When it comes to options trading, there are hundreds of strategies available on the internet. From option buying to option writing, combinations to spreads, there is something for everyone.
The zero-to-hero option trading strategy is something that is generally used on expiry days. It can be quite beneficial if used right. But you need to understand the principles on which this strategy is based before you implement it.
Let’s find out what the zero-to-hero option trading strategy is and how it works.
What is the zero-to-hero option trading strategy?
As the name suggests, you buy an option contract which is trading close to zero, and then you hold it until it becomes a hero.
Sounds simple enough, doesn’t it?
This strategy is generally used on expiry days when volatility is high. Ideally, you should hold the positions only for a few minutes before squaring them off.
How does it work?
Options contracts in India are generally released in a weekly series. Nifty and BankNifty option contracts expire every Thursday, and FinNifty option contracts expire every Tuesday. You can implement the zero-to-hero option strategy on any of these option chains on the expiry day.
Now, why does this strategy only work on the expiry day? There are two main reasons.
Firstly, on the expiry day, the price of an option contract is low. Because there is practically no more time value left to the option contract, it generally trades for a very low premium. Thus, you can enter the position at a negligible price.
Secondly, on expiry day, volatility is very high. Because the option contract series is going to expire on that day, all positions will have to be squared off. Institutional traders, who have held large positions for hedging purposes will start to unwind. The volume of transactions leads to sudden and unpredictable fluctuations in price levels.
How does the zero-to-hero option trading strategy work?
Consider the following scenario.
You’ve been tracking the price movements in the BankNifty and you’ve noted down your levels for the day. You have a prediction for where BankNifty will take resistance, and you’ve got your prediction for the support levels.
You can take a long trade in BankNifty when it comes near the support level, and then square it off when it reaches the resistance zone. Because option premiums are so low, you could enter the position at a minimal price of Rs 2 per share, and then ride the wave till it reaches Rs 30-40 per share.
Now, keep in mind that fluctuations on expiry day are sharp and brutal. That means, price reversals will happen just as fast.
So, the entire trade will take a couple of minutes at the most.
This is how an ideal zero-to-hero strategy works.
But, please keep in mind that it all depends on how well you can identify your levels and whether the market respects your levels or not. Please remember that predicting the Indian share markets can be a fool’s gamble unless you know what you’re doing!