The "holy grail" for many traders is generating a regular income from investing in the Stock Market (SM). Due to high levels of market volatility in India, many professional traders prefer to implement option-selling strategies to gain regular "rent" from the market.
Whereas buying options requires a significant move in the underlying asset to achieve profit, selling options allows traders to profit even when the market is sideways. Therefore, if your objective is to transition from speculation to creating a systematic income-generating business, this guide will assist you.
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Why Option Selling is Ideal for Monthly Income?
Option buying is typically where new traders begin due to the relatively small initial investment required, but option sellers have a significantly higher win probability ratio, as demonstrated here:
The time decay or Theta edge: Any given day, options lose value; therefore, every day that goes by represents a profit on the sale of the option due to the time value decrease.
Probability of Profit (POP): When you sell an option, you win if the underlying asset moves in your favour, remains unchanged, or even moves minimally against you.
Volatility Advantage: In the Indian environment, the Implied Volatility (IV) for options is typically much larger than the actual Volatility experienced (Realised Volatility); therefore, options are considered to be "too expensive".
Before putting down significant amounts of money, it is essential for an investor to gain an understanding of the Difference Between Call Options & Put Options.
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Top 4 Option Selling Strategies for Indian Traders
In the search for an ideal Option Selling strategy (for Nifty/Bank Nifty), it's very important to find a way to balance risk with reward. Below are the four most widely used option-selling strategies used by traders in India.
1. The Iron Condor (Best for Sideways Markets)
The Iron Condor is a Neutral strategy. As the name suggests, the Iron Condor consists of selling an out-of-the-money (OTM) Put Option and an OTM Call Option while buying OTM options further away from where the underlying stock trades, in case the stock takes an unexpected large drop (“Black Swan Event”).
2. Bull Put Spread (A Conservative Bull Strategy)
If you are slightly Bullish on Nifty, you should sell a Put Option with an OTM strike and then buy a long-term Put Option at a lower strike price to hedge your position against downside risk. This is one of the most reliable strategies for generating monthly income through selling options in India, as it limits downside risk.
3. Covered Call (Portfolio Holder)
If you have shares of stocks such as Reliance or HDFC Bank, you can sell OTM Call Options against those shares you hold in your portfolio. By doing this, you create an opportunity to receive extra money for holding onto these stocks for a long time. To learn more about this strategy, it is recommended to consider Trading Derivatives Markets.
4. Short Strangle (For Advanced Set of Option Traders)
The strategy is built around an OTM Call and an OTM Put that are sold and have no hedges. The primary benefit of this position is that you can take advantage of the theta decay on both sides at once. The main downside of this strategy is that you are required to monitor the Open Interest on a regular basis in order to identify when the market trades through one of your strikes.
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Managing Capital & Margin
The most common issue that many traders face with trading Options in India is the level of Margin requirement. When Options were first introduced in India, it was necessary to maintain a margin greater than Rs. 1.5 lakh for just one Nifty Option Lot.
Options to Reduce Margin:
Hedging (use "wing" for OTM options) - By using "wing" for OTM options, you can reduce your margin on a lot from Rs. 1.2 lakh down to about Rs. 40,000 – Rs. 50,000.
Pledging your stock and mutual funds - You can pledge your existing stocks and mutual funds for Margin Trading, therefore utilizing your capital twice.
Basket Orders - Use your broker's basket order ability to ensure you can execute your hedge first and ensure that you are getting the benefit of margin immediately when executing the hedge & Option trades.
For serious traders & those who want to be Professional Traders, obtaining your NISM Certification will allow you to obtain a deeper level of familiarity with the regulatory margin requirements surrounding Option Trading.
Risk Management: Protecting Your Monthly Paycheck
If you are not careful in your trading of Options, "You'll eat like a bird and strain like an elephant". Just one bad day can wipe out several months of your profit. To maintain consistent profits, be sure to follow these guidelines:
Using strict stop losses: Do not engage in “naked” short trading without a stop loss based on your trading system.
Keep an eye on volatility (the Indian VIX): When the VIX is low, options are priced cheaply; when the VIX is high, the price you pay for options will be high, but purchasing options can be dangerous given how much time is left until expiration.
Position Sizing: Never use all your available cash on any single trade. Always have some available (30%) so you can adjust the trade when/if the market reaches levels of concern.
Utilize technical analysis tools: Use the best technical analysis tools in connection with the Options Chain to help determine your strike prices as scientifically as possible, rather than guessing.
Knowing how to handle risk in stock trading will set you apart from being a successful income earner versus being a gambler.
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Conclusion
The key to succeeding in this business of selling options is not about trying to predict where the market will be in the future, but rather predicting where the market will not be based on time decay; as long as you stick to your discipline and maintain good risk/reward tradeoffs, generating monthly income from the Indian markets will be a question of probability, not opportunity.
Start small and practice your strategy until you understand how the market works; once you have a good grasp of how the market works and you are comfortable with the ebbs and flows of the market, begin scaling your investment.
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