Re: Very Simple Method to Earn Money from Options without knowning anything about opt
Let me start with my example of buying 2 kg sugar and selling 2 kg sugar. However, it is important to note that there are four types of sugar available:
(1) Brand A at Rs. 254.45
(2) Brand B at Rs. 218.10
(3) Brand C at Rs. 101.50
(4) Brand D at Rs. 80
We purchase 1 kg each of Brand A and Brand D (Highest Quality and Worst Quality), it cost us Rs. 334.45. Then, we sell 1 kg each of Brand B and Brand C (Sell both Medium Quality Brands) and get 319.60. The net result is we lose Rs. 14.85.
Now, the question is why should we do the transaction where we are losing Rs. 14.85. The simple answer is we are not buying and selling sugar, we are buying and selling options. Let us replace Sugar with Options:
(1) Brand A is Nifty Option 6100 CE 28 Nov 2013 (Read Strike Price of 6100 C means Call E means European style and 28 Nov 2013 means option expiring on 28 Nov 2013). We purchase 1 lot at 254.45 (This is the price as per NSE EOD of 30 Oct 2013).
(2) Brand B is Nifty Option 6150 CE 28 Nov 2013. We sell 1 lot at 218.10 (Price as per NSE EOD of 30 Oct 2013)
(3) Brand C is Nifty Option 6350 CE 28 Nov 2013. We sell 1 lot at 101.50 (Price as per NSE EOD of 30 Oct 2013)
(4) Brand D is Nifty Option 6400 CE 28 Nov 2013. We buy 1 lot at 80 (Price as per NSE EOD of 30 Oct 2013)
Though, tomorrow, when you execute this, the price may differ. For the purpose of computation, we presume that you are able to purchase and sell at the price given above.
From the above, it is clear that we have purchased 2 lots of options and sold 2 lots of options. All four options are call (not put).
In the process we have paid total amount of 14.85 * 50 = Rs. 742.50 as each point cost Rs. 50.
Now, we take different scenarios:
(1) If Nifty remains between 6150 and 6350, we earn net points 35.15 (compute 50-14.85). So, the net profit will be Rs. 1,757.50 after covering Rs. 742.50.
(2) The two break even points are 6,114.85 and 6,385.15 where we do not earn anything. No Profit, No Loss.
(3) If Nifty goes below 6,114.85, then we lose Rs. 742.50 as paid at the time of buying and selling.
(4) If Nifty goes above 6,385.15, then, also we lose Rs. 742.50.
In summary, the maximum loss is Rs. 742.50 + Broker's Commission + Transaction Tax. (Approx Rs. 1,000)
The maximum profit is Rs. 1,757.50 - Broker's Commission - Transaction Tax. (Approx Rs. 1,500).
If you execute 5 lots, then the maximum loss will be Rs. 5,000 whereas the maximum profit is Rs. 7,500.
The above strategy is called "Long Condor". There are may variations to this. There are strategies where earning potential is very high and lose is limited. The strategy given is balanced because sum of buying striking points and sum of selling striking points are equal (both are 12,500). The above strategy is also neutralized because the present Nifty (spot) is in the central value of all four striking points. The Nifty closed today (30th October 2013) at 6,251.70.
If we expect Nifty to go up, we can create balanced strategy in such a way, that lower striking point is 6,200 and upper striking point is 6,600.
Below, I give computation for different values of Nifty:
6,000 -254.45 218.10 101.50 -80.00 -14.85
6,050 -254.45 218.10 101.50 -80.00 -14.85
6,100 -254.45 218.10 101.50 -80.00 -14.85
6,150 -204.45 218.10 101.50 -80.00 35.15
6,200 -154.45 168.10 101.50 -80.00 35.15
6,250 -104.45 118.10 101.50 -80.00 35.15
6,300 -54.45 68.10 101.50 -80.00 35.15
6,350 -4.45 18.10 101.50 -80.00 35.15
6,400 45.55 -31.90 51.50 -80.00 -14.85
6,450 95.55 -81.90 1.50 -30.00 -14.85
6,500 145.55 -131.90 -48.50 20.00 -14.85
Below, I give values of Delta, Gamma, Theta, Vega and Rho:
Delta -0.0046
Gamma -0.0001
Theta 0.2420
Vega -0.7072
Rho -0.0341
Though, in above strategy, you do not require to compute the above, these are very important, if you want to trade in options. I shall explain about Delta, Gamma, Theta, Vega and Rho at a later stage.
Summary:
The maximum loss is Rs. 742.50 + Broker's Commission + Transaction Tax. (Approx Rs. 1,000 per lot)
The maximum profit is Rs. 1,757.50 - Broker's Commission - Transaction Tax. (Approx Rs. 1,500 per lot).
Note: If you take longer spread, the profit will get reduced but the probability of profit will become higher.
Disclaimer: I shall not be responsible in case of any loss. Neither I share profit nor loss.
