Checklist for Indian Stock Options Traders
Checklist for Indian Stock Options Traders
According to SEBI, about 89% of individual F&O, options traders lost, with average loss of ₹1.1 lakh. SEBI's updated report shows 93% of individual traders incurred losses.
General risk management, for minimizing the loses
1. Never risk more than 1.5 % of trading capital. For 1,00,000, maximum risk is 15,000.
2. Hedging the position reduces risk of sudden events - Selling a Call option at deep OTM and buying at ATM.
3. Physical delivery risk (critical for stock options)- Since stock options in India are physically settled, avoid holding at ITM on expiry.
4. Always place, correct stop-loss.
5. Never average a losing options, instead take hedging.
6. Book partial profits intermittently.
7. Check Liquidity and volume.
8. Check News and Events.
9. Brokerage cost is significant, eat substantial profit.
Following are the key parameters for an options trader to check before taking a trade. It can reduce the risk of the trade.
1. Check Events & Calendar
Always check earnings results, dividend dates, mergers and related sensitive corporate news.
News can drift the premium prices for the strike prices significantly.
Pre-event → Implied Volatility, IV rises (premiums costly).
Post-event → IV crush (premiums collapse). Buy or Sell, before events based on IV.
2. Correlation Between IV, Premium & OI
IV ↑ → Premium ↑ (even if stock is flat)
Market expects bigger future moves → options become expensive.
IV ↓ → Premium ↓
After news and events (earnings, results), IV crush causes premiums to collapse.
OI ↑ + Premium ↑
Long build-up (buyers active, bullish for Calls, bearish for Puts).
OI ↑ + Premium ↓
Short build-up (sellers dominating).
OI ↓ + Premium ↑
Short covering (sellers exiting, premium spikes).
OI ↓ + Premium ↓
Long unwinding (buyers exiting, premium falls).
OI indicates who is driving the premium (buyers or sellers).
OI ↑ + IV ↑
Aggressive activity. Buyers pay up → high uncertainty.
OI ↑ + IV ↓
Option selling dominating; calm market.
OI ↓ + IV ↑
Panic hedging, shorts exiting, or sudden demand from buyers.
OI ↓ + IV ↓
Both sides unwinding, market cooling down.
IV is the hidden pressure, pushes premiums higher or lower regardless of stock. OI, tells whether the move has real money behind it. IV helps to judge, if options are cheap (low IV) or expensive (high IV).
If IV is rising with premium, indicates fear/greed buying. Premium price is directly proportional to IV.
If IV is falling with weak price, indicates premium decay.
|
Change in OI |
Change in Premium |
Change in IV |
Interpretation |
|
↑ |
↑ |
↔ /↑ |
Long build-up (buyers entering) |
|
↑ |
↓ |
↔ / ↓ |
Short build-up (sellers entering) |
|
↓ |
↑ |
↑ |
Short covering rally |
|
↓ |
↓ |
↓ |
Long unwinding |
|
↔ |
↑ |
↑ |
IV-driven premium rise (fear/expectation, not OI-based) |
|
↔ |
↓ |
↓ |
IV crush (after event; premium collapses even if stock flat) |
3. Liquidity
Only trade stocks with high open interest (OI) and high volume.
Avoid illiquid contracts wide bid ask spreads destroy the profits.
If spread > 1% of premium, avoid.
4. Future prices
Compare Spot and Futures prices to see if the futures are trading at a premium (above spot) or discount (below spot).
Future Price > Spot Price → Futures at Premium
Example: Reliance spot ₹2500, October future ₹2515 (₹15 higher).
Indicates positive sentiment / bullish outlook.
Usually, in normal markets, futures trade at small premium to spot.
Futures < Spot → Futures at Discount
Example: Reliance spot ₹2500, October future ₹2485 (₹15 lower).
Futures trading below spot indicates bearishness or short build-up.
Traders are not willing to pay cost-of-carry; may expect the stock to fall.
Futures = Spot
Happens close to expiry (because futures and spot must converge).
5. Underlying Stock + Futures Trend
Confirm with futures OI + Price:
Price ↑ + OI ↑ = Long build-up.
Price ↓ + OI ↑ = Short build-up.
Price ↑ + OI ↓ = Short covering.
Price ↓ + OI ↓ = Long unwinding.
Futures premium/discount vs spot, gives a hint about market sentiment.
6. Options Chain (OI + Premium + IV)
This is most important parameter.
Strike-wise OI concentration, defines support/resistance.
Always monitor changes in OI with premium price & IV:
OI ↑ + Premium price ↑ = Long build-up (buyers active).
OI ↑ + Premium price ↓ = Short build-up (sellers active).
OI ↓ + Premium price ↑ = Short covering.
OI ↓ + Premium price ↓ = Long unwinding.
7. Option Greeks
1. Delta → how much premium moves with stock.
ITM ≈ 1, ATM ≈ 0.5, OTM ≈ 0.1 or less.
2. Gamma → how fast Delta changes (watch expiry week).
3. Vega → sensitivity to IV. Big factor near events.
4. Theta → time decay.
Theta (time decay) accelerates in the last week, rapidly eroding option premium. By expiry, all time value is zero; only intrinsic value (if ITM) remains. This works against buyers and favors option writers.
ATM options decay fast: At-the-money contracts lose premium value quickest.
Stock options are monthly expiry (unlike index weekly).
Last week: high gamma risk → small stock moves, wild premium swings.
ITM options can spike erratically on expiry day due to hedging/arbitrage.
8. Max Pain
The strike price at which the combined losses of option buyers (both calls and puts) are maximum and option writers gain the most. Market often settles toward this strike price near expiry, because big players (option sellers) dominate positioning.
If Max Pain is shifting upward, may be bullish.
If Max Pain is shifting downward, may be bearish.
Max Pain is more reliable in indices, in stock options, mainly for high liquidity stocks such as Reliance, SBIN, HDFC Bank.
9. Sector & Market Correlation
Stock price movement follows its sector/index.
Example: ICICI Bank trades with BankNIFTY.
10. PCR (Put-Call Ratio)
If PCR > 1, market leaning bullish (more puts written).
If PCR < 0.7, market leaning bearish (more calls written).
Extreme values → contrarian signals (too much one-sided positioning often reverses).
Strike-wise PCR (not just overall) gives better support/resistance insights.
11. MWPL (Market-Wide Position Limits)
Always check MWPL % for stock.
If > 90% → risk of F&O ban period → no new positions, only square-off.
Do not take fresh trades near ban levels.
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