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Why Time Decay in Options isn’t your Foe?

One of the best things about options trading is one can utilize the large number of strategies to earn consistent profits with minimum risk, if one manages the trade well. But, what most Options buyers fear is the “Time Decay” which decays the value as time progresses. It is because the majority of traders don’t understand the role and effect of time decay and how it affected contracts you own.

Truth to be told, you shouldn’t fear time decay. If you are trading in Options market then you can use time decay as per your strategy to make profits out of trades. So, let’s found out how to take advantage of time decay while trading in Options market.

First you have to clear your mind and accept that “Majority of Options buyers lose their profits (premium) to the Options sellers.” It is the Options sellers who make consistent profits with almost no risk. Below we are going to share a strategy of making profits in Options market while taking the advantage of time decay. So, if you are really want to make time decay your friend then you need to be Options seller instead of Options buyer.

Before we discuss this strategy, first let us remind you that this strategy will not be applicable on BANK NIFTY. So, try to avoid this strategy in BANK NIFTY.

How to Make Time Decay your Friend?

Here, we are going to discuss the strategy with the example of Nifty50. Make sure you execute this strategy only after the 15th of the month. Let’s assume the current spot price is 11500. In that case, you have to sell both the Calls and Puts which are out of money (OTM). Make sure both have approximately similar premium price.

Let’s assume you sell a NIFTY 11800 Call and NIFTY 11200 PUT with the same premium. In this way you are hoping Nifty won’t shoot above 11800 and on other side it won’t tank below 11200. At the expiry both your Put and Call Options will be profitable in case NIFTY remains in the mentioned range.

In doing so, don’t forget to analyze the open interest to keep adjusting the trade accordingly.

You may not believe but this strategy will work out most of the times. The only way you will be in loss when NIFTY shoots up more than 10% in either direction, which by the way is very rare. But, in case of BANK NIFTY, try to avoid this strategy because when the BANK NIFTY starts to move, it is very volatile.

To avoid unlimited loss and secure your capital, you can buy cover positions on either side. By using this strategy you can make better profits every time. All you required is sufficient capital to sell options.  Even you can take the professional help and make trades using stock market app, if needed.

(This is a personal opinion. We will not be responsible for any loss in capital.)

 

Hope, this article helped you in a way you expected it to be. If you have any query or would like to add something then please don’t forget to mention in the comment section below.

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Tuesday, 11 December 2018

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