How to take advantage of weekly expiry options:
There used to be large participation in the expiry week, for monthly expiry options. Seeing this demand NSE has introduced Options expiring each week. Now every week crores of rupees expire in options. One way to benefit from this boon, all year around, is to short them. As a rule, I never short naked options, they must be covered
So, the idea is to short near term, and go long on far. This takes advantage of the principle that theta for near term is high, and long term is low; as long as beta is unchanged.
An example of One such trade in the current scenario is:
Trade 3:
Short PE 11600 18th Apr; collect 51 premium
Long PE 11500 25th Apr: Pay 53 premium.
If 18th 11600 PE expires worthless, you get entire 51 points, and whatever remains of 11500 25th Apr is your profit, and that depends on how much the market goes up. Therefore beta should not change much.
The only other principle you must bear in mind is, the short term option must not go ITM, that will be bad for business. That will require us to close the trade as is.
Another very good example is this:
Trade 4:
Short PE 11600 30May; collect 300
Buy PE 11500 26Dec; pay 440
Buy CE 12000 25Apr; pay 27
Net Paid: 170;
Max Profit: around 250 points.
Time decay is very low on OTM Dec options, around 25 points a month. However, the May options will completely become zero on 30May, rate of decay is 200 points a month; However, if market makes big moves, and value of Dec PE falls we start losing on the max gain of 250 points.
Therefore, our job is to manage this trade such that you are shielded from large moves. One way to do that is to buy OTM options in the direction of the trend, which is currently up.
So add a third leg... buy OTMs: 12000 CE 25Apr at 27 points. Hence, we will have to re-adjust this set after 25Apr.