1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures - Bac

[gmt900]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Some Theory on how to Construct a Pair for Selling using the DELTA-NEUTRAL Strategy.

Delta - This is an Option Greek - "The amount that the theoretical price in Option will change if the market moves up/down 1 point".

Market today closed at 5979 (NIFTY Futures ).

The MAX OI at 5800PE-6000CE Pair and ideally it would be good to SELL this pair. But we want to know how much quantity to trade in this pair.

Let us calculate the Delta for 5800PE and 6000CE with the following parameters

Underlying Price , Exercise Price, Time to Expiry, Interest Rate, Volatility, Dividend

Underlying Price - I take the Futures current price
Exercise Price - It is 5800 or 6000
Time to Expiry - It is the number of days to Expiry expressed as a fraction of 365 days
Interest Rate - In the Options Chain the IV is calaculated using 10%. So we will use the same
Volatility - We will use the IV from the Options chain
Dividend - For Index it would be Zero because there is no dividend for Index. for Stocks you have to take the Average Dividend

IV - Implied volatility

So using the above values -

If we calculate the Delta then for
5800 PE -0.15 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 5800 PE will decrease by 0.15
6000 CE .49 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 6000 CE will increase by .49.

We can apply this Delta Neutral Strateg if we know the Range.

Using the MAX OI we know the Range for NIFTY is 5800-6000.

Now we have to make the Delta to Zero (more or less).

So we can say that .49 (Delta of 6000 CE) + 3 * -0.15 (Delta of 5800 PE) = 0.04.

That means For constructing our pair,

We have to Sell one Lot of 6000 CE and 3 lots of 5800 PE.

6000 CE Premium is 50.8
5800 PE Premium is 17.25

So our total Premium would be 50.8+3* 17.25 = 102.55.

So when the Market reaches around 6030, we can execute this strategy.

Tomorrow When the Market reaches around 6000,

The Delta for 6000 CE would be .54 and the price would be around 69.
The Delta for 5800 PE would be -0.12 and the price would be around 12.

So you might have to SELL 1 6000 CE and 4 5800 PE - with the Total premium of 117.

Thank you Raj.
You have explained the theory of writing short strangle very well.
If one wants to keep the trade till expiry or whatever period and adjust delta,
Wastej and DanPickUp have explained ways in which this can be done. Wastej's method suggests use of futures to adjust trade while Dan's method suggests use of options.
Both have their merits and one may choose method one is comfortable with or the one that is more suitable for a given situation.
I am trying both these methods.
Would you like to comment on the theory of adjusting the trade/

 

[Option.Trader]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Thank you Raj.
You have explained the theory of writing short strangle very well.
If one wants to keep the trade till expiry or whatever period and adjust delta,
Wastej and DanPickUp have explained ways in which this can be done. Wastej's method suggests use of futures to adjust trade while Dan's method suggests use of options.
Both have their merits and one may choose method one is comfortable with or the one that is more suitable for a given situation.
I am trying both these methods.
Would you like to comment on the theory of adjusting the trade/

Exactly, for Delta neutral you need to keep tweaking to keep it at zero. That means keeping a close watch and adding to position if it shifts out of zero. There was a very good thread which even explored which options to take

 

[Option.Trader]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

For Example If you apply this to INFY, you will notice that the Trend line crosses each other at around 2850. So till 2850, it is a Buy and above 2850 it is a SELL.

How do you plot trend lines IV'S of different strike prices?

 

[healthraj]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

How do you plot trend lines IV'S of different strike prices?

In Excel, First plot the IVs for PEs and CEs. And then you can configure in Excel to plot the Trend lines.

 

[jamit_05]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

@jamit,
I totally agree with raj's analysis. In fact, I wrote this pair @101 on 11 July.
My target, though, is to keep the pair till expiry by doing adjustments to the trade, if and when required.
The question you raised about the action required to be taken in NS crosses 6300 is rather irrelevant at this stage since the upper BEP is 6400, which is way above the realm of possibility even granting that market has it's own mind. Finally, if one has to take a risk to trade, I think this is the least unsafe trade.

Correction : upper BEP is 6300 and not 6400

Therein lies the catch.

People approach trading with different mindsets. You are comfortable with High Strike Rate, hence get a Low Risk Reward ratio. Some folks trading NF, are comfy with a high DD (almost 10 back-to-back losses around 4 times a year) and hence get a higher RR.

Whatever route you chose, one fact remains undisputed:

One single trade has the potential to completely WIPE OUT our accounts !!

So, do not be blind-sided by a high strike rate. Do not forget the above fact after 7 good trades.

2 out of 10 such trades WILL fail, regardless of how improbably it appears. If you are getting money off it, then surely you could lose... right? Hence, one must have an exit plan such that after 20 such trades you have reasonable profits. Else, one single bad trade will wipe out profits from 10 good trades... don't trust me... experience it. And till you hv that real-time experience keep your position size to an absolute minimum. Just my humble suggestion. To each his own.

 

[jamit_05]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Amit,

First of all I don't look at too many things. I see the MAX OI and then Sell the pair. Normally the NIFTY OI takes a lot of time to build up. And it won't happen suddenly. And when the Range is crossed then I close the position. So the Stoploss is breaking the Range by 30 points. On upper side the 6230 and on the downside it would be 5570.

It is also a Pair which is very much away from each other and so there won't much movement in the pair.

Looking at the August Series, it looks Bullish - This is my first assumption. So even for a Neutral trade we have to take some direction.

One more thing is the Volatility -

CE Volatility @ 14.5%
PE Volatility @ 22.5%

So even if the market moves UP, the change in CE price would not be that fast.
Since the PE volatility is more, the price it looses will be more.

So net net CE will move UP slowly and PE move down faster and my target is not more than 20-25 points.

I am actually learning. So let me know if there is anything wrong with my approach.

It is nice to know that you have a SL of 30 points and a target of 30 odd points. This sounds successful to me. Pls keep posting updates.

 

[Purushotham]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Some Theory on how to Construct a Pair for Selling using the DELTA-NEUTRAL Strategy.

Delta - This is an Option Greek - "The amount that the theoretical price in Option will change if the market moves up/down 1 point".

Market today closed at 5979 (NIFTY Futures ).

The MAX OI at 5800PE-6000CE Pair and ideally it would be good to SELL this pair. But we want to know how much quantity to trade in this pair.

Let us calculate the Delta for 5800PE and 6000CE with the following parameters

Underlying Price , Exercise Price, Time to Expiry, Interest Rate, Volatility, Dividend

Underlying Price - I take the Futures current price
Exercise Price - It is 5800 or 6000
Time to Expiry - It is the number of days to Expiry expressed as a fraction of 365 days
Interest Rate - In the Options Chain the IV is calaculated using 10%. So we will use the same
Volatility - We will use the IV from the Options chain
Dividend - For Index it would be Zero because there is no dividend for Index. for Stocks you have to take the Average Dividend

IV - Implied volatility

So using the above values -

If we calculate the Delta then for
5800 PE -0.15 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 5800 PE will decrease by 0.15
6000 CE .49 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 6000 CE will increase by .49.

We can apply this Delta Neutral Strateg if we know the Range.

Using the MAX OI we know the Range for NIFTY is 5800-6000.

Now we have to make the Delta to Zero (more or less).

So we can say that .49 (Delta of 6000 CE) + 3 * -0.15 (Delta of 5800 PE) = 0.04.

That means For constructing our pair,

We have to Sell one Lot of 6000 CE and 3 lots of 5800 PE.

6000 CE Premium is 50.8
5800 PE Premium is 17.25

So our total Premium would be 50.8+3* 17.25 = 102.55.

So when the Market reaches around 6030, we can execute this strategy.

Tomorrow When the Market reaches around 6000,

The Delta for 6000 CE would be .54 and the price would be around 69.
The Delta for 5800 PE would be -0.12 and the price would be around 12.

So you might have to SELL 1 6000 CE and 4 5800 PE - with the Total premium of 117.

So when the Market reaches around 6030, we can execute this strategy.

Please explain me how to calculated this 6030.

 

[jamit_05]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

@Raj

The problem with Delta Neutral trades is, Delta changes with every 30 odd Nifty Points move or just simple change in IV. So we must keep adjusting Delta. Else, 3 lots on one side and one lot on the other could spell trouble.

 

[healthraj]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Options update at 9:30 AM

It seems to be Flat market with Pivot around 5960. Since the world markets are Down, 5960 might act as the pivot with 30 points UP and 30 points down. So I think 5990 might be the Top today.

MAX CHG in OI at 5900-6000 Pair

5900PE @ 274K
6000CE @ 316K, Mildly bearish.

No Big Volumes today as of now... So trade less quantity.

 

[healthraj]

Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -

Total CHG in OI is also indicating a SELL. So be cautious on LONGs above 5990.

Total CE @ 7.21L
Total PE @ 6.92L