A simple systematic low risk income generating strategy

ncube

Well-Known Member
#1
Its quite sometime I had wanted to write this thread, got some time today. In this thread I will try to explain how one can easily generate regular income at very low risk and is suitable for someone who is looking for an steady alternative to FD/debt MF as the returns in those instruments are very low these days.

Generating a steady income from markets need not be complex, what I am sharing is nothing new, people having some experience in the market would already know about this. My objective here is only to make the process systematic and simple so that even who are not experts can take advantage of this and my request is that please share this strategy with those who are struggling with the lower FD returns and exploring ways to invest in equity but are worried about the volatility and risk.

I will explain the strategy in 2 parts, in the first part I will explain the steps to build the capital assuming that the person is currently working and wants to build the capital over the years through equity and in the 2nd part how he can generate regular income from the capital base.

Strategy:
The strategy is very simple as we just need to 2 ETF's: NIFTYBEES & GOLDBEES for the capital building, these 2 ETF's have become very liquid in the last one year and does not require high capital to start and we will be selling NIFTY index call options against this capital base. The reason for selecting these 2 ETF's are that NIFTY index will not go to zero and will grow as per India GDP growth which is very optimistic for a long term and GOLD is a natural hedge to the Equity market. These 2 together will ensure that our investments are well balanced.

Capital Building Steps:
1. As and when you have some savings available for investment, invest the amount equally between these 2 ETF's. i.e the ratio should always be 50%:50%
2. At every next investment, rebalance them so that the ratio remains constant at 50%:50%.
3. This rebalance is very important as that will ensure that the volatility of the equity curve is low and the compounding happens faster.

For example:
1. On Jan 1st I have rs 2000 /- available for investment, I will buy NIFTYBEES of rs 1000 and GOLDBEES of rs 1000.
2. On Feb 1st I have rs 2000 /- available, but say the value of NIFTYBEES in the PF is now rs 1100 and GOLDBEES is rs 1050. i.e total rs 2150 /-
Now to rebalance we just add the new investment amt to pf value and divide by 2 ...i.e 2150 + 2000 = 4150/2 = 2075
The new investment in NIFTYBEES would be 2075 - 1100 = 925 and new investment in GOLDBESS will be 2075 - 1050 = 1025
3. This need to be repeated for every new investments being made and continued till one have built a capital base equal to 1 lot of nifty value. i.e if nifty index value if 14500, then 75 * 14500 = 11 Lakh
4. This investment can easily yield 10-15% returns over the years and will easily beat the FD/MF returns.

Income generation Steps:
If someone already have the capital base and they are just looking for the income generation, then it is fine to invest the capital in this strategy in one go, however it is always better to invest in parts at regular intervals, preferably whenever there is a nifty down move of 400-500 odd points.

1. Even though during this step, there is no regular investments, the rebalancing process should not be stopped.
2. Every month or quarterly the allocation between NIFTYBEES and GOLDBEES should be rebalanced and reset to the 50%:50% ratio.

Steps to generate regular income:
1. Once the capital base is ready, pledge the ETF's with broker to generate capital which is sufficient for selling 2 Lots of NIFTY OTM calls. Though the capital is for 2 lots, we will just be selling 1 lot of NIFTY OTM calls.
2. Selection of the OTM NIFTY calls to sell: sell the NIFTY next month OTM calls 45days before expiry and which gives a premium of minimum 100 points. Since we are selling the Calls in the mid of month for the next month, we need the capital for 2 lots as the next lot is sold at the mid of next month. The calls are usually 800-1000 points away from current index price and have a very low probability to go into money.
3. In the event which is rare if the NIFTY price touches the sold call, book the loss by selling some part of the PF, there is no problem booking the loss as the NIFTYBEES & GOLDBEES combination would have generated enough profits to offset the loss.
4. In situations where there is crash and NIFTY price goes down a lot, its not a concern as unlike stocks NIFTY index will not go to zero.
5. This option selling can easily generate 5-10% returns even if one is conservative.

In summary, Its a misconception that investments in equity markets are risky, this strategy can easily generate 15-20% returns much better and safer than risky FD's/Debt funds. Give it a try and I can confidently say this return is achievable, just don't get greedy and take higher risks.

If you have any queries, feel free to ask, I will try to answer whenever I get time.
 
Last edited:
#2
Thanks for sharing Ncube. Its a great write up.
Small problem that I see over here is "next month OTM calls 45days before expiry" isn't active for the taking on d-day it tends to get active during last week of the month. You may want to check that or may be I am misinterpreting

Respectfully
 

ncube

Well-Known Member
#4
Thanks for sharing Ncube. Its a great write up.
Small problem that I see over here is "next month OTM calls 45days before expiry" isn't active for the taking on d-day it tends to get active during last week of the month. You may want to check that or may be I am misinterpreting

Respectfully
I am not sure which broker you are using, but with Zerodha I am able to trade far options, for example even today I can place order for 25th March Nifty 15000 call option which is trading at 177 and its 2 months away.

What I mean by 45 days before expiry is that on 15th Jan, I should be able to sell the 25th Feb expiry options. today 25th feb call option 14900 is available for 102

1611728346947.png


This is for 25th March NIFTY 15300 and is trading at 105
1611728482150.png


Update: I think I understood your concern, I thought it would be obvious. Actually its not 45 days from any day, as you are correct maybe weekly option expiring in 45 days may not be active today, however all monthly options are active at least the next 2 months are liquid to some extent.
 
Last edited:

ncube

Well-Known Member
#5
so at some point you have one open position against one hedged right..
yes, thats correct, sell only one call option as the portfolio value is equal to 1 lot of nifty index price. I have just explained the conservative strategy, if someone has good experience then he can be more adventurous and trade at slightly nearer call options or even try weekly options.
 

siddhant4u

Well-Unknown Member
#6
Thanks for sharing Ncube. Its a great write up.
Small problem that I see over here is "next month OTM calls 45days before expiry" isn't active for the taking on d-day it tends to get active during last week of the month. You may want to check that or may be I am misinterpreting

Respectfully
On 15th jan, you will write option for feb month. On 15th feb write option for march month. Don’t go for weekly expiry they are not liquid.
 

ncube

Well-Known Member
#7
Trying this strategy with weekly credit spreads based on the intraday timing model explained in another thread. Small sample data but performance so far seems to be as expected.

1613574429319.png
 

Vmaster369

Active Member
#8
option are who ever buys there Trading account is empty
and whoever writes option there BANKS are empty

instead pick any good small cap who is about weekly 44 days moving average and hold for 1-3 yrs
risk free return ;xD just a saying
 

Similar threads

Zerodha – Open Paperless Account

Open online account with Zerodha. Free delivery trading and Max Rs 20 for Intraday, F&O, Currency and Commodity Trading. Intraday High leverage with MIS, CO and BO.

Name:Phone:
Email:City:
State:
Are you a day trader?