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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DAX analysis for a client

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