Strategy for Low Risk Moderate Reward

[Purushotham]

you mean selling deep in the options and not out of the money?

Also , what if the index starts moving in one direction early during the month? We can convert it to covered position by unwinding the profit leg and adding futures.
e.g. in your case Nifty recently went to ~8,500, we can convert the position to Covered Put by unwinding Call side (profit) and short Futures @ level equal to original premium received on put + strike price of put?

Please explain in detail with numbers.
Thnaks,

 

[trader_ks]

It is called short gut

http://www.theoptionsguide.com/short-guts.aspx

I tried it long back.

Two things if you going to let it expire you will have to pay the STT and all which will eat into profits.

There are lot of algo running which will pick up these trades before you

ITM has wider spread so we will get bad fill while entering and exiting so eroding profits

Apart from the usual risk.

Good Luck

I think STT(for option expired) will be for buy option only not for sell option.

 

[pos_trader]

Hello all

I am really thankful all the boarders for their responses ... there is really lot to learn from the forum members .... am happy that I posted here.

Apologies for using wrong term ... what I should have said in the original post is "DEEP IN THE MONEY" call / put and not out of the money.

Clarifications:
1. Stoploss : Assume that in first few days of the contract NIFTY is at 8900. At that time sell 9200 PUT and 8600 CALL creating a 600 points wide BRIDGE. (800 wide is also possible ... I will try next month). Take 1-2 hrs to sell so as to take benefit of 15-20 point fluctuation in NIFTY so that max premium can be collected. When I sold earlier this month the spread in each was only Rs 2 so that's not a big problem (this answers one of the questions raised).

Assume that on each side u manage to collect Rs 360 (what I collected on 04-02.2015 is not imp here).... total Rs 720. With this .... 8480 to 9320 is NO LOSS ZONE. If NIFTY drifts outside this zone then there is a good chance that it will return back into zone in next 3-4 days (remember when u took position it was 8900). This is a month long game. THE ONLY EXCEPTION IS A MONTH WITH VERY GOOD OR VERY BAD NEWS (once in 18-20 months) in which case it would be better to close position around 8400 or 9400 (as the case may be) with a loss of 80 points (i.e. Rs 2000 per lot). But over a period of 24 months u would still be in a profit.

2. STT: This is levied only on one side (SELL side) but it is only a small amount compared to profit of Rs 3000.

Signing off for now. But Pls do respond with your queries.

pos_trader

 

[test123]

Not looking down on you of anything..
bro do paper trade for this month using the technique u mentioned and let us know result at end of expiry.

question is why do we trade option ? (90% ppls will answer Fat profit)

To be honest i would say it;s dumb.
whats wrong with FD if all u aim is just 10%... per month
shh this sucks i do tend to aim 10% per day in option lool

last expiry we saw 1000 points move in nifty.if u played using that i am sure bank would have been empty as R.s 4 call went way 110 lool

What i learnt from option is never be a writer in option ... unlimited risk.

Again thats only My opinion...

 

[pos_trader]

@Tester123: First things first ... bank FD return in 10% per year and not per month.... that stmt alone speaks a lot about your personality.

Secondly, I have already taken position in Feb contract and there is a 90% chance that NIFTY will expire between 8600 and 9200 this month giving me 10% profit (or I may close position earlier with 6 to 8% profit).

Third, this thread is not for day traders.

Fourth, it is common knowledge that if u buying options and then selling then there is 80% chance of making loss.

Fifth, this is the last time I have responded to your post. Next time I am going to ignore (mature boarders will agree with me).

pos_trader

 

[abcpankaj]

Hello

Writing in this forum after a gap of SIX years.

I have found a very useful strategy to make a good monthly income. But it is not discussed here earlier (at least I could not locate).

It can be named as WIDE REVERSE STRANGLE. This involves selling deep out of the money CALL and selling deep out of the money PUT. Keep the strike prices about 600 - 800 points apart for high safety. Returns??? 10% per month.

Sounds too good to be true?

Here is a live example:On 4 Feb 2015 I managed to collect a total premium of Rs 720 by selling 8600 CALL and 9200 PUT. If the NIFTY expires in Feb between 8600 and 9200 then I will have to give back exactly Rs 600 (i.e. gap between 9200 and 8600), leaving with me a profit of Rs. 120 per pair (i.e. Rs 120 x 25 = Rs 3000 in Rupee terms).
Investment: One pair means two lots Rs 42000/- minus the premium collected (Rs 720 x 25 = 18000/-) i.e. 24000/- . To this add 6000/- to account for M2M cushion. Thus, on an investment of Rs. 30,000/- there is a very good chance of getting Rs 3000/- in one month. Trade can also be closed few days before expiry for a slightly lower profit (say 2500 instead of 3000).
(If towards expiry NIFTY goes outside the 600 point range then buy or sell NIFTY futures to balance the trade).

Has anybody tried this strategy?

ONLY SERIOUS REPLIES PLEASE. PLS AVOID MAKING CASUAL ONE LINE COMMENTS (Sorry that I had to say this).

pos_trader

India vix was at 20 on 4 Feb 2015 which was around highest it has been in preceding 6-8 months.Premiums collected (& hence yield of this strategy ) will fall if IV retreats (6-8 month low being 12) .

 

[Verde]

Apologies for using wrong term ... what I should have said in the original post is "DEEP IN THE MONEY" call / put and not out of the money.

If Nifty at 8800, then the 9200 call and 8400 call have the same time value. It makes zero difference which one you sell since the risk reward graph and breakeven points are the same for a sold straddle.
Sell 9200 Ce + 8400Pe = Sell 8400 Ce + 9200 Pe

 

[mterminator]

If Nifty at 8800, then the 9200 call and 8400 call have the same time value. It makes zero difference which one you sell since the risk reward graph and breakeven points are the same for a sold straddle.
Sell 9200 Ce + 8400Pe = Sell 8400 Ce + 9200 Pe

I beg to differ, as far as my knowledge goes,
Sell 9200 Ce + 8400Pe = Sell 8400 Ce + 9200 Pe only if Rate = 0%


Below values are from NSE site (have taken avg of Bid and Ask)
Sell 9200 Ce + 8400 Pe = 12.5+10.8 = 23.3
Sell 8400 Ce + 9200 Pe = 457+355 - 800(strike difference) = 12


In-fact, further in the money put options have negative time value because rate is not equal to zero . For e.g.
9000 pe = 187 (intrinsic value = 200, time value = -13?)
9100 pe = 266 (intrinsic value = 300, time value = -34?)


Tried to plot Time value across strikes for put and call using Black Scholes formula . Put and Call graph exactly overlap each other at R = 0 %.
However for R = 10% , Put time values goes negative for deep in the money options.

Conclusion = Selling Out of money is better thn selling equivalent In the money options?

Seniors can pls comment on above?

 

[Somatung]

If Nifty at 8800, then the 9200 call and 8400 call have the same time value. It makes zero difference which one you sell since the risk reward graph and breakeven points are the same for a sold straddle.
Sell 9200 Ce + 8400Pe = Sell 8400 Ce + 9200 Pe

@Verde

By the way: It is a short gut the talk is about and not a short straddle.

- Short Straddle: http://www.theoptionsguide.com/short-straddle.aspx
- Short Stranlge: http://www.theoptionsguide.com/short-strangle.aspx
- Short Gut: http://www.theoptionsguide.com/short-guts.aspx

I am clear it is a bit confusing with all those specific names. Never mind. Now what you tell about the risk reward graph in your examples is right, as the BE are the same with both pairs you mentioned. Even the PP is more or less the same.

Still, the reward is not the same with the itm options pair compare to the otm options pair. Mterminator has explained this very clearly in his way, so no need to do it again from my side.

An an other point is the trade Pos_trader mentioned, as his short put leg is very deep in the money on the 04. Feb.2015 compare to his short call leg, which is just a bit in the money. So the risk graph shows also this very clearly and here the BE are even different to any of your mentioned examples include the PP, which is lower compare to your showed pairs.

All in all: The trade from Pos_trader brings the most profit when he brings it home compare to any other trades mentioned so far in this thread. His risk on the put side is very high, even highest so far from all mentioned here.

@Mterminator

http://www.traderji.com/options/97567-strategy-low-risk-moderate-reward.html#post1049967 This is surely some thing of the best to handle the risk, or lets say stop loss in this strategy on each side. Also Pos_trader did mention this way in his first post even you also could do iit with options by converting the specific side into what ever like a simple debit or credit spread and so on.

@Abcpankaj

Your post is very important and points into the direction mentioned in this post http://www.traderji.com/options/97567-strategy-low-risk-moderate-reward.html#post1049973 when to enter short and when to enter long, as the answer to this point is the vola in the market.

Have a nice day / Dan

 

[Tamil Kumaran]

POS-
do you really trade only this????