GOOD PROFIT: Hedged nifty positions with straddle...

[abigbull]

Please don't mind as i am just picking the funda of options , but here on a practical note just wanted to understand what should be a good options bet for the october series .

Experts pls suggest a simple yet affective strategy with Call Buy / Write with Put Buy / write for oct 09 which can help .
My belief is that too an emotional one that Nifty having reached 5000 will face resistance may go to 4900 - 4850 and then will again bounce back to 5200 may be till oct end .

Is this the right way of thinking and then wld like to plan a Put - Call strategy which provides me buffer as well as give me reasonable premium profit due to time decay . Hope this will be a good learning exercise .

Is the following right approach .
1> Defensive
Sell Call 5400 @ 19 ( As i think it will not reach 5400 Nifty in oct )
Sell Put 4700 @ 52 ( As i think it will not drop to 4700 Nifty in oct 2009 )

2 > Bit aggressive
Sell Call 5300 @ 34
Sell Put 4800 @ 76

But here in case the Nifty follows a trend in one direction i will lose money so what should be my right " write option " strategy for Oct no when the nifty is in ( 4950 - 5000) range ......

Thanks in advance as this is for my learning .
Edit/Delete Message

 

[linkon7]

Please don't mind as i am just picking the funda of options , but here on a practical note just wanted to understand what should be a good options bet for the october series .

Experts pls suggest a simple yet affective strategy with Call Buy / Write with Put Buy / write for oct 09 which can help .
My belief is that too an emotional one that Nifty having reached 5000 will face resistance may go to 4900 - 4850 and then will again bounce back to 5200 may be till oct end .

Is this the right way of thinking and then wld like to plan a Put - Call strategy which provides me buffer as well as give me reasonable premium profit due to time decay . Hope this will be a good learning exercise .

Is the following right approach .
1> Defensive
Sell Call 5400 @ 19 ( As i think it will not reach 5400 Nifty in oct )
Sell Put 4700 @ 52 ( As i think it will not drop to 4700 Nifty in oct 2009 )

2 > Bit aggressive
Sell Call 5300 @ 34
Sell Put 4800 @ 76

But here in case the Nifty follows a trend in one direction i will lose money so what should be my right " write option " strategy for Oct no when the nifty is in ( 4950 - 5000) range ......

Thanks in advance as this is for my learning .
Edit/Delete Message

One thing i learnt is never trust the market to do what u think it will do...
lot of days before the series expires... so no point predicting the direction and taking short positions where the direction is not clear.
One big 2-3% day is all we need to place all the option writers on the back foot.
with the option value at rock bottom... better buy options then sell them...

going for 5000 call buy and sell 5100 call... makes more sense if u r bullish
selling 5000 put and buying 4900 put if u r bearish...
if u r neutral..then buy 4800 put and 5200 call...

avoid naked writing options....

 

[VJAY]

buy a 5000 call and keep it as a hedge...till 4920 is broken on closing basis....

Dear linkon,
thanks for the reply,am only visiting TJ on morning and evening so missed this post....can i took it on tuesday?

 

[linkon7]

Dear linkon,
thanks for the reply,am only visiting TJ on morning and evening so missed this post....can i took it on tuesday?

Buy 5100 call if we give a closing above 5052 and 4800 put if we close below 4920...

 

[sihasan]

Hi Linkon, how do you handle the risk of gap open days when you carry foward the future position? Also are there any other risk in this strategy from you experience apart from gap days ?

Another observation I found is that the best payout price I am able to find on straddles now-a-days is Rs.300, how do you manage to get a payout of Rs. 400?

:thumb:

 

[linkon7]

Hi Linkon, how do you handle the risk of gap open days when you carry foward the future position? Also are there any other risk in this strategy from you experience apart from gap days ?

Another observation I found is that the best payout price I am able to find on straddles now-a-days is Rs.300, how do you manage to get a payout of Rs. 400?

:thumb:

Options IV has come down very badly. Shorting is a lot safer now a days and hence the payout is less.

for hedging future positions i always buy slightly OTM call or put to prevent damage from gaps...

 

[sibumajumdar]

Linkon, My Feb 5300 Straddle with ce @ 116.45 & pe @ 160. Prem collected is 276.45. My understanding is that iam safe between 5575 & 5024. If nifty crosses 5025 dn side then iam suppose to short NF & Long if crosses 5575 upside. This is to protect prem already collected. Otherwise no action is required. Plz enlighten me.
U advised me to Buy Feb 5400CE & sell 5200PE. Plz tell me how this going to help me. I wish to get cleared. BTW though iam not suppose to but sq off CE @ 96.50 today with an intention of short again at higher price to continue with the straddle. Now my pos is one sided with PE short at 160.00. Awaiting for your comment cum suggestion. Shortly i shall go through your thread again to get a clear idea. Thanks....SLM Uncle

 

[linkon7]

Linkon, My Feb 5300 Straddle with ce @ 116.45 & pe @ 160. Prem collected is 276.45. My understanding is that iam safe between 5575 & 5024. If nifty crosses 5025 dn side then iam suppose to short NF & Long if crosses 5575 upside. This is to protect prem already collected. Otherwise no action is required. Plz enlighten me.
U advised me to Buy Feb 5400CE & sell 5200PE. Plz tell me how this going to help me. I wish to get cleared. BTW though iam not suppose to but sq off CE @ 96.50 today with an intention of short again at higher price to continue with the straddle. Now my pos is one sided with PE short at 160.00. Awaiting for your comment cum suggestion. Shortly i shall go through your thread again to get a clear idea. Thanks....SLM Uncle

We always treat both the legs as a pair. And under no circumstances, do we carry one leg for the next day. We never know which direction market will open and by then damage is done. Intraday, we can risk closing one leg and job it to lower the cost, but thats done only when trend is very clear. A 60-65% sure trade is not worth jobbing.

In ur case, Your profit end point is, 5300+276 = 5576 on the up side and 5024 on the down side.

Now what to expect for the next 2 weeks. The total premium will come down only if NF trades near the 5300 levels. The more it moves above and below the strike price, the more churning will take place and Premium will slowly come down.

We are not expecting to carry this position till feb expiry, so we will use the low volatility to target a max of 50-60 points. If u plan to target the whole premium then u have to carry a NF position along with this pair. The direction is short below 5300 and long above 5300. NF and this pair combined will ensure u get the whole premium towards the end of the feb series.

Now biggest problem is we fear gap ups and down and this causes a lot of loss if its against the direction of our NF. To hedge this, we normally hold a OTM call / put to hedge against the gap. But this is just a hedge, and within 15-30 min of market open, we target to exit this position cost to cost and carry the NF and pair only.

NF and the pair can be utilized to job the cost much lower. This part required discipline and under no circumstances, can we speculate the direction. Market always does the opposite of what anyone expects it to do. So expectation will only weaken the positions.

 

[sibumajumdar]

We always treat both the legs as a pair. And under no circumstances, do we carry one leg for the next day. We never know which direction market will open and by then damage is done. Intraday, we can risk closing one leg and job it to lower the cost, but thats done only when trend is very clear. A 60-65% sure trade is not worth jobbing.

In ur case, Your profit end point is, 5300+276 = 5576 on the up side and 5024 on the down side.

Now what to expect for the next 2 weeks. The total premium will come down only if NF trades near the 5300 levels. The more it moves above and below the strike price, the more churning will take place and Premium will slowly come down.

We are not expecting to carry this position till feb expiry, so we will use the low volatility to target a max of 50-60 points. If u plan to target the whole premium then u have to carry a NF position along with this pair. The direction is short below 5300 and long above 5300. NF and this pair combined will ensure u get the whole premium towards the end of the feb series.

Now biggest problem is we fear gap ups and down and this causes a lot of loss if its against the direction of our NF. To hedge this, we normally hold a OTM call / put to hedge against the gap. But this is just a hedge, and within 15-30 min of market open, we target to exit this position cost to cost and carry the NF and pair only.

NF and the pair can be utilized to job the cost much lower. This part required discipline and under no circumstances, can we speculate the direction. Market always does the opposite of what anyone expects it to do. So expectation will only weaken the positions.

Thanks a lot for making me understand how to safe guard the straddle. Now SN is aroound 5200 (ie <5300), hence i shld immediately sort 1L NF, hold it till 5300 & then sq it off & long again if moves above 5300. Na? Means lot of churning is required. Then plz tell me in which stage i need not do anything bcz mkt will always move up/dn of 5300. I feel for persons like us we should go for Strangle where we have a range beyond which we need to do something. otherwise we can just sit & watch. Sorry to make it lengthy. If i learn well the full credit will go to U. So far i learned a lot from your teaching. Thanks for the same.....SLM Uncle

 

[linkon7]

Thanks a lot for making me understand how to safe guard the straddle. Now SN is aroound 5200 (ie <5300), hence i shld immediately sort 1L NF, hold it till 5300 & then sq it off & long again if moves above 5300. Na? Means lot of churning is required. Then plz tell me in which stage i need not do anything bcz mkt will always move up/dn of 5300. I feel for persons like us we should go for Strangle where we have a range beyond which we need to do something. otherwise we can just sit & watch. Sorry to make it lengthy. If i learn well the full credit will go to U. So far i learned a lot from your teaching. Thanks for the same.....SLM Uncle

strangles loose value much slowly and present premium is very low. That gives u a situation where the decay will be very less over a period of time. e.g. 5400 - 5000 strangle would fetch you a total of say 110 points and 2 weeks of staying in the band will will cause a decay of 15-20 points. Since we are going to have RBI policy action and budget soon, a buildup will make these OTM options to increase in premium.

normal thumb rule is, when the volatility is low, people buy strangles. when its high, people sell them.

I initiated a 5200-5300 strangle of jan series for a total premium of 76 points this week. Expectedly, 5200 will be worth 76 plus today itself...5300 will not become zero, to that's a bonus.
If someone would short this strangle, he would be playing for cover now...