Experimenting with OTM Nifty Options

gonifty · #1 30th August 2008, 11:50 AM

I have started an experiment in analyzing Nifty and trading Nifty's OTM(out of money options).

Being extremely liquid, nifty OTMs offer a decent risk reward ratio. Having said this, I am aware that 90% of all options expire worthless. In doing so it would be great to interact and share thoughts with people trading in nifty options. With OTM options, the risk is much much higher (and so probably, would be the rewards)

I have a specific strategy, and based on my workings and calculations, I am going to trade and keep listing these trades. Based on my workings so far, I would be dabbling in 200 to 1000 point OTMs.

The start is pretty simple. I have 1,00,000 as my experimental kitty. With no more than 15,000 drawdown per month would help me survive for next 6+ months at 0 profit every month.

Exit: Rs. 0 at end of 6 months
Target: Rs. 2,00,000 at end of 12 months.

What I am looking for is an interactive discussion, suggestions and experiences to help me optimize my learnings. I would like to discuss the strategy only if it turns out to be adequately successful.

To being with, I believe that 4212 was the bottom (and will hold at least for 2 months).

My trade starts with Nifty 5000 Sep calls. The first resistance I think may be around 4530 and next around 4780

Welcome to the discussion.

Trades Web Excel Sheet

bandlab2 · #2 31st August 2008, 10:50 PM

good luck !!!!

one thing is sure your man will be very rich with this strategy, 2.15k brokerage on 4.5k trade !!!!

you need to find a guy whi gives the least brokerage on options. some brokers reduce brokerage on ftures but not on options

what is the exit strategy for sept 5000 call ? i think you need to get 8k per month to make it double in a year, so keeping this in view you shold book profit (after paying another 2.15k to the man) when the call hits 10 rs. too steep if you ask me and all you get is 1.8 k after paying 4.3k to the man. you need it to go to 15 rs to meet your target. i dont expect you will have time to do another round.

imo, 4800 call when the market is at 4300 should be fair. too deep calls are good for writing, not for buying. jst my opinion

rkkarnani · #3 1st September 2008, 07:05 AM

Quote:

Originally Posted by gonifty

I have started an experiment in analyzing Nifty and trading Nifty's OTM(out of money options).

Being extremely liquid, nifty OTMs offer a decent risk reward ratio. Having said this, I am aware that 90% of all options expire worthless. In doing so it would be great to interact and share thoughts with people trading in nifty options. With OTM options, the risk is much much higher (and so probably, would be the rewards)

I have a specific strategy, and based on my workings and calculations, I am going to trade and keep listing these trades. Based on my workings so far, I would be dabbling in 200 to 1000 point OTMs.

The start is pretty simple. I have 1,00,000 as my experimental kitty. With no more than 15,000 drawdown per month would help me survive for next 6+ months at 0 profit every month.

Exit: Rs. 0 at end of 6 months
Target: Rs. 2,00,000 at end of 12 months.

What I am looking for is an interactive discussion, suggestions and experiences to help me optimize my learnings. I would like to discuss the strategy only if it turns out to be adequately successful.

To being with, I believe that 4212 was the bottom (and will hold at least for 2 months).

My trade starts with Nifty 5000 Sep calls. The first resistance I think may be around 4530 and next around 4780

Welcome to the discussion.

Trades Web Excel Sheet

Hi, Your statement "I am aware that 90% of all options expire worthless" is quiet true!! With this statement in view , why not sell some Option to hedge your Long Calls!!!!??? Not much idea about options but feel this should be considered too!!
Wouldn't that be prudent!!!

gonifty · #4 1st September 2008, 10:13 AM

Quote:

Originally Posted by bandlab2

good luck !!!!

one thing is sure your man will be very rich with this strategy, 2.15k brokerage on 4.5k trade !!!!

you need to find a guy whi gives the least brokerage on options. some brokers reduce brokerage on ftures but not on options

what is the exit strategy for sept 5000 call ? i think you need to get 8k per month to make it double in a year, so keeping this in view you shold book profit (after paying another 2.15k to the man) when the call hits 10 rs. too steep if you ask me and all you get is 1.8 k after paying 4.3k to the man. you need it to go to 15 rs to meet your target. i dont expect you will have time to do another round.

imo, 4800 call when the market is at 4300 should be fair. too deep calls are good for writing, not for buying. jst my opinion

So true buddy, but in options, this is the least (or near least) brokerage I have found. The funny thing is, even if the premium is Rs.100, I would still pay the same brokerage.

But the part of the experiment is not to frequently trade. I would think that from 6357 to 3790 we may (repeat may) see a retrenchment to 5075. That would be a good time to exit calls and get into OTM puts...

As I said, let me experiment for a few months (get broke) and then retry.

Why do you call them brokers, .... cause they help you go broke

gonifty · #5 1st September 2008, 10:19 AM

Quote:

Originally Posted by rkkarnani

Hi, Your statement "I am aware that 90% of all options expire worthless" is quiet true!! With this statement in view , why not sell some Option to hedge your Long Calls!!!!??? Not much idea about options but feel this should be considered too!!
Wouldn't that be prudent!!!

True, It is prudent and logical, but in the current scenario, writing OTM options don't pay too well (after brokerage) and ITM options can get me broke if the tide turns the other way.

But I surely would want to review my experiment on hedging by writing calls.

psvaja · #6 1st September 2008, 12:10 PM

Quote:

Originally Posted by gonifty

..... I would think that from 6357 to 3790 we may (repeat may) see a retrenchment to 5075. That would be a good time to exit calls and get into OTM puts...

From 6357 to 3790 (40%) down, it took almost 6 months time. so it is unwise to buy a call with expiration days less than 30 & expects retracement to 5075. what you are expecting is 17% upmove in 18 trading session left till expiry. i.e. almost 1% upmove each day. is it achievable ?

Pravin

gonifty · #7 1st September 2008, 12:31 PM

Quote:

Originally Posted by psvaja

From 6357 to 3790 (40%) down, it took almost 6 months time. so it is unwise to buy a call with expiration days less than 30 & expects retracement to 5075. what you are expecting is 17% upmove in 18 trading session left till expiry. i.e. almost 1% upmove each day. is it achievable ?

Pravin

Achievable = probably but not impossible. unwise = yes

- From a more "sentiments" perspective, I think most of the positional traders would believe the best mode to be in this market is to be short (volatility index is pretty stable) any change in sentiment (crude, gold and dow) could turn the tide.

and historically most changes in trends are ballistic (6357 to 4448 in days)

I am experimenting on long-shots(calculated lottery tickets, would be a more suitable phrase) and hence 90% probability of failure is what I am prepared for.

munde_77 · #8 1st September 2008, 01:11 PM

Quote:

Originally Posted by gonifty

True, It is prudent and logical, but in the current scenario, writing OTM options don't pay too well (after brokerage) and ITM options can get me broke if the tide turns the other way.

But I surely would want to review my experiment on hedging by writing calls.

Try this site..........This will be very useful for you if you want to write otm call. Their brokerage in options is rs.9/- per lot.
Try and write.

http://www.rkglobal.net/

jnj333 · #9 1st September 2008, 01:29 PM

My First Thoughts-I feel that this strategy would not prove much fruitful as you are buying 5000 Sep call, if it would had been oct or nov calls then maybe some chance would be there but in india so far OTM calls are hardly liquid for further months, you may not get any sellers for Nov 5000 call or they may be very expensive, Time is one the biggest enemy of option buyers. You need explosive moves in your favour to be highly profitable.

My second Thoughts- On the contrary as Nifty Sep 5000 call are available for around 4 and you are to invest about 15000, that means you will buy 3750 calls at 4 , If I have got the maths right you need about 6% monthly return(on 1 lac) in order to get 100% annualized that comes to about 6000 on 15000(first month only) i.e 40% on 15000 that means you need the sell you calls at 4 + 4x40%= 5.6 . If you get this rate and add this profit for the next month trade then you need 6360 profit on 21000(15000+6000) that comes to about 33% for next month and so your net profit requirement will keep on decreasing on subsequent month.This is when you are profitable , if you are not then it is a different story all together. Maybe you could devise a stop loss strategy to protect your capital rather than take a gambling angle.
You could also lower the OTM calls to a realistic levels say if you believe that nifty could go upto 4700 but not cross 5000 this month then you could buy the neccasary 4700 calls and sell the 5000 calls so you could buy more 4700 calls for the same amount.

gonifty · #10 1st September 2008, 02:07 PM

Quote:

Originally Posted by jnj333

My First Thoughts-.... You need explosive moves in your favour to be highly profitable.....

My second Thoughts- On the contrary as Nifty Sep 5000 call are available for around 4 and you are to invest about 15000, that means you will buy 3750 calls at 4 , If I have got the maths right you need about 6% monthly return(on 1 lac) in order to get 100% annualized that comes to about 6000 on 15000(first month only) i.e 40% on 15000 that means you need the sell you calls at 4 + 4x40%= 5.6 . If you get this rate and add this profit for the next month trade then you need 6360 profit on 21000(15000+6000) that comes to about 33% for next month and so your net profit requirement will keep on decreasing on subsequent month.This is when you are profitable , if you are not then it is a different story all together. Maybe you could devise a stop loss strategy to protect your capital rather than take a gambling angle.
You could also lower the OTM calls to a realistic levels say if you believe that nifty could go upto 4700 but not cross 5000 this month then you could buy the neccasary 4700 calls and sell the 5000 calls so you could buy more 4700 calls for the same amount.

Well said...

1. Yes, only explosive moves would help. Considering the current downtrend... I do expect market to stabilize and then move northward... Otherwise the options would surely expire worthless.

2. No I do not expect to make incremental profits on the trades... i.e. not at 6% per month. But whichever month has significant moves, will help me take optimal positions next month. Thus some of the months may surely expire worthless.

3. Appreciate your idea for buying nearer strikes, will surely look into that.

4. I am not comfortable writing options (nakeds or hedges) just because I cannot provide that amount of margin

The Following 3 Users Say Thank You to gonifty For This Useful Post:
jstraju (1st September 2008), rkkarnani (1st September 2008), VJAY (1st September 2008)

The Following User Says Thank You to bandlab2 For This Useful Post:
rkkarnani (1st September 2008)

The Following User Says Thank You to munde_77 For This Useful Post:
gonifty (1st September 2008)