Future-Option Combo strategy for almost risk free profits.

ravi_s_ghosh · #1 3rd December 2007, 08:41 PM

I dont trade in F&O's nor do I trade much in cash too.

I just struck with this idea and thought of posting it here to have all you guys' opinion on it.

Supose a certain stock or the market in general is in a certain trend, uptrend or downtrend, not moving sidewise. Lets assume its going upward. Now, you buy a future (of stock or nifty) at certain price, say Rs X and you buy same value (total value of future contract) of put option at strike price of Rs X and pay premium of Rs Y. Now, if the price moves up as predicted by you and you close your future position at price Z, then you make profit on your future contract and you lose preminum paid on put contract since it expires worthless. So, the effective profit will be Z-X-Y and you will brekeven at X+Y price of the future contract. In the unfortunate event of your predictions going wrong and your stock or nifty declines, so you will make a loss on the future contract, but you can exercise your put option and sell the stocks or nifty at Rs X effectively nullifying your loss in future contract. In this case, you would only lose the premium paid in put contract.

The reverse can be also true in case stock or markets is trending downward and you sell a future contract and buy a call option and protect yourself from increase in prices.

Could you guys please comment on this strategy. Are my assumptions correct?

sudoku1 · #2 3rd December 2007, 08:48 PM

Quote:

Originally Posted by ravi_s_ghosh

I dont trade in F&O's nor do I trade much in cash too.

I just struck with this idea and thought of posting it here to have all you guys' opinion on it.

Supose a certain stock or the market in general is in a certain trend, uptrend or downtrend, not moving sidewise. Lets assume its going upward. Now, you buy a future (of stock or nifty) at certain price, say Rs X and you buy same value (total value of future contract) of put option at strike price of Rs X and pay premium of Rs Y. Now, if the price moves up as predicted by you and you close your future position at price Z, then you make profit on your future contract and you lose preminum paid on put contract since it expires worthless. So, the effective profit will be Z-X-Y and you will brekeven at X+Y price of the future contract. In the unfortunate event of your predictions going wrong and your stock or nifty declines, so you will make a loss on the future contract, but you can exercise your put option and sell the stocks or nifty at Rs X effectively nullifying your loss in future contract. In this case, you would only lose the premium paid in put contract.

The reverse can be also true in case stock or markets is trending downward and you sell a future contract and buy a call option and protect yourself from increase in prices.

Could you guys please comment on this strategy. Are my assumptions correct?

>50% correct...the delivery brokerage will kill most of the profits in cash.
> a month has @ an average 20 trading sessions...so a hit on bulls eye is needed bcause time decay will erode most of the options gains....

THETRADER · #3 3rd December 2007, 10:09 PM

Isnt that equivalent to buying a CALL (or PUT)? In this case there is no margin to be paid on futures position!
There are lots of strategies. Some risk free ones are,

1. Buy Futures, Buy PUT and short CALL (Same Strike)

2. Sell Futures, Sell PUT and Buy CALL (Same Strike).

Your profit in the first case is, CALL - PUT - (Futures - Strike). You need to take the trade only when it's positive (You've to make profits, dont you?). You can work it out for the second one. Your profits are going to be limited (very limited), just better than interest, and, is for Very large volume players.

BTW, your option on indices cannot be exercised as they are Euro type. Exercising an option is normally a last resort, as selling the option in the market will give you time value premium in addition to just the intrinsic value which you would get by exercising.

www.cboe.com has (or had? I havent looked at it for quite sometime), some good learning material on Options (Chicago Board of Options Exchange).

munde_77 · #4 3rd December 2007, 11:26 PM

Quote:

Originally Posted by ravi_s_ghosh

I dont trade in F&O's nor do I trade much in cash too.

I just struck with this idea and thought of posting it here to have all you guys' opinion on it.

Supose a certain stock or the market in general is in a certain trend, uptrend or downtrend, not moving sidewise. Lets assume its going upward. Now, you buy a future (of stock or nifty) at certain price, say Rs X and you buy same value (total value of future contract) of put option at strike price of Rs X and pay premium of Rs Y. Now, if the price moves up as predicted by you and you close your future position at price Z, then you make profit on your future contract and you lose preminum paid on put contract since it expires worthless. So, the effective profit will be Z-X-Y and you will brekeven at X+Y price of the future contract. In the unfortunate event of your predictions going wrong and your stock or nifty declines, so you will make a loss on the future contract, but you can exercise your put option and sell the stocks or nifty at Rs X effectively nullifying your loss in future contract. In this case, you would only lose the premium paid in put contract.

The reverse can be also true in case stock or markets is trending downward and you sell a future contract and buy a call option and protect yourself from increase in prices.

Could you guys please comment on this strategy. Are my assumptions correct?

Why dont u try on covered calls

rajsingh · #5 4th December 2007, 06:50 AM

Quote:

Originally Posted by THETRADER

Isnt that equivalent to buying a CALL (or PUT)? In this case there is no margin to be paid on futures position!
There are lots of strategies. Some risk free ones are,

1. Buy Futures, Buy PUT and short CALL (Same Strike)

2. Sell Futures, Sell PUT and Buy CALL (Same Strike).

Your profit in the first case is, CALL - PUT - (Futures - Strike). You need to take the trade only when it's positive (You've to make profits, dont you?). You can work it out for the second one. Your profits are going to be limited (very limited), just better than interest, and, is for Very large volume players.

BTW, your option on indices cannot be exercised as they are Euro type. Exercising an option is normally a last resort, as selling the option in the market will give you time value premium in addition to just the intrinsic value which you would get by exercising.

www.cboe.com has (or had? I havent looked at it for quite sometime), some good learning material on Options (Chicago Board of Options Exchange).

A conversion or arbitrage is what you mean. The opportunities are rare and margins extremely slim. Done by those who don't pay or pay marginal brokerage. (read floor traders)

marcus · #6 8th December 2007, 02:36 PM

I agree with Singh saab arbitrage will give you risk free (literally .... for all practical purposes) returns, and contrary to popular belief of being in high single digits it can and in fact often does go to double digit returns, there are financial firms which solely arbitrage and do resonably well.

Have you ever wondered why the cost of carry never goes beyond certain limits, its because once the difference between the spot and futures price is substancial arbitrageurs step in and start buying and selling thereby reducing the gap, if you remember a while ago we saw this in IFCI, the OI went on increasing at the same time the difference between the spot and futures increased and once the difference was large enough to exploit the arbitrageurs stepped in and the spot price started shooting up thereby keeping the cost of carry in check.

Actually the cost of carry can never be correctly evaluated taking into account interest rate time value, expected corporate action etc, the same with options whether its black - scholes or the polynomial model these things can never gauge the most imp factor which is market sentiment. They are used primarily for risk evaluation purposes.

As Mr. singh has correctly pointed out opportunities are rare, though there are many firms who do practice it not necessarily floor traders.

marcus · #7 8th December 2007, 09:42 PM

faltiie what do you mean by "spreads" do you mean taking opposite positions in two differentcontract periods as in spread trading in futures? Can you please elaborate what you mean?

THETRADER · #8 12th December 2007, 02:59 PM

Quote:

Originally Posted by faltub

Well, bought fut, bought put and sold call. Now, my future is rising but one side I am losing my premium on put + other side my short call is enough to increas my BP. If the delta of my put and call is nearly .5 I will lose 1 on both with increase of 1 point in future, If fut went down I would loose 1 point on fut, and earn 1 (.5+.5) on short call and long put but net profit would 0,

visa versa the same thing would be applicable with other strategy (I didn’t gone through it) and the brokerage for 3 contracts would be a reward of headging.

Cheers
F

This is a zero risk strategy, absolutely ZERO RISK strategy, and, your profits are limited, and is decided on entry, Period. (Including the commissions). You take the trade only if it is profitable, and, the returns are better than interest. It is for high volume players. You just take the trade and relax till expiry.

Futures go up - takes care of call going up. Futures go down, Long Put takes care of the futures loss. Contact me if you still have doubts.

hidilip1975 · #9 20th December 2007, 08:52 PM

Although in thoery it works well .there are a couple of aspects .

1-during the start of the month put and call options have extremely high premium

2 lot of put and call options except for highly liquid stocks like the reliance group-both ifci,etc are not liquid

3 therefore if you have the money -the a combination of futures and stocks will work

aca_trader · #10 24th December 2007, 07:33 PM

Quote:

Originally Posted by faltub

Zero risk+zero Profit.

Not Really, It's an arbitrage strategy. So gives some profit. Ofcourse not suitable on a low capital base.

Regards,
--Ashish