Introductory Context
"The four pre-trade pricing questions: (1) Is IV cheap or expensive relative to context? (2) What is my break-even and is the required move realistic? (3) Does my daily theta cost leave room for the thesis to develop? (4) How will IV crush affect my position if I hold through any upcoming event? Answering all four before every trade prevents the majority of structurally unsound entries. "
The Four Questions
Question 1: Is IV Cheap or Expensive?
Check India VIX or the specific strike IV. Check IV Rank on Sensibull. Check IV vs HV30 on TradingView.
Answer format: 'IV is at [X]%. IV Rank is [Y]. IV is [above/below] HV30 by [Z] percentage points. This is a [cheap/normal/expensive] IV environment.'
Action based on answer: Cheap (IVR < 25, IV < HV): proceed to naked buying, standard size. Normal (IVR 25–65): standard analysis, no IV-driven modification. Expensive (IVR > 65, IV > HV by 3+): use spread structure, reduce size by 30–50%.
Question 2: What Is My Break-Even and Is the Required Move Realistic?
Calculate: Strike + Premium (for calls), Strike − Premium (for puts). Compare break-even to current spot. The difference is the required move.
Answer format: 'Break-even is [level]. Required move is [X] points or [Y]%. Nifty's typical [N]-day range is approximately [Z] points. The required move is [within/outside] the typical range.'
Action based on answer: Required move within 75% of typical range: viable structure. Required move equal to typical range: marginal, monitor carefully. Required move exceeds typical range: option is too expensive for the thesis — move to a different strike, use a spread, or wait for a better entry.
Question 3: Is the Daily Theta Cost Acceptable?
Find the option's theta (Sensibull displays this per unit per day). Multiply by lot size. Multiply by expected holding period in days. This is the total theta cost if Nifty stays flat.
Answer format: 'Theta is ₹[X] per unit per day. Total theta over [N] days = ₹[X × N × lot size]. As a percentage of total premium paid: [Y]%.'
Action based on answer: Total theta under 30% of premium: acceptable for the holding period. Total theta 30–50% of premium: be specific about the expected move timeline — if Nifty does not move in the first half of the period, the position loses half the premium remaining by the end. Total theta over 50% of premium in the holding period: theta is too punishing — use a shorter holding period, different expiry, or accept that the trade needs to work quickly.
Question 4: How Will IV Crush Affect This Position?
Identify any major scheduled events within the option's remaining life. Estimate post-event IV (typically 50–65% of pre-event IV for Budget/RBI, smaller drops for minor events).
Answer format: 'There is [a major event / no event] during this option's life. If a major event: expected post-event IV is [Y]%. Vega loss = [vega × IV change] = ₹[Z] per unit. I need delta gain of at least ₹[Z ÷ delta] points just to break even against IV crush.'
Action based on answer: No event: IV crush risk is minimal, proceed as planned. Event with moderate IV decline: use spread to reduce net vega, or exit before the event. Event with severe expected IV decline: avoid naked buying — use spread only or enter 10–14 days before the event when IV has not yet peaked.
Putting It All Together — A Complete Walkthrough
Trade setup: Nifty at 24,000. You want to buy the 24,200 CE for the upcoming week's expiry. Premium ₹88. Lot size 75 units. Holding period: 5 days. India VIX: 16%. IVR: 45. HV30: 14.5%. Vega: ₹5.5 per unit. Theta: ₹14 per unit per day. No major events scheduled.
Q1 Answer: IVR 45 — neutral. IV 16% above HV30 14.5% by 1.5 points — minor selling advantage. Assessment: normal to slightly expensive. Use standard size, consider a spread.
Q2 Answer: Break-even = 24,200 + 88 = 24,288. Required move = 24,288 − 24,000 = 288 points (1.2%). Nifty's typical 5-day range: 150–350 points. Required move is within range but toward the upper end. Marginal — proceed with directional conviction but note the tight break-even.
Q3 Answer: Theta ₹14 × 75 units × 5 days = ₹5,250 total theta cost. Premium paid = ₹88 × 75 = ₹6,600. Total theta as % of premium: ₹5,250 ÷ ₹6,600 = 79%. Theta is punishing — nearly the entire premium decays if Nifty stays flat. This option needs to move within 2–3 days or theta becomes the primary risk. Consider buying fewer lots (reduce capital at risk) or buying 7 days of expiry for less punishing daily theta.
Q4 Answer: No major events during the week. IV crush risk is minimal. Proceed.
Decision: The trade is viable directionally but the theta over a 5-day hold is too high relative to premium. Revised plan: buy the next-week expiry (13 days to expiry) for ₹130 premium — higher upfront cost but theta of ₹9 per day (lower daily rate), giving the thesis more time to develop. Break-even: 24,200 + 130 = 24,330 — slightly higher break-even but much more manageable daily theta cost.
The Checklist Is Your Pre-Commit Review
Run the 4-question checklist after you have decided on the trade (direction, strike, expiry) and before you place the order. It is not meant to generate the trade idea — your chart analysis and market reading do that. The checklist is the final pricing sanity check. If any answer produces a red flag, adjust the trade structure rather than proceeding with a known structural weakness.