A credit spread sells one option and buys a further out-of-the-money one for protection. You receive a net premium, you keep it if the index stays away from your short strike, and your loss is capped at the distance between the strikes minus what you collected.
The phrase “income strategy” does a lot of quiet work in descriptions of this. The premium is not income in the sense a coupon is income. It is payment for accepting a risk, and the whole question is whether you are being paid enough for the risk you took. Everything below is about answering that honestly.
Read the disclaimer at the foot. All figures here are illustrative round numbers, not live prices, and nothing here is advice.
What the premium actually compensates you for
When you sell an option you are selling insurance. The buyer is paying to transfer a risk to you, and your profit comes from the fact that insurance usually costs more than the claims it pays out.
That gap has a name, the variance risk premium, and it is well documented across markets: implied volatility tends to sit above subsequently realised volatility most of the time. Selling options harvests that gap. This is a real effect, not a market inefficiency, and it exists for a reason. Someone is willing to overpay for protection because they need protection, and you are being compensated for standing on the other side when it is needed.
The consequence follows directly. Your strategy makes small amounts frequently and loses large amounts rarely. That is not a flaw in the execution. It is the shape of the business you have chosen, and a run of profitable months is evidence of nothing except that the rare event has not happened yet.
The bull put spread
Sell a put below the current index level. Buy a further put below that. You collect the difference.
That last sentence in the caption is the one worth sitting with. A structure collecting 60 against a 140 risk needs a win rate above 70 percent just to break even before costs. Sellers often quote their high win rate as evidence the strategy works. A high win rate is not optional here. It is arithmetically required, and the interesting question is whether it is high enough.
A bear call spread is the same trade above the market: sell a call, buy a further call. The mathematics is identical with the direction reversed.
The iron condor
Run both at once and you have an iron condor: a bull put spread below and a bear call spread above, sharing nothing except the underlying and the expiry.
The condor’s advantage is real and often misunderstood. You collect premium from both sides, but the index can only finish on one side, so you can only lose on one side. The cost is that you now have two strikes to be wrong about instead of one, and a violent move gets you regardless of direction.
Choosing strikes, and what delta really tells you
The common rule of thumb picks short strikes near a delta of 0.15 or 0.16. The reasoning behind it is worth knowing rather than accepting.
An option’s delta approximates the probability, under the pricing model, that it finishes in the money. A 0.15 delta short strike therefore implies roughly an 85 percent chance of expiring worthless, which is where the comforting win rates come from.
Two caveats matter. That probability comes from a model that assumes a return distribution with thinner tails than reality has, so the true chance of a large move is higher than the delta suggests. And a high probability of a small win paired with a low probability of a large loss can still have negative expectancy. The win rate tells you almost nothing on its own.
Wider spreads collect more premium and risk more. Narrower ones do the reverse. There is no free configuration, only different placements on the same trade-off, and the useful discipline is to size by the maximum loss rather than by the margin required.
When to sell, which matters more than what to sell
The variance risk premium is not constant. It is large when fear is priced in and thin when it is not, and selling into a thin premium is the most reliable way to be paid badly for real risk.
The standard tool is implied volatility rank or percentile: where today’s implied volatility sits relative to its own range over the past year. High rank means options are expensive by their own historical standard, and there is room for volatility to fall in your favour. Low rank means the opposite, and it also means the thing you are short has more room to rise than to fall.
Selling premium at a low volatility rank is doubly unattractive. You collect less for the same strikes, so your reward-to-risk worsens, and you are short vega into a market where volatility has more upside than downside. The credit looks similar on the order screen. The trade is not similar at all.
A useful second check is the spread between implied and recently realised volatility. Implied above realised is the condition the whole strategy depends on. When realised volatility exceeds what you are being paid for, you are selling insurance below cost, and no amount of strike selection fixes that.
None of this makes timing a solved problem. It does mean that “I sell condors every week regardless” is a strategy with a known weakness, and that the weeks you skip may contribute more to your returns than the weeks you trade.
Margin, and why the number you estimate is not the number you get
Indian derivatives margin runs on a SPAN-based framework plus an exposure margin, with parameter files updated through the day. The NSE margin documentation is the authority.
Three practical points:
Hedged structures get margin relief, but only when recognised as hedged. Enter the legs separately and there may be a window where you are margined as a naked seller. On a volatile morning that window can be expensive.
Margin rises when volatility rises. The moment your position is under stress is the moment the exchange asks for more capital to hold it. Plan for that in advance, because being forced to close at the worst moment converts a defined-risk trade into a realised maximum loss.
Four legs of costs are not trivial. A condor is four legs in and potentially four out, each carrying brokerage, exchange charges, GST, stamp duty and securities transaction tax. Against a credit of 90 points, those costs are a meaningful fraction of the edge. Current rates are on the NSE securities transaction tax page.
Contract specifications change, so check them
Lot sizes, strike intervals and expiry schedules for Indian index derivatives have all been revised more than once in recent years, sometimes materially. Any article quoting a specific lot size or expiry weekday will eventually be wrong, and a strategy sized against a stale specification is a strategy sized incorrectly.
Take these from the source before trading rather than from any blog, including this one: the SEBI circulars listing and NSE’s own circular feed carry the current position. This matters more than it sounds, because wing widths and position sizes are usually reasoned in rupees, and rupee exposure moves whenever contract notional does.
Managing the position
Most of a credit spread’s profit arrives late, because the options you sold hold time value until close to expiry. This creates the central tension: holding to expiry captures the most premium and carries the most risk of a late adverse move, while closing early gives up profit for certainty.
A common discipline is closing once most of the credit has been captured, on the reasoning that the remaining premium is small compensation for continuing to carry the risk. That is defensible. What is not defensible is the adjustment that turns a losing defined-risk position into a larger one. Rolling a tested side further out, widening the other side to fund it, and adding size to recover a loss are all ways of removing the cap that made the structure attractive in the first place.
The decision worth making before entry is simple: at what point is the trade wrong, and what will you do then? Deciding that with the position open and moving against you is how people discover their risk was never actually defined.
Where to go next
For the structure that concentrates this same idea onto a single price rather than a band, see butterfly option structures, which shares the mechanics and sharpens the trade-off.
Position sizing and the tail-risk problem sketched above are covered properly in risk management. For testing whether a selling programme actually earned its risk after costs, rather than merely producing a pleasing sequence of small wins, see quantitative analysis. And if you want to price these structures and compute their Greeks yourself, derivflow-finance is the open-source library I maintain for it.
Selling premium works. It works in a specific way, with a specific failure mode, and the traders who last are the ones who sized for the failure mode rather than the success rate.