Nifty 50 was sideways on 23rd April. I took 5 trades on different occasions of chart movement but in the end, booked a loss because of the time decay factor (#theta) and strong resistance of 20 points (22400 – 22420) shown below.
The market opened with 130 points higher than the previous day. Ideally, that was a BTST trade which I missed but I took the Call side trade at 22450 (OTM) with the lowest wig reversal candle and kept it hold with 1300 quantity. Over the period I have seen a profit of 9,000 Rs in that single trade but kept it on hold for the bigger profits and booked a loss of 20,000 INR.
The market has created a very strong resistance at between 20 points at the top and every time the market falls from there, the OTM call option of 22450. (Shown below)
You can easily identify that on the right there is a chart of the Nifty 50 movement and on the left, you have a chart of the 22450 Call option. So it proves that if you hold your trade in the market for a long time then with the time decay your trade value will also get reduced.
That is why most of the traders who trade in options book losses.
Now let’s talk about why this happens and what we call this.
So this phenomenon is called Theta decay. Check out this post from Investopedia to know more about theta decay
Solution
Theta decay happens because of the weekly expiry of the option chart. As the option moves closer to its expiry date theta starts decaying more rapidly. For example, the effect of theta decay is much less on Friday for Nifty 50 because it has an expiry on Thursday and has a huge decay on Wednesday.
So after trading for over a year, I have experienced two ways to solve this issue.
- Do not hold your trade while buying options
- Strictly avoid OTM (Out of the money) or ATM (At the money trades)
My suggestion for option traders
In the end, I would like to add that while trading in option buying mode always try to be a scalper rather than a very long trade holder. And option trading requires lots of patience and good backup finances.
Do not put all your money in one trade. Always expect a reversal and keep 1/3rd amount to invest back when the market touches the bottom or be ready to cut the trade with 10 points Stop Loss (SL) in Nifty 50.
Generally, we ask how much money one should use for intraday trade. So my answer to that is 100,000 INR is a good capital to start with.
So how much you can expect from 100,000 capital?
Well, you can keep the profit and loss between 1 – 5%. It means 1,000 INR to 5,000 INR is safe money with this capital.
