High Profit EOD based option Strategy for Advanced Traders

[gmt900]

The options are expiring on 26 Dec 2013. If by that date, Nifty remains within 6300, you get full premium. Even at 6400, you are not losing much, you are gaining 5 points whereas brokerage, STT may comes to say 10-15 points.

Suppose, Nifty goes below 6100 and remain around that level (or below this level), you keep gaining around 4 points each day. So, if you want to avoid risk, you can close any time after gaining 50 to 60 points or you may wait till 26 Dec 2013.

The main concern is Nifty touches 6300 within a day or two. In that case, theta is not used at all and Delta comes into full swing. So, you may likely to lose around 100 points. However, the simple option is to hedge this by purchasing Future. If Nifty has to move to 6300 or above in a day or two, it has to move at great pace. Whenever, it is making upward move with a great pace, just buy Nifty Future and whatever you are losing in options, you can cover in Future. However, it has to be understood that you can buy Future only if Nifty is moving at a great pace. In any other case, if Nifty starts coming down, you may lose on Future also. So, you have to be careful while hedging with Nifty Future and with proper stop loss. It is very important that if you hedge options with Future, as soon as you cover points through Future, close the options trade and you are either left with little loss or little profit.

If you do not want to take additional risk of Nifty Future, then you can simple close the trade and take the loss. After all, losses are part of trading. The key thing is we need to do 10 winning trades and 1-2 losing trades.

Note: Till date, the highest value of Nifty has gone on the following days:

Highest of High 6357.10 on 8 Jan 2008
Highest of Open 6335.25 on 8 Nov 2010
Highest of Close 6317.35 on 3 Nov 2013.

If you see historical data, Nifty never crossed 6357.10 till date. In any case, you are safe if Nifty reaches 6400 on 26 Dec 2013. But, in stock market, you never know what will happen and when. So, you need to be ready with all the alternatives.

NIFTY closed @ 6176 today. Do you mean, only if nifty closes above 6300 by monday or tuesday, one can book loss or buy nifty future ? If nifty does not close above 6300 say by tuesday, what will the recommended action?

 

[jagankris]

Some how I am not convinced with the strategy this time.
Last month it worked doesn't mean that this month also it should work.
We have election results on Dec 08th.
It is expected that BJP will clinch the election this time.
If BJP clinches in Delhi also then markets may shoot up heavily.

 

[pannalal]

NIFTY closed @ 6176 today. Do you mean, only if nifty closes above 6300 by monday or tuesday, one can book loss or buy nifty future ? If nifty does not close above 6300 say by tuesday, what will the recommended action?

Any time Nifty crosses 6300, we need to book loss. The only thing as time passes, the loss gets reduced because of time decay (as Theta is almost 4 so you gain roughly 4 points each day). It also depends upon how much premium you have received. Suppose, you have received premium of 147 (as per today's closing position), then you are safe till Nifty reaches 6447. In such case, you need to book loss only if Nifty crosses 6350. Let us hope that Nifty never touches 6300.

If you want to buy Future, be very careful. If Nifty keep on increasing after you buy Future, you can sell it and get good number of points. That enables you to cover partial loss (even full loss depends upon when you buy and sell). But, be aware that Nifty may start sliding after you buy, then you lose points in Future and Options are still in danger because Nifty may again move up. So, this method is only for well experienced traders.

Just add premium points to 6300 and that is the break even point. For example, if you have received premium of 140. Then, if Nifty closes below 6440, you are in profit.

 

[pannalal]

In the last 3 days, as per Options Chain data analysis the MAX build in Calls is more or less the same in 6300 and 6500. So 6500 is also in the cards for this month. Do not be so sure. Plan for 6500 also in worst case.

Healthrajji,

My plan is simple. As soon as Nifty touches 6300, I am closing all the trades. The strategy was suggested based on yesterday's Options Chain data. Based on today's data, the strategy would have changed.

As far as Open Interest is concerned, 6500 CE shows 4,145,750, that is the maximum for any CE. However, this only indicates that its liquidity is very high, not necessarily mean that Nifty will go to 6500.

We just do not know what will happen tomorrow. In stock market, you cannot earn without losing. But, I am ready to lose 1-2 time if I am doing 10-11 winning trades in a year.

 

[pannalal]

Some how I am not convinced with the strategy this time.
Last month it worked doesn't mean that this month also it should work.
We have election results on Dec 08th.
It is expected that BJP will clinch the election this time.
If BJP clinches in Delhi also then markets may shoot up heavily.

In stock market, there is no free lunch. Reward comes with the risk. As far as election is concerned, Delhi Government does not run India, it runs only Delhi territory. As far as indications are concerned, GDP growth is 5.5%, inflation is at its peak, industries are not in good shape, US and European economy is in very bad shape. But, logic never works in Stock market. So, you just do not know what will happen.

You should be ready to face any situation and should have exit strategy.

 

[gmt900]

Any time Nifty crosses 6300, we need to book loss. The only thing as time passes, the loss gets reduced because of time decay (as Theta is almost 4 so you gain roughly 4 points each day). It also depends upon how much premium you have received. Suppose, you have received premium of 147 (as per today's closing position), then you are safe till Nifty reaches 6447. In such case, you need to book loss only if Nifty crosses 6350. Let us hope that Nifty never touches 6300.

If you want to buy Future, be very careful. If Nifty keep on increasing after you buy Future, you can sell it and get good number of points. That enables you to cover partial loss (even full loss depends upon when you buy and sell). But, be aware that Nifty may start sliding after you buy, then you lose points in Future and Options are still in danger because Nifty may again move up. So, this method is only for well experienced traders.

Just add premium points to 6300 and that is the break even point. For example, if you have received premium of 140. Then, if Nifty closes below 6440, you are in profit.

Thank you Pannalal for prompt reply. Got it. I have tried hedging options with future and I know how difficult it is if you are not experienced enough.
You asked us to keep track of Delta and Gamma. This gives me an opportunity to refresh the fundas of greeks. Will come back to you if there are questions. But in the mean time if you can explain how does one use info about these greeks, it would be great.
While there are risks in the stategy proposed by you, I agree that if one consistently uses this strategy over a period of say one year, it is bound to give good profit.
Thanks and regards,
gmt

 

[pannalal]

Thank you Pannalal for prompt reply. Got it. I have tried hedging options with future and I know how difficult it is if you are not experienced enough.
You asked us to keep track of Delta and Gamma. This gives me an opportunity to refresh the fundas of greeks. Will come back to you if there are questions. But in the mean time if you can explain how does one use info about these greeks, it would be great.
While there are risks in the stategy proposed by you, I agree that if one consistently uses this strategy over a period of say one year, it is bound to give good profit.
Thanks and regards,
gmt

In case of the given strategy, the values of various greeks are as under (these are always approximate values):
Delta: -0.48821
Gamma: -0.00152
Theta: 3.97090
Vega: -8.50396
Rho: -2.12734

Delta signifies that you are going to lose roughly 0.49 point when Nifty increase by one point. Suppose, Nifty increase by 100 points, you are going to lose around 50 points. Actually speaking, you may lose around 55-60 points because of negative gamma. However, if Nifty goes down, you are going to gain around 0.49 point when Nifty decreases by one point.

Gamma is like a delta square. This means it just tell how delta will change when Nifty changes. Say, if Nifty increases by 100 points, Gamma value will be 0.152. Thus, Delta will become around 0.64 and at that point you start losing 0.64 point when Nifty moves up by one points.

Theta is positive, so you are going to gain around 4 points each day. Suppose, Nifty remains at the same place, you gain roughly 4 points every day. So, if Nifty comes back to same point after 15 days, you got around 60 points because of theta. However, if Nifty goes down, then you also gain because of delta and gamma.

Vega is related to volatility. However, it is very difficult to estimate volatility, NSE is giving VIX - volatility index. There are methods based on time left (of expiry) and strike price to estimate the volatility but still it is a guess and nobody knows what will be exact volatility (just like we do not know about Nifty).

Rho is related to interest rate, so you can largely ignore its effect. As, interest rate does not change in short term, this is more or less meaningless in Indian context (particularly when we are talking about one month period).

 

[gmt900]

In case of the given strategy, the values of various greeks are as under (these are always approximate values):
Delta: -0.48821
Gamma: -0.00152
Theta: 3.97090
Vega: -8.50396
Rho: -2.12734

Delta signifies that you are going to lose roughly 0.49 point when Nifty increase by one point. Suppose, Nifty increase by 100 points, you are going to lose around 50 points. Actually speaking, you may lose around 55-60 points because of negative gamma.

Gamma is like a delta square. This means it just tell how delta will change when Nifty changes. Say, if Nifty increases by 100 points, Gamma value will be 0.152. Thus, Delta will become around 0.64 and at that point you start losing 0.64 point when Nifty moves up by one points.

Theta is positive, so you are going to gain around 4 points each day. Suppose, Nifty remains at the same place, you gain roughly 4 points every day. So, if Nifty comes back to same point after 15 days, you got around 60 points because of theta. However, if Nifty goes down, then you also gain because of delta and gamma.

Vega is related to volatility. However, it is very difficult to estimate volatility, NSE is giving VIX - volatility index. There are methods based on time left (of expiry) and strike price to estimate the volatility but still it is a guess and nobody knows what will be exact volatility (just like we do not know about Nifty).

Rho is related to interest rate, so you can largely ignore its effect. As, interest rate does not change in short term, this is more or less meaningless in Indian context (particularly when we are talking about one month period).

Thanks for a very lucid explanation.

 

[jagankris]

In stock market, there is no free lunch. Reward comes with the risk. As far as election is concerned, Delhi Government does not run India, it runs only Delhi territory. As far as indications are concerned, GDP growth is 5.5%, inflation is at its peak, industries are not in good shape, US and European economy is in very bad shape. But, logic never works in Stock market. So, you just do not know what will happen.

You should be ready to face any situation and should have exit strategy.

Delhi results are still unclear - if BJP wins means 4 out of 5 states.
Markets are not concerned about Congress or BJP but a clear strong central govt.Even if congress wins 4/5 states there will be a gap up.

And GDP growth is not a single day story.
A clear one sided win means no policy paralysis by the future govt.
And hence a better GDP growth in 2015.

In general election times are very volatile.
A un expected gap up on 9th Dec could be very costly.

Market always doesn't follow the fundamentals.
If the market controllers are on the long side and a 10% up move form here on a single month and no is going to ask why markets moved up in spite of bad fundamentals.

How can one have the exit after a huge gap ?

Option strategies has to be decided based upon the events that are coming up.

Note:- Historically Markets are 95% bullish on Dec.

 

[SaravananKS]

Any time Nifty crosses 6300, we need to book loss. The only thing as time passes, the loss gets reduced because of time decay (as Theta is almost 4 so you gain roughly 4 points each day). It also depends upon how much premium you have received. Suppose, you have received premium of 147 (as per today's closing position), then you are safe till Nifty reaches 6447. In such case, you need to book loss only if Nifty crosses 6350. Let us hope that Nifty never touches 6300.

If you want to buy Future, be very careful. If Nifty keep on increasing after you buy Future, you can sell it and get good number of points. That enables you to cover partial loss (even full loss depends upon when you buy and sell). But, be aware that Nifty may start sliding after you buy, then you lose points in Future and Options are still in danger because Nifty may again move up. So, this method is only for well experienced traders.

Just add premium points to 6300 and that is the break even point. For example, if you have received premium of 140. Then, if Nifty closes below 6440, you are in profit.

4 Points gain every day is not assured.... if volatility increases even nifty stays at same Point Premium Increases I have seen this Particularly in election times

Though I adapted this Strategy @ Todays Close Price to hedge my Longs , The movement in India Vix Play important role in coming days as India vix Neither very low or Very High