Arbitrage: Nifty Bees & Options

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prasham

Active Member
#1
#1
Arbitrage of Nifty using Nifty Bees & Writing OTM Calls.

First I buy nifty bees equivalent to lot size of Nifty. Then I write an option call. Now there are 3 possible scenarios


a) Either the written call shall have nil value on expiry. Thus entire premium is the profit.

b) Option Value < the premium collected. So again profit.

c) Option Value > the premium collected. So there would be loss but this loss would be set off by increase in price of Nifty Bees.

For Example:

1) I buy Nifty Bees equivalent to Nifty Lot.

2) I write Call of 5500 Apr @ 50.

Now the three outcomes...

a) Market didn't come closer to 5500 and hence the call expired worthless and entire premium is profit.

b) Market closed at some point when value of the call is 25. So Profit is 50 -25 = 25.

c) Market closed at some point when value of the call is 75. So Loss is 75 - 50 = 25. But when would price of a call increase? Yes you got it right when the underlying has moved high. So if nifty has moved high price of our Nifty Bees would have also increased and hence the loss would be offsetted.

:clap: EXPERTS PLEASE COMMENT ON VIABILITY OF THIS STRATEGY :clap:
 
P

prasham

Active Member
#3
#3
Can you please explain how would the Risk 2 Reward remain same in both the cases? I don't think there's any loss associated with my strategy. Only loss would be that of commissions paid for buying and selling, if any. While in case of selling naked calls puts, if markets move sharply, value of those calls/puts could increase drastically causing heavy losses.
 
P

prasham

Active Member
#5
#5
At 4500 I would have a massive loss. But I wouldn't let that happen. SL is the answer to such condition.
 
Capricorn

Capricorn

Well-Known Member
#8
#8
prasham said:
Arbitrage of Nifty using Nifty Bees & Writing OTM Calls.

First I buy nifty bees equivalent to lot size of Nifty. Then I write an option call. Now there are 3 possible scenarios


a) Either the written call shall have nil value on expiry. Thus entire premium is the profit.

b) Option Value < the premium collected. So again profit.

c) Option Value > the premium collected. So there would be loss but this loss would be set off by increase in price of Nifty Bees.

For Example:

1) I buy Nifty Bees equivalent to Nifty Lot.

2) I write Call of 5500 Apr @ 50.

Now the three outcomes...

a) Market didn't come closer to 5500 and hence the call expired worthless and entire premium is profit.

b) Market closed at some point when value of the call is 25. So Profit is 50 -25 = 25.

c) Market closed at some point when value of the call is 75. So Loss is 75 - 50 = 25. But when would price of a call increase? Yes you got it right when the underlying has moved high. So if nifty has moved high price of our Nifty Bees would have also increased and hence the loss would be offsetted.

:clap: EXPERTS PLEASE COMMENT ON VIABILITY OF THIS STRATEGY :clap:
Click to expand...
This is nothing but a Covered call not arbitrage.

Cheaper to do it using Nifty futures.
 
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