When Option Buying should be avoided?

In the last trading session Bank Nifty moved almost 150 point from day's low of 21410. But weekly call option prices hardly move much! What is the reason? Option prices depends mainly on factors such as price movement of underlying instrument, time left for expiry and volatility. Also move was not impulsive but slow up move taking almost whole day for move.

In yesterday's session, India VIX index, measure of market volatility fall sharply by almost 7% due to lack of any global event and not much surprise expected from Monetary policy of RBI due on Thursday. Hence, call option prices did not move even when instrument(stock/index) prices moved favorably.

It is better to stay away from option buying during such scenario. From above chart you can see option prices (21800CE) continuously moved up and down and trading is difficult in this case.Time factor was also against option pricing as next day was trading holiday!

Some profit can be made only if you buy At-The-Money(ATM) 21500CE or next Out-Of-The-Money(OTM) 21600CE option.

If you sell OTM (in this case put)options (required higher margin) you can make good money in such event as option prices will fall due to fall in volatility and time decay even if there is not much price movement. You can see the price fall is steep(21200PE), so easy to trade using trailing stop loss(TSL).

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VIX Analysis

The daily VIX chart shows the formation of Doji candles at the bottom and reversal. The daily RSI crossed the previous resistance level of 40. The MACD signal gave bullish crossover suggesting bullish move in VIX. So the daily chart shows the possibility of VIX moving towards 28 levels in the coming days. The weekly chart shows the formation of wedge and reversal from the bottom. VIX may move towards the upper wedge line @ 29-30. So VIX suggesting the bearish mood of the market and hence the high possibility of fall in Nifty-50 and Banknifty in the coming days/weeks. VIX Gann Box: The daily Gann Box shows a reversal from the mid-zone of time factor points. The next time factor date is Jul-21. So will VIX continue to move high till Jul-21 or it will reverse from angle point? Wait and watch. Using VIX to spot Intraday Reversal on Indices: VIX is a very useful indicator to spot reversal during day trade. If the price of an index moves up and @ resistance zone watch values of VIX. If VIX s...

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BankNifty Update For Jul-09,2020 - Weekly Expiry

Banknifty opened Gap up @ 22700 and then achieved all our bullish targets of 23900/23000. But the upmove was very choppy and looked like terminating pattern and was not easy to trade. So I did not take a trade on the upside. My observation was Banknifty good up (250-300 points) while Nifty was not at all moving up and was just 10-15 points up and VIX was increasing. That was a signal that there is a high probability of reversal. (I twitted this around 12.30 pm). Banknifty continued its upmove and VIX was not falling, so I was sure that reversal is on the card from the strong resistance zone of 23900-23000/50. In yesterday's post, I mentioned about daily RSI @ resistance. That was another reason I was expecting a high probability of fall after it moved higher levels to come to at least yesterday's close levels or below. I got down-trade from almost 23000 to 22700 (got out earlier as it was intraday and not much time left though I was expecting at least 22600. It gave a much lowe...

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