Low Risk Options Trading Strategy - Option Spreads

[DanPickUp]

One more question, as I was reading some where else in the forum, that selling option strategies and the margin depend on the broker in India.

By the way: Such question you even have to clear in the land of options ( USA )

If some body sells on both side ( Put and Calls ), you are hedged.

Some brokers in India would allow smaller margins on such strategies.

Which Brokers are that in India or where can newbies get an overlook about such questions in India with real good links and serious answers?

To clear every thing: I do not trade option in India, as your market not offers nothing, not even options on commodities. Not my world. Sorry.

The question is really meant to be a help for the newbies in your land of option trading.

DanPickUp

 

[gunsho]

First of all my apologies for replying so late (My day job is sucking big time)

Now just to elaborate my strategy (although I do not trade it)

Suppose on 1st of month NIFTY is at 5200
we sell 5400 CE and 500 PE for a collective premium of at least 100 points

We do this every month without considering any TA

Now suppose NIFTY catches a trend say uptrend and starts moving
and say in 5 days it moves to 5250, now we know that market is in strong uptrend so we can buy FUT to hedge our call and buy our PE back. Now what I feel we can sell FUT if market continues to move up at a profit of say 100 points and also buyback CE. Net net some money you will mint.

Best profit is when nifty remains in the range.

One can keep a buyback plan for CE/PE in the following manner

1st week buy if options are 50% cheaper
2nd week say at 20 bucks
3rd week say at 10 bucks
last week say at 5 bucks

By buying back when ever opportunity is there you are reducing your risk of any sudden movement

a rough analysis is in excel attached


jain.er.xlsx

Check the thread in post#1720. If the market remains in range, which means there will be considerable amount of whipsaw. The challenge with this approach is managing the whipsaws.

 

[gunsho]

arounk 50K

100 points = 5K

And if future positions are added, another 30K per lot + few cash reserve for M2M expenses.

 

[gunsho]

Some brokers in India would allow smaller margins on such strategies.

I really doubt that. All the brokers here consider them separate. For Nifty shorting it is 27-30K per lot (options / futures). I have not seen considering the fact that, we are shorting both put and call (like in US market).

 

[comm4300]

Now just to elaborate my strategy (although I do not trade it)

Suppose on 1st of month NIFTY is at 5200
we sell 5400 CE and 500 PE for a collective premium of at least 100 points

We do this every month without considering any TA

will have to do this at the beginning of the month or max 1st week to collect 100 premium combined.

Now suppose NIFTY catches a trend say uptrend and starts moving
and say in 5 days it moves to 5250,

nifty can move much more than that. as you saw last 2 days back - almost a 150 point fall in a day. Moreover, nifty average daily range is around 40-50 points.

now we know that market is in strong uptrend so we can buy FUT to hedge our call and buy our PE back.

good idea. however, PE would still have some value in it. If PE was sold for 50, you'll max make 30 on it. [max]

Now what I feel we can sell FUT if market continues to move up at a profit of say 100 points and also buyback CE. Net net some money you will mint.

again, the hope is to have time eat into premium. you've entered future at 5250, by which time your call option is in loss due to increased premium. your PE is sold for small profit.

And, moreover, if nifty turns around, FUT is in loss [point to point] and CE is making small profit.


this strategy looks nice and needs some fine tuning by experts - Dan and others.

Kindly take my comments as constructive. See, being a learner, Iam always intrigued by new strategies and try to dissect it to check for RISK and worst case scenarios.

rgds,


COST factor:
SELLING CALL - 20k
SELLING PUT - 20K
FUTURES - 30k-50k m2m also required.
that's close to 100,000.

 

[jain.er]

Good lets discuss...

1. yes 100 -150 to upto 250 is collectible

2 Sure NIFTY can move, this is a risk , but if u consider this month we are still in the mid of the range so no need of hedging as of now

3. I think generally I observed PE / CE reducing a lot more in value , but its better to buy back raher then wait or give more margin

4. see we will gain more i n FUT due to delta and loose less in CE due to delta and theta

so if FUT more by 100 CE will move around 70 - 80 only or may be even less

5. This is no doubt a risky strategy

6. Excerpts will certainly suggest to go and buy CE and PE one strike further which will translate it into an Iron Condor , which I feel is not a particularly profitable strategy, infact chances are there you will loose money there.




Just a modification in your cost factor ,

9 out of 10 times we will buy back PE or CE before buy or selling FUT so margin is 50K, also MTM needed is less , because PE and CE one will gain and other loose or net net falt or gain or minor loss in general

 

[comm4300]

4. see we will gain more i n FUT due to delta and loose less in CE due to delta and theta

so if FUT more by 100 CE will move around 70 - 80 only or may be even less

point taken about delta and theta. what about price?

you sold CE at the beginning of the month and before the up move...remember?

ex. nifty 5200 - sold CE
nifty move to 5250 - BUY futures. by this time CE has risen in value from your sell point even with a lesser delta. profit frm FUT = 0 ; CE premium = loss.
nifty moves further to 5300 - futures profit =50 [delta of 1]; CE moves even more.

this will lead to probably a break even trade. the only consolation is the sale of PE for profit which is sold at the time of buying futures. So, we've missed further profit from PE possible due to upmove.


kindly share your viewpoint.

 

[TheDreamer]

The strategy that you are considering is actually a strangle added with a future position on the winning side. Similar strategy has already been discussed by Linkon with a straddle and a future position in one of his threads. The idea behind this strategy is to collect the premium of the straddle/strangle without taking much directional play.

I would suggest to combine any of the trend-following methods coupled with short straddle/strangle for better results.

Coming back to the Greeks... Though delta-neutral initially, this strategy may backfire if volatility increases and/or the directional play of the market intensifies and you do not hedge your positions with the futures at opportune time.

IMHO, this strategy looks good on paper like all other short options strategies, but implementation and maintenance problems should be taken care off in order to get good results.

 

[TheDreamer]

point taken about delta and theta. what about price?

you sold CE at the beginning of the month and before the up move...remember?

ex. nifty 5200 - sold CE
nifty move to 5250 - BUY futures. by this time CE has risen in value from your sell point even with a lesser delta. profit frm FUT = 0 ; CE premium = loss.
nifty moves further to 5300 - futures profit =50 [delta of 1]; CE moves even more.

this will lead to probably a break even trade. the only consolation is the sale of PE for profit which is sold at the time of buying futures. So, we've missed further profit from PE possible due to upmove.


kindly share your viewpoint.

All ATM options have delta of 0.5 to 0.6 depending on the time to expiry. Only deep ITM options have delta greater than 0.70. So in any case, the strategy won't give you break-even trades, if you do not make huge mistakes of not adding the futures leg to the strategy at the appropriate time.

Taking the example of Jain.er... Let's think of a situation where the market has gone to 5000 or 5400. Theoretically, this is the time from which you must protect your short strangle strategy to save the 100 bucks premium. But if the market has reached 5000 or 5400 in the very beginning of the series (i.e. within 2-3 days of the short strategy), you can see a loss of 25-40 points (depends on volatility, downside risk is generally more) without the suitable futures position. Hope this helps.

 

[gunsho]

IMHO, this strategy looks good on paper like all other short options strategies, but implementation and maintenance problems should be taken care off in order to get good results.

Well said. And the effort was well demonstrated by linkon. Another point which is normally forgot (and is easily missed while using option oracle) is, the Future will be trading at a premium of ~40 points during the month start. We should consider this also as a cost.