Will this system work??

Guys,

I had been paper trading on this system that might help bring moderate profits from OPTIONS. This system involves only two strategies - STRADDLES & STRANGLES. I had found the system to be working in sync with risk mgmt & optimal position sizing. However there are certain issues that i need all your help to fix. Please do look into it & provide me your feedback.

Total Capital: 20,000
% of Portfolio Risk: 20%
Max Amount that is available to risk:4000
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RULES OF PLAY: ONLY 20% of the invested amount can be risked at any given point of time & ALWAYS FOLLOW THE STOPLOSS.
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Depending on the market scenario, a strangle or straddle can be created.
Here for our reference, a strangle is demonstrated.
Currently NiftyCE5300 is priced at 82.00 & NiftyPE5100 priced at 73.00. If we need to create a strangle with this two contracts, position size needs to be decided considering risk mgmt as well.

Chances of each lot of CE & PE - (82*50 & 73*50)=7750. [20% of invst amt is 1550 which is way less than the max amt available to risk 4000].

Chances of 2 lots of CE&PE - (82*100 & 73*100)=15500. [20% of invst amt is 3200 which is less than the max amt available to risk 4000].

Chances of 3 lots of CE & PE -(82*150 & 73*150)=23250. [20% of invst amt is 4750 which is higher than the max amt available to risk 4000].
Hence 3 lots of CE & PE are not feasible. So maximum lots that can be bought is 2 lots of CE & PE.

Since the position size is determined, we now move forward to the next level. Here onwards risk percentage is 20% of the amt we have invested in creating the strategy (20% of 15500 = 3200) though we had the buffer up till Rs.4000 to risk.
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Total amt invested - 15500, risk appetite-20% which is Rs.3200.
Since it's a strangle, on each side the max risk is Rs.1600.
That gives a (1600/100)=16 pts on each side.
Therefore the SL of the CE = (82-16)=66 || SL of PE = (72-16)=57.
Also BeP for CE = {15500 - 5700(SL PE)/100 (CE lot size)} = 98 || BeP for PE = {15500 - 6600(SL CE)/100 (PE lot size)} = 89
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Considering a Risk Reward Ratio as minimal of 1.5% of the risked amt,
For CE ((20% of 8200=1640 risked. 1.5% of 1640 = 2460/100(lot size), CE RRR is 82+24.6 = 106.6)
For PE (20% of 7300=1460 risked. 1.5% of 1460 = 2190/100(lot size), PE RRR is 73+21.90 = 94.9)
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If the mkt moves either ways, one stoploss triggers & other touches the RRR line.
So in this strategy, the outcome can be:
CE BeP(106.6*100) + PE SL(57*100) = 16360 or
CE SL(66*100) + PE BeP(94.9*100) = 16090.
I know it's miniscual considering the profits but as you work up the number of lots, the margin increases or you can choose to increse the Risk Reward Ratio.
This system therefore returns descent profit without loss of capital. It is a very low risk system. One can increase the amt invested as they go forward, by which the risk amt also increases helping in buying more lots. 200/250 lots can help make a descent profit on a consistent basis.

Issues:

1. What if there is a gap down/up opening? If the contract opens lower than the SL?
2. What if the volatility is weak, eg: SL hits on one side but RRR is not acheived on the other side?
3. Is there a better approach to fix the SL & Reward Ratio?

I do know you guys will have doubts on the impact the commisions will play on the minimal profits above, but had discount brokers in mind!
Please do provide your valuable feedbacks.

Which series are you talking about ??

The preimium are two days old, from the aug series...
Excuse me on that.. Just used the same to qoute the example.

please provide some feedback guys...

I think there are less experts to analyse strategies you discussed in options..

May be Danpickup is the right one to comment on this strategy..as he is Option expert.. May be you could PM him..to draw his attention to this thread..

eagerly waiting for dan's comments.

Dear Madhusnair

I went quickly through your post and that is what I first recognized:

Simple and very important point is not explained in any words: When do you implement such a strangle or a straddle?

Please define in clear words under what circumstances you want to implement those option strategies as your comment doe's not give any hint about that.

Depending on the market scenario, a strangle or straddle can be created.

Yes, depending on the market scenario any kind of option strategy can be created. Did you get the point? as I think you do not understand when what kind of option strategy is created and implemented.

All the rest you posted has no impact when the odds are any way against you. Please clear that mentioned point. Kindly wait for your post.

Good trading

DanPickUp

Dan,

Thank you so much for looking into the thread.
Well as you rightly pointed out, i did miss to elaborate on the condition i create the said strategy. My bad..

I only buy options, i am not comfortable enough to write them yet.
I am not well versed with options & chose to stick with strangles/straddles due unpredicted nature of nifty movements.
The parameters i use to understand the market scenario for this strategies are:

1. To start with, checks how the Historic Volatility is? In our case, India VIX. Always tries not to enter into options until VIX is above a certain level. (Normally at 19 or above).
2. A look at the IV of the strikes. I believe if the IV is too high or low to Hist Vol, should avoid those strikes(underrated or overrated). If the IV is in line or closer to the Hist Vol, i identify those strikes to be appropriately priced create strategy.
3. Based on IV & Hist Vol if the strikes are selected, either strangle or straddle is decided. Normally attempt is to make it using nearest OTM options for strangles.
4. A check with optionoracle is done to see if the selected strikes provides a combined neutral delta. Though it doesnt arrive exactly at zero,in most case tries to see combined delta is close enough to 0 while entering the position.
5. SInce nifty has strikes of 100 pts, mostly wait for the spot to reach a position which is equi-distant from strikes (5000/5050/5100/5150/5200 ...etc) to take position.

In breif, Hist Vol is checked, IV of strikes are checked vs Hist Vol. Once the strategy is decided based on the strikes, combined delta is looked in optionoracle & finally when spot as well is equal distant from strikes, the strategy is entered.
You might be wondering if all the 5 parameters are arrived but i ensure that most of them correct before entering a strategy.

Used to monitor OI before but too many details where causing hindrance in entering a position.
But OI is monitored to know until which all strikes have OI builtup on both sides (call & puts).

Finally when the strikes are finalised, no: of lots are decided using the position sizing as mentioned in orginal post.

This are the situation i use for implement the strategies....

Is there any way one can trade buy option Call or Put one side as per the market move for the day..

Did anyone see Dan around?