30% returns with Delta hedging options

[myamit]

6th March 2014...

Sold one more lot of
PE 5000 @ 73.8

Now position is

250 x Short PE 5000 (Dec-14) @ 83.5 (Avg price)
100 x Short CE 7500 (Dec-14) @ 170

Premium earned : 37875
Current premium : 35950
Notional profit : 1925


Regards,

7-Mar-2014

Sold one more lot of
PE 5000 @ 65.95

Now position is

300 x Short PE 5000 (Dec-14) @ 80.575 (Avg price)
100 x Short CE 7500 (Dec-14) @ 170

Premium earned : 41172
Current premium : 40165
Notional profit : 1007

Capital employed (approx.) : Rs. 2.0 Lac


Regards,

 

[SaravananKS]

As of now, I'm paper trading this.

However I have kept a mental note for trading capital as 10L. Currently blocked capital is 1.75L

Regards,

if it is 10L then getting 30% Return would be 3L Profit.Pls explain in what is your ideal market conditions to get remaining 2.5(as of now Premium earned (Notional) is around 45K)

and analyse what worst market condition for which one should be prepare

 

[myamit]

if it is 10L then getting 30% Return would be 3L Profit.Pls explain in what is your ideal market conditions to get remaining 2.5(as of now Premium earned (Notional) is around 45K)

and analyse what worst market condition for which one should be prepare

Hello,

Initially I thought 30% return will be for capital employed only. However to me it seems that this can achieve even better and 30% for full capital blocked/planned. Just wait for few days to see the real game.

Regards,

 

[gmt900]

Which brokers allow taking positions in Dec 2014 options, especially, far OTM ?

One of my brokers, IIFL, does not even allow June 2014 options saying they are illiquid and hence risky.

 

[myamit]

Which brokers allow taking positions in Dec 2014 options, especially, far OTM ?

One of my brokers, IIFL, does not even allow June 2014 options saying they are illiquid and hence risky.

I guess all brokers should allow this. I work with Sharekhan, IIFL, Angel & ISS. All are allowing this.

Regards,

 

[myamit]

7-Mar-2014

Sold one more lot of
PE 5000 @ 65.95

Now position is

300 x Short PE 5000 (Dec-14) @ 80.575 (Avg price)
100 x Short CE 7500 (Dec-14) @ 170

Premium earned : 41172
Current premium : 40165
Notional profit : 1007

Capital employed (approx.) : Rs. 2.0 Lac


Regards,

10-Mar-2014

Sold seven lot of PE 5000 @ 65.5
Sold two lot of CE 7500 @ 225

Now position is

650 x Short PE 5000 (Dec-14) @ 72.45 (Avg price)
200 x Short CE 7500 (Dec-14) @ 197.5 (Avg price)

Premium earned : 86595
Current premium : 87575
Notional loss : 1020

Capital employed (approx.) : Rs. 4.25 Lac

 

[jamit_05]

myamit,

From what I understand, this strategy succeeds if the seller is able to continuously fund the venture to maintain delta neutral. Each time there is a notional loss, he sell more options. But, there comes a time of respite, when he can close all positions, when he sees profit. And that would happen only when there comes a month where nifty has poor range, so poor that you will not be required to make adjustments. Those 20 days of time decay will wear down the option legs of both sides, giving returns.

Whereas in all other months, gains due to theta are washed away by loss due to delta. But, only in that one slow month, theta is at its highest and delta at its lowest. This would be a great opportunity to wind-up positions, and probably rollover to next series.

Till that happens, the trader must have funds. He must be patient and focused on adjusting delta.

 

[myamit]

myamit,

From what I understand, this strategy succeeds if the seller is able to continuously fund the venture to maintain delta neutral. Each time there is a notional loss, he sell more options. But, there comes a time of respite, when he can close all positions, when he sees profit. And that would happen only when there comes a month where nifty has poor range, so poor that you will not be required to make adjustments. Those 20 days of time decay will wear down the option legs of both sides, giving returns.

Whereas in all other months, gains due to theta are washed away by loss due to delta. But, only in that one slow month, theta is at its highest and delta at its lowest. This would be a great opportunity to wind-up positions, and probably rollover to next series.

Till that happens, the trader must have funds. He must be patient and focused on adjusting delta.

jamit_05,

Yes, I guess you're spot on with minor correction. I may need not fund only but even square up some position to hedge delta. Actually I'm planning this in this week itself. Idea here is that volatility can not continue beyond a point. Hence I believe i may get a chance to buy some options to manage my delta by this Friday.

Rest I agree with you.

Regards,

 

[myamit]

10-Mar-2014

Sold seven lot of PE 5000 @ 65.5
Sold two lot of CE 7500 @ 225

Now position is

650 x Short PE 5000 (Dec-14) @ 72.45 (Avg price)
200 x Short CE 7500 (Dec-14) @ 197.5 (Avg price)

Premium earned : 86595
Current premium : 87575
Notional loss : 1020

Capital employed (approx.) : Rs. 4.25 Lac

==========
11-Mar-2014
==========

Sold two lots of PE 5000 @ 68.5
Sold one lot of CE 7500 @ 216

Now position is

750 x Short PE 5000 (Dec-14) @ 71.92 (Avg price)
250 x Short CE 7500 (Dec-14) @ 201.2 (Avg price)

Premium earned : 104242
Current premium : 104225
Notional profit : 17

Capital employed (approx.) : Rs. 4.99 Lac

 

[jamit_05]

jamit_05,

Yes, I guess you're spot on with minor correction. I may need not fund only but even square up some position to hedge delta. Actually I'm planning this in this week itself. Idea here is that volatility can not continue beyond a point. Hence I believe i may get a chance to buy some options to manage my delta by this Friday.

Rest I agree with you.

Regards,

Sure, quite simply, there are two ways neutralize delta, either buy off the excessive side, hence booking loss, or sell the other side and balancing the weigh-scale.

Another smart thing that can be done is act in anticipation, when price has traveled to one extreme. Just like you did yesterday. You SOLD CEs in anticipation. Even if it went wrong, if market continued relentlessly upwards, then it may spell some temporary trouble.