F&O Query: Option selling before results

Is it a good strategy to sell options ahead of results? - Iqbal

Selling options ahead of results is generally considered risky. One, the implied volatility (IV) of options will normally go up as we approach results, and hence options price can shoot up, and two, if the stock moves sharply in an unfavourable direction as a reaction to the results, it can cause huge losses as well.

Remember, a spike in volatility can shoot up options prices irrespective of the option type (calls or puts) and of the direction of the price movement. Even when the stock is flat, an increase in IV can increase options prices, which is not good when you’ve sold options.

One common strategy in selling can be to wait for the IV to rise significantly and then short. IV can hit a peak just before results, maybe a day before. Again, this might not happen every time, and IV can even stay at elevated levels for some time.

If you are selling positions, ensure a proper risk management/exit strategy to limit the losses.

One more risk to note is when stock options expire in-the-money because of sharp moves triggered by results, you might have to buy or sell the underlying stock equivalent to the lot size, which can run into lakhs of rupee.

For a more detailed insight on when to buy or sell options and understand the nuances behind them, check out our Big Story on options published recently.

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