SH's MArket Correction Prediction Strategy
- Thread starter Tradewithhunter
- Start date
[First of all, the trades are done in options. If you invest 50K in buying options, you can expect the options to become 60K to 70K within a month (sometimes more!) and hence 25% - 50% returns on investment. Anyone ready to invest larger amounts, My suggestion would be to start booking gradual profits starting from 10% onwards]
Dear SH,
Apologies for not reverting earlier as I was a little tied up.
The platform of this option buying strategy is the premise that the Nifty hates the 100 EMA and would shoot in either direction on approach.[ which is also the basic requirement to profiting from buying options,that the underlying should make a large move quickly to over ride time decay].
Since profit is calculated in terms of percentage to capital deployed,the same would increase if the capital outlay decreases in relation to capital inflow.
My suggestion is that we can increase the profit percentage by decreasing the capital outlay by legging in a short put.
In our instance the Nifty on 03-11-09 closed at 4536
The 4500 put was at 121, and 4800 call at 42 [ EOD]
The total points in buying this pair is ....163 [outflow]
Now on 11-11-09 our Nifty was at 5014 [EOD]
4500 put was at 11, and 4800 call at 249 [EOD]
On selling our pair we would have received 260 points[ inflow]
A PROFIT OF 60%
Now since the nifty is moving down towards the 100 EMA the short term outlook would have turned bearish.In such a scenerio the IV of the put would be higher as the demand for puts would on the higher side.Hence alternatively
on 03-11-09 we could do the following.
Sell 4300 put @ 58
Buy 4500 put @ 121 and buy 4800 call @ 42.
The total now points engaged in this setup are 105 [outlay]
ON 11-11-09 we sell the 4500 put @ 11, sell the 4800 call 249 and
Buy back the 4300 put @ 6 [EOD]
Total points gained......254 .Hence profit is now 140%
Essentially we have created a bear spread by selling the 4300 put thereby reducing our capital outlay.Although the same could have been done on the call side by creating a bull call spread we avoid doing that because the IV of the calls being on the lower side [5000 call @16 only] the material impact would have been less than significant, and also because spreads don't allow quick exit and secondly as I gather from the presentation the possibility of Nifty reverting back to it's primary trend after touching the 100 EMA is slighty higher and in the above instance the Nifty did exactly that thereby allowing us a quick exit.
On the other hand if Nifty had continiued it's downward journey after the 100 EMA the bearish trend would have got more pronounced and intense,in that scenerio the bear spread would have eventually earned us
200 points [ 4500 put- 4300 put]. A profit of 90%.
The lowdown of this alternative is that the exit from the put side may not be quick.We may have to hold on to that position till expiry or there about and that's if Nifty stays down, rest allow all possibilitise remain the same.
The alternative if applied to the March exemple would result in the following
On 25-03-09 the Nifty was at 2990 [EOD]
Sell 2600 put @ 29 [april]
Buy 2800 put @ 62 and Buy the 3100 call @ 81. [april]
Total points engaged...114 [outflow]
On 02-04-09 the Nifty was at 3222 [EOD].We Buyback the 2600 put@ 9.80
Sell the 2800 put @20 and Sell the 3100 call @ 192 .Total points earned are
203 [Inflow].A profit of about 80% in about 6 trading sessions.The vanilla application would have fetched us about 45%
The choice then is between higher profit percentage, quick exit from one side but slightly higher stay on the other side, and between lower profit percentage [RELATIVELY SPEAKING THAT IS] and quick exit.
THANKS FOR SHARING THE 100 EMA FUNDA.
P.S There are other strategies whereby the capital outlay can be further reduced but would involve risk management of higher order as the dynamics would change significantly
o
Dear SH,
Apologies for not reverting earlier as I was a little tied up.
The platform of this option buying strategy is the premise that the Nifty hates the 100 EMA and would shoot in either direction on approach.[ which is also the basic requirement to profiting from buying options,that the underlying should make a large move quickly to over ride time decay].
Since profit is calculated in terms of percentage to capital deployed,the same would increase if the capital outlay decreases in relation to capital inflow.
My suggestion is that we can increase the profit percentage by decreasing the capital outlay by legging in a short put.
In our instance the Nifty on 03-11-09 closed at 4536
The 4500 put was at 121, and 4800 call at 42 [ EOD]
The total points in buying this pair is ....163 [outflow]
Now on 11-11-09 our Nifty was at 5014 [EOD]
4500 put was at 11, and 4800 call at 249 [EOD]
On selling our pair we would have received 260 points[ inflow]
A PROFIT OF 60%
Now since the nifty is moving down towards the 100 EMA the short term outlook would have turned bearish.In such a scenerio the IV of the put would be higher as the demand for puts would on the higher side.Hence alternatively
on 03-11-09 we could do the following.
Sell 4300 put @ 58
Buy 4500 put @ 121 and buy 4800 call @ 42.
The total now points engaged in this setup are 105 [outlay]
ON 11-11-09 we sell the 4500 put @ 11, sell the 4800 call 249 and
Buy back the 4300 put @ 6 [EOD]
Total points gained......254 .Hence profit is now 140%
Essentially we have created a bear spread by selling the 4300 put thereby reducing our capital outlay.Although the same could have been done on the call side by creating a bull call spread we avoid doing that because the IV of the calls being on the lower side [5000 call @16 only] the material impact would have been less than significant, and also because spreads don't allow quick exit and secondly as I gather from the presentation the possibility of Nifty reverting back to it's primary trend after touching the 100 EMA is slighty higher and in the above instance the Nifty did exactly that thereby allowing us a quick exit.
On the other hand if Nifty had continiued it's downward journey after the 100 EMA the bearish trend would have got more pronounced and intense,in that scenerio the bear spread would have eventually earned us
200 points [ 4500 put- 4300 put]. A profit of 90%.
The lowdown of this alternative is that the exit from the put side may not be quick.We may have to hold on to that position till expiry or there about and that's if Nifty stays down, rest allow all possibilitise remain the same.
The alternative if applied to the March exemple would result in the following
On 25-03-09 the Nifty was at 2990 [EOD]
Sell 2600 put @ 29 [april]
Buy 2800 put @ 62 and Buy the 3100 call @ 81. [april]
Total points engaged...114 [outflow]
On 02-04-09 the Nifty was at 3222 [EOD].We Buyback the 2600 put@ 9.80
Sell the 2800 put @20 and Sell the 3100 call @ 192 .Total points earned are
203 [Inflow].A profit of about 80% in about 6 trading sessions.The vanilla application would have fetched us about 45%
The choice then is between higher profit percentage, quick exit from one side but slightly higher stay on the other side, and between lower profit percentage [RELATIVELY SPEAKING THAT IS] and quick exit.
THANKS FOR SHARING THE 100 EMA FUNDA.
P.S There are other strategies whereby the capital outlay can be further reduced but would involve risk management of higher order as the dynamics would change significantly
o
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forest, how can the cap outflow is lower ? in fact its much much higher. in india selling options needs magin money (same as 1 lot future) even though its covered by a buy call
i would never recommn selling options in india (naked or covered) for various reasons (mostly broker related). SH idea of buying a strangle would be simple and need less money and cover both directions
i would never recommn selling options in india (naked or covered) for various reasons (mostly broker related). SH idea of buying a strangle would be simple and need less money and cover both directions
Dear bandlab2
The margin requirement[half of nifty future in this case] has not been taken into consideration[how conveniet of me]. Yes the strangle application is simpler and provides quick exit.But personelly I would have created a ladder on the put side.
Debit spreads such as bull call are safe enough [debit incurred is the only risk]
Naked option selling involves risk management of high degree and is the domain of seasoned option traders. I do not prefer buying options and only do that to hegde. But like they say 'To each his own'.
Happy trading and good luck buddy.
The margin requirement[half of nifty future in this case] has not been taken into consideration[how conveniet of me]. Yes the strangle application is simpler and provides quick exit.But personelly I would have created a ladder on the put side.
Debit spreads such as bull call are safe enough [debit incurred is the only risk]
Naked option selling involves risk management of high degree and is the domain of seasoned option traders. I do not prefer buying options and only do that to hegde. But like they say 'To each his own'.
Happy trading and good luck buddy.
Last edited:
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