Delta Neutral Strategy (Long Nifty @ Long Puts)

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#11
Hi Wastej:

Sorry for running ahead of myself look forward to following the trade with you.

Once again thanks and really appreciate your efforts.

Nautilus
 
#13
Hi Traders,

Those traders who do not understand what Deltas are? I am giving brief explanation here under:

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 deltas 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 neutral 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 strategy, I will update the trade on daily basis.

Traders are encouraged to read the GREEKS of the option. They can visit NSE web site for the detail understanding of the Options Greeks, some brokers web sites also provide this information also.

Good Luck

Wastej
 
#14
It is important in a strategy like this is to watch, the time decay of the long puts, which can be very detrimental to our profit potential. Usually this strategy is implemented buy buying 3 to 6 months far options. Since in India, the options are available for maximum of three months far period, therefore, the choice is limited to that extent. Further lack of liquidity in far months options is due to immature traders in the field of options. In real sense we had no other choice other than using the near month options.

Most matured and experienced option traders liquidate their positions 30 days before the expiry date of the option, in order to avoid the maximum time decay, which is greatest in last 30 days. In India only thirty days far options are being traded. Therefore, I call them immature traders in the field of options.

On the flip side, it is easy to defeat immature trader and win their money, as the game of option is zero sum game. My gain is some ones loss. It is very important to learn this game in the early stages, once the market matures, knowledgeable traders will be far ahead of the game.

Wastej
 
#15
Does this mean that you will trade only one month out! I have tried to check the liquidity in the farther months but it is disappointing. This will be a very interesting trade to watch. Its would be great to walk this trade with you.

Thanks

Nautilus
 
#16
Hi Traders,

Nifty futures closed at 2361 and the put option traded at 40. (Closing of Market on August 31st, 2005.)

On Long Nifty future position we are ahead by 2361-2347= 14 X 1000 = 14000 unrealized profit.

On long Put position we are loosing by 46-40 = 6 X 2000= 12000.00 Unrealized Loss.

The Net effect on our trade is Profit of Rs.2000.00 (14000-12000).

Action:

We will sell 100 futures of Nifty (September 29, 2005) for Rs. 2361x100= 23,6100.00 (A)

Now we are left with 900 futures of Nifty and 2000 Put options expiring September.


Comments:

We have invested Rs.92, 000.00 on 2000 Put Options, which will become absolutely ZERO come September 29, 2005. Because all of it is Time Value and it does not have any intrinsic value in it. Therefore, we have to concentrate just on that aspect and get that money back while making sure that there is still some juice left in the trade. Once we have recovered this money than we will put our energy on maximizing the profits.

We are going to place the following sell stop orders on Nifty futures.

1) Sell 100 Nifty futures at stop limit of Rs.2375.00
2) Sell 100 Nifty futures at stop limit of Rs.2390.00
3) Sell 100 Nifty futures at stop limit of Rs.2405.00

Every order that matures, I will place a buy stop limit order for 100 Nifty futures, in real time, and will post it here, as soon as I place such order.

I will be more than happy to answer any questions, at the end of the trade. Please hold your horses until than. Please do not invest your money because there is no guarantee that this trade will make money. This trade is being used for educational purposes only.

Please feel free to post your comments on this forum for all traders to read.

Good Luck

Wastej
 
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#17
All three orders have executed.

1) SOLD 100 Nifty futures at stop limit of Rs.2375.00
2) SOLD 100 Nifty futures at stop limit of Rs.2390.00
3) SOLD 100 Nifty futures at stop limit of Rs.2405.00

Now we will buy back Nifty futures, if market comes back therefore we will place buy stop orders.

1) Buy 100 Nifty Futures @ 2365
2) Buy 100 Nifty Futures @ 2355
3) Buy 100 Nifty Futures @ 2345

These orders are good till cancelled.

Keep coming back and read the latest development of this trade.

Good Luck

Wastej
 

alokdaga

Active Member
#18
2405 did not happen. The high of 2444 was artificial

Alok

All three orders have executed.

1) SOLD 100 Nifty futures at stop limit of Rs.2375.00
2) SOLD 100 Nifty futures at stop limit of Rs.2390.00
3) SOLD 100 Nifty futures at stop limit of Rs.2405.00

Now we will buy back Nifty futures, if market comes back therefore we will place buy stop orders.

1) Buy 100 Nifty Futures @ 2365
2) Buy 100 Nifty Futures @ 2355
3) Buy 100 Nifty Futures @ 2345

These orders are good till cancelled.

Keep coming back and read the latest development of this trade.

Good Luck

Wastej
 
#19
Closing Price of Nifty futures as of September 1, 2005 is Rs.2389.00
Closing Price of SP2340 Nifty future Put Option is 26.50

We are loosing on our Long Put position 46.00-26.50 = 19.50 x 2000 =39,000.00

On remaining Long Nifty futures 700 we are making profit 2389-2347 = 42 x 700 = 29,400.00

Alokdaga pointed out that our sell limit order of 100 Nifty futures at 2405 did not happen and he further points out that its high of the day was artificial. Keeping that in mind we have adjusted our numbers accordingly. Therefore, we have 700 Nifty futures in hand as oppose to 600.
So far we have sold three hundred Nifty futures:

1) 100 future got sold at 2392 against or order of 2361, 2392 being the opening price, which gives us profit of 2392-2347= 45 x 100 = 4500.00
2) 100 futures sold at 2375 which give us 2375-2347 =28 x 100 = 2800.00 as profit
3) 100 futures sold at 2390 which give us 2390-2347= 43 x 100 = 4300.00 as profit

Total profit realized so far 4500.00+2800.00+4300.00 = 11,600.00 by adding unrealized profit from our long Nifty position we will have 29,400.00 + 11,600.00 = 41,000.00 and deducting or loss from Our long put position 41,000.00 39,000.00 = we are still ahead of the game by merely Rs.2000.00

All previous orders stand cancelled. We will have the following orders put for the next trading day.

1) Sell 100 Nifty future at limit of 2405
2) Sell 100 Nifty future at limit of 2420
3) Sell 100 Nifty future at limit of 2435
4) Sell 100 Nifty future at limit of 2450
5) Sell 100 Nifty future at limit of 2465
6) Sell 100 Nifty future at limit of 2480
7) Sell 100 Nifty future at limit of 2495

Beside the sell order we will place buy limit orders also in the same manner as we have for sell orders. Now we want to capture every whiplash of 15 points. At any time we do not want to have more than 1000 open positions of Nifty futures, just keep this in mind. The first buy order will trigger when (a) either the sell order at a limit of 2405 has matured or (b) if nifty trades 15 points below todays closing price, i.e. 2374 and than on every 15 points up or down the orders will start executing. On every 15 points rise we will sell 100 futures and on every 15 points dip, we will buy 100 futures. If need be we will change the above orders to reflect this.

Due to the time difference, and also my traveling plans (Long Week End- Labor Day Week End) I may not have access to the Internet, therefore, will not be able of posting day-to-day progress.

I need some volunteers who should come forward and keep track of this trade. On my return I will catch up and take the trade further. Volunteer should be able to keep the track of all the trades as explained.

Good Luck

Wastej
 
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