Most of us dream to trade big during Option expiry day. Yes it is possible o trade big, bagging one jackpot deal to multifold profits. Sometimes option premiums go crazy at sudden change of momentum.
But the question is how retail traders can win a jackpot when it is highly unpredictable specially on an expiry day. Bulls and bears can trap your hard earn money and you cannot do anything about. So what is the strategy to trade with peace of mind. In case market moves reverse to our analysis, then also our money should be hedged.
First thing first, before we talk about any trading strategy, let us first talk about importance of stop loss. No trader can win 100 % trade. Talking so, loss is just the part of a game. Just we need to minimize our risks so that our profits flourish.
Now easiest way is to buy a Call option and a Put option just near the market level. But important is the time and the proper strike price. The basic of any option premium is that, it is bound to come at per on its expiry day.
Let us assume that market level is 10,000 unit and we consider buying a Call option of $150 of strike price 9,900 unit. Now intrinsic value of that premium should be $100. But before the expiry the same premium is a mix of many variables (i.e. theta, vega, gamma, delta) which are diminishing in nature. Now on the expiry day the premium at the same market level should come at $100.
On expiry day, after the option premium diminishing value is null, only intrinsic value exists. Suppose, market value is at 10,000 unit and we buy OTM Call option (10,100) at price 15 and OTM Put option(9,900) at price 15. Considering one lot option is 100 units. Hence calculation would be as below:-
So, going through the above, we can imagine that how much this strategy can deliver to grab you a jackpot. Max probability of loss is $800 and Max profit would be $2700, meaning Risk: Reward =1: 3.
(i) Like every trade there must be some stop loss. We should strictly maintain our SL.
ii) This strategy works more than 60% of time.
(iii) Do not take more than 2 trades and beginners are not to use more than 5% of capital.
(iv) Strategy of the author of this blog might not be fit for others. So, do not trade blindly. First paper trade at least for 10 trading expiry then only think of investing real money. Risk lies on you only as per your appetite and reward would be as per your desire.