The Good Stuff
Choice is always good. Let us see how
- If you are expecting a quick big move, it makes sense to buy options. So for buyers who are expecting a big move (I mean big), the weeklies are a good idea. This is because of the higher gamma and increasing delta of options with less time to expiry. Delta is how much the price of the option changes with the underlying price. And gamma is how fast the delta moves. Price is distance, delta is speed, and gamma is acceleration.
Weekly options have higher acceleration than monthlies
- If you are a seller, this is extremely good news. Simply because weekly options decay at a higher rate of theta than monthly options. Let me put it this way
Premium of a monthly ATM option on Nifty at 11000 assuming 15% IV = ~ 170 Rs
Premium of a weekly = 85 option.
In case that has not sunk in, 4 weekly ATMs give you two times the premium of a monthly. Or in other words, half of the decay of an option happens in the last 1/4th of the time.
So if you are betting on no move, I think the case is pretty obvious. Did I say betting? No I did not say betting, I meant calculated risk taking with ML and AI
3. You have more choice if spreads now, to do all sorts of calendar spreads
4. If you are a retail investor, I am guessing that you do not like Vega and IV. Weekly options do not really have much Vega or effect of IV
Dos and Donts
- Please do not buy OTMs on these things with all your money. Like I said before, the high Theta decay will kill you for sure if something else doesn’t
- Again, do not buy OTMs because they are cheap lotteries. Lotteries are cheap for a reason. And that reason is that most of them never work out
Interesting comparison with Bank Nifty
Here is Bank Nifty top 5 and their % weights
- HDFC Bank Ltd. 35.2%
- ICICI Bank Ltd. 18.5%
- Kotak Mahindra Bank Ltd. 13.2%
- Axis Bank Ltd. 10.1%
- State Bank of India 8.7%
Top stock is 35% of it. Top 2 which are very correlated is 53%. Top 3, again highly correlated are 66%. I need to be really out of my mind to call this an index. This is betting on HDFC for all practical purposes :)
I heard SEBI is going to restrict the weightage of one stock in an index to 25%. So may be soon, this is will somewhat be an index. May be
- HDFC Bank Ltd. 10.3%
- Reliance Industries Ltd. 9.7%
- Housing Development Finance Corporation 7.3%
- Infosys Ltd. 6.6%
- I T C Ltd. 5.5%
That’s diversified. So you might not see the kind of wild swings in Nifty weeklies which you might see in Bank Nifty weeklies.
Right then, good luck and Godspeed