Monthly Income Strategy - What do you think?

AmeliaEarhart2

AmeliaEarhart2

New Member
#1
#1
I am trying out a strategy, that I hope will give me 5% per month. I ask the seniors here what they think.

The strategy is not new. It is like a condor. Basically, look at Nifty futures and sell call option at nifty plus 200 and sell put option at nifty minus 200. Cover by buying call at nifty plus 500 and buy a put at nifty minus 500. Your maximum loss = 300 points

Every time nifty moves by 100 points, adjust the condor to once again get nifty +/- 200 and nifty +/- 500. Wait till expiry and enjoy the premium.

This is nothing new. But it may appear that the 300 point "loss band" on either side is very risky. It is. This is my logic.

During market hours, adjusting the position actively ensures that we are not getting hit by the risk. Problem comes with gap up, gap down. I have done a back testing of 600 trading days. There was only one large gap down in those days (at 250 points ) and 1 large gap up at 175 points. So basically, because of back testing, I can say that max loss should be 50 points, (provided future is like the past). It will happen rarely. Incidentally, while back testing, I used percent deviation rather than absolute deviation because there were times when Nifty was 6000 only.

Now comes the question, why limit max loss to 300? When historically it has been about 50? It is because I would like peace of mind. What if terrorist plays some big mischief somewhere and Nifty goes in free fall during opening session? 300 point loss once in a while I can take.

What do the seniors think? Right now I am testing this on NSE "pathshala" simulator with real prices but imaginary rupees

Thanks for your valued feedback in anticipation

Amy
 
Subhadip

Subhadip

Well-Known Member
#2
#2
AmeliaEarhart2 said:
I am trying out a strategy, that I hope will give me 5% per month. I ask the seniors here what they think.

The strategy is not new. It is like a condor. Basically, look at Nifty futures and sell call option at nifty plus 200 and sell put option at nifty minus 200. Cover by buying call at nifty plus 500 and buy a put at nifty minus 500. Your maximum loss = 300 points

Every time nifty moves by 100 points, adjust the condor to once again get nifty +/- 200 and nifty +/- 500. Wait till expiry and enjoy the premium.

This is nothing new. But it may appear that the 300 point "loss band" on either side is very risky. It is. This is my logic.

During market hours, adjusting the position actively ensures that we are not getting hit by the risk. Problem comes with gap up, gap down. I have done a back testing of 600 trading days. There was only one large gap down in those days (at 250 points ) and 1 large gap up at 175 points. So basically, because of back testing, I can say that max loss should be 50 points, (provided future is like the past). It will happen rarely. Incidentally, while back testing, I used percent deviation rather than absolute deviation because there were times when Nifty was 6000 only.

Now comes the question, why limit max loss to 300? When historically it has been about 50? It is because I would like peace of mind. What if terrorist plays some big mischief somewhere and Nifty goes in free fall during opening session? 300 point loss once in a while I can take.

What do the seniors think? Right now I am testing this on NSE "pathshala" simulator with real prices but imaginary rupees

Thanks for your valued feedback in anticipation

Amy
Click to expand...
Good idea.

But the problem is slippage and loss as we are adjusting position.

Give here real time trade. Do it for two months. Let's see how it goes.
 
T

tradedatrend

Well-Known Member
#4
#4
AmeliaEarhart2 said:
I have done a back testing of 600 trading days. There was only one large gap down in those days (at 250 points ) and 1 large gap up at 175 points.
Click to expand...

Well within 1 year (perhaps last year august) 500 point intraday fall was there too.

So would we be adjusting position for 5 time in a same day?

Many a times market goes 100/200 up or 100/200 down and the reverses and gets flat, so would we be adjusting position twice / thrice on such days ?

Since options are current month OTM and Deep OTM hence you should not face any liquidity problem, but manual shifting of position EVERY-TIME is a cumbersome task which includes slippage on each shifting too.

Moreover risk reward ratio is negatively skewed, i.e. at the opening of series you would be selling 200 point OTM CE & PE @ 60/70 = ~130, and buying ~or ~20-25 thus maximum net gain of 100-110 points whereas in worst case scenario loss could be in the tune of 300 points.

Although if you could manage to automate this trade i.e. suppose from 8500 you initiated this trade whenever market touches 100+/- positions get shifted automatically without manual intervention - then you can try it with a small capital.

Given the OTM & Deep OTM options - slippage in case of automated shifting should not be really very high unless trade occurs between 9:15-9:25 or 3:20-3:30.
 
AmeliaEarhart2

AmeliaEarhart2

New Member
#8
#8
NOTICE - What I am writing here is what I think, and may not be true. I am only getting it checked by seniors. So members, please do not consider this as gospel truth

Shubadip,

You asked for an example. I will give one with explanation. Can you check if it is OK?



Consider this example of call/put option prices

ATM = 130
100 away = 100
200 away = 75
300 away = 55
400 away = 40
500 away = 30
600 away = 22

Now when I initiate a condor, I will Receive the following

for Nifty + 200 call sold = 75 (recd)
For Nifty minus 200 put sold = 75 (recd)
for Nifty + 500 call bought = 30 (paid out)
for Nifty minus 500 put bought = 30 (paid out)
Total received = 75 + 75 - 30 - 30 = 90


Let Nifty move up by 100 points with vol not changing and theta not changing. At this time my position is -

Nifty + 100 Call short
Nifty - 300 put short
Nifty + 400 Call Long
Nifty - 600 put long

I liquidate the position at -

for Nifty + 100 call bought = 100 (paid out)
For Nifty minus 300 put bought = 55 (paid out)
for Nifty + 400 call sold = 40 (recd)
for Nifty minus 600 put sold = 22 (recd)
Total paid out = 100 + 55 -40 - 22 = 93


I initiate new position at 90.

So I have a new position EXACTLY like my old position, but in the process I LOST 93 - 90 = 3 Rs.

This means that per 100 position move, without considering change in vol and theta, I lose Rs 3. But this loss is for a particular vol. If I start out with a higher vol, and it is unchanged throughout the transaction, the loss per 100 point move will be much higher. But the initial amount received from the condor will be higher too.

Now come the question of vol increasing decreasing in between the transaction. That can dramatically change the buy/sell price and affect the profits. But any loss in profit for the first sell-buy pair is offset buy a gain in profit for the next sell-buy pair. Remember, we are selling and buying at the same time. Finally, as we approach expiration and time decay takes over, everything will be decayed.

Thus, our loss is about 3-7 Rs per 100 point change. Our initial receipt from the condor is 90 Rs. What are the chances of a profit at expiry? Pretty good I think

Amy
 
Last edited:
Subhadip

Subhadip

Well-Known Member
#9
#9
AmeliaEarhart2 said:
NOTICE - What I am writing here is what I think, and may not be true. I am only getting it checked by seniors. So members, please do not consider this as gospel truth

Shubadip,

You asked for an example. I will give one with explanation. Can you check if it is OK?



Consider this example of call/put option prices

ATM = 130
100 away = 100
200 away = 75
300 away = 55
400 away = 40
500 away = 30
600 away = 22

Now when I initiate a condor, I will Receive the following

for Nifty + 200 call sold = 75 (recd)
For Nifty minus 200 call sold = 75 (recd)
for Nifty + 500 call bought = 30 (paid out)
for Nifty minus 500 call bought = 30 (paid out)
Total received = 75 + 75 - 30 - 30 = 90


Let Nifty move up by 100 points with vol not changing and theta not changing. I liquidate the position at -

for Nifty + 100 call bought = 100 (paid out)
For Nifty minus 300 call bought = 55 (paid out)
for Nifty + 400 call sold = 40 (recd)
for Nifty minus 600 call sold = 22 (recd)
Total paid out = 100 + 55 -40 - 22 = 93


I initiate new position at 90.

So I have a new position EXACTLY like my old position, but in the process I LOST 93 - 90 = 3 Rs.

This means that per 100 position move, without considering change in vol and theta, I lose Rs 3. But this loss is for a particular vol. If I start out with a higher vol, and it is unchanged throughout the transaction, the loss per 100 point move will be much higher. But the initial amount received from the condor will be higher too.

Now come the question of vol increasing decreasing in between the transaction. That can dramatically change the buy/sell price and affect the profits. But any loss in profit for the first sell-buy pair is offset buy a gain in profit for the next sell-buy pair. Remember, we are selling and buying at the same time. Finally, as we approach expiration and time decay takes over, everything will be decayed.

Thus, our loss is about 3-7 Rs per 100 point change. Our initial receipt from the condor is 90 Rs. What are the chances of a profit at expiry? Pretty good I think

Amy
Click to expand...
Nifty minus 200 call and nifty plus 200 call at same price ??

Give us a real example bro. Not hypothetical.

U can get data of NSE nifty option in NSE website.
 
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