Tuesday, 13 October 2015

Advantages of Trading Nifty Options over Future


I started day trading with Nifty Future few years back.  I was trading it comfortably as my size was too small.  Later on the NSE decided to increase the lot size and that is when I started thinking about trading options.  Now I mainly trade ATM or ITM option strikes.  Only on certain days like expiry day, major event day I prefer to trade the Futures.

There are certain advantages for trading options.  The biggest advantage of day trading options is that it is very much cost effective.  Let me illustrate the cost-effectiveness by calculating the total cost involved like this,

Cost of buying and selling one lot of Nifty Future (75) @ 8200 with minimum brokerage in market available today is something like this.

Buy + Sell 8200*75= Total brokerage(18) +STT(61.5)+Transaction charge(30.75)+Service tax(6.83)+Sebi fee(2.46)+stamp duty(21.5)  = 141

Whereas for option the same is like this,

Buy + Sell 8200 (premium 120 *75= Total brokerage(18) +STT(1.53)+Transaction charge(11.70)+Service tax(4.11)+Sebi fee(0.04)+stamp duty(1.5)  = 37

By trading options, I save here more than Rs. 100 per trade per lot, so I thought trading options is the only way left to keep the stop loss at bare minimum level and cost under control.  My number of trades average around 40 per month and by trading options I will be able to save around Rs. 4000 per lot per month.  Now if I multiply that with the number of lots that I trade nowdays my total savings will be around Rs. 40,000.  Every penny saved here is actually earned.

Other advantage is that ATM and ITM option strikes are very much liquid, having more volume than Futures, and there is very little to no slippage. You can get your order filled with even 0.10 difference between trigger and order limit price whereas for Futures it will be 0.25 to 0.5.  So here you also save some money.  Even on very conservative basis if I count saving a slippage of 0.2 points, it will help save around Rs. 600 per month per lot.  Also as a short term trader, one more advantage is there and that is I do not need to bother about time decay of the premium.  I do not need to bother about the open interest as I trade pure price action.  I also do not need to bother what the Greeks are.

Let me confess it is really fun trading options.  I wish I could have started trading them much earlier in my trading career.  Anyway, it is always “better late than never.”

Explore further on,

How to make 30% in a day or more by trading Index options

Success of an options trader

Trading Index Options can turn your losses into profit

How many nifty points do I need to make.html

My lot size



10 comments:

  1. Hi UR Dave,

    Nice to see your new initiative, you always come with new ideas... Why we liked you so much for :)

    I agree with advantages you mentioned as it saves good amount & much useful for traders with 1-2 lot size.

    Few doubts on methodology you are adopting to trade option chart.

    1. If bullish, you are selling PUT & vice versa... Right?

    2. Will you plot PDH/PDL/PDC of NF on Option chart & trade DP + Range confluence?
    Or
    You are marking PDH/PDL/PDC of Option, on Option chart & trading DP + Range confluence?

    3. Other than cost effective & effective fill, did you observe any merit on shifting to options over futures like better trade setups etc…?

    ReplyDelete
  2. Rose

    Thanks a lot. You need to remember we are trying to trade the underlying Nifty. Here what different is the instrument to trade Nifty. When we trade with Options we just to understand the characteristics of it as we understood the characteristics of Futures. That is it. Everything else remains the same. All trading tactics are same. Don't confuse yourself. Remember, it is not the car that the racer drives important for the race to win, but it is the racer himself. So if your tactics are right, you will be able to trade any instrument. Believe me, price reaction at the DP's and established ranges is "omnipresent."

    URD


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  3. Totally agree URD. But I strongly believe that this change of lot sizes is going to back fire for the exchange. My guess it they will revert by Q1 next year.

    Whats the new blog you are planning? do send me an invite and good luck :)

    ReplyDelete
    Replies
    1. Bhavir

      Thanks. Let them do whatever they want to. What we have in our hand we have to do to best cope with it.

      Here is the link, http://charttechnicals.blogspot.in/2015/10/option-trading-blog.html

      Send me your email and I will send you the invite.

      URD

      Delete
  4. Hope you are aware of the fact that for shorting options, you require future's margin

    ReplyDelete
    Replies
    1. Manju

      Yes you are right. If you short the options, you would need to keep the margin equivalent to future. For the NEST, currently under MIS, margin for shorting the option is around Rs. 8000.

      URD

      Delete
  5. As its intraday, use cover and bracket orders too as they provide higher leverage.

    ReplyDelete
    Replies
    1. Manju

      Enough capital is the basic requirement for trading. You have to have it in order to trade. Never get trapped into the higher leverage. Avoid the facility which encourages higher leverage.

      URD

      Delete
  6. Hey thanks for this informative post. Because of SEBIs new rule now future trading has become more riskier for a retail trader comparing to institutional one. What is the margin required for nifty options? i know that nifty futures is around 40-50000

    ReplyDelete
    Replies
    1. Anon

      My broker SAS Online requires margin around 25K for selling the option for intraday trading.

      URD

      Delete