Top 3 strategy modifications to implement in case of short-term expiry

Shubham Agarwal

The Indian derivative market, at least on the equity front, has seen rather swifter development considering the performance of peers. One more such step in the direction of maturity is shorter-term expiry.

For now, we do need to look at the significance and utility of trading in Options. There are both pros and cons in having smaller series. This article details the strategy modifications that could optimize Options on the verge of expiry .

With Weekly expiry, the predominant factor that would have a material change is the time-value element. The options would have a very fast decay in premium value, keeping the price constant as compared to available monthly options.

Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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We all go through this behaviour in the last week of every monthly expiry. Considering the same, let us discuss how the deployment of options trade in different horizons would be required to be modified.

3. 3-4 Sessions

Immediate view (1-2 Days):

For Immediate view, we resort to single Options which are capital efficient. With monthly expiry, holding on to it for a day or two does not imply a great deal of time-value loss but considering shorter horizon we may need to make alterations.

Get rid of the position during the day. Just in case the position has to be carried forward for a day more convert it into a vertical spread by adding one more leg of the short option of a Higher Call for a Long Call or a Lower Put for a Long Put.

Carry forward for a weekend:

In case the view has a time horizon that extends over a 2-3 session, resort to Vertical Spreads where every Call or Put bought is funded with a short position in corresponding higher Call or Lower Put at the initiation.

Over here in case, we are on a Tuesday with expiry being on following Thursday, it does make sense to take a trade with 2 short positions instead of 1 in farther options.

Just to make sure that we do not get bitten by the negative risk profile due to extra option sold, make sure that higher Call or Lower Put is a little further higher or lower than the target price in mind.

3-4 Sessions:

Lastly, if one wants to trade for the whole expiry with a view that is expected to materialize over a period of 5 trading sessions.

Minimize your cost and take the same ratio spread that we discussed in the previous point, but with a slight change

The change is that this time, along with one option Buy and 2 farther strikes Sell we are adding one more leg to Buy Protection with Buying an Option going even farther.

For instance, in the case of Bank Nifty Bullish View, if I buy 27,500 Call and Sell 2 lots of 2,800 Call then to protect that I would buy 28,500 Call. This would limit my loss, just in case of abrupt volatility.

These modifications have come out of empirical evidence. The key factor to keep in mind is due consideration of drawdown along with the profit potential and everything would modify itself automatically.

(The author is CEO & Head of Research at Quantsapp Private Limited.)