Delta Netural Strategy (short Strangle)

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It seems Nifty has gone too far south. Let us be agressive and cover the 200 future contracts at 2324.

Action: Buy Nifty 200 future at Rs.2324.00

By doing this we are still 300 future short.

Time: 3.05 Afternoon Indian Time.

 

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Nifty was all over again, I have never seen any Index behaving in this manner in my entire trading carrier. Let us see where do we stand with respect to our Trade.

First the facts:

Nifty future LTP (Expires 25th August, 2005. Rs.2328.00

Short 5 Calls SP2380 Rs.2.40
Short 10 Calls SP2400 Rs.1.95 X2=3.90 (Because of 10 Contracts)
Short 5 Puts SP2340 Rs.21.60
Short 5 Puts SP2380 Rs.50.15
Total Market Value 78.05 x 500 = Rs.39, 025.00

Short 500 Nifty Future Rs.2366.20 (Opening Price)
Covered 200 futures at 2324.00 (2366.20-2324=42.20x200=8440 (Profit)
Open Position Short 300 Nifty future LTP 2328.00 Unrealized profit from this position is
2366.20-2328=38.20x300=11460.00. Thus the realized and unrealized profit from this position is
11460+8440=19,990.00.

Now let us add this to the total premium we have collected which is 34,424.00. By adding these two numbers we will have total premium and profit from the Nifty future trade. 34,424.00+19,990.00=54,324.00

If we were to close the position as of now than it will cost us Rs.39, 025.00 Thus leaving us profit of Rs.15, 299.00 (54,324.00 39,025.00=15,299.00)

Despite the roller cost ride by the Nifty and we have been wrong more often, we still are in good shape.

Normally it is not a very good step to close the short future position, which we have done here. But that is my trading style. Per the rules of this trade, one should not take an action like this just because we still have two things going against us. First, the 5 puts of SP2340 and secondly the 5 puts of SP 2380. On top of that we have just small premium left, to safe us from any potential losses.

Let us see what tomorrow brings for us.

If Nifty keep going south we will add to our short position of Nifty futures, say 700 future contracts to cut any potential loss.

I will post in real time if any such action is taken.

Wastej

 

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Not much of a change. We have captured additional time decay only which will add little to our profits.

Tomorrow being the last trading day and also the option expiration day, let us see what is in store for us.

WasteJ

 

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I will post the final outcome of the trade today. Today being option expiry date, the market can be very volatile therefore, during the market hours some action will be required. As soon as I take action, I will post it here, so please keep coming back and look for such action.

Thanks for watching the trade in progress.

Regards to you all.

Wastej

 

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Rs.33, 564.00 Profit in Just Nine Trading Days, without a single day of draw down, despite roller coaster ride by Nifty. At the start of the trade Nifty was at 2362 and on closing of the trade it is at 2354 hardly any change. Most directional trades made almost nothing or even lost money in the same time frame.



Nifty futures closed at Rs.2354.20

Let us see where we stand in terms of our trade:

Except, Short 5 Puts SP 2380 every option expired worth less. Thus we keep the premium.

Our loss on 5 Short Puts (2380-2354.20=25.80 x 500 =12,900.00
Profit when we covered 200 futures of Nifty (2366.20-2324.00 X 200) on August 23rd, 2005 = 8440.00

Profit from the short position of Nifty futures.

We were still short 300 Nifty Futures at 2366.20 and the Nifty closed at 2354.20 thus leaving us profit of 2366.20-2354.20 = 12 x300 = 3600.00

Let us calculate the final profits (the most difficult job in trading).

Premium Collected on all the short positions of Options = Rs.34, 424.00
Add profit from 200 covered futures on 23rd August 25, 2005= 8440.00
Add profit from 300 short Nifty futures on expiry 3600.00
-------------------

Total: Rs.46, 464.00

Less Loss from 5 Short puts SP 2380 on Expiry (Rs.12.900.00)

Net Profit= Rs.33, 564.00


When we initiated the trade we had collected only 23,475.00 and with our adjustments we are keeping 10,000.00 additional premiums thus totaling Rs.33, 564.00.

All members are now welcome to ask any question, make comments, advise, suggestions or what ever now. I will try to respond to every one for next 3 days only.

Wastej

 

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It seems no one has any questions as of now. Would like some feed back with your comments.

 

[joy_mitali]

Hi WasteJ--
Not exactly that---But going through it---Will shower u with Qs.---withen days hopefully---The 1st very basic one---It this strategy good---at any time of the mth---or the last week of F&O closure?
Need to understand it more---But --thanks---for all ur efforts---this post has been an eye--opener---for many of us probably----

Thanks Again--
On behalf of
All ignorants--and newbees
In the Traderji Family,
joy_mitali

 

[[email protected]]

This strategy is good any time as long as there is good premium to be collected. Specially when the implied volatality is high. Its even better when the market is sideways.

To a good trader, the market is nothing else but source of regular income, depending on his own resources (capital) and skills.

WasteJ

 

[chheda]

Hi WasteJ ,
Really good stuff from you , thanks and congratulation for starting such a good stuff . As We are not playing in option market actively , it is very hard to digest for
All ignorant -- and newbees .
Some ? from me to understand the strategy
1. Plz explain what is Delta and How to calculate it ?
2. If market move sharply upward or downward how to manage Delta Near Neutral ?
3. As from your trade during last 9 to 10 days what i understand is as follow , Plz comment on my markings
a. sell put and call near support and resistance area and collect premium
b. when u fill that market is rising buy futures with stop loss of 10 to 20 Rs. to protect your call premium and sell put to cover your additional risk generated by newly bought futures.
c. when u fill that market is going down sell futures with stop loss of 10 to 20 Rs. to protect your put premium and sell call to cover your additional risk generated by newly shorted futures.
4. Is it possible to right return trading plan from your strategy ? then help us all newbees to develop return trading plan .

Thanks and Regards ,
Harish Chheda

 

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Hi Harish,


What is a delta, to understand one needs to read the Greeks of the option? All most all brokers web site provide this information, in addition one can read at the web site of yahoo as well as BSE and NSE also. In laymans language the delta of an ATM (At the Money) Call option is +. 50 and the Put option is -.50. Once the option is in the money the delta keep increasing as the stock price keep rising. Deep in the money (ITM) options have almost 1 delta. (-1 in case of Put Options). All stocks have +1 delta for Long Stocks and negative One (-1) for Short Stocks.

Most market makers do not hold the risk in their hands for more than 6 seconds (In USA). Depending what order they receive, immediately they off load the risk by bringing their position to delta neutral position. They are able to do because the margin requirements of Market Makers are far less than that of Traders.

Let us consider that the MM has received order for 10 Nifty Call Options (10X100=1000 X +. 50 (ATM has .50 Delta)= +500. MM as soon as fills this order he is risking 500 Delta. So he in real sense is negative 500 delta because he sold positive delta. In order to hedge his position he will go long 500 future contracts as each contract has +delta (+1). From time to time he will than adjust his position to bring it to delta netural and thus will avoid any risk in the market. In the end the option sold will expire and he will capture all the time value of the option.

Think of a Race Bookie, They offer lowest odds for the favorite horse and the least favorite horse will have the highest odds. Though, they try to give better odds on least favorite horses, by doing this they try to match their liability (In case the favorite wins) to the premium they have collected, by offering higher odds on the other horses, participating in the race, thus reducing their risks. It is not a new method; this has been going on for years.

In order that most members of the Traderji forum can get benefit from such strategies, I will start another trade, which is rather going to be much simpler. It will be just Long Nifty Futures and Long Put option. Please keep coming back.

I am sorry; as I have not been able to understand the question 4, please explain the same once again.

Regards,

Wastej