Stock Market Learning Index
Complete guide to master stock market trading
Foundation Concepts
Stock Market Basics
What is stock market and how it works?
Market Terms
All important market terminology
Trade Types
Different types of trades
Trading Styles
Various approaches to trading
Candlestick Patterns
Bullish, Bearish & Continuation patterns
Chart Patterns
Technical chart analysis
Support & Resistance
Key price levels identification
Market Analysis
Technical, Fundamental & Price Action
Advanced Trading
Comprehensive Guide For Options Selling
Options selling involves writing (selling) options contracts, giving the buyer the right to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before a specific date (expiration date). Sellers (also called writers) profit by collecting premiums from buyers but take on the obligation to fulfill the contract if exercised.
1. Key Concepts in Options Selling
1.1 Options Basics
Call Option:
Buyer has the right to buy an asset at the strike price.
Put Option:
Buyer has the right to sell an asset at the strike price.
Premium:
The price the buyer pays to the seller for the option contract.
Strike Price:
The agreed-upon price for the asset in the contract.
Expiration Date:
The date by which the option must be exercised or it expires worthless.
1.2 Selling vs Buying Options
Buyers:
Limited loss (premium paid) but unlimited profit potential.
Sellers:
Limited profit (premium received) but significant risk.
2. Why Sell Options?
Time Decay (Theta)
Options lose value as expiration nears. Sellers benefit from this.
High Probability of Profit
Many options expire worthless, allowing sellers to keep the premium.
Flexibility
Can create income and hedge existing positions.
3. Methods of Options Selling
3.1 Covered Call
Sell a call option while holding the underlying stock.
Example:
- - Own 100 shares of XYZ stock priced at ₹1,000.
- - Sell a ₹1,050 call for a ₹20 premium.
Outcome:
- - If XYZ stays below ₹1,050, keep the ₹20 premium.
- - If XYZ rises above ₹1,050, sell the stock at ₹1,050 and keep the ₹20 premium.
3.2 Cash-Secured Put
Sell a put option with enough cash reserved to buy the stock if assigned.
Example:
- - Sell a ₹950 put on XYZ for ₹30 premium.
Outcome:
- - If XYZ stays above ₹950, keep the ₹30 premium.
- - If XYZ drops below ₹950, buy the stock at ₹950 (effective cost: ₹950 - ₹30 = ₹920).
3.3 Naked Options
Selling options without holding the underlying asset.
⚠️ High risk: Unlimited loss potential (for calls) or significant loss (for puts).
3.4 Spread Strategies (Risk-Defined)
Combine buying and selling options to limit risk.
Bull Put Spread
Example:
- - Sell ₹1,000 put for ₹100 and buy ₹950 put for ₹50.
- - Max Profit = Premium Collected (₹100 - ₹50 = ₹50).
- - Max Loss = ₹50 (Difference in Strikes - Premium).
Bear Call Spread
Example:
- - Sell ₹1,000 call for ₹120 and buy ₹1,050 call for ₹80.
- - Max Profit = ₹40.
- - Max Loss = ₹50 - ₹40 = ₹10.
Iron Condor
Combine a bull put spread and a bear call spread.
Example:
- - Sell ₹1,000 put for ₹30, buy ₹950 put for ₹10.
- - Sell ₹1,100 call for ₹30, buy ₹1,150 call for ₹10.
- - Profit if the stock stays between ₹1,000 and ₹1,100.
Iron Butterfly
Sell at-the-money call and put and buy out-of-the-money call and put.
Example:
- - Sell ₹1,000 call for ₹50, sell ₹1,000 put for ₹50.
- - Buy ₹1,050 call for ₹20, buy ₹950 put for ₹20.
- - Max Profit = ₹60 (Premium Collected).
4. Risk Management
Key Points:
Position Sizing
Only risk 2-3% of your total capital per trade.
Example: If you have ₹10000, don't risk more than ₹200-300 loss on a single trade.
Stop-Loss Orders
Automatically exit the trade if the price moves against you.
Example: If you buy a futures contract at ₹100, set a stop-loss at ₹95 to limit your loss.
Hedging
Use options or other futures contracts to reduce risk.
Example: If you hold a bullish position, you can buy a put option as insurance.
Avoid Overleveraging
While leverage can amplify profits, it can also magnify losses. Trade within your financial limits.
5. Advanced Options Selling Strategies
5.1 Short Strangle
Sell an out-of-the-money call and put on the same asset.
Example:
- - Sell ₹1,100 call for ₹30 and ₹900 put for ₹30.
- - Profit if the stock stays between ₹900 and ₹1,100.
5.2 Short Straddle
Sell at-the-money call and put options.
Example:
- - Sell ₹1,000 call for ₹50 and ₹1,000 put for ₹50.
- - Profit if the stock remains near ₹1,000.
5.3 Jade Lizard
Combine a short put and a short call spread.
Example:
- - Sell ₹950 put for ₹30.
- - Sell ₹1,050 call for ₹30.
- - Buy ₹1,100 call for ₹10.
- - Max Profit = ₹50 (Premium Collected).
5.4 Calendar Spread
Sell a short-term option and buy a longer-term option at the same strike price.
Example:
- - Sell ₹1,000 call expiring in 1 month for ₹30.
- - Buy ₹1,000 call expiring in 3 months for ₹60.
- - Profit from time decay in the short-term option.
6. Understanding the Greeks in INR Context
Delta
Indicates how much the option price changes with a ₹1 move in the stock.
Delta = 0.3 → Option premium changes by ₹0.30 for every ₹1 move.
Theta
Indicates time decay. Sellers benefit as options lose value closer to expiration.
Vega
Indicates sensitivity to volatility. High implied volatility = Higher premiums for sellers.
7. Factors Influencing Options Pricing
Implied Volatility (IV)
- High IV = Higher premiums, good for sellers.
- Low IV = Lower premiums, less attractive for selling.
Time Decay (Theta)
Shorter-dated options decay faster, benefiting sellers.
Underlying Asset Price
Options are affected by movements in the stock price.
8. Tips for Indian Traders
Sell Options with High Probability: Target options with a delta of 0.2-0.3 (approx. 70-80% chance of expiring worthless).
Use Technical Analysis: Identify support/resistance levels to choose strike prices.
Sell During High Volatility: Higher premiums during volatile markets.
Avoid Earnings Events: Unexpected price moves can lead to losses.
Use Nifty and Bank Nifty Options: High liquidity and lower chances of manipulation.
Focus on High-Probability Trades: Sell options with a delta of 0.2-0.3 (70-80% chance of expiring worthless).
Monitor Volatility: Use India VIX to assess market volatility. High VIX = Higher premiums.
Avoid Holding to Expiry: Close trades early if 50-70% of the premium is captured.
Key Takeaways
Risk-Defined Strategies: Use spreads to cap potential losses.
Sell Options with High Premiums: Focus on out-of-the-money options with high time decay.
Diversify Trades: Spread positions across various strike prices and expiration dates.
Practice with Paper Trading: Gain experience before committing real money.
9. Risks of Options Selling
Assignment Risk
Options can be exercised at any time before expiration.
Margin Requirements
Naked options require high margin, increasing capital at risk.
Market Gaps
Sudden price movements can lead to significant losses.
Till now this guide provides a deep dive into options selling. Before concluding lets discuss all the advance strategies for OPTION SELLING you need.
Advanced Options Selling Strategies
1. Calendar Spread (Time Spread)
A strategy that involves selling a short-term option and buying a longer-term option at the same strike price.
Goal: Profit from time decay in the short-term option while benefiting from the longer-term option's retained value.
Example:
Stock: XYZ trading at ₹100.
Sell: 1-month ₹100 call for ₹2.
Buy: 3-month ₹100 call for ₹5.
Outcomes:
If XYZ remains near ₹100, the short-term option decays faster, resulting in a net gain.
If XYZ moves sharply, the longer-term option retains value, minimizing losses.
2. Diagonal Spread
Similar to a calendar spread but involves different strike prices.
Goal: Capture time decay and take advantage of directional price movement.
Example:
Stock: XYZ trading at ₹100.
Sell: 1-month ₹105 call for ₹2.
Buy: 3-month ₹110 call for ₹4.
Outcomes:
If XYZ rises slowly, the sold call decays faster, creating a profit.
If XYZ rises above ₹110, the long call offsets the loss from the short call.
3. Ratio Spread
Sell more options than you buy, creating a directional bias.
Goal: Generate income with limited risk.
Example (Bullish Ratio Spread):
Stock: XYZ trading at ₹100.
Buy: 1 ₹95 put for ₹2.
Sell: 2 ₹90 puts for ₹3 each.
Outcomes:
If XYZ stays above ₹90, both sold puts expire worthless, and you keep a net premium.
If XYZ falls below ₹90, you face increased risk but have limited protection from the purchased put.
4. Short Straddle
Sell at-the-money call and put options.
Goal: Profit from minimal price movement and time decay.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹100 call for ₹3.
Sell: ₹100 put for ₹3.
Outcomes:
If XYZ stays at ₹100, both options expire worthless, and you keep ₹6.
If XYZ moves significantly in either direction, losses are theoretically unlimited.
5. Short Strangle
Similar to a short straddle but involves selling out-of-the-money call and put options.
Goal: Profit from a range-bound market.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹110 call for ₹2.
Sell: ₹90 put for ₹2.
Outcomes:
If XYZ stays between ₹90-₹110, both options expire worthless, and you keep ₹4.
If XYZ moves outside this range, losses are theoretically unlimited.
6. Jade Lizard
A combination of a short put and a short call spread.
Goal: Generate premium with no upside risk.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹90 put for ₹2.
Sell: ₹105 call for ₹2.
Buy: ₹110 call for ₹1.
Outcomes:
Max profit: Premium collected (₹3).
Limited downside risk below ₹90.
No risk above ₹110 (the long call offsets further losses).
7. Iron Fly (Iron Butterfly)
Combines selling a straddle with buying protective wings (out-of-the-money call and put).
Goal: Profit from minimal price movement with limited risk.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹100 call for ₹3, ₹100 put for ₹3.
Buy: ₹110 call for ₹1, ₹90 put for ₹1.
Outcomes:
Max profit: Premium collected (₹4).
Max loss: ₹10 - ₹4 = ₹6 (difference between strikes minus premium).
8. Broken-Wing Butterfly
Similar to an Iron Fly but shifts one wing further out to create a directional bias.
Goal: Profit from directional price movement with reduced risk.
Example (Bearish Broken-Wing Butterfly):
Stock: XYZ trading at ₹100.
Buy: ₹105 call for ₹1.
Sell: 2 ₹100 calls for ₹3 each.
Buy: ₹90 call for ₹0.5.
Outcomes:
If XYZ drops or remains stagnant, you profit from time decay.
If XYZ rises above ₹105, losses are limited.
9. Credit Box Spread
A combination of a bull put spread and a bear call spread.
Goal: Lock in a small credit by exploiting mispriced options.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹95 put for ₹1, buy ₹90 put for ₹0.5 (bull put spread).
Sell: ₹105 call for ₹1, buy ₹110 call for ₹0.5 (bear call spread).
Outcomes:
Max profit: Credit collected.
Losses occur only if there's an extreme price move beyond ₹90 or ₹110.
10. Poor Man's Covered Call
A leveraged alternative to a covered call, using a deep-in-the-money call instead of owning the stock.
Goal: Generate income with less capital.
Example:
Stock: XYZ trading at ₹100.
Buy: 1-year ₹70 call for ₹35.
Sell: 1-month ₹105 call for ₹2.
Outcomes:
Max profit: Premium collected (₹2).
Losses are limited to the cost of the long call minus any premiums collected.
11. High-Probability Delta Selling
Sell options with low delta (e.g., 0.1-0.3) to create a high probability of success.
Goal: Consistent income with minimal risk.
Example:
Stock: XYZ trading at ₹100.
Sell: ₹115 call with a delta of 0.2 for ₹1.
Outcomes:
Probability of profit: ~80%.
Risk increases if XYZ approaches ₹115.
Additional Concepts and Tips
1. The Greeks and Their Role
Delta: Measures price sensitivity. Helps assess directional risk.
Theta: Time decay. Sellers benefit as options lose value over time.
Vega: Sensitivity to implied volatility. Avoid selling options in low-volatility environments.
Gamma: Measures changes in delta. Lower gamma means less risk for sellers.
2. Choosing Expiration Dates
Short-Term Options: Higher time decay but riskier due to price movement.
Long-Term Options: Slower time decay but safer for beginners.
3. Volatility Management
Implied Volatility (IV):
Sell options when IV is high (premiums are higher).
Avoid selling options when IV is low (less reward for the risk).
Example:
Stock XYZ IV: 30%.
Sell ₹110 call when IV is high, as the premium will decay more rapidly if volatility decreases.
4. Adjustments and Exiting Trades
Roll Forward: Extend expiration to collect more premium or avoid assignment.
Close Early: Take profits when 50-75% of the premium is collected.
Key Takeaways
Understand Risk: Use defined-risk strategies (e.g., spreads) to minimize losses.
Sell High-Probability Options: Focus on options with a high chance of expiring worthless.
Diversify: Spread trades across different assets and expiration dates.
Monitor Trades: Adjust positions as needed to optimize profitability.