Low Risk Options Trading Strategy - Option Spreads

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Dear all,

Pls go through the stratagy mentioned below which I found very fool-proof to earn nearly 10-15% out of your investment of 3 lots of nifty.

its posted on some other site from one very kind hearted person. really nice stratagy . and one can defenately trust on it.

the levels mentioned are litle old but try to understand the logic, which will surely work.


Sell Nifty 4800 Call (Jan) at 255-265 and hold. Go Long if Nifty Fut trades above 5000 and hold till Nifty Fut comes back below 5000

Sell Nifty 5100 Put (Jan) at 220-228 & hold. Go Short if Nifty Fut trades below 4950 and hold till Nifty Fut comes back above 4950

NF is 4974

Note :

1. Premium of above options may be beyond the range given above. But the idea is to get minimum 480 points as premium by selling Nifty Options and Nifty levels should be between 4950 and 5000.
2. Sell both Put and Call Options simultaneously and don't try to wait for change in price.
3. You will have to hedge the option with Nifty Future by buying or selling as per conditions. Do it as many times nifty future comes at these levels.
4. Keep aside your sentiments and do it in a disciplined way. You will get good profits.
5. There may be some instances where you may not be able to catch the Nifty Future levels for hedging. To know the experience on how to handle such situation or for any other clarification, you can post here or pm me.

give you example of last trade :

Date 07.12.2009
Sold 5300 Put and 5000 Call with total premium of 550
Action for Nifty Fut = "Buy at 5190 and Sell at 5130"
Margin for selling options = 54000
Received premium = 27500
Net Investment = 26500
Sold Nifty at 5130
Margin for Nifty = 26000
Total Investment = 26500 + 26000 = 52500
Exited from above call yesterday i.e. 21.12.2009
Bought Both Options at 500 points (total for both)
Bought Nifty at 4980
Got 50 points in Options and 150 points in Nifty Fut
Total Points gained = 200
Total amount gained = 10000
Total trades done in Nifty Future = 4 times
Total brokerage for trading in Options and Future = 900
Net Profit = 10000 - 900 = 9100
Total Investment = 52500
Profit in Percentage = 17.3%

I (the original writer) have been trading with this strategy for last so many months and gaining on regular basis and having sound sleep in night.
 
for above stratagy.... pls find Explanation : How to decide what option to sell and when?

Always sell option of next month. Ideal time to sell is first & 3rd week of contract month.

Sell Call of about 100-150 points below the current nifty level and Sell Put of about 100-150 points above the current nifty level.

Check-out the nearest support/resistence levels and decide the levels to go long or short. The difference between short and long level should not be more than 100 points.

Explanation 2 : How this works and gives profit?

Let's discuss the current call given today which in the morning gave 480 points by selling 4800 call and 5100 put of december

Nifty level was around 4970. Today's immediate support was 4950 and resistence 5000

During the next 2-3 weeks nifty either remain between 4950-5000, or go above 5000 or go below 4950 (any number of points) i.e. 3 probabilities are there, either nifty go down or go up or remain between 4950-5000. No other instance can happen. Let's discuss all the probabilities.
1. If nifty goes above 5000 - go long in nifty and hold till it comes below 5000. Because if nifty goes above, premium of call of 4800 will start increasing but we will get more points from Nifty Future and premium of 5100 Put will erode fastly and that will be our profit.
2. If nifty goes below 4950 - go short at 4950 and hold till it comes above 4950. Because if nifty goes below, preimum of put of 5100 will start increasing but we will get more points from Nifty short and preimum of 4800 call will erode fastly and that will be our profit.
3. If nifty comes or remains between 4950 - 5000 after 2-3 weeks or near to expiry of Jan. the premium of both the put and call will erode as happened today. Yesterday the total premium of this combo was 487 points and today it is 459 points. Premium of both will keep on eroding day-by-day if nifty remains at current levels. At the time of expiry if nifty closes below 5000 and above 4950, we will have to give premium of 300 points (difference between strike price of Put and Call sold) and even then, we will get profit of more than 180 points.

Go short in Nifty Future at 4950 and hold it for as many time or days as it remains below 4950. If it again comes at 4950, exit at this level. Under such situation, you won't gain even a single point in future, but you will get somany points in premium erosion.
Go long in Nifty Future at 5000 or 5040 level and hold it for as many time or days as it remains above 5000 or 5040 (whatever is the entry point). If it again comes at 5000 or 5040, exit at this level. Under such situation, you won't gain even a single point in future, but you will get somany points in premium erosion.
It means your entry and exit points in nifty future long or short will remain same till you hold this combo option.
 

VJAY

Well-Known Member
Dear jaywings,
Looks good this strategy...will try to papertrade......have one doubt...suppose enter trade this month then can use sell next month call&put not current month am i right?
 
Hy Smart_trade

How is your put ratio spread going ?

Regards

DanPickUp
Hy Dan...

The trade is doing well...I have taken some action in the trade today....I have traded multiple contracts so I am taking example of say the following to illustrate my action....

Bought 100 Nifty Jan 5300 put
Sold 200 Nifty Jan 5100 puts

This was our original trade.....today at 5200 ,I have bought 40 Nifty ( 2 contracts of mininifty) in futures . The stoploss for this purchase is 5150 so I now hold 40 nifty futures....The reason for buying Nifty Futures is to book some profits in case the market reverses and goes to 5300....in case it continues its downward march,we have a stoploss for futures...and 5300 put will continue making money....I intend to sell this futures long position at around 5280 if the prices go there....and take a free ride in this trade....

Best wishes,

Smart_trade
 

AW10

Well-Known Member
Dear all,

..........
Sell Nifty 4800 Call (Jan) at 255-265 and hold. Go Long if Nifty Fut trades above 5000 and hold till Nifty Fut comes back below 5000

Sell Nifty 5100 Put (Jan) at 220-228 & hold. Go Short if Nifty Fut trades below 4950 and hold till Nifty Fut comes back above 4950

NF is 4974

Note :

1. Premium of above options may be beyond the range given above. But the idea is to get minimum 480 points as premium by selling Nifty Options and Nifty levels should be between 4950 and 5000.
2. Sell both Put and Call Options simultaneously and don't try to wait for change in price.
3. You will have to hedge the option with Nifty Future by buying or selling as per conditions. Do it as many times nifty future comes at these levels.
4. Keep aside your sentiments and do it in a disciplined way. You will get good profits.
5. There may be some instances where you may not be able to catch the Nifty Future levels for hedging. To know the experience on how to handle such situation or for any other clarification, you can post here or pm me.

give you example of last trade :

Date 07.12.2009
Sold 5300 Put and 5000 Call with total premium of 550
Action for Nifty Fut = "Buy at 5190 and Sell at 5130"
Margin for selling options = 54000
Received premium = 27500
Net Investment = 26500
Sold Nifty at 5130
Margin for Nifty = 26000
Total Investment = 26500 + 26000 = 52500
Exited from above call yesterday i.e. 21.12.2009
Bought Both Options at 500 points (total for both)
Bought Nifty at 4980
Got 50 points in Options and 150 points in Nifty Fut
Total Points gained = 200
Total amount gained = 10000
Total trades done in Nifty Future = 4 times
Total brokerage for trading in Options and Future = 900
Net Profit = 10000 - 900 = 9100
Total Investment = 52500
Profit in Percentage = 17.3%

......
Almost similar startegy was discussed by Linkon7 in another thread here.

http://www.traderji.com/options/28235-good-profit-hedged-nifty-positions-straddle.html

As I understand it, the idea is to collect premium from market i.e. timevalue of sold options.. and then use NF to play around. Due to premium collected, u get extra cushion.
Now when selling the options, u can sell straddle (i.e. ATM Call and ATM put), or can sell ITM Calls and Put (like given in strategy) or Can sell OTM Calls and Puts.
As the idea is collect time value, then it is maximum in ATM strikes.. so they are best to sell, OTM options are purely timevalue so they are second best.

ITM options have less time value so I am bit uncomfortable with the selected strikes in above strategy. More over due to high value of premium, Taxes will be higher and as ITM options are sold, hence wil need slightly higher margin money. Moreover margin requirement will fluctuate a lot everyday.

Though it migh seem that u are collecting 550 rs of premium, but actually u are going to give back 300 rs of it (5300- 5000 strike) hence u r collecting only 550-300 = 250 rs of premium. That gives u breakever of 5300+250 = 5550 and 5000-250 = 4750.
You might be able to get same premium by selling OTM call of 5300 and OTM put of 5000. And if you are collecting same 250 rs. then there is no change in breakeven point.
What will differ in both strategies are the tax, margin requirement and speed of time decay. From these point of view, I will prefer to use OTM strikes.

Besides that, this strategy has naked short, so theoratically it is open for high risk.

Otherwise, it is fairly nice strategy to use for consistent income.

That's my view on it. Would love to see others view as well.

Happy Trading
 

AW10

Well-Known Member
Dear jaywings,
Looks good this strategy...will try to papertrade......have one doubt...suppose enter trade this month then can use sell next month call&put not current month am i right?
Vijay, as i understand, the core of this startegy is to collect max timevalue.
And far expiry options have more of time value, though the rate of decay is slow.
But that is not focus here. Due to larger amt collection, you have more flexbility/buffer to
play around with NF.

Shorter expiry option have lower TF and are lot more sensitive to spot movement hence the selection was for next month options.

Hope this helps
Happy Trading
 
Sell Nifty 4800 Call (Jan) at 255-265 and hold. Go Long if Nifty Fut trades above 5000 and hold till Nifty Fut comes back below 5000

Sell Nifty 5100 Put (Jan) at 220-228 & hold. Go Short if Nifty Fut trades below 4950 and hold till Nifty Fut comes back above 4950

NF is 4974
How many points above/below the pivots of 5000 and 4950 will you enter and exit? If you decide on say 5 points then will you enter at 5005 and exit at 4995? With a naked future, thought the straddle will give you some cover, how will you deal with large gaps around the pivots?
 

VJAY

Well-Known Member
Dear AW10 sir,
Thanks for your valuable thought for the strategy....it will help lot to me and others who are tendency to enter any strategy without looking inside the strategy.........thanks a lot...
 
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