Buys Stocks, Sell Options. Beat FD by a factor of 2

jamit_05

Well-Known Member
#1
This approach will beat FD by a factor of 2 by putting the investor in a win-win situation.

The Approach

1) Purchase Stocks of Low Beta at strong supports. This is important. Else, you won't be able to derive maximum joy.

2) Sell seemingly harmless OTM calls such that you get 2% on capital. One could place spreads as well.

Case Study A:
Purchase SBIN at Rs.1500... And sell Rs.300 OTM Calls to get Rs.30.

Case 1: Month closes >1800 say at Rs.1900.

Net gain Rs. 330, which is one year's interest @2%.
Then you move your capital to Debt funds and wait for price to come lower again.

Case 2: Month Closes <1800

Option expires worthless. You only make 2% for the month and still hold the stock.
 
#2
Sir, How Rs. 300 call can be OTM when SBIN is at 1500 ?
Am I missing something here ?
 

jamit_05

Well-Known Member
#3
Sir, How Rs. 300 call can be OTM when SBIN is at 1500 ?
Am I missing something here ?
Code:
Case Study A:
Purchase SBIN at Rs.1500... And sell Rs.300 OTM Calls to get Rs.30.

Case 1: Month closes >1800 say at Rs.1900. 

Net gain Rs. 330, which is one year's interest @2%.
Then you move your capital to Debt funds and wait for price to come lower again.
:)

Rs. 300 OTM from CMP Rs.1500. Hence, sell Rs.1800 CE... Rs.300 OTM...
 

comm4300

Well-Known Member
#4
1) Purchase Stocks of Low Beta at strong supports.
thank you for the wonderful idea.

Strong support is the big premise here....failure to identify support would lock the investment for a lot longer time than anticipated.

would like to know your thoughts on how to deal with such situations....
 

jamit_05

Well-Known Member
#5
thank you for the wonderful idea.

Strong support is the big premise here....failure to identify support would lock the investment for a lot longer time than anticipated.

would like to know your thoughts on how to deal with such situations....

I have a very clear and a simple theory on this: A strong support is 52 Week Low :)

One may miss-out on some opportunities, but whatever he gets will be gold's worth. This mostly works for stocks of low beta and high market cap, this also makes a safer investment.

I'd like to add that, one should not buy stock to sell options. In other words, his primary focus should be to invest in good stocks at good rates. And once he has done his h.w/study and made the purchase, he could start earning by selling options.
 

rkkarnani

Well-Known Member
#6
This approach will beat FD by a factor of 2 by putting the investor in a win-win situation.

The Approach

1) Purchase Stocks of Low Beta at strong supports. This is important. Else, you won't be able to derive maximum joy.

2) Sell seemingly harmless OTM calls such that you get 2% on capital. One could place spreads as well.

Case Study A:
Purchase SBIN at Rs.1500... And sell Rs.300 OTM Calls to get Rs.30.

Case 1: Month closes >1800 say at Rs.1900.

Net gain Rs. 330, which is one year's interest @2%.
Then you move your capital to Debt funds and wait for price to come lower again.

Case 2: Month Closes <1800

Option expires worthless. You only make 2% for the month and still hold the stock.
Very good initiative ! Trust many will benefit from this !

Here are my thoughts :
If we Buy SBI at 1500 and sell 1800 CE (Rs.300/- , say on the first day of the Derivative month.... the CE will be priced around Rs.10/- to 12/-

I was checking right now, SBI Cash is ~1850
SBI Nov expiry 2150 CE trading at 9:05 10:65 with just 2 lots traded !

And just see the spread between Buy and Sell >Rs.1.60

This should work well for the person who wishes to hold the stock of a company for verrrrry long period. He should sell deep out of money calls, but that wont beat the FD, but surely act as Extra dividend earning, not Declared by the company. In case of some wild upmove, one has to be prepared to SELL his holding !
 

rkkarnani

Well-Known Member
#7
I have a very clear and a simple theory on this: A strong support is 52 Week Low :)

One may miss-out on some opportunities, but whatever he gets will be gold's worth. This mostly works for stocks of low beta and high market cap, this also makes a safer investment.

I'd like to add that, one should not buy stock to sell options. In other words, his primary focus should be to invest in good stocks at good rates. And once he has done his h.w/study and made the purchase, he could start earning by selling options.
There is another thread where, probably "droption" has advocated to Sell PUTS to enter Stocks at lower rates !
 

jamit_05

Well-Known Member
#8
Very good initiative ! Trust many will benefit from this !

Here are my thoughts :
If we Buy SBI at 1500 and sell 1800 CE (Rs.300/- , say on the first day of the Derivative month.... the CE will be priced around Rs.10/- to 12/-

I was checking right now, SBI Cash is ~1850
SBI Nov expiry 2150 CE trading at 9:05 10:65 with just 2 lots traded !

And just see the spread between Buy and Sell >Rs.1.60

This should work well for the person who wishes to hold the stock of a company for verrrrry long period. He should sell deep out of money calls, but that wont beat the FD, but surely act as Extra dividend earning, not Declared by the company. In case of some wild upmove, one has to be prepared to SELL his holding !
So there are other factors that emerge.

The stock holder must be comfortable selling his stock at the level, only then should he sell the CEs. Hence, the level of CE-selling must be a dependable resistance.

If the sold call expires ITM, then the stock must be sold. However, if the resistance is worth its salt then the price will mostly ricochet hence giving a lower level of re-entry.
 

gmt900

Well-Known Member
#9
I have a very clear and a simple theory on this: A strong support is 52 Week Low :)

One may miss-out on some opportunities, but whatever he gets will be gold's worth. This mostly works for stocks of low beta and high market cap, this also makes a safer investment.

I'd like to add that, one should not buy stock to sell options. In other words, his primary focus should be to invest in good stocks at good rates. And once he has done his h.w/study and made the purchase, he could start earning by selling options.
I have tried this for RIL. I bought 250 shares @ 930 and kept on writing calls every month. Rs 2.35 lacs were locked. The idea ( I think they call it covered call) worked well for several months. But since RIL started sliding, the worth of my shares started reducing. Eventually, I sold my entire holding @ 850. I did not keep separate account of these trades. But it was more or less no profit /no loss.
Moral of the story is, you have to buy the stock at support. Also, the stock has to be in bullish mode.
I understand there are people who do it on a month to month basis. They buy stock, write calls and sell stock at the end of series.
I have tried several strategies of futures and options and come to the conclusion that one should concentrate on one or two strategies and try to excel in using them.
I liked a couple of threads which emphasised this point.
This may be cliche : The strategy is as good as the trader using it.
Good trading,
gmt
 

rkkarnani

Well-Known Member
#10
An old write up I had on my system. Taken from Net, but do not have the link to the original ! :eek:

Option strategies – Covered call, Covered put
by PRIYA

Covered call and Covered put are both one of the best option strategies for those who trade in F&O segment. These strategies are used for reducing the loss if trade goes against our expected trend. F&O is a risky segment which always needs protection for the trader if something goes wrong unexpectedly in the stock. These strategies are very good for positional traders as well as day traders(if the underlying stock is a market mover and shows potential movement in trend).

So what are these covered call and covered put? It is very easy to understand. This is not a rocket science..just simple strategy that needs to be applied with some disciplinary rules which you may consider them as conditions to apply this strategy. They can be applied for both stock as well as index futures and options.

Covered call – Take long in future(buy) and cover that with shorting the nearest call option.

Covered put – Take short in future and cover that with shorting the nearest put option.

Let me explain how this covered call works. If we expect the stock to move up then we take long position in stock future and to protect this we need to short(write) the nearest call option. So, if the stock moves up and meets the target, we will be in profit in FUT. At the same time, we shorted call option and when the stock moves up the call premium also increases. When the stock meets the target we need to cover the long position in future and cover the call option as well. Since we are shorting either At-the-money or the nearest Out-the-money call option, the rate of increase in premium will obviously be less than the rate at which the stock future moves. The profit that we get in future will be reduced to the extent to the premium we need to cover in the shorting of call and the difference in them is our profit earned.

Example: Take JPASSOC which was 124 last week and the 130ca option premium stands at 3.2. If we expect the stock to move up then we take long position in future and short 130ca. When the stock moved 134 then the premium went 8 from 3.2. so, we earned 10rs in Fut and lost 4.8rs in shorting. Difference is 10-4.8=5.2rs is our profit. Lot is 2k..means 5.2*2k = Rs.10400.

Assume, the stock goes down from 124 to 121. Then assume premium in 130ca goes from 3.2 to 1.5. Means, we get 3points loss in FUT but 1.7 points profit in option. So, overall 1.3 is loss but not 3. So, the advantage of this strategy is that it protects from heavy loss in future. One more merit of this concept is, assume if the stock doesn’t move much and stays at 124 till expiry. But 130ca goes from 3.2 to 0. Means there is no profit in FUT but we get 3.2rs in option..which is around Rs. 6400. In other words, if the stock is purely in sideways, this strategy works at its best, apart from purely trendy market.

Same concept applies vice-versa to covered put option strategy but in the opposite direction.

These are the following conditions which need to be taken into consideration before applying these strategies:

1. The stock needs to b a market mover. At the same time it works at its best when the stock is purely sideways.

2. It should have good liquidity in options. Otherwise due to less volume premium will have much varied bid and offer rates.

3. Choose either ATM or OTM options.

4. Both FUT and shorting the option should be taken and covered at the same time. If short not covered then it will be a naked short which is highly risky and loss is unlimited. So disclaimer of risk in shorting naked options will always be there.

Here are the few Nifty stocks which are market movers with good liquid options. SBI, Reliance, Tisco, JPAsso, Renuka, Chambal Fert, IFCI, ICICI Bank. Last but not the least in index category, Nifty Future :)

Happy Trading.
Priya.
**********************************
 
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