appears to be not very strong\. However, if the bearish trend appears to be continuing and strong then instead of initiating PE Long at lower Strikes than PE Short, it will be prudent to initiate PE Long on higher Strike than PE Shorts in equal quantity \(*thus, converting naked PE Shorts in to Bear PE Spread*\)\. Since, the original Strategy was towards bullish side, therefore large quantities for Bear PE Spread may need to be deployed as part of these adjustments in order to sufficiently mitigate the loss on the original Strategy due to trend reversal on the bearish side\.

Therefore, this adjustment, to play out the bearish trending reversal so as to curtail/mitigate the loss on the original bullish/mild bullish Strategy, should be considered only if there is a strong conviction on the support level on the downside to remain intact by Expiry\.

__Illustrations of Pyramiding upon Mild Bearish Trend Reversals:__

Basis the aforementioned factors, the following table will indicatively explain the Adjustments through Pyramiding in Mild\-Bearish trend reversal situations:

“__Original Strategy/ positions: \(naked / hedged\)__”: “Bullish / Mild Bullish”, “__Trend Reversal:__”: “Mild\-Bearish momentum”, “__Selection of Strike levels for Adjustments through Pyramiding:__”: “Idea is to benefit by Shorting the Option whose Premium would be on rise due to trend reversal\. In this case of trend reversal toward bearish momentum, we will target Shorting PEs below the support level \(below which we do not expect the underlying to fall by the approaching relevant Expiry of the instruments in the original Strategy\)\. \\n We will keep adding larger quantity of Short PEs at lower Strikes \(below the support level and at Strikes even lower than the Strike at which PE Shorts were initiated  previously as part of adjustments through pyramiding\), as their Premium rises due to trending reversal toward bearish momentum\. Thus, it can be implemented in the following manner: \(i\) few quantities of PE Short at Strike below the support level; \(ii\) then, more quantities of PE Short below support level and at even lower Strikes than the previous PE Short Strike; \(iii\) then, even more quantities of PE Short below support level and at even lower Strikes than the previous two PE Short Strikes; and so on\.”

“__Original Strategy/ positions: \(naked / hedged\)__”: “Rangebound”, “__Trend Reversal:__”: “Mild\-Bearish momentum  with range Breakdown”, “__Selection of Strike levels for Adjustments through Pyramiding:__”: “Idea is to benefit by Shorting the Option whose Premium would be on rise due to trend reversal\. In this case of trend reversal toward bearish momentum, we will target Shorting PEs below the support level \(below which we do not expect the underlying to fall by the approaching relevant Expiry of the instruments in the original Strategy\)\. \\n We will keep adding larger quantity of Short PEs at lower Strikes \(below the support level and at Strikes even lower than the Strike at which PE Shorts were initiated  previously as part of adjustments through pyramiding\), as their Premium rises due to trending reversal toward bearish momentum\. Thus, it can be implemented in the following manner: \(i\) few quantities of PE Short at Strike below the support level; \(ii\) then, more quantities of PE Short below support level and at even lower Strikes than the previous PE Short Strike; \(iii\) then, even more quantities of PE Short below support level and at even lower Strikes than the previous two PE Short Strikes; and so on\.” __<end>__

__Adjustment through Countering:__

This simply means initiating trading positions in more quantity \(than the original trading quantity\) of suitable F&O instruments, with higher Delta value \(than the Delta value of the original trading Strategy\), in the direction of the reversed trend \(which is in opposite direction of the original trend basis which running F&O positions/ Strategy was executed originally\)\.That is: if the original trend in Nifty was bullish and the trend was being played out by initiating some bullish trading positions / Strategy by employing F&O instruments of Nifty, then in order to make counter adjustments upon reversal of the bullish trend towards bearish side, we would contemplate initiating fresh Nifty F&O positions/ Strategy with more quantity and higher delta on the bearish side \(than the delta value of the bullish position\)\. Thus, initiating positions on the opposite side of the original trend is called __Counter Adjustments __or __Adjustment through Countering __the original position\. 

This adjustment may be done only by deploying naked Options positions or hedged Strategies to play out the trend reversal\.

__Strike Selection for Counter Adjustments:__

Counter Adjustment positions through Options, are therefore, decided after taking into account the following factors, namely:

1. Counter Adjustment positions to be initiated in the direction of the reversed trend \(i\.e\. in opposite direction of the original trend basis which running F&O positions/ Strategy was executed\)\. Thus, if the original trend has reversed and turned bearish / mild bearish, then adjustments are done initiating Long PEs or Short CEs; and if the trend has reversed and turned bullish / mild bullish, then adjustments are done initiating Long CEs or Short PEs\. 
2. Counter Adjustment positions must be initiated at a higher aggregate Delta value than the Delta value of the original Strategy\. 
3. Counter Adjustment positions should also factor the Options Premium debit/ credit situation in the original Strategy\.
4. And finally, depending upon whether the trend reversal is in momentum or not, Counter Adjustment positions may employ Long Options or Short Options\.

Thus, basis the aforementioned factors, Counter Adjustment positions must be initiated through Options at suitable Strike levels\.

__Counter Adjustments through Long or Short Options:__

However, the most important aspect in Counter Adjustment is to consider if the trend reversal needs to be played through favourable Long Options or favourable Short Options\. That is: if the original trend of Nifty has reversed from bullish to bearish, then the Counter Adjustments need to be planned basis whether we must play the bearish reversal through Long PE or Short CE\. Likewise, if the original trend of Nifty has reversed from bearish to bullish, then the Counter Adjustments need to be planned basis whether we must play the bullish reversal through Long CE or Short PE\. The answer to this is as follows:

- If the reversal seems to be with momentum, which is expected to sustain and the trend to continue, then we must make counter Adjustment positions by employing Long Options in the direction of the current trend upon reversal\. For example, bearish reversal can be played through PE Long and bullish reversal through CE Long\.
- If the reversal seems to be slow \(not with momentum\) or likely to remain rangebound or the reversal is with  momentum but does not seem last, then we must make counter Adjustment positions by employing Short Options in the direction of the current trend upon reversal\. For example, bearish/mild bearish reversal can be played through CE Short and bullish/mild bullish reversal through PE Short\.

Thus, whether or not there seems to be a sustaining momentum basis technical analysis, is the key factor for determining if the counter Adjustments should be initiated with Long Option positions or Short Option positions\. However, initiating Short Options positions would require more capital and may also have to meet the MTM requirements\.

__The significance of Counter Adjustments is that it can be used for both mild and super reversals\.__ Mild reversals are played through Short Options and super reversal having momentum are played through Long Options\.

__Counter Adjustments through Delta positions:__

__*Higher Delta on positions in Counter Adjustments:*__

Second most important factor, after determining whether the trend reversal should be played out through Long Option positions or Short Option positions, is the aggregate Delta value of the positions initiated as part of Counter Adjustments\.

The positions on the Counter Adjustments must have an aggregate higher Delta \(than the aggregate Delta on the original position\) in the direction of the current trend after reversal\. This higher Delta requirement on the Counter Adjustment positions can be met by, either selecting higher Delta Strike or increasing quantity on lower Delta Strike \(thereby achieving higher Delta than the original position\): 

Thus,  if the original bullish trend reverses on the bearish side, then such bearish reversal can be played through few PE Long on such higher Strike, which can on aggregate basis  make up for higher Delta for the counter position \(than the aggregate Delta on the original position\); or through more quantity of PE Long on lower Strike, which can on aggregate basis make up for higher Delta for the bearish counter position \(than the aggregate Delta on the original position\)\. However, bearish reversal through CE Short must be preferably played through Far OTMs\. This is because, if the trend again reverses on the bullish side, then the PE Long counter positions may suffer limited loss \(to the extent of Premium paid\), but CE Short may suffer unlimited loss if it is near ATM Strike as it will go in the money should there arrives a bullish trend again\.

Likewise,  if the original bearish trend reverses on the bullish side, then such bullish reversal can be played through few CE Long on such lower Strike, which can on aggregate basis  make up for higher Delta for the counter position \(than the aggregate Delta on the original position\); or through more quantity of CE Long on higher Strike, which can on aggregate basis make up for higher Delta for the bullish counter position \(than the aggregate Delta on the original position\)\. However, bullish reversal through PE Short must be preferably played through Far OTMs\. This is because, if the trend again reverses on the bearish side, then the CE Long counter positions may suffer limited loss \(to the extent of Premium paid\), but PE Short may suffer unlimited loss if it is near ATM Strike as it will go in the money should there arrives a bearish trend again\.

__*Delta shifting in Counter Adjustments:*__

When Counter Adjustments are planned through overall higher Delta on the adjustment positions \(than the original trading position\), then the same may be implemented and played through Delta shifting mechanism\. Therefore:

- if the original bullish trend reverses on the bearish side, then such bearish reversal can be played through Delta shifting mechanism by buying PEs as Near OTMs / slightly Far OTMs \(i\.e\. those PEs having Delta values per Lot basis, ranging from 0\.3 to 0\.45\)\. Once these Near OTM PEs / slightly Far OTM PEs becomes an ITM, then these PEs can be booked and if the bearish reversal seems to continue, then again fresh set of Near OTM PEs / slightly Far OTM PEs \(i\.e\. those PEs having Delta values per Lot basis, ranging from 0\.3 to 0\.45\) can be bought, in order to continue to ride the bearish reversal as an Counter Adjustment to the original bullish side trading positions\. This process of initiating fresh lower Deltas \(and booking them at profit\), time and again to ride the bearish momentum is __PE side Delta shifting \(through Long Options\) based Counter Adjustment to play the bearish side reversal__\. In this Delta shifting based Counter Adjustment, it is ensured that if the trend reversal fails upon initiating the Counter Adjustment trading positions, then the loss on these positions will be relatively less \(as they are on lower Delta\), as compared to the Counter Adjustment trading positions initiated on per Lot higher Delta PEs \(like ITMs / deeper ITMs\)\. 

This bearish reversal can also be played through __CE side Delta shifting \(through Short Options\) Counter Adjustment__\. In this case, the bearish reversal can be targeted through Delta shifting by initiating Counter Adjustments on Far OTM CEs having Delta value  around the range of 0\.3 to 0\.20 per Lot sorts\. This position is booked when the profit is generated on these Short CEs, when the CE Strike becomes even Far OTM due to bearish move in the underlying and the Ce Strikes moves to even lower Delta value like 0\.15 or less\. If the bearish move in the underlying appears to continue, then again a fresh Short CE is initiated at a relatively higher Delta value like 0\.3 to 0\.2 per Lot, on which profit is booked again as this Strike too becomes an even farther OTM due to bearish move in the underlying\.

- if the original bearish trend reverses on the bullish side, then such bullish reversal can be played through Delta shifting mechanism by buying CEs as Near OTMs / slightly Far OTMs \(i\.e\. those CEs having Delta values per Lot basis, ranging from 0\.3 to 0\.45\)\. Once these Near OTM CEs / slightly Far OTM CEs becomes an ITM, then these CEs can be booked and if the bullish reversal seems to continue, then again fresh set of Near OTM CEs / slightly Far OTM CEs \(i\.e\. those CEs having Delta values per Lot basis, ranging from 0\.3 to 0\.45\) can be bought, in order to continue to ride the bullish reversal as a Counter Adjustment to the original bearish side trading positions\. This process of initiating fresh lower Deltas \(and booking them at profit\), time and again to ride the bullish momentum is __CE side Delta shifting based Counter Adjustment to play the bullish side reversal__\. In this Delta shifting based Counter Adjustment, it is ensured that if the trend reversal fails upon initiating the Counter Adjustment trading positions, then the loss on these positions will be relatively less \(as they are on lower Delta\), as compared to the Counter Adjustment trading positions initiated on per Lot higher Delta CEs \(like ITMs / deeper ITMs\)\.

This bullish reversal can also be played through __PE side Delta shifting \(through Short Options\) Counter Adjustment__\. In this case, the bullish reversal can be targeted through Delta shifting by initiating Counter Adjustments on Far OTM PEs having Delta value  around the range of 0\.3 to 0\.20 per Lot sorts\. This position is booked when the profit is generated on these Short PEs, when the PE Strike becomes even Far OTM due to bullish move in the underlying and the PE Strike moves to even lower Delta value like 0\.15 or less\. If the bullish move in the underlying appears to continue, then again a fresh Short PE is initiated at a relatively higher Delta value like 0\.3 to 0\.2 per Lot, on which profit is booked again as this Strike too becomes an even farther OTM due to bullish move in the underlying\.

The decision whether or not to buy a lower Delta Options for the purpose of Counter Adjustments through Delta shifting, will depend on the expected momentum in the trend reversal\. This Delta shifting for Counter Adjustment, through Long Options positions, must only be implemented when the trend reversal is expected to be strong and last, else Delta shifting based Counter Adjustment through Short Options position can be explored\.

__Counter Adjustments to Net Premium Credit / Debit positions:__

Every original Options positions/ Strategies, which is initiated to play out a trend, is effectively, either:

1. a Debit position \(*i\.e\. where Premiums are paid on Long legs; or more Premiums are paid on Long legs than the Premium credit received on Short legs*\); or 
2. a Credit position \(*i\.e\. where Premium credits are received on Short legs; or more Premiums credits are received on Short legs than the Premium paid on the Long legs*\)\.

Therefore, when the original Options positions/ strategies goes wrong, on account of trend reversal or otherwise, then the Counter Adjustments need to also factor in the following considerations:

1. If the original Options position/ Strategy is a Premium Debit positions/Strategy, then the Counter Adjustments must be targeted to save the loss of the Premium debit incurred on the original Strategy\. This can be achieved by initiating Short Options positions in the direction of trend reversal \(*i\.e\. PE Short to play trend reversal towards bullish/ mild bullish; and through CE Shorts to play trend reversal towards bearish/ mild bearish*\), at far OTM Strikes, with such large quantity so as to have an effective Delta higher than the Delta value of the original Strategy\. Here the objective must be to have as much Premium credit on Short Options \(contemplated as part of Counter Adjustments\) so as to be able to recover the Premium debit incurred on the original Strategy\. 

However, if the original Strategy involves a Futures leg \(or huge Premium debit positions in large quantities\) and the trend reversal is with strong momentum, then the Short Options position \(contemplated as part of Counter Adjustments\) may have the limitation of being able to generate limited profits to the maximum extent of the Premium credits received on the Short Options positions initiated as part of Counter Adjustments, and thus may not be able to sufficiently cover up for the losses incurred on the original Strategy\. This limitation can be mitigated by, either: 

1. initiating numerous successive batches of Short Options positions \(favourable to the direction of the reversed trend\), in large quantities, initiated one after the other i\.e\. as soon as the one batch of Short Options position is exhausted of its Premium and the momentum in the direction of the trend reversal is still continuing, a successive batch of Short Options positions \(favourable to the direction of the reversed trend\) can be initiated after booking profit on the earlier batch of Short Options; or
2. to play such momentum in the direction of reversed trend though initiating Long Options positions, with such large quantity so as to have an effective Delta higher than the Delta value of the original Strategy, as part of Counter Adjustments to the original Strategy\. The objective is that these Long Options must yield greater / reasonable profit so as to be able to absorb the max loss on the original Debit strategy to the tune of Premium paid, as the reversed trend continues with momentum\.   as part of Counter Adjustments to the original Strategy\. Since, initiating Long Options positions as Counter Adjustments, will create Premium debit positions, therefore, such Long Options positions must only be initiated as part of Counter Adjustment when the strong lasting momentum is expected on the trend reversal\. 
3. If the original Options position/ Strategy is a Premium Credit positions/Strategy \(or involves a Futures leg\), then the Counter Adjustments must be targeted to save the max unlimited loss situation that may arise on account of the Short Options position or Futures position in the original Strategy\. This can be achieved by initiating Short Options positions in the direction of trend reversal \(*i\.e\. PE Short to play trend reversal towards bullish/ mild bullish; and through CE Shorts to play trend reversal towards bearish/ mild bearish*\), at far OTM Strikes, with such large quantity so as to have an effective Delta higher than the Delta value of the original Strategy\. Here the objective must be to have as much Premium credit on Short Options \(contemplated as part of Counter Adjustments\) so as to be able to mitigate the loss likely to be incurred on the original Strategy\.

However, if the original Strategy involves huge Premium credit positions in large quantities on account of Short Options positions \(or Futures leg\) and the trend reversal is with strong momentum, then the Short Options position \(contemplated as part of Counter Adjustments\) may have the limitation of being able to generate limited profits to the maximum extent of the Premium credits received on the Short Options positions initiated as part of Counter Adjustments, and thus may not be able to sufficiently cover up for the losses incurred on the original Strategy\. This limitation can be mitigated by, either: 

to play such momentum in the direction of reversed trend though initiating Long Options positions, with such large quantity so as to have an effective Delta higher than the Delta value of the original Strategy, as part of Counter Adjustments to the original Strategy\. The objective is that these Long Options must yield greater / reasonable profit as compared to the loss being incurred on the original Credit strategy, as the reversed trend continues with momentum\.  Since, initiating Long Options positions as Counter Adjustments, will create Premium debit positions, therefore, such Long Options positions must only be initiated as part of Counter Adjustment when the strong lasting momentum is expected on the trend reversal\.

__Illustrations of Counter Adjustment technique on trend reversal:__

The following table will indicatively explain about the Positions and Strike levels that may be considered for initiating Counter Adjustment positions taking into account all the relevant factors in the context of Counter Adjustments:

“__Original Strategy/ positions\(naked / hedged\)__”: “Bullish / Mild Bullish”, “__Trend Reversal__”: “Bearish momentum”, “__Selection of Strike levels for Counter Adjustments__”: “Long PE with such quantities on ITM or OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Idea is to play trend reversal on bearish momentum, through higher Delta PE Long counter positions, to cover/mitigate potential loss on the original Strategy; or \\n Short CE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Also, idea is to get sufficient Premium credit on Short CEs, so as to cover/mitigate potential loss in original Strategy\. In order to do so, successive batches of far OTM CEs may need to be Shorted as and when the previous batch of CE Short have exhausted their Premium value, and the bearish momentum is still trending and continuing\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Bullish / Mild Bullish”, “__Trend Reversal__”: “Mild Bearish”, “__Selection of Strike levels for Counter Adjustments__”: “Short CE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Also, idea is to get sufficient Premium credit on Short CEs, so as to cover/mitigate potential loss in original Strategy\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Bearish / Mild Bearish”, “__Trend Reversal__”: “Bullish momentum”, “__Selection of Strike levels for Counter Adjustments__”: “Long CE with such quantities on ITM or OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Idea is to play trend reversal on bullish momentum, through higher Delta CE Long counter positions, to cover/mitigate potential loss on the original Strategy; or \\n Short PE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Also, idea is to get sufficient Premium credit on Short PEs, so as to cover/mitigate potential loss in original Strategy\. In order to do so, successive batches of far OTM PEs may need to be Shorted as and when the previous batch of PE Short have exhausted their Premium value, and the bullish momentum is still trending and continuing\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Bearish / Mild Bearish”, “__Trend Reversal__”: “Mild Bullish”, “__Selection of Strike levels for Counter Adjustments__”: “Short PE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on original Strategy\. Also, idea is to get sufficient Premium credit on Short PEs, so as to cover/mitigate potential  loss in original Strategy\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Rangebound”, “__Trend Reversal__”: “Bullish momentum range Breakout”, “__Selection of Strike levels for Counter Adjustments__”: “Long CE with such quantities on ITM or OTM Strikes so as to have aggregate Delta more than the aggregate Delta on the bearish leg of original Strategy \(i\.e\. *Futures Short and/or CE Short and/or PE Long, as the case may be*\)\. Idea is to play bullish momentum breakout trend, through higher Delta CE Long counter positions, to cover/mitigate potential loss on the original Strategy; or \\n Short PE with such quantities on far OTM Strikes so as to have sufficient Premium credit on Short PEs, in order to cover/mitigate potential loss in original Strategy\. In order to do so, successive batches of far OTM PEs may need to be Shorted as and when the previous batch of PE Short have exhausted their Premium value, and the bullish momentum is still trending and continuing\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Rangebound”, “__Trend Reversal__”: “Mild Bullish range Breakout”, “__Selection of Strike levels for Counter Adjustments__”: “Short PE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on the bearish leg of original Strategy \(*i\.e\. Futures Short and/or CE Short and/or PE Long, as the case may be*\)\. Also, idea is to get sufficient Premium credit on Short PEs, so as to cover/mitigate potential loss in the original Strategy\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Rangebound”, “__Trend Reversal__”: “Bearish momentum  range Breakdown”, “__Selection of Strike levels for Counter Adjustments__”: “Long PE with such quantities on ITM or OTM Strikes so as to have aggregate Delta more than the aggregate Delta on the bullish leg of original Strategy \(i\.e\. *Futures Long and/or PE Short and/or CE Long, as the case may be*\)\. Idea is to play bearish momentum breakdown trend, through higher Delta PE Long counter positions, to cover/mitigate potential loss on the original Strategy; or \\n Short CE with such quantities on far OTM Strikes so as to have sufficient Premium credit on Short CEs, in order to cover/mitigate potential loss in original Strategy\. In order to do so, successive batches of far OTM CEs may need to be Shorted as and when the previous batch of CE Short have exhausted their Premium value, and the bearish momentum is still trending and continuing\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Rangebound”, “__Trend Reversal__”: “Mild Bearish range Breakdown”, “__Selection of Strike levels for Counter Adjustments__”: “Short CE with such quantities on far OTM Strikes so as to have aggregate Delta more than the aggregate Delta on the bullish leg of original Strategy \(i\.e\. *Futures Long and/or PE Short and/or CE Long, as the case may be*\)\. Also, idea is to get sufficient Premium credit on Short CEs, so as to cover/mitigate potential loss in the original Strategy\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Non\-directional breakout/ breakdown Strategy”, “__Trend Reversal__”: “Breakout/ Breakdown with momentum does not arrive or fails \(i\.e\. underlying gets rangebound\)”, “__Selection of Strike levels for Counter Adjustments__”: “Short CEs and Short PEs with such number of equal quantities on far OTM Strikes \(outside the possible range\)\. Idea is to get sufficient Premium credit on Short CEs and Short PEs, collectively, so as to cover/mitigate potential loss in the original Strategy \(or to have aggregate Premium credit more than the Premium paid for on the original Strategy\)\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Non\-directional breakout/ breakdown Strategy”, “__Trend Reversal__”: “Mild Breakout instead of Strong Breakout with  momentum”, “__Selection of Strike levels for Counter Adjustments__”: “Short PEs with such quantities on far OTM Strikes so as to have sufficient Premium credit on Short PEs, in order to cover/mitigate potential loss in the original Strategy \(or to have aggregate Premium credit more than the Premium paid for on the original Strategy\)\.”

“__Original Strategy/ positions\(naked / hedged\)__”: “Non\-directional breakout/ breakdown Strategy”, “__Trend Reversal__”: “Mild Breakdown instead of Strong Breakdown with  momentum”, “__Selection of Strike levels for Counter Adjustments__”: “Short CEs with such quantities on far OTM Strikes so as to have sufficient Premium credit on Short CEs, in order to cover/mitigate potential loss in the original Strategy \(or to have aggregate Premium credit more than the Premium paid for on the original Strategy\)\.” __<end>__

__<start> *Note the following in respect of the above Table:*__

- Long Options positions in the aforementioned Counter Adjustments must be of the current Expiry series only if the Expiry is still far, in order to avoid Theta impact\. However, if the Expiry is near, then in order to avoid the impact of Theta decay, Long Options of subsequent farther Expiry series may be considered to initiate positions for Counter Adjustments\.
- Long Options are being contemplated as part of counter Adjustments, as against Futures position, because the Long Options position will have limited risk to the extent or Premium paid on them \(whereas Futures positions would have unlimited risk\) if the trend again reverses back to the direction of the original Strategy\.
- Short Options positions in the aforementioned Counter Adjustments must be of the current Expiry series, so as to get benefit of the increasing Theta impact due to approaching Expiry\. The Short Options for Counter Adjustments must be of the same Expiry series as that of the closer Expiry series in the original Strategy\. However, if the Premium in the closer Expiry series is less \(due to low volatility or otherwise\), then large quantities at smaller available Premium values may be considered \(*i\.e\. more decay on large Short quantities*\); or else even large quantities on subsequent farther Expiry series may also be considered to get benefitted from lower decay on much large quantities of Short positions \(*i\.e\. lower decay on even much larger quantities with higher Premium values*\)\.
- Short Options positions, as part of Counter Adjustments, must be initiated at such far OTM Strikes, which are reasonably expected to expire worthless as OTM by Expiry, i\.e\. CE Shorts must be above the upper resistance level where the underlying is not expected to cross by Expiry and the PE Shorts must be below the lower support level where the underlying is not expected to cross by Expiry\.
- Counter Adjustments involving Short Options positions may require huge capital and compliance towards MTM requirements\.
- The Counter Adjustments may be implemented through naked Options positions or through relevant hedged Strategies favourable to the direction / type of the trend reversal requiring adjustments to the original trade\. However, hedged strategies will require relatively much larger quantities than the naked positions for implementing relevant adjustments\.
- If Volatility is in rising state then Counter Adjustments through Long Options must be considered; and if Volatility is in falling state then Counter Adjustments through Short Options must be considered\.  __<end>__

Now, basis the aforesaid understanding about the possible trading positions which can be initiated as part of Counter Adjustment to the existing positions, we can explore different possible Counter Adjustments that may be employed to different types of trading positions, in order to mitigate the losses on such existing positions in case of trend reversal\.

__Different Counter Adjustment Techniques on different F&O __

__Positions basis market dynamics:__

Let us now look at some situations to understand the logic with which certain Counter Adjustment techniques can be employed, in case of trend reversal\. Primarily, the logic to use __these adjustment techniques, are based on Net Premium Debit / Credit situation or bringing in the Delta variance in the overall trading positions/ Strategy__\.

Here for the purpose of understanding the core concept of making suitable Counter Adjustments in a trading position, we will discuss the naked positions of FNO\. This will help us understand the logic to be applied to Counter Adjust the leg which may cause the overall trading positions/ Strategy into loss\.

Adjustments, as explained in the context of naked Futures and Options \(Long & Short\) positions, would form the basic tenet basis which even the hedged Strategies can also be adjusted\.

__<start> Adjustment\-2: Converting naked PE Short into Bear PE Spread__

In the event reversal towards bearish side appears indecisive \(i\.e\. whether it would sustain or reverse back\), then such type of reversal on the bearish side may be adjusted by initiating Long PE\. This will convert naked PE Short into __Bear PE Spread\.__

1. *In Bear PE Spread, Long PE \(on same Expiry series as that of the PE Short leg, if 50% or more time period is remaining to Expiry\) can be initiated on higher Strike than PE Short leg; so as to bring the Delta variance between the PE Long and PE Short leg \(i\.e\. PE Long on higher Delta than the PE short leg\)\. Further, the PE Long strike must have such Premium value, so as to ensure that the net Premium debit \(if any\) on this  Spread Strategy is reasonably less\. The net Premium debit on this Vertical Spread will be the max loss on this Strategy from Expiry perspective\. This net Premium debit, may be attempted to be recovered after a clear view on the underlying is established\. *
2. *If 50% or more time period to Expiry for the PE Short leg has already lapsed, the PE Long leg must be initiated on next / farther Expiry Series \(making it a Calendar Spread\), in order to avoid the Theta impact on this PE Long leg\. However, the net Premium debit factor must still be ensured to keep the max loss situation reasonably low\. Also, Delta variance must be ensured such that PE Long is at higher Delta than PE Short leg*

Logic for Adjustment\-2: By initiating PE Long on higher Delta than PE Short leg, it can be ensured that if the bearish move continues then from the time the adjustment is implemented, PE Long will set\-off the losses incurred on PE Short leg\. Further, the net Premium debit is ensured to be low, so that the max loss on the Spread from Expiry perspective \(for the PE Short leg\), is kept low\. This max loss situation can be mitigated upon confirmation of the bearish trend by Shorting Far OTM CEs with an aggregate Premium Credit sufficient to set\-off the max loss situation on the Spread\.

In the event the trend again reverses on the bullish side, after initiating PE Long leg, then this Spread Strategy may generate max loss situation from Expiry perspective\. In such event, suitable adjustments may have to be made with the logic as applicable on naked PE Long leg \(discussed above\)\. In such case, converting the Spread into PE Ratio Spread may be explored\. __<end>__

__Adjustment of a Naked PE Short position__

__Original Position: __PE Short \(*bullish view*\)

__Trend Reversal:__ Bearish \(*such that the underlying price is likely to breach the PE Short Strike, on the downside, by Expiry*\)

__Logic of the Adjustments:__ 

In case of trend reversal on the bearish side, potential loss caused on PE Short leg may be unlimited\. Thus, unlimited loss situation can be set\-off, by initiating positions to play the bearish trend and outwit the potential loss on the PE Short leg\.__ __

Accordingly, in case of strong bearish trend reversal, potential loss caused on PE Short leg may be set\-off, by playing the strong bearish momentum of the trend through Short Futures or Long PEs\.__ __

Both__ __these adjustments  are Counter Adjustments, are mentioned below:

1. __<start> Adjustment\-1: __Converting naked PE Short into Covered Put Strategy <__end__>
2. __<start> Adjustment\-2: __Converting naked PE Short into Bear PE Spread <__end__>

__Important points in relation to aforesaid Counter Adjustments:__

The logic in the aforesaid Counter Adjustments is that upon reversal of trend on the bearish side, the potential unlimited loss on the PE Short leg must be attempted to be either recovered by initiating Futures Short \(*to take Delta advantage*\) or by limiting the loss by converting into Bear PE Spread thereby limiting potential loss on PE Short leg\.

Since, Adjustment\-1 requires initiating Futures Short positions therefore more capital would be needed in order to sell Futures\. Moreover, Futures Short are initiated against naked PE Short which itself requires higher margin\. Therefore, conversion into  Covered Put Strategy would entail requirement of more capital to fulfil margin & MTM requirements\. 

Further, Adjustment\-2 requiring conversion into Bear PE Spread, would entail lesser margin requirements as it involves buying PE against existing PE Shorts\. However, in order to cover the max loss on the Spread, CE Short may be required to be initiated, which would entail requirement of more capital to fulfil margin & MTM requirements\.

Additionally, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  / VIX; and \(ii\) time period for Expiry of the PE Short leg\. Accordingly, if the volatility / VIX is in falling state, or the Expiry of the PE Short leg has already lapsed by 50% or more, then it may be advisable to initiate Counter Adjustments using Futures Short \(instead of using PE Long\)\. But if volatility / VIX is in rising state, and the Expiry of the CE Short leg has not already lapsed by 50% or more, and the bearish momentum is not very sure, then it may be advisable to initiate Counter Adjustments using PE Long \(instead of using Futures Short\)\.

It is not advisable to exit the PE Short leg, instead try to mitigate loss on PE Short leg by initiating suitable Counter Adjustments as explained above\.

__<start> Adjustment\-1: Converting naked PE Short into Covered Put Strategy__

1. As soon as the trend reversal on the bearish side is confirmed and strong \(and PE Short Strike is expected to become an ATM or near ITM\), add Futures Short position of the same Expiry series as that of the PE Short leg\. This will convert naked PE Short leg into Covered Put Strategy\.
2. Ensure to add same quantity of Futures as those on PE Short leg\.

Logic for Adjustment\-1: Futures Delta is 1 \(per Lot basis\), which is higher than the Delta value of PE \(per Lot basis\)\. Thus, as the strong downtrend continues, the loss generated on the PE Short leg would get set\-off with relatively more profit generated on the Futures Short leg\.

Further, there will not be any Theta impact on the Futures leg and hence this position can be held close to Expiry to take full advantage of the unlimited profit potential on a continued downward move of the underlying\. Also, there will not be any adverse impact of rise or fall in volatility / VIX on the Futures leg, and thus can be held with conviction so long the underlying is in a downtrend\.

In the event the trend again reverses on the bullish side, after initiating Futures Short leg, then this Covered Put Strategy would be able to absorb any bullish move upto the Futures Short Sell Price plus Premium Credit collected on PE Short leg\. Any upward move above this Strike, would require adjustments with the logic as applicable on naked Futures Short leg\. __<end>__

__<start> Adjustment\-2:__ __Converting naked CE into Bear CE Credit Spread__

In the event, reversal towards bearish side is strong and confirmed, then Short CEs of lower Strike than CE Long leg\. This will convert naked CE into __Bear CE Credit Spread__\. 

1. *In Bear CE Credit Spread, CE Short shall be of the same quantity as that of the CE Long leg\. The net Premium credit \(i\.e\. Premium received on CE Short leg minus Premium paid on CE Long leg\), shall be the max profit in this Strategy, from Expiry perspective\. *
2. *Ensure that Premium Credit received on CE Short is more than the Premium paid on the CE Long leg \(by Shorting CEs of such lower Strike which offers decent Premium Credit\)\.*
3. *However, if upon bearish reversal, naked CE Long position is adjusted subsequently by Shorting CEs of any given lower Strike than CE Long leg Strike, then there may be a possibility that the Premium credit received on the CE Short leg would be less than the Premium already paid on the Long leg\. Thus, in this scenario, there will be a net Premium debit situation on the Bear CE Credit Spread; and the net Premium debit shall be the max loss in this Strategy\. This net Premium debit, may be attempted to be recovered by shorting some extra Far OTM CEs aggregating to atleast net Premium debit or more\.*

Logic for Adjustment\-2:__ __Premium paid on CE Long leg, will be lower than the Premium Credit received on the CE Short leg initiated towards adjustment as part of Bear CE Credit Spread\. The Net Premium Credit on the Spread will be the expected profit from Expiry perspective\. Further, strong bearish move will favour the Delta move on this Bear CE Credit Spread to set\-off potential loss on CE Long leg\. __<end>__

__Adjustment of a Naked CE Long position__

- __Original Position:__ CE Long \(*bullish view*\)
- __Trend Reversal:__ Bearish / Mild Bearish
- __Logic of the Adjustments:__ To set\-off the possible loss on the Premium paid for the CE Long due to reversal on the Bearish / Mild Bearish side, through collecting Premium Credit by Shorting relevant CEs\.__ __The adjustments discussed below are all Counter Adjustment measures

Different Adjustments can be employed in respect of aforementioned Naked CE Long position:

1. __<start> Adjustment\-1: __Converting naked CE into CE Ratio  Credit Spread __<end>__
2. __<start> Adjustment\-2:__ Converting naked CE into Bear CE Credit Spread __<end>__
3. __<start> Adjustment\-3:__ Converting naked CE into Futures Hedge \(Bearish side\) __<end>__
4. __<start> Adjustment\-4: __Converting naked CE into Bull CE Debit Spread <__end__>

The logic in all the aforesaid Counter Adjustments is that upon reversal of trend on the bearish or mild bearish side, the potential loss on the CE Long leg must be attempted to be recovered by collecting Premiums through Shorting CEs or Shorting Futures\.

Since, these Counter Adjustments require initiating CE Short / Futures Short positions therefore more capital would be needed in order to sell CEs or Short Futures\. However, since, there are already CE Long against which CE Shorts / Futures Short are initiated therefore initiating these CE Shorts/ Futures Short will effectively require lower margins as compared to the capital required for initiating naked Short Options / Futures\.

Further, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  VIX; and \(ii\) strength of trend reversal on bearish side\. Accordingly, if the volatility / VIX is in rising state and bearish trend is in strong momentum, then it may be advisable to initiate Counter Adjustments using Futures Short \(instead of using CE Short\)\. However, if the volatility / VIX is stable or in falling state, and bearish trend is not in strong momentum, then it may be advisable to initiate Counter Adjustments using CE Short \(instead of using Futures Short\)\.

Lastly, in order to look for Shorting CEs, following key factors must be borne in mind:

- Do not exit the CE Long leg, instead try to recover losing Premium on Long leg by Shorting Far OTM CEs in higher quantities\.
- Try to get Premium credit of an amount closer or more than the Premium paid for the CE Long leg\.
- Try to get Premium credit by Shorting Far OTM CEs \(*avoid Shorting CEs of Strike lower than the CE Long leg, unless strong bearish trend is confirmed, as mentioned above*\)\. Idea here is to ensure that the Far OTM CEs must be of those Strikes which are not expected to be breached by the underlying on the upside by the Expiry\. This is important so as to ensure that there is no risk even if the bearish side again reverses and gets mild bullish;
- It is better to add more quantity of CE Shorts to get the desired Premium Credit, rather than compromising on the Strike and choosing a lower CE OTM Strike closer to ATM \(in order to get higher Premium Credit with fewer quantity of CEs\) than higher CE Strike Far OTM for CE Short leg\. This will save the Adjustment made in case of any subsequent reversal on the mild bullish side\.
- If there is safe opportunity then it is advisable to keep booking profit on CE Short leg, and re\-create the CE Short position \(if needed, by moving CE Short positions at lower Strikes with relatively more Premium\) in same or farther Expiry series\. Idea is to take benefit of favourable Delta move on CE Short leg during continuation of bearish  trend\.
- Try to get Premium credit on the same or closer Expiry series than the Expiry series of the CE Long leg\. This will help get the Theta to work on the CEs Shorted in order to generate quick profit even if the bearish trend is not swift\.
- In case there isn’t enough Premium credit available on Far OTM CEs of the same or closer Expiry series, then Far OTM CEs of immediately next higher Expiry series may also be considered\. However, in this case, the trend must either be bearish or mildly bearish; then only the CE short initiated at this next Expiry series will benefit to recover loss on the CE Long leg\. But if the trend ceases to remain bearish/ mild bearish, and again reverses on the bullish side, then these CE Shorts initiated at next Expiry series will not work \(as both Theta and Delta will not be favourable\); in which case these CE Shorts must either be immediately exited at minor loss or these CE Shorts must be adjusted by taking more CE Longs of same or preferably higher Expiry series \(than that of the CE short leg\) as explained below in relation to Adjustment for naked CE Shorts\.

__<start> Adjustment\-3:__ __Converting naked CE into Futures Hedge \(Bearish side\)__:

1. In the event, reversal towards bearish side is strong and confirmed, then Short Futures\. This will convert naked CE into Futures Hedge \(Bearish side\)\. 
2. Futures Short shall be of the same quantity and Expiry series as that of the CE Long\.

Logic for Adjustment\-3: Futures will have a Delta of 1 \(per Lot basis\), and will be higher than the Delta on the CE Long leg \(per Lot basis\)\. Therefore, effectively, the net Delta of Futures Hedge \(Bearish side\) shall favour the bearish move in the underlying\. Thus, as the downtrend continues, Futures Short leg would generate more profit than the loss incurred on the CE Long leg\. Further, the max loss on the CE Long leg due to continued downtrend will be limited to the amount of Premium paid; while the potential profit on the Futures Short leg due to continued downward move in the underlying would be unlimited\.

Thus, in the event of confirmed reversal on the bearish side, this Futures Hedge \(Bearish side\) Strategy may be implemented, to take advantage of the Delta move of Futures Short leg\.

Further, there will not be any Theta impact on the Futures leg and hence this position can be held close to Expiry to take full advantage of the unlimited profit potential on a continued downward move of the underlying\. Also, there will not be any adverse impact of rise or fall in volatility / VIX on this Futures Hedge \(Bearish side\) Strategy, and thus can be held with conviction so long the underlying is in a downtrend\. __<end>__

__<start> Adjustment\-4: Converting naked CE into Bull CE Debit Spread__

In the event reversal towards bearish side is unsure, or if the CE Long leg does not seem to generate desired profit, then potential loss on CE Long leg may be set\-off to some extent by Shorting Far OTM CEs of higher Strike than CE Long leg\. This will convert naked CE into __Bull CE Debit Spread__\.

1. *In Bull CE Debit Spread, Far OTM CE Short shall be of the same quantity as that of the CE Long leg\. The net Premium debit \(i\.e\. Premium paid on CE Long minus Premium credit received on CE Short leg\), shall be the max loss in this Strategy, from Expiry perspective\. This net Premium debit, may be attempted to be recovered by Shorting some extra Far OTM CEs aggregating to atleast net Premium debit or more\. If more quantity of Far OTM CE is shorted than those on CE Long leg, such that the aggregate Premium Credit on CE Short leg is more than the Premium debit  on the CE Long leg, then the Strategy will not be Bull CE  Debit Spread but CE Ratio Spread \(already discussed above as Adjustment 1\)\. *
2. *Ensure that Premium Credit received on Far OTM CE Short is not too low than the Premium paid on the CE Long leg\.*

Logic for Adjustment\-4:__ __Premium paid on CE Long leg, will be higher than the Premium Credit received on the CE Short leg initiated towards adjustment as part of Bull CE Debit Spread\. The Net Premium Debit on the Spread will be the max loss from Expiry perspective\. The idea in this adjustment is that the potential loss in the CE Long leg, due to bearish/ mild bearish trend reversal, will be largely set\-off from the premium credit received on the CE short leg\. Further, if the trend again changes on the bullish side, then CE Long will generate more profit than the loss generated by the CE Short leg, hence, this Strategy \(both Long & Short legs\) can be continued if the trend again changes towards bullish side\. __<end>__

__<start> Adjustment\-1: Converting naked CE into CE Ratio  Credit Spread__

1. Short Far OTM CEs \(*i\.e\. CEs of much higher Strike than CE Long leg*\) in more quantity than the CEs on Long leg\. This will convert naked CE into __CE Ratio Credit Spread__\.
2. Ensure that Premium Credit received on CE Short is more than the Premium paid on the CE Long leg \(by selling more quantity of Far OTM CE\)

Logic for Adjustment\-1: Premium paid on CE Long leg, can be set\-off by the Premium Credit received on the CE Short leg initiated towards adjustment as part of CE Ratio Spread, if the trend remains towards bearish /  mild bearish side \(thus, CEs shorted expire worthless as OTMs on Expiry thereby generating profit higher than the loss generated by the CE Long leg\)\. However, if the trend again reverses on the bullish side, such that it appears that the underlying may breach the CE Short Strike by Expiry of the CE Long leg, then: these CE Shorts must be adjusted by taking more CE Long of same or preferably higher Expiry series \(than that of the CE Short leg\) as explained in relation to Adjustment for naked CE Shorts\. __<end>__

__<start> Adjustment\-2: Converting naked CE Short into Bull CE Spread__

In the event reversal towards bullish side appears indecisive \(i\.e\. whether it would sustain or reverse back\), then such type of reversal on the bullish side may be adjusted by initiating Long CE\. This will convert naked CE Short into __Bull CE Spread__\.

1. *In Bull CE Spread, Long CE \(on same Expiry series as that of the CE Short leg, if 50% or more time period is remaining to Expiry\) can be initiated on lower Strike than CE Short leg; so as to bring the Delta variance between the CE Long and CE Short leg \(i\.e\. CE Long on higher Delta than the CE short leg\)\. Further, the CE Long strike must have such Premium value, so as to ensure that the net Premium debit \(if any\) on this  Spread Strategy is reasonably less\. The net Premium debit on this Vertical Spread will be the max loss on this Strategy from Expiry perspective\. This net Premium debit, may be attempted to be recovered after a clear view on the underlying is established\. *
2. *If 50% or more time period to Expiry for the CE Short leg has already lapsed, the CE Long leg must be initiated on next / farther Expiry Series \(making it a Calendar Spread\), in order to avoid the Theta impact on this CE Long leg\. However, the net Premium debit factor must still be ensured to keep the max loss situation reasonably low\. Also, Delta variance must be ensured such that CE Long is at higher Delta than CE Short leg\.*

Logic for Adjustment\-2: By initiating CE Long on higher Delta than CE Short leg, it can be ensured that if the bullish move continues then from the time the adjustment is implemented, CE Long will set\-off the losses incurred on CE short leg\. Further, the net Premium debit is ensured to be low, so that the max loss on the Spread from Expiry perspective \(for the CE Short leg\), is kept low\. This max loss situation can be mitigated upon confirmation of the bullish trend by Shorting Far OTM PEs with an aggregate Premium Credit sufficient to set\-off the max loss situation on the Spread\.

In the event the trend again reverses on the bearish side, after initiating CE Long leg, then this Spread Strategy may generate max loss situation from Expiry perspective\. In such event, suitable adjustments may have to be made with the logic as applicable on naked CE Long leg\. In such case, converting the Spread into CE Ratio Spread may be explored\. __<end>__

__Adjustment of a Naked CE Short position__

__Original Position: __CE Short \(*bearish view*\)

__Trend Reversal:__ Bullish \(*such that the underlying price is likely to breach the CE Short Strike, on the upside, by Expiry*\)

In case of bullish trend reversal, potential loss caused on CE Short leg may be unlimited\. Thus, unlimited loss situation can be set\-off, by initiating positions to play the bullish trend and outwit the potential loss on the CE Short leg\.__ __

Accordingly, in case of strong bullish trend reversal, potential loss caused on CE Short leg may be set\-off, by playing the strong bullish momentum of the trend through Long Futures or Long CEs\.__ __

Both__ __these adjustments  are Counter Adjustments are mentioned below:

1. __<start> Adjustment\-1: __Converting naked CE Short into Covered Call Strategy <__end__>
2. __<start> Adjustment\-2: __Converting naked CE Short into Bull CE Spread <__end__>

The logic in the aforesaid Counter Adjustments is that upon reversal of trend on the bullish side, the potential unlimited loss on the CE Short leg must be attempted to be either recovered by initiating Futures Long \(*to take Delta advantage*\) or by limiting the loss by converting into Bull CE Spread thereby limiting potential loss on CE Short leg\.

Since, Adjustment\-1 requires initiating Futures Long positions therefore more capital would be needed in order to buy Futures\. Moreover, Futures Long are initiated against naked CE Short which itself requires higher margin\. Therefore, conversion into  Covered Call Strategy would entail requirement of more capital to fulfil margin & MTM requirements\. 

Further, Adjustment\-2 requiring conversion into Bull CE Spread, would entail lesser margin requirements as it involves buying CE against existing CE Shorts\. However, in order to cover the max loss on the Spread, PE Short may be required to be initiated, which would entail requirement of more capital to fulfil margin & MTM requirements\.

Additionally, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  / VIX; and \(ii\) time period for Expiry of the CE Short leg\. Accordingly, if the volatility / VIX is in falling state, or the Expiry of the CE Short leg has already lapsed by 50% or more, then it may be advisable to initiate Counter Adjustments using Futures Long \(instead of using CE Long\)\. But if volatility / VIX is in rising state, and the Expiry of the CE Short leg has not already lapsed by 50% or more, and the bullish momentum is not very sure, then it may be advisable to initiate Counter Adjustments using CE Long \(instead of using Futures Long\)\.

It is not advisable to exit the CE Short leg, instead try to mitigate loss on CE Short leg by initiating suitable Counter Adjustments as explained above\.

__<start> Adjustment\-1: Converting naked CE Short into Covered Call Strategy__

1. As soon as the trend reversal on the bullish side is confirmed and strong \(and CE Short Strike is expected to become an ATM or near ITM\), add Long Futures position of the same Expiry series as that of the CE Short leg\. This will convert naked CE Short leg into Covered Call Strategy\.
2. Ensure to add same quantity of Futures as those on CE Short leg\.

Logic for Adjustment\-1: Futures Delta is 1 \(per Lot basis\), which is higher than the Delta value of CE \(per Lot basis\)\. Thus, as the strong uptrend continues, the loss generated on the CE Short leg would get set\-off with relatively more profit generated on the Futures Long leg\.

Further, there will not be any Theta impact on the Futures leg and hence this position can be held close to Expiry to take full advantage of the unlimited profit potential on a continued upward move of the underlying\. Also, there will not be any adverse impact of rise or fall in volatility / VIX on the Futures leg, and thus can be held with conviction so long the underlying is in an uptrend\.

In the event the trend again reverses on the bearish side, after initiating Futures Long leg, then this Covered Call Strategy would be able to absorb any bearish move upto the Futures Long Buy Price minus Premium Credit collected on CE Short leg\. Any downward move below this Strike, would require adjustments with the logic as applicable on naked Futures Long leg \(discussed above\)\. __<end>__

__<start> Adjustment\-2: Converting naked Futures Short into Futures Hedge__\.

In the event reversal towards bullish side is sure and strong, then potential loss on Futures Short leg can be limited to large extent by initiating ITM CE Long of same or farther Expiry series as that of the Futures leg\. This will convert naked Futures Short into __Futures Hedge \(*CE* *side*\)__\.

1. *In Futures Hedge, ITM CE Long shall be of the same quantity as that of the Futures Short* *leg\. ITM CE must have atleast around 75% Intrinsic Value\. *
2. *This Strategy helps confine the potential unlimited loss on Futures Short* *leg due to trend reversal on the bullish side to the max extent of Time Value comprised in the ITM CE leg \(per Lot basis\)\. *
3. *If the trend again reverses on the bearish side then addition of CE Long leg does not limit the downside profit potential for the Futures* *Short, thereby making this Strategy an unlimited reward and limited loss Strategy\. Therefore, if the trend again reverses on the bearish side after initiating CE Long leg, then no further adjustments would be required and the Futures Hedge Strategy can be continued as such to play the bearish move in the underlying\.*
4. *The max loss that may be caused due to continued bullish trend, to the maximum extent of Time Value of the CE Long leg \(per Lot basis\), can be attempted to be recovered by Shorting some Far OTM PEs \(in addition to Futures Hedge comprising of Futures* *Short & CE Long only\) aggregating to atleast max loss amount or more\.*
5. *Also, if the continuation of strong uptrend momentum is confirmed to sustain, then even more CE Longs in higher quantity than the existing Futures Short quantity can be initiated, in order to make the net Delta on this Futures Hedge Strategy favouring bullish side\. This way, the max loss on this Futures Hedge Strategy can be mitigated and even profit can be generated out of the strong uptrend\.*

Logic for Adjustment\-2:__ __Strong bullish momentum will cause Futures Short leg to bleed profusely as its Delta is 1\. This can be best mitigated by initiating a Long CE leg with around 80% or more Intrinsic Value, which will have around 0\.7 Delta value or more \(per Lot basis\), thus effectively controlling the loss caused on Futures leg\. Further, the upside risk in this Strategy gets limited to pre\-defined max loss, which can be easily set\-off by Shorting some Far OTM PEs; while, the downside profit remains unlimited and does not require any further adjustments\. __<end>__

__Adjustment of a Naked Futures Short position__

__Original Position: __Futures Short \(*bearish view*\)

__Trend Reversal:__ Bullish and Mild Bullish

In case of mild bullish trend reversal, potential loss caused on Futures Short leg may be set\-off, through collecting Premium Credit by Shorting Far OTM PEs\.__ __

In case of strong bullish trend reversal, potential loss caused on Futures Short leg may be set\-off, by playing the strong bullish momentum of the trend through Long CEs or Shorting large quantities of Far OTM PEs\.__ __

1. __<start> Adjustment\-1: __Converting naked Futures Short into Covered Put Strategy <__end__>
2. __<start> Adjustment\-2: __Converting naked Futures Short into Futures Hedge <__end__>

The logic in all the aforesaid Counter Adjustments is that upon reversal of trend on the bullish or mild bullish side, the potential loss on the Futures Short leg must be attempted to be either recovered by collecting Premiums through Shorting PEs or by limiting potential loss by initiating ITM Long CEs \(*even more CE Long can be initiated than Futures Short quantity, in order to make the net Delta on Futures Hedge Strategy favouring bullish side*\)\.

Further, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  / VIX; and \(ii\) strength of trend reversal on bullish side\. Accordingly, if the volatility / VIX is in rising state and bullish trend is in strong momentum, then it may be advisable to initiate Counter Adjustments using more quantity of Long CE \(instead of using PE Short\)\. However, if the volatility / VIX is stable or in falling state, and bullish trend is not in strong momentum, then it may be advisable to initiate Counter Adjustments using PE Short \(instead of using Long CE\)\.

In relation to the above Adjustments, following key factors must be borne in mind:

- Since, there are already Futures Short against which CE Long are initiated therefore these CE Long will lower the overall margin requirement as compared to the capital required for initiating naked Futures Short\.
- These Counter Adjustments may require initiating PE Short positions therefore more capital would be needed in order to sell PEs\. 
- Do not exit the Futures Short leg, instead try to mitigate loss incurred on Futures Short leg by initiating suitable Counter Adjustments as explained above\.
- Try to get Premium credit by Shorting Far OTM PEs\. Idea here is to ensure that the Far OTM PEs must be of those Strikes which are not expected to be breached by the underlying on the downside by the Expiry\. This is important so as to ensure that there is no risk even if the bullish trend again reverses and gets mild bearish\.
- It is better to add more quantity of PE Shorts to get the desired Premium Credit, rather than compromising on the Strike and choosing a higher PE OTM Strike closer to ATM \(in order to get higher Premium Credit with fewer quantity of PEs\) than lower PE Strike Far OTM for PE Short leg\. This will save the Adjustment made in case of any subsequent reversal on the mild bearish side\.
- If there is safe opportunity then it is advisable to keep booking profit on PE Short leg, and re\-create the PE Short position \(if needed, by moving CE Short positions at higher Strikes with relatively more Premium\) in same or farther Expiry series\. Idea is to take benefit of favourable Delta move on PE Short leg during continuation of bullish  trend\.
- Try to get Premium credit when plan to Short PEs, on the same or closer Expiry series than the Expiry series of the Futures Short leg\. This will help get the Theta to work on the PEs Shorted in order to generate quick profit even if the bullish trend is not swift\. 
- In case there isn’t enough Premium credit available on Far OTM PEs of the same or closer Expiry series, then Far OTM PEs of immediately next higher Expiry series may also be considered\. However, in this case, the trend must either be bullish or mildly bullish; then only the PE Short initiated at this next Expiry series will benefit to recover loss on the Futures Short leg\. But if the trend ceases to remain bearish/ mild bearish, and again reverses on the bearish side, then these PE Shorts initiated at next Expiry series will not work \(as both Theta and Delta will not be favourable\); in which case these PE Shorts must either be immediately exited at minor loss or these PE Shorts must be adjusted by taking more Futures Short or PE Longs \(of same or preferably higher Expiry series than that of the PE Short leg\) as explained below in relation to Adjustment for naked PE Shorts\.

__<start> Adjustment\-1: Converting naked Futures Short into Covered Put Strategy__

1. Short Far OTM PEs of the same Expiry series as that of the Futures leg\. This will convert naked Futures Short leg into __Covered Put Strategy__\.
2. Ensure that there is sufficient Premium Credit received on PE Short \(by selling more quantity of Far OTM PEs\)\. Aggregate amount of Credit collected through PE Shorting, will be the max amount upto which Futures loss shall be mitigated\.

Logic for Adjustment\-1: Premium credit received on the PE Short leg will help absorb the loss incurred on Futures Short leg, if the trend remains towards bullish /  mild bullish side\. 

Idea is to ensure that the underlying does not breaches the PE Strike Shorted on the downside by Expiry \(thus, PEs Shorted expire worthless as OTMs on Expiry thereby generating profit, which will absorb the loss incurred on the Futures Short leg\)\. 

Delta value of a Futures is 1 \(per Lot\), accordingly, suitable quantity of Far OTM PE Shorts need to be ensured, so that the net Delta position on this Strategy is favourable for the bullish trend \(and accordingly movement of the underlying on the bullish side causing loss on the Futures Short leg is sufficiently absorbed by the PE Shorts\)\. __<end>__

__<start> Adjustment\-2: Converting naked Futures Long into Futures Hedge__

In the event reversal towards bearish side is sure and strong, then potential loss on Futures Long leg can be limited to large extent by initiating ITM PE Long of same or farther Expiry series as that of the Futures leg\. This will convert naked Futures Long into __Futures Hedge \(*PE side*\)__\.

1. *In Futures Hedge, ITM PE Long shall be of the same quantity as that of the Futures Long leg\. ITM PE must have atleast around 75% Intrinsic Value\. *
2. *This Strategy helps confine the potential unlimited loss on Futures Long leg due to trend reversal on the bearish side to the max extent of Time Value comprised in the ITM PE leg \(per Lot basis\)\. *
3. *If the trend again reverses on the bullish side then addition of PE Long leg does not limit the upside profit potential for the Futures Long, thereby making this Strategy an unlimited reward and limited loss Strategy\. Therefore, if the trend again reverses on the bullish side after initiating PE Long leg, then no further adjustments would be required and the Futures Hedge Strategy can be continued as such to play the bullish move in the underlying\.*
4. *The max loss that may be caused due to continued bearish trend, to the maximum extent of Time Value of the PE Long leg *\(per Lot basis\)*, can be attempted to be recovered by Shorting some Far OTM CEs \(in addition to Futures Hedge comprising of Futures Long & PE Long only\) aggregating to atleast max loss amount or more\.*
5. *Also, if the continuation of strong downtrend momentum is confirmed to sustain, then even more PE Longs in higher quantity than the existing Futures Long quantity can be initiated, in order to make the net Delta on this Futures Hedge Strategy favouring bearish side\. This way, the max loss on this Futures Hedge Strategy can be mitigated and even profit can be generated out of the strong downtrend\.*

Logic for Adjustment\-2:__ __Strong bearish momentum will cause Futures Long leg to bleed profusely as its Delta is 1\. This can be best mitigated by initiating a Long PE leg with around 80% or more Intrinsic Value, which will have around 0\.7 Delta value or more \(per Lot basis\), thus effectively controlling the loss caused on Futures leg\. Further, the downside risk in this Strategy gets limited to pre\-defined max loss, which can be easily set\-off by Shorting some Far OTM CEs; while, the upside profit remains unlimited and does not require any further adjustments\. __<end>__

__Adjustment of a Naked Futures Long position__

__Original Position: __Futures Long \(*bullish view*\)

__Trend Reversal:__ Bearish and Mild Bearish

In case of mild bearish trend reversal, potential loss caused on Futures Long leg may be set\-off, through collecting Premium Credit by Shorting Far OTM CEs\.__ __

In case of strong bearish trend reversal, potential loss caused on Futures Long leg may be set\-off, by playing the strong bearish momentum of the trend through Long PEs or Shorting large quantities of Far OTM CEs\.__ __

Both__ __these adjustments  are Counter Adjustments, as stated below:

1. __<start> Adjustment\-1: __Converting naked Futures Long into Covered Call Strategy <__end__>
2. __<start> Adjustment\-2: __Converting naked Futures Long into Futures Hedge <__end__>

The logic in all the aforesaid Counter Adjustments is that upon reversal of trend on the bearish or mild bearish side, the potential loss on the Futures Long leg must be attempted to be either recovered by collecting Premiums through Shorting CEs or by limiting potential loss by initiating ITM Long PEs \(*even more PE Long can be initiated than Futures Long quantity, in order to make the net Delta on Futures Hedge Strategy favouring bearish side*\)\.

Further, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  / VIX; and \(ii\) strength of trend reversal on bearish side\. Accordingly, if the volatility / VIX is in rising state and bearish trend is in strong momentum, then it may be advisable to initiate Counter Adjustments using more quantity of Long PE \(instead of using CE Short\)\. However, if the volatility / VIX is stable or in falling state, and bearish trend is not in strong momentum, then it may be advisable to initiate Counter Adjustments using CE Short \(instead of using Long PE\)\.

- Since, there are already Futures Long against which PE Long are initiated therefore these PE Long will lower the overall margin requirement as compared to the capital required for initiating naked Long Futures\.
- These Counter Adjustments may require initiating CE Short positions therefore more capital would be needed in order to sell CEs\. 
- Do not exit the Futures Long leg, instead try to mitigate loss incurred on Futures Long leg by initiating suitable Counter Adjustments as explained above\.
- Try to get Premium credit by Shorting Far OTM CEs\. Idea here is to ensure that the Far OTM CEs must be of those Strikes which are not expected to be breached by the underlying on the upside by the Expiry\. This is important so as to ensure that there is no risk even if the bearish side again reverses and gets mild bullish\.
- Try to get Premium credit when plan to Short CEs, on the same or closer Expiry series than the Expiry series of the Futures Long leg\. This will help get the Theta to work on the CEs Shorted in order to generate quick profit even if the bearish trend is not swift\. 
- In case there isn’t enough Premium credit available on Far OTM CEs of the same or closer Expiry series, then Far OTM CEs of immediately next higher Expiry series may also be considered\. However, in this case, the trend must either be bearish or mildly bearish; then only the CE Short initiated at this next Expiry series will benefit to recover loss on the Futures Long leg\. But if the trend ceases to remain bearish/ mild bearish, and again reverses on the bullish side, then these CE Shorts initiated at next Expiry series will not work \(as both Theta and Delta will not be favourable\); in which case these CE Shorts must either be immediately exited at minor loss or these CE Shorts must be adjusted by taking more Futures Long or CE Longs \(of same or preferably higher Expiry series than that of the CE Short leg\) as explained below in relation to Adjustment for naked CE Shorts\.

__<start> Adjustment\-1: Converting naked Futures Long into Covered Call Strategy__:

1. Short Far OTM CEs of the same Expiry series as that of the Futures leg\. This will convert naked Futures Long leg into Covered Call Strategy\.
2. Ensure that there is sufficient Premium Credit received on CE Short \(by selling more quantity of Far OTM CEs\)\. Aggregate amount of Credit collected through CE Shorting, will be the max amount upto which Futures loss shall be mitigated\.

Logic for Adjustment\-1: Premium credit received on the CE Short leg will help absorb the loss incurred on Futures Long leg, if the trend remains towards bearish /  mild bearish side\. 

Idea is to ensure that the underlying does not breaches the CE Strike Shorted on the upside by Expiry \(thus, CEs Shorted expire worthless as OTMs on Expiry thereby generating profit, which will absorb the loss incurred on the Futures Long leg\)\. 

Delta value of a Futures is 1 \(per Lot\), accordingly, suitable quantity of Far OTM CE Shorts need to be ensured, so that the net Delta position on this Strategy is favourable for the bearish trend \(and accordingly movement of the underlying on the bearish side causing loss on the Futures Long leg is sufficiently absorbed by the CE Shorts\)\. __<end>__

__<start> Adjustment\-2:__ __Converting naked PE into Bull PE Credit Spread__:

In the event, reversal towards bullish side is strong and confirmed, then Short PEs of higher Strike than PE Long leg\. This will convert naked PE into __Bull PE Credit Spread__\. 

1. *In Bull PE Credit Spread, PE Short shall be of the same quantity as that of the PE Long leg\. The net Premium credit \(i\.e\. Premium received on PE Short leg minus Premium paid on PE Long leg\), shall be the max profit in this Strategy, from Expiry perspective\. *
2. *Ensure that Premium Credit received on PE Short is more than the Premium paid on the PE Long leg \(by Shorting PEs of such higher Strike which offers decent Premium Credit\)\.*
3. *However, if upon bullish reversal, naked PE Long position is adjusted subsequently by Shorting PEs of any given higher Strike than PE Long leg Strike, then there may be a possibility that the Premium credit received on the PE Short leg would be less than the Premium already paid on the Long leg\. Thus, in this scenario, there will be a net Premium debit situation on the Bull PE Credit Spread; and the net Premium debit shall be the max loss in this Strategy\. This net Premium debit, may be attempted to be recovered by shorting some extra Far OTM PEs aggregating to atleast net Premium debit or more\.*

Logic for Adjustment\-2:__ __Premium paid on PE Long leg, will be lower than the Premium Credit received on the PE Short leg initiated towards adjustment as part of Bull PE Credit Spread\. The Net Premium Credit on the Spread will be the expected profit from Expiry perspective\. Further, strong bullish move will favour the Delta move on this Bull PE Credit Spread to set\-off potential loss on PE Long leg\. __<end>__

__Adjustment of a Naked PE Long position__

__Original Position:__ PE Long \(*bearish view*\)

__Trend Reversal:__ Bullish / Mild Bullish

__Logic of the Adjustments:__ To set\-off the possible loss on the Premium paid for the PE Long due to reversal on the Bullish / Mild Bullish side, through collecting Premium Credit by Shorting relevant PEs\.__ __

The adjustments stated below are all Counter Adjustment measures in respect of naked PE Long positions:

1. __<start> Adjustment\-1: __Converting naked PE into PE Ratio Credit Spread __<end>__
2. __<start> Adjustment\-2:__ Converting naked PE into Bull PE Credit Spread <__end__>
3. __<start> Adjustment\-3:__ Converting naked PE into Futures Hedge \(Bullish side\) <__end__>
4. __<start> Adjustment\-4: __Converting naked PE into Bear PE Debit Spread <__end__>

The logic in all the aforesaid Counter Adjustments is that upon reversal of trend on the bullish or mild bullish side, the potential loss on the PE Long leg must be attempted to be recovered by collecting Premiums through Shorting PEs\.

Since, these Counter Adjustments require initiating PE Short / Futures Long positions therefore more capital would be needed in order to sell PEs or buy Futures\. However, since, there are already PE Long against which PE Shorts / Futures Long are initiated therefore initiating these PE Shorts  / Futures Long will require lower margins as compared to the capital required for initiating naked Short Options or Futures Long\.

Further, in order to consider an appropriate Adjustment technique, one must also consider the: \(i\) state of volatility  / VIX; and \(ii\) strength of trend reversal on bullish side\. Accordingly, if the volatility / VIX is in rising state and bullish trend is in strong momentum, then it may be advisable to initiate Counter Adjustments using Futures Long \(instead of using PE Short\)\. However, if the volatility / VIX is stable or in falling state, and bullish trend is not in strong momentum, then it may be advisable to initiate Counter Adjustments using PE Short \(instead of using Futures Long\)\.

Lastly, in order to look for Shorting PEs, following key factors must be borne in mind:

- Do not exit the PE Long leg, instead try to recover losing Premium on Long leg by Shorting Far OTM PEs in higher quantities\.
- Try to get Premium credit of an amount closer or more than the Premium paid for the PE Long leg\.
- Try to get Premium credit by Shorting Far OTM PEs \(*avoid Shorting PEs of Strike higher than the PE Long leg, unless strong bullish trend is confirmed, as mentioned above*\)\. Idea here is to ensure that the Far OTM PEs must be of those Strikes which are not expected to be breached by the underlying on the downside by the Expiry\. This is important so as to ensure that there is no risk even if the bullish side again reverses and gets mild bearish\.
- If there is safe opportunity then it is advisable to keep booking profit on PE Short leg, and re\-create the PE Short position \(if needed, by moving PE Short positions at higher Strikes with relatively more Premium\) in same or farther Expiry series\. Idea is to take benefit of favourable Delta move on PE Short leg during continuation of bullish  trend\.
- Try to get Premium credit on the same or closer Expiry series than the Expiry series of the PE Long leg\. This will help get the Theta to work on the PEs Shorted in order to generate quick profit even if the bullish trend is not swift\.
- In case there isn’t enough Premium credit available on Far OTM PEs of the same or closer Expiry series, then Far OTM PEs of immediately next higher Expiry series may also be considered\. However, in this case, the trend must either be bullish or mildly bullish; then only the PE short initiated at this next Expiry series will benefit to recover loss on the PE Long leg\. But if the trend ceases to remain bullish/ mild bullish, and again reverses on the bearish side, then these PE Shorts initiated at next Expiry series will not work \(as both Theta and Delta will not be favourable\); in which case these PE Shorts must either be immediately exited at minor loss or these PE Shorts must be adjusted by taking more PE Longs of same or preferably higher Expiry series \(than that of the PE short leg\) as explained below in relation to Adjustment for naked PE Shorts\.

__<start> Adjustment\-3:__ __Converting naked PE into Futures Hedge \(Bullish side\)__:

1. In the event, reversal towards bullish side is strong and confirmed, then Long Futures\. This will convert naked CE into Futures Hedge \(Bullish side\)\. 
2. Futures Long shall be of the same quantity and Expiry series as that of the PE Long\.

Logic for Adjustment\-3: Futures will have a Delta of 1 \(per Lot basis\), and will be higher than the Delta on the PE Long leg \(per Lot basis\)\. Therefore, effectively, the net Delta of Futures Hedge \(Bullish side\) shall favour the bullish move in the underlying\. Thus, as the uptrend continues, Futures Long leg would generate more profit than the loss incurred on the PE Long leg\. Further, the max loss on the PE Long leg due to continued uptrend will be limited to the amount of Premium paid; while the potential profit on the Futures Long leg due to continued upward move in the underlying would be unlimited\.

Thus, in the event of confirmed reversal on the bullish side, this Futures Hedge \(Bullish side\) Strategy may be implemented, to take advantage of the Delta move of Futures Long leg\.

Further, there will not be any Theta impact on the Futures leg and hence this position can be held close to Expiry to take full advantage of the unlimited profit potential on a continued upward move of the underlying\. Also, there will not be any adverse impact of rise or fall in volatility / VIX on this Futures Hedge \(Bullish side\) Strategy , and thus can be held with conviction so long the underlying is in an uptrend\. __<end>__

__<start> Adjustment\-4: Converting naked PE into Bear PE Debit Spread__

In the event reversal towards bullish side is unsure, or if the PE Long leg does not seem to generate desired profit, then potential loss on PE Long leg may be set\-off to some extent by Shorting Far OTM PEs of lower Strike than PE Long leg\. This will convert naked PE into __Bear PE Debit Spread__\.

1. *In Bear PE Debit Spread, Far OTM PE Short shall be of the same quantity as that of the PE Long leg\. The net Premium debit \(i\.e\. Premium paid on PE Long minus Premium credit received on PE Short leg\), shall be the max loss in this Strategy, from Expiry perspective\. This net Premium debit, may be attempted to be recovered by Shorting some extra Far OTM PEs aggregating to atleast net Premium debit or more\. If more quantity of Far OTM PE is shorted than those on PE Long leg, such that the aggregate Premium Credit on PE Short leg is more than the Premium debit  on the PE Long leg, then the Strategy will not be Bear PE  Debit Spread but PE Ratio Spread \(already discussed above as Adjustment 1\)\. *
2. *Ensure that Premium Credit received on Far OTM PE Short is not too low than the Premium paid on the PE Long leg\.*

Logic for Adjustment\-4:__ __Premium paid on PE Long leg, will be higher than the Premium Credit received on the PE Short leg initiated towards adjustment as part of Bear PE Debit Spread\. The Net Premium Debit on the Spread will be the max loss from Expiry perspective\. The idea in this adjustment is that the potential loss in the PE Long leg, due to bullish/ mild bullish trend reversal, will be largely set\-off from the premium credit received on the PE short leg\. Further, if the trend again changes on the bearish side, then PE Long will generate more profit than the loss generated by the PE Short leg, hence, this Strategy \(both Long & Short legs\) can be continued if the trend again changes towards bearish side\. __<end>__

__<start> Adjustment\-1: Converting naked PE into PE Ratio Credit Spread__

1. Short Far OTM PEs \(*i\.e\. PEs of much lower Strike than PE Long leg*\) in more quantity than the PEs on Long leg\. This will convert naked PE into __PE Ratio Credit Spread__\.
2. Ensure that Premium Credit received on PE Short is more than the Premium paid on the PE Long leg \(by selling more quantity of Far OTM PEs\)

Logic for Adjustment\-1: Premium paid on PE Long leg, can be set\-off by the Premium Credit received on the PE Short leg initiated towards adjustment as part of PE Ratio Spread, if the trend remains towards bullish /  mild bullish side \(thus, PEs shorted expire worthless as OTMs on Expiry thereby generating profit higher than the loss generated by the PE Long leg\)\. However, if the trend again reverses on the bearish side, such that it appears that the underlying may breach the PE Short Strike by Expiry of the PE Long leg, then: these PE Shorts must be adjusted by taking more PE Long of same or preferably higher Expiry series \(than that of the PE Short leg\) as explained below in relation to Adjustment for naked PE Shorts\. __<end>__

__Reversal of original Trend requiring Adjustments:__

As discussed, the first step before any particular trading position is initiated or a Strategy is executed, is to identify the trend\. If the position or Strategy executed to play out the identified trend goes right, then the Strategy would obviously yield profit and a trader may consider booking the profits generated on the Strategy before Expiry of the F&O instruments involved in the trading positions\. However, the problem would arise if the trend basis which the F&O trading positions were executed goes wrong\. In such situation there may be a need to make adjustments to the running positions to mitigate the losses\.

The following table outlines broadly the situation, when the trend as originally envisaged is no longer applicable/ sustaining and thereby meriting adjustments to the running F&O positions:

 “__Sl\. No\.__”: “1”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Bullish”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When original bullish trend turns mild bullish or bearish”,

“__Sl\. No\.__”: “2”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Mildly Bullish”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When original mild bullish trend turns bearish”,

“__Sl\. No\.__”: “3”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Bearish”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When original bearish trend turns mild bearish or bullish”,

“__Sl\. No\.__”: “4”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Mildly Bearish”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When original mild bearish trend turns bullish”,

“__Sl\. No\.__”: “5”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Rangebound / sideways”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When the underlying breaks out from the range and starts trending in either direction”,

“__Sl\. No\.__”: “6”, “__Trend as originally envisaged at the time of initiating trading positions__”: “Non\-directional \(may either breakout or breakdown from the range\)”, “__Reversal / Trend which requires adjustments to be made to the original trading positions__”: “When the underlying fails to break out / break down and gets trapped in  range”, __<end>__

Thus, when the original trend is confirmed to have reversed as per the technical analysis, then the situation would require making adjustments to the running F&O positions\. 