Long-Term Option Contracts: A Challenging Strategy in the Trading Landscape

Is selling long-term option contracts for periods of 1 year or 6 months a good strategy? The answer is decidedly no. This strategy leaves your positions vulnerable to significant loss if any unexpected news or events occur. Option selling should ideally be within the shortest possible timeframe, typically corresponding to a few days, with a focus on capturing the optimal conditions where demand and supply act favorably. Extending this practice to longer-term contracts can lead to dire consequences, as demonstrated by experienced traders who have faced the realities of the stock market.

Understanding the Fundamentals of Option Trading

The complexity of option trading cannot be understated. A comprehensive understanding of option pricing, including the concepts of demand and supply zones, is crucial. Selling options at any arbitrary point in time can be financially irresponsible, especially when dealing with longer-term contracts that span a year or more. In the United States, the best opportunities for such extended term selling may only arise once every 3 to 5 years. This is due to the specific market conditions that must align for such extended strategies to be viable and profitable.

The Expert's Perspective

As a professional trader since 2013 and a former stock market employee from 2004 to 2013, I have observed and experienced the challenges of implementing long-term option strategies. If you are considering adopting such a strategy, it is imperative that you thoroughly educate yourself. Attending a class focused on option trading would provide you with the necessary knowledge and skills to navigate the complex market landscape effectively.

Key Trading Strategies Illustrated

Let me detail some of the trades I have executed to illustrate the effectiveness of a more concise trading strategy. On October 19, 2021, I closed all long positions, signaling the end of the rally for the Nifty index. This strategy was communicated to my students the following day. Two months later, on December 13, 2021, I closed out Nifty futures and a highly in-the-money (ITM) call option with a strike price of 500 points deep in the money. On December 24, 2021, I again predicted the end of the rally for the Nifty and executed the sale of Nifty futures and a 500 points deep ITM call option. On December 21, 2021, I decided to go short, acquiring Nifty futures and a 500 points deep ITM put option. Finally, on January 18, 2022, I shorted Nifty futures and a 500 points deep ITM call option.

March 7, 2022, and March 8, 2022, saw me exiting all short positions and going long with Nifty futures while shorting the put option. These trades collectively illustrate how I manage my trades. In each of these seven trades, I achieved profits of over 900 points per lot. However, if you adopt a strategy of holding deep ITM calls for longer periods without timely exits, you run the risk of earning a much lower ROI. Holding onto such positions indefinitely can result in financial ruin, ultimately leading to non-performing assets (NPA) status for your investment. Late exits and repetitive reentry are inherently dangerous and should be avoided at all costs.

It is essential to embrace a more agile and responsive trading strategy, especially when dealing with longer-term option contracts. Understanding the market's movements and timing your trades accordingly can lead to significant financial gains. Conversely, a rigid, long-term holding strategy can result in substantial losses and long-term financial setbacks.