EARNING RISK FREE 20% PER ANNUM

#1
I am planning to implement a weekly covered call strategy

I will buy SBI-ETF NIFTY
Presently it is quoting @ Rs 155.25
My broker gives margin Collateral keeping 10% cash
For one lot Nifty call it requires Rs 116000/- margin
So if I buy 1500 ETF I will be investing Rs 234000 ( 1500 x 156 ).
I will get Rs 210600 margin from my broker
I can sell one lot of Nifty call at Rs 116000 margin

I will sell every Friday Next expiry Option (if current expiry is 18.02.21, next expiry will be 25.02.21).
I worked out Nifty weekly move since 04-07-2019. Out of 88 weeks, move above 10% is 1 time, above 8% 2 times and above 5% 6 times.
Hence I will sell 5% away Strike. If current Nifty is at 15100, 5% away stwill be 15900.
Premium for 25-02-2021 will be around Rs 26.
So one lot will fetch me Rs 1950/-. I predict next friday 50% of this premium will erode.
That is I can pocket Rs 13/- i.e. Rs 975/-.
That will be about 0.42% per week, 0.42 x 4 = 1.68% per month, 20% per year return.
This is better than Bank Deposit.

If Nifty gains 5% in a week, Nifty-ETF will also gain 5%, I can liquidate ETF and squareoff Call. There will be no loss.
If Nifty crashes, No issue sold call will be profitable. I can continue to sell Call.

This strategy looks fine for me.
I am unable to find problems in this strategy, hence please help.
Please inform what are the risks I can face and what can be remedy.
 
#2
What I implement Covered call using monthly expiry?
I will enter around 15th with next month expiry option. Presently 15800 Call for April expiry is quoting Rs 160.65. I will square off this after April 15th. I am expecting 60% premium erosion by then. So I can gain Rs. 112/-, i.e Rs. 8400/-. So my monthly return will be around 3.5%, i.e. annually 42%. It looks unbelievable. It cannot be so simple. What I am missing here?
 

lemondew

Well-Known Member
#4
If nifty falls 15 % then on one expiry it gains more than 5 you will liquidate at -10% and gain .48% 3weeks


I am planning to implement a weekly covered call strategy

I will buy SBI-ETF NIFTY
Presently it is quoting @ Rs 155.25
My broker gives margin Collateral keeping 10% cash
For one lot Nifty call it requires Rs 116000/- margin
So if I buy 1500 ETF I will be investing Rs 234000 ( 1500 x 156 ).
I will get Rs 210600 margin from my broker
I can sell one lot of Nifty call at Rs 116000 margin

I will sell every Friday Next expiry Option (if current expiry is 18.02.21, next expiry will be 25.02.21).
I worked out Nifty weekly move since 04-07-2019. Out of 88 weeks, move above 10% is 1 time, above 8% 2 times and above 5% 6 times.
Hence I will sell 5% away Strike. If current Nifty is at 15100, 5% away stwill be 15900.
Premium for 25-02-2021 will be around Rs 26.
So one lot will fetch me Rs 1950/-. I predict next friday 50% of this premium will erode.
That is I can pocket Rs 13/- i.e. Rs 975/-.
That will be about 0.42% per week, 0.42 x 4 = 1.68% per month, 20% per year return.
This is better than Bank Deposit.

If Nifty gains 5% in a week, Nifty-ETF will also gain 5%, I can liquidate ETF and squareoff Call. There will be no loss.
If Nifty crashes, No issue sold call will be profitable. I can continue to sell Call.

This strategy looks fine for me.
I am unable to find problems in this strategy, hence please help.
Please inform what are the risks I can face and what can be remedy.
 

Verde

Well-Known Member
#5
I am planning to implement a weekly covered call strategy

I will buy SBI-ETF NIFTY
Presently it is quoting @ Rs 155.25
My broker gives margin Collateral keeping 10% cash
For one lot Nifty call it requires Rs 116000/- margin
So if I buy 1500 ETF I will be investing Rs 234000 ( 1500 x 156 ).
I will get Rs 210600 margin from my broker
I can sell one lot of Nifty call at Rs 116000 margin.
Instead of buying Nifty etf it may be more cost effective to buy 1 lot of nifty futures and margin will be lower also.
A rough extimate for the full position is below 25000. Check the actual margin required at the zerodha margin calculator.

If Nifty goes up by 600 in 1 week your put will lose a big amount compared to the profit from the call.......and again the put will need to be changed. The retired guys are using this for monthly income, but it is not that simple because the weekly adjustment of positions is critical.

If you are good at doing the adjustments, the return can go above 30% per annum depending on margin used.
 
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#7
1)
I would recommend NIFTYBEES (Nippon Nifty ETF) instead of SETNIF50 (SBI Nifty ETF) because it has higher liquidity and lower tracking error compared to the SBI EFT. On average NIFTYBEES volume is 3-4 times the volume of SETNIF50.

2)
You intend to purchase 1500 units of the ETF, so theoretically you are not fully hedged.
1500 x 155 = Rs 2,32,500, whereas 1 lot of NIFTY is of 75, so
75 x 15,000 = Rs 11,25,000.

You are only 1/4th hedged against NIFTY rise (you have a greater safety margin because you are selling OTM).

3)
Let us say NIFTY has moved 3-4% up after you initiated your covered call strategy. Then it gaps up following day at the opening by 2%.
In this case, the likelihood of ending up a sizeable loss is significant - because you are long 1/4 size of the NIFTY contract.

Ideally, you should run this analysis using an option calculator at breakeven(5% up-move), 7% up-move and even 10% up-move. Remember, you are only 1/4th hedged. A huge up-move can be devastating - even though you plan on squaring off. It has happened to many in the past.

4)
What happens if NIFTY falls by 10% ? Your ETF is in a loss. After a couple of months, if you keep selling OTM calls that are 10% below your ETF price, then you cannot make profit on squaring-off on 5% up-move if it happens, because you will be selling the ETFs at a loss.

5)
Another thing is profits from option premium and profit from sale of ETF will be short term profits, and 15% STCG is applicable. That will reduce your profits as well.
 
#8
Instead of buying Nifty etf it may be more cost effective to buy 1 lot of nifty futures and margin will be lower also.
A rough extimate for the full position is below 25000. Check the actual margin required at the zerodha margin calculator.

If Nifty goes up by 600 in 1 week your put will lose a big amount compared to the profit from the call.......and again the put will need to be changed. The retired guys are using this for monthly income, but it is not that simple because the weekly adjustment of positions is critical.

If you are good at doing the adjustments, the return can go above 30% per annum depending on margin used.
I treat Futures as risky.
 
#9
My aim is generating around Rs. 50,000/- per month.
1) I have to invest Rs. 28,51,020/- for buying 18000 ETF(Nifty 50). And I will sell 15 lots of Calls, 8% away from current Nifty 50, expecting Rs 45/- premium.
2) When index grows, value of ETF also grows.
3) When index falls Call option makes profit.
4) Excess amount available, after provisioning for Options will be invested into Bharatbonds, fetching 8% p.a. interest.
5) I worked out a simulation taking Nifty movements month on month since January 2012. Current Nifty value is taken as 14,900.
6) excel sheet working is attached
 

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Verde

Well-Known Member
#10
My aim is generating around Rs. 50,000/- per month.
1) I have to invest Rs. 28,51,020/- for buying 18000 ETF(Nifty 50). And I will sell 15 lots of Calls, 8% away from current Nifty 50, expecting Rs 45/- premium.
one gap and 100-200 will go
45 rs is not worth
it is too risky without the put :eekk:
 

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