Strategy for Low Risk Moderate Reward

[pos_trader]

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

 

[pos_trader]

I will add few points to my own post above.

1. This strategy is for people who doing full time job or business. This is not evenly remotely related to day trading. This just requires overall knowledge of market related MAJOR events like RBI policy, budget, etc. and no tech analysis is needed.

2. A wider BRIDGE of 800 points may result in a lower profit of say 4% but with much lower risk. So take your pick.

3. Different brokers have different policy reg. M2M debit on options. Try to negotiate on this front (it is possible).

Pls study the EoD prices of various NIFTY options for Feb and give a well-studied reply.

Thanks
pos_trader

 

[Smart_trade]

I have following points to make :

1) The deep in the money calls and puts have less time value so normally 8600 call and 9200 puts should give 640-650 points ( the EOD prices today indicate that it is 644 as on today ) Premium mentioned by you is very high..need to check up on some months.

2) If the market crosses any of the boundries, then it is best to wind up the trade with may be a small loss...protecting it with a futures is very difficult. I have tried it and in theory it looks great but in practice few stoplosses wipe off the premium we get over and above 600 points.

Smart_trade

 

[pos_trader]

Dear Smart_Trader:
Thanks for your well-studied reply. My comments:

1. On 4 Feb 2015 the total premium was 690-695 but I spent one hour in front of screen to form a pair (as opposed to usual 1 minute required for entering two trades) so as to increase the premium collected to 720. The premium has died down from 690 to 645 in last 8 days. I hope that clarifies point 1.

2. Your argument on closing the trade (with small loss) is well taken. If the BRIDGE is formed at the beginning of the contract then even 800 points wide BRIDGE can give 4% profit. With this only WILD fluctuation in NIFTY will result in early closure which would happen only once in 18-24 months.

(Reminder - Always target reasonable RoI and you will emerge as winner).

Thanks again.
pos_trader

 

[mterminator]

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.


pos_trader

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?

 

[Somatung]

@pos_trader

You mentioned in post two in point one that this strategy is for:

1. This strategy is for people who doing full time job or business. This is not evenly remotely related to day trading. This just requires overall knowledge of market related MAJOR events like RBI policy, budget, etc. and no tech analysis is needed.

Fine.

Here some points to consider and which you did not tell much about it:

- Stop loss and how will you do it specially on the put side, as this is your absolute weak and absolute high risk leg?

- How to consider that it is the right time to do so and not the time to buy long legs?

- How to decide the range with out knowing on which side to have the bigger part of the "Bridge"?

Absolute serious questions to your absolute serious question you have to have a clear answer to it if you want to trade this strategy with real money.

Take care / Dan

By the way: I had a look at your strategy with my software and those questions are build on the result of this and on the system how your market works with no pre market orders.

 

[bpr]

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

 

[Somatung]

@bpr

I would call it: Modified very high risk short gut, as his risk on the put side on the 04.02 2015 (Post one of him which tells about when he had a look at this trade) was much higher compare to his short call leg. Check any chart and the range in Nifty on those day and you will see the risk he took on the put side. It was not equal like in your link, instead very deep itm on the put side and very less itm on the call side, as he expected market to go up.

Here the rules have to be clear and the risk token has to be defined with such trades, as this is absolute high risk for not pros and traders with not deeper market informations or event expectations, proved on facts and past experience trading instinct.

 

[comm4300]

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[bpr]

No STT issue as he is selling the options.

Letting LONG options expire ITM invites heavy STT on expiration.

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