Should you trade Penny Options? | The Long & The Short Ep. 13

Welcome to The Long & The Short - a show where you can expect an honest take on trading, something you won’t hear elsewhere.

I’m your host, Sandeep Rao (SEBI Registered Research Analyst – INH000013059).

In this thirteenth episode, we explore a widely used but deeply misunderstood expiry-day phenomenon in options trading: Penny Options - those far OTM, ₹1-₹2 “chillar” strikes that tempt both buyers and sellers with asymmetric payoffs.

This episode breaks down the two distinct return profiles penny options create:
Taleb Distribution — small, frequent gains with rare but devastating blow-ups (typical for sellers)
Holy Grail Distribution — frequent small losses with rare explosive wins (typical for buyers)

We walk through:
1. What penny options really are and how far-OTM pricing reflects market fear
2. Backtests of penny option buying - the hero-or-zero profile
3. Backtests of penny option selling - the “picking pennies in front of a steamroller” trap
4. When selling far-OTM options does make sense (events like elections, tariff shocks & ceasefires)
5. Why major historical blow-ups - LTCM, XIV, volatility spikes - mirror this exact payoff structure

By the end of this episode, you’ll understand why penny options look attractive, why they so often destroy traders, and how payoff asymmetry shapes both risk and reward.

📌 Chapters
00:00 Intro - Taleb Distribution & the Turkey Story
02:49 What Penny Options Actually Are
06:06 How Fear & IV Shape Far-OTM Pricing
06:37 Penny Option Buying Backtest
07:44 Penny Option Selling Backtest
09:27 When Penny Option Selling Makes Sense - Event-Driven Examples (2024–2025)
13:03 What do we learn?
14:20 Historical Blow-Ups & Volatility Shocks
15:10 Closing Thoughts - Survival Over Heroism

🔗 References & Show Notes:

1. Zerodha Varsity – Options Module → https://zerodha.com/varsity/module/op...
2. Market Metrics Google Sheet → tinyurl.com/Market-Metrics-Sandeep-Rao
3. Explainer video on the Market Metrics Sheet →    • 6 Key Weekly Market Metrics You Should Tra...  
4. Vega – Zerodha Vasity → https://zerodha.com/varsity/chapter/v...

Disclaimer: The information and tools presented in this video are for educational purposes only. Backtest data is credited to algotest.in. Neither Zerodha nor Sandeep Rao (SEBI Registered Research Analyst) endorses or recommends any of the platforms, products, or tools demonstrated.

If you prefer reading, we've written a post about this episode here:
https://inthemoneybyzerodha.substack....

Check out Varsity Live, a hands-on way to learn finance with experts. Instead of only listening, you practice in real time through activities like personal finance planning, technical charting, balance sheet analysis, and more: https://varsitylive.zerodha.com/home

Do check out our newsletter "Aftermarket Report" where we do a quick daily wrap-up of what happened in the markets, both in India and globally. here: https://aftermarketreport.substack.com/

Disclaimer:

Investments in securities are subject to market risks. Please read all related documents carefully before investing. SEBI registration does not guarantee the performance of the intermediary or assure returns to investors. The securities mentioned are for illustrative purposes only and do not constitute a recommendation. By proceeding, you acknowledge and agree that any returns shown on this platform are solely for informational purposes. They are not intended to serve as advertisements or promotional material, nor should they influence your investment decisions.

Trading and investment decisions should be made at your own discretion, and it is strongly advised to consult a qualified financial advisor before acting on any information provided.

Note: Some image(s) may have been created using Al, no copyright infringement is intended.

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