How I made Profit in a falling Market - Options Expiry

Today, 14th May 2020 (Thursday), was the expiry date for Weekly Options of Nifty 50. Those who are new to the Stock Market, Nifty 50 is the index of Top 50 Indian companies listed on National Stock Exchange (NSE). Options are a derivative instrument used by Traders to trade the price change in the underlying asset.

Nifty has both monthly and weekly expiry contracts. The weekly contracts expire on every Thursday and monthly on the last working Thursday of the month. The weekly Option contracts attract a large number of traders who try to make money by projecting a target of Nifty at the end of trading day of Thursday. They buy or sell Call/Put options based on their assessment of the levels Nifty will hit by the closing hours of the market. Options offer a huge earning potential if your view is supported by the actual movement of Nifty in your target range.

---

Coming to the trades I took today:

Yesterday, Finance ministry had made a few announcements regarding the relief package for the Economy suffering from the Corona pandemic. The major focus of the relief measures was the distressed MSME sector. There are further announcements to be made in the coming days. So, taking a clear position was very difficult.

As a trader, I had to take a position for Nifty for today's expiry. I had to project the level Nifty will likely touch today based on yesterday's announcement. I decided to opt for intra-day trading as the market is very volatile these days (you never know what's going to happen overnight). Nifty opened with a gap down (when there is a huge gap between yesterday's close price and today's open price).

Figure 1: 10-min Chart of Nifty 50

Nifty tried to recover from the gap down and touched a high of 9280 (seen in the 3rd green candle from left). It started falling down from that level and found support at 9200 level. After 1 pm, it started going down further to touch lower level of 9120 by 2:15 pm. It tried to bounce back to 9170 but finally closed at 9150.

---

Trading Strategy

Since there was overall weakness in the market since morning, I planned to buy Put options as the price of Put options increases if Nifty goes down (best instrument to make money in a down-trending market). Let's see how 9200 Put option behaved during the day.

Figure 2: 10-min Chart of Nifty 14th May 9200 PE

As you can observe in the above chart of 9200 PE (Put option), when Nifty started moving downwards towards 9200 and 9150 levels, there was a corresponding rise in Premium of 9200 PE. The first session of buying lead to a premium increase from 17 to 35 (RoI = 2x). After hitting the level of 34-35, the PE premium experienced a resistance.

The second session of buying saw the Premium jump from the level of 20 to more than 70 (RoI = 3.5x). The entry and exit of any Trade taken in this situation would have varied based on the Trader's mindset and risk appetite. I managed a small profit in the first session of buying and a bigger one in the second.

---

Options are a very versatile instrument offering multiple possibilities in all types of Market conditions. This trading style is recommended for those who have prior trading experience as the premium price changes very quickly and needs a very fast decision making to profit from the trade setup.

Explore our Pro Options Trader course to learn how to trade Options

Maximize your ROI !