Option Timing 101: Technical Analysis Every Trader Must Know

CA Manish Singh: 
Hello everyone. As we have discussed MTM, Theta, Delta, Gamma, how options are priced and how they behave, the next step is execution. You have learnt technical analysis as well. 
Now we will combine technical tools with options knowledge to understand how to make trading decisions at the right moment. When done correctly, it improves your chances of being in the 7 percent category of traders who actually make money. 

Let us discuss this on the charts. 

Using the Nifty 50 Chart with the 20 EMA 

This is a normal Nifty 50 chart. 

I have applied the 20 moving average. As I have explained earlier, you can use the 20 EMA as a simple rule of thumb. 

If the market is below the 20 EMA and you are in a short position, it is acceptable. 
Do not stay in a long position when the market is below the 20 EMA. 

Similarly, if the market is above the 20 EMA, you stand a better chance in long trades. 
Short trades taken above the 20 EMA usually lead to losses. 

Now we will discuss how to plan option trades using all this. 

Using Candlestick Patterns and the 20 EMA 

If you remember, I had explained that when a Marubozu candle forms, the trend may continue for three or four candles. 

Here, after the Marubozu, the market kept falling for three to four candles. 

I had also explained that a wick at a level indicates that the market is trying to take a bounce. 

Then we discussed patterns like the Morning Star. The market kept falling, then a small green candle appeared, followed by another green candle. That is a typical Morning Star pattern. We learnt this in earlier chapters. 

After the Morning Star formed, the market reversed. 
The market then fought with the 20 moving average and finally sustained above it. 
A breakout followed and the market shot up. 

If this pattern appears, your logical decision is to think of going long. 

Even if you did not identify the Morning Star, you would still notice that the market is sustaining above the 20 EMA. So a bullish trade makes sense. 

Entry, Target and Stop Loss Planning 

If you are experienced, you may take the entry somewhere around 25,350. 

Once the market crosses and sustains above the 20 EMA, it moves gradually upwards. 
Let us assume your appetite is only 30 to 40 points in the index. 

From 25,350 the market moves to around 25,400. 
That is a 50 point movement. 

Now consider option buying. 

If you purchased the At the Money 25,350 Call option, Delta movement tells us that a 50 point Nifty move results in roughly a 25 point premium increase. 

So your option target should be around 25 points. 

If your target is 25 points, your stop loss should be set accordingly. 

When you entered around 25,350, the low of the pattern is around 25,330 to 25,335. 
If the market falls below this level, the Morning Star pattern loses validity. 

So a fall below this level should trigger your stop loss. 

This translates into roughly a 10 to 15 point stop loss on the option premium. 

Your risk is 10 to 15 points. 
Your reward is 25 points. 

This gives a 1:2 risk to reward ratio, which is acceptable. 

If the ratio becomes 1:3 or 1:4, nothing is better, but 1:2 should be the minimum. 

Planning for Option Selling 

Now consider the option seller. 

If you expect the market to move up, you may sell the 25,350 Put option. 

Market rises to 25,400. 
You gain from Theta decay and from directional decay. 

A 50 point market rise gives you roughly 25 points directional decay. 
Theta may give another 10 to 12 points in a day. 

So your total gain may be around 35 points. 

Your stop loss should be around 15 to 17 points. 

From 25,350 this places the stop loss zone around 25,320 to 25,325. 

Whether you are an option buyer or seller, your decision must be guided by whether the trade offers at least a 1:2 risk to reward ratio. 

When to Prefer Buying vs Selling 

If the market is highly volatile, buying options may give better results. 

If the market is dull or range bound, option buying will suffer from Theta decay. 
In such conditions, option selling performs better. 

If you know the clear direction and have the capital bandwidth, you may even choose futures. 

But for options, all decisions must be computed using: 

• your target in index points 
• Delta movement 
• Theta decay 
• risk to reward ratio 
• candlestick structure 
• and EMA positioning 

Final Takeaways 

Technical analysis plays a crucial role in options trading. 

Without clarity on targets and stop loss levels, you cannot plan your trades. 

Similarly: 

• Option buying suffers from Theta decay 
• Option selling benefits from Theta 
• Strategies can be created to make selling easier 
• Directional and non-directional strategies become more effective when technical cues are clear 

Revise all technical analysis concepts again and apply them in live market conditions. 

In the next chapter, we will understand physical settlement in F and O, how it works, and how indices and stocks are settled. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.