Keep the option open
My recent interactions with many market participants indicated that selling deep Out of Money (OTM) options (mostly Call Options) on the last day of the weekly option expiry days (e.g., Wednesday for Nifty Bank and Thursday for Nifty50) has become a very popular trading strategy for many high networth individuals (HNIs). By pledging stocks, mutual funds, and bank deposits as margin money, HNIs claim to be enhancing their overall returns by 6% to 8% p.a. using this trading strategy. Surprisingly, most brokers and money managers, who run this strategy for their clients, are selling this as a risk-free strategy arguing that a move of 5% of more in Nifty50 or Bank Nifty on the expiry day is unlikely. An option of strike price 5% away from the current index value will hence expire worthless. There are three points to be considered in this regard, in my view. 1. In recent years we have not witnessed large (5% or more) daily moves in benchmark indices. In fact, ...