A Low Risk Nifty Option Buying Strategy

In the markets it is a well-known fact that majority of the option buyers (almost more than 90%) lose money. So, what should you do if you want to be in the remaining 10%?

In this blog post we will cover a low-risk Nifty Option Buying Strategy that if followed rigorously can generate good returns.

In the chart below, you can see that at 9:42 am there is a trendline breakdown as well as a support breakdown of 17,677. The 17677 and 17684 lines are the very strong Auto-Support/Resistance lines in Investar and if we enter the position at 17677, then our risk can be defined as the difference of these two lines, approximately 7 points.

Our risk is very clearly defined because the Stop-Loss is basically a value slightly above the 17684.45, which is 17,685. Moreover, at the time of the breakdown, we can also see there were two consecutive bars of high volume.

Now you must be wondering, but how can one take a trade in NIFTY, and that is correct. We will now pull up an option chart along with the NIFTY chart and then take a trade it based on this setup.

In general, when buying options, two important things need to be considered:

  • Always start with a very small position size if you are a beginner (like 1 lot) and then slowly increase.
  • Trade with monthly options to minimize the negative impact of theta decay. Theta decay causes the premium to decay as the option comes closer to expiry and works against option buyers.

So, in order to trade this setup, we will buy an ATM (At-The-Money) option which in this case is the NIFTY-27APR23-PUT-17650 (as shown below), since we are betting on the NIFTY to go down.

So what is the entry point? Entry point would be 73.15 which is the close at 9:42 am. What is the Stop-Loss (SL)? Typically for an ATM monthly option, the change in points can be considered as ½ the change in Nifty points, and that is because ATM options generally have 0.5 delta. If we take our Stop-Loss in Nifty as 10 points, then we can take the SL in the NIFTY PUT as 5 points, hence the SL will be 73.15 – 5, so approximately 67. But, in this case, there is a very strong support at 69.55 in the NIFTY PUT and hence we can take that as SL.

We can exit the trade when the downtrend line that is created later in NIFTY gets broken at 10:16 am, and at that time, the NIFTY-27APR23-PUT-17650 is at 90.50.

Hence the statistics of our trade are as follows:

Entry @ 73.15
Exit @ 90.5
Hence Profit = 90.5 – 73.15 = 17.35, and
Risk = 73.15 – 69 = 4.15

Hence, this is a trade with almost 4.5 times the Reward compared to the risk we are taking!

To summarize, here are the key elements of this low-risk high reward strategy:

  • Trendline Breakdown/Breakout along with Support/Resistance Breakdown/Breakout
  • Breakout/Breakdown should be on above average volume
  • Price rejection before the breakdown/breakout is a plus!

To see this strategy in more detail, you can see the following video on YouTube: