Delta Neutral Strategy (Long Nifty @ Long Puts)

Hi Nautilus,

Thanks for posting profit and loss of the trade. You are showing a loss of mere Rs.9910.00, which is extremely a small percentage of the total bet. The reason for this loss is nothing else but your own bias of the market.

In a delta neutral trade, one should not have any bias at all. One should go into the trade with neutral bias, and as the market makes move, one should adjust the trade. Your bearish bias forced us to hold the long position of 2000 put options, but market never looked back. If you look the moves I suggested to you to take, first selling 400 short puts SP2350 was also to reduce the effect of your bearish bias. Secondly selling 200 short calls SP2480 as covered call against long position of 200 long futures further reduced our loss. I am quoting your comments here under along with my comments addressed to you and Joy Mitali in the previous posts.



My purpose is not to blame you for the loss at all. After all it is just a mock trade. The purpose is to make you understand as how the trade should be executed. In the coming days we are going to have greatest time loss on all the options. Since market has not gone thru the correction and has had a bullish run for almost ten trading days. It should be ready to make a correction any time. Now that we are loosing money we need to be aggressive in our approach (We will assume more risk in order to offset our losses). In order to break even we have to collect at least Rs.10, 000.00 as premium. So lets go and sell some put options to collect this premium. I would like to sell 1000 put options at this time at a price of no less than Rs.10.00 each. You look into the option chain and whatever strike price gives you Rs.10.00 premium, sell those put options. SP2380 or 2390 put options should give you that premium. Wait at least one hour after the market opens before executing your trade. If you see that market is correcting then wait little longer, purpose is to collect the most premium by selling the least strike priced put options

In the meanwhile think it thru and ask me any question that come to your mind, it apply to all the readers as well.

Regards,

Wastej

Wastej Hi:

I really appreciate your critical comments and I am learning from it, and thanks for your patience. I have been an out right trader all my life so this strategy is absolutely new and great for me!! I can see the pattern of the trade developing and I am grateful for hammering in my head that during delta neutral trade market bias should be discarded from the mind - but one can use it to ones advantage if the bias does appear - thanks for this lesson. I am also getting the idea as to how you are balancing the delta through Harish's trades and I think he is doing a great job.

As per your suggestions I have sold 1000 Sep puts(sp2400) @11.50. Both the 2380 and 2390 strikes were trading at 9 so I took a decision to go for 2400 strike.

Your critical critisism would be welcome.

Thanks once again

Regards

Nautilus

Ps: One question that does come to my mind is that since the option premia will decay very quickly from now on, so why did you suggest that I sell either 2380 or 2390 put and not higher sp puts say nearer the market or even higher than the market and collect higher premium? I am sure there is a reason for your recommendation which I haven't figured out as yet!!!

Thanks.

Hi Nautilus,

Very simple answer is higher the strike we sell greater the risk we assume. For a change if market obliges you by moving in the direction of your bias, we will be under water again. Because we do not know how much lower the market will move. Therefore, we try to keep the distance as much as possible. The time decay from now onwards will be greatest, this is true for all options, even the one we have sold. This is how we minimize the number of days we hold the risk in our hands. Keep in mind that we would like to capture the time value and not give it to other traders, as it is zero sum game.

Just remember that this strategy is all about “not assuming the risk.”

I hope I have answered the question. Please post the profit and loss of your trade so that all the readers can see and understand what is going on.

You can see how wrong you have been while predicting the market; you thought the market will get support at 2300 or even 2250. Actually the market is 200 points away from your support target. With this much wrong, one should be completely wiped out from the market, but your trade is still alive and going - this is the beauty of Delta Neutral Trade



Regards,

Wastej

Hi WAsteJ ,

Trade 2380 (i.e Trade where we Sold Nifty call option SP 2380 on 12th Sep. )

Trade Today :
Short 200 Nifty Put Option SP 2350 at 6.50
(As Nifty move down to 2466 i.e. 20 point from previous close)

To Day's prices (Name : open - high - low - LTP )
Nifty Fut : 2484.05 - 2503.00 - 2462.60 - 2486.60
Nifty Put SP 2340 : No Trade (prev. close 4.50)
Nifty Put SP 2350 : 6.00 - 7.00 - 4.50 - 4.70
Nifty Put SP 2360 : No Trade (prev. close 7)
Nifty Put SP 2380 : 6.50 - 10.20 - 6.50 - 10.20
Nifty Call SP 2380 : 125.00 - 125.00 - 125.00 - 125.00
Nifty Call SP 2460: 55.00 - 55.00 - 40.00 - 45.00

Profit / Loss calc.

Long Nifty Fut
Closed out profit of 32000.00
Plus open profit 400 * (2486.60 - 2347) = 55840.00
Total Profit (closed) 32000.00 + (open) 55840.00 = 87840.00

Long Nifty Put SP 2340
2000 * (4.50 - 46.00) = (Loss) 83000.00

Short Nifty Put SP 2350
200 * (6.50 - 4.70) = 360.00

Short Nifty Put SP 2360
200 * (26 - 7.00) = 3800.00

Short Nifty Put SP 2380
300 * (21 - 10.20) = 3240.00

Short Nifty call SP 2380
200 * (104 - 125.00) = (Loss) 4200.00

Short Nifty call SP 2460
200 * (29 - 45.00) = (Loss) 3200.00

Total Profit = 87840.00 - 83000.00 + 360.00 + 3800.00 + 3240.00 - 4200.00 - 3200.00 = 4840.00

Open Positions :
Long Nifty Future : 400
Long Put SP 2340 : 2000
Short Put SP 2350 : 200
Short Put SP 2360 : 200
Short Put SP 2380 : 300
Short Call SP 2380: 200
Short Call sp 2460: 200

Paid / Collected Primium in options

Long Put SP 2340 : 2000@ 46 : - 92000
Short Put SP 2350 : 200 @ 6.50: + 1300
Short Put SP 2360 : 200 @ 26 : + 5200
Short Put SP 2380 : 300 @ 21 : + 6300
Short Call SP 2380 : 200 @104 : + 20800
Short Call sp 2460 : 200 @29 : + 5800
Total : - 52600

Part 2 :

Trade 2480 (i.e Trade where we Sold Nifty call option SP 2480 on 12th Sep. )

Trade Today :
Short 200 Nifty Put Option SP 2350 at 6.50
(As Nifty move down to 2466 i.e. 20 point from previous close)


To Day's prices (Name : open - high - low - LTP )
Nifty Fut : 2484.05 - 2503.00 - 2462.60 - 2486.60
Nifty Put SP 2340 : No Trade (prev. close 4.50)
Nifty Put SP 2350 : 6.00 - 7.00 - 4.50 - 4.70
Nifty Put SP 2360 : No Trade (prev. close 7)
Nifty Put SP 2380 : 6.50 - 10.20 - 6.50 - 10.20
Nifty Call SP 2480 : 37.00 - 45.00 - 29.50 - 35.60
Nifty Call SP 2460: 55.00 - 55.00 - 40.00 - 45.00

Profit / Loss calc.

Long Nifty Fut
Closed out profit of 32000.00
Plus open profit 400 * (2486.60 - 2347) = 55840.00
Total Profit (closed) 32000.00 + (open) 55840.00 = 87840.00

Long Nifty Put SP 2340
2000 * (4.50 - 46.00) = (Loss) 83000.00

Short Nifty Put SP 2350
200 * (6.50 - 4.70) = 360.00

Short Nifty Put SP 2360
200 * (26 - 7.00) = 3800.00

Short Nifty Put SP 2380
300 * (21 - 10.20) = 3240.00

Short Nifty call SP 2480
200 * (33.85 - 35.60) = (Loss) 350.00

Short Nifty call SP 2460
200 * (29 - 45.00) = (Loss) 3200.00

Total Profit = 87840.00 - 83000.00 + 360.00 + 3800.00 + 3240.00 - 350.00 - 3200.00 = 8690.00

Open Positions :
Long Nifty Future : 400
Long Put SP 2340 : 2000
Short Put SP 2350 : 200
Short Put SP 2360 : 200
Short Put SP 2380 : 300
Short Call SP 2380: 200
Short Call sp 2460: 200

Paid / Collected Primium in options

Long Put SP 2340 : 2000 @ 46 : - 92000
Short Put SP 2350 : 200 @ 6.50 : + 1300
Short Put SP 2360 : 200 @ 26 : + 5200
Short Put SP 2380 : 300 @ 21 : + 6300
Short Call SP 2480: 200 @ 33.85 : + 6770
Short Call sp 2460: 200 @ 29 : + 5800
Total : - 66630


Thanks & Regards

Harish Chheda

In the above trade you have 1300 Put options SP2340 against which we have not sold any thing as yet. Now you have two options first to sell these options and collect the premium on a dip of Nifty, or you can go in stages, say 200 on every dip of 20 or 25 points. It depends on trader's skill from here, how to maximize profit without assuming any additional risk. If I was you, I will sell SP2380 puts more. Think it thru and see where I am coming from and why I want to sell 2380put options.

Good Luck

Wastej

Hi Harish,

You are making the same mistake I made. You are holding short call of SP2480 instead of SP2380 as mentioned above. Please correct your position. In this trade also you have 1300 Put options of SP2340 uncommitted. You have to liquidate the same at an appropriate time so that you could maximize the profit. I leave it to you judgment to do so. Please try to get the maximum profit from this position. If you like to sell slightly higher amount of Put options against your holdings, that is fine also.

Should you have any question, please do not hesitate to contact me.

Regards,

Wastej

Hi WasteJ ,

Plz explain why it is better to sell Nifty Put SP 2380 in your view , I can't get your point .

Thanks & Regards

Harish Chheda

Hi WasteJ ,

Thanks for pointing out my mistake

Corrected Calculation

Trade 2480 (i.e Trade where we Sold Nifty call option SP 2480 on 12th Sep. )

Trade Today :
Short 200 Nifty Put Option SP 2350 at 6.50
(As Nifty move down to 2466 i.e. 20 point from previous close)


To Day's prices (Name : open - high - low - LTP )
Nifty Fut : 2484.05 - 2503.00 - 2462.60 - 2486.60
Nifty Put SP 2340 : No Trade (prev. close 4.50)
Nifty Put SP 2350 : 6.00 - 7.00 - 4.50 - 4.70
Nifty Put SP 2360 : No Trade (prev. close 7)
Nifty Put SP 2380 : 6.50 - 10.20 - 6.50 - 10.20
Nifty Call SP 2480 : 37.00 - 45.00 - 29.50 - 35.60
Nifty Call SP 2460: 55.00 - 55.00 - 40.00 - 45.00

Profit / Loss calc.

Long Nifty Fut
Closed out profit of 32000.00
Plus open profit 400 * (2486.60 - 2347) = 55840.00
Total Profit (closed) 32000.00 + (open) 55840.00 = 87840.00

Long Nifty Put SP 2340
2000 * (4.50 - 46.00) = (Loss) 83000.00

Short Nifty Put SP 2350
200 * (6.50 - 4.70) = 360.00

Short Nifty Put SP 2360
200 * (26 - 7.00) = 3800.00

Short Nifty Put SP 2380
300 * (21 - 10.20) = 3240.00

Short Nifty call SP 2480
200 * (33.85 - 35.60) = (Loss) 350.00

Short Nifty call SP 2460
200 * (29 - 45.00) = (Loss) 3200.00

Total Profit = 87840.00 - 83000.00 + 360.00 + 3800.00 + 3240.00 - 350.00 - 3200.00 = 8690.00

Open Positions :
Long Nifty Future : 400
Long Put SP 2340 : 2000
Short Put SP 2350 : 200
Short Put SP 2360 : 200
Short Put SP 2380 : 300
Short Call SP 2480: 200
Short Call sp 2460: 200

Paid / Collected Primium in options

Long Put SP 2340 : 2000 @ 46 : - 92000
Short Put SP 2350 : 200 @ 6.50 : + 1300
Short Put SP 2360 : 200 @ 26 : + 5200
Short Put SP 2380 : 300 @ 21 : + 6300
Short Call SP 2480: 200 @ 33.85 : + 6770
Short Call sp 2460: 200 @ 29 : + 5800
Total : - 66630


Thanks & Regards

Harish Chheda

It is very simple; you are short 2380 call, which is deep in the money. You will have to return some of the premium you have collected against this sale on the option expiry day. If you sell some puts and collect some premium then you will be returning only one premium either put premium or call premium the other side will be yours free and easy. If you get lucky, and nifty closes at 2380 then you will have both the premiums as your profits. I hope it makes sense for you.

Good Luck

Wastej