Simple way to make 100 Nifty points a month (low risk)

[comm4300]

Folks

I have back-tested this for last three months and it works well.

What is the strategy --- SHORT GUT : sell CALL from lower strike and sell PUT from higher strike (strike price higher than current price of underlying).

When to enter --- this is the real trick which suddenly struck me. Enter SHORT GUT in the middle of earlier month of expiry (e.g. For July expiry sell CE and PE around mid-June) and in next 20 - 25 days one can easily cover both positions about 100-120 points lower.

Example - On 20 Feb Nifty spot was 8800 so sold 8500 CE and 9000 PE for March expiry for a total premium of about 750 and by 10 Mar covered the same for 550 (profit of 200)

On 20 Mar Nifty spot was 8600 so sold 8300 CE and 8800 PE for April expiry for a total premium of about 650 and by 17 Apr covered the same for 530 (profit of 120)

On 20 Apr Nifty spot was 8450 so sold 8200 CE and 8700 PE for May expiry for a total premium of about 640 and by 20 May covered the same for 520 (profit of 120).

It so happened that in between the total premium went higher but since this GAME is for 20-25 days, one can wait patiently. But somehow if the premium remains on higher side till two days before expiry (which means NIFTY has swung outside no-loss zone), then add some capital to sell more CE or PE (as the case may be) so as to get out at least in no profit no loss manner.

So, are we game for July expiry?

It looks like till mid-July NIFTY will remain range-bound between 8000 and 8500. Thus, I am planning to sell July 8000 CE and 8500 PE late next week for a premium of about 680 - 700 points and then cover the positions for about 550 points by 10-15 July.

Expert comments invited.

Thanks in advance for your patience and time.

pos_trader

Thank you for sharing the strategy.

Few questions:

1. your entry is time based instead of levels. I am presuming that you do not use Technical Analysis at all.
   
2. do you take VIX into account?
   
3. Selling guts, getting good premium and using the same to further sell more guts. Are you not over leveraging. How will you have capital for : a) adjustments; b) margin requirements. Agree with you about better ROI.
   
4. for my understanding, can you please present an example of adjustment?
   
5. have you checked (backtested) this strategy in a situation like that of 2008?
   

thanks,

 

[James Martin]

Seems good, will backtest it for sure.

 

[abcpankaj]

As per the july series data in OO at my end :
-selling 8000/8500 gut has max profit around 183 with theta decay of 2.46
-selling 8000/8500 strangle has max profit around 221 with theta decay of 3.36

will the extra guts sold using premium, not offset the lesser max gain (221-183)

By all means go with selling guts (vs strangle) if you are psychologically more comfortable doing that .

All the best for your trades & thanks for sharing.

regards

 

[indianbank]

It looks like till mid-July NIFTY will remain range-bound between 8000 and 8500. Thus, I am planning to sell July 8000 CE and 8500 PE late next week for a premium of about 680 - 700 points and then cover the positions for about 550 points by 10-15 July.

pos_trader

Nice post very good strategy....
-----------------------------------

1.Sell 8000 CE 2.Sell 8500 PE Premium 700 points

ok now we will analyse this trade...

difference of both strikes = 500 points
premium = 700

max profit(closing basis) = 200 points if July nifty closes between 8000-8500 level

Profit will decrease each points when nifty breaks 8000-8500 range either side

u will get profit until july nifty closes 7800--- 8700 level :clapping:

 

[indianbank]

Again we will make it more simple....

U people having very good charting softwares.....
take nifty monthly chart ...find out avg Range % wise (not point wise) ....
if its above 5.5 % then this strategy can be a failure....

 

[Smart_trade]

Again we will make it more simple....

U people having very good charting softwares.....
take nifty monthly chart ...find out avg Range % wise (not point wise) ....
if its above 5.5 % then this strategy can be a failure....

Average monthly range in 2014 and 2015 is between 400 points to 600 points

Smart_trade

 

[indianbank]

Average monthly range in 2014 and 2015 is between 400 points to 600 points so most months will need some rectification to be done in the strategy.

Smart_trade

Smart trade sir,

range point wise is not required.... range % wise is required:thumb:

 

[Smart_trade]

Smart trade sir,

range point wise is not required.... range % wise is required:thumb:

So 5-7 % of Nifty value.

ST

 

[Smart_trade]

With Nifty range of 5-7 % assuming max 7 % it means we need to roll down /roll up once by strike price which is up/down by 300 points.

Smart_trade

 

[pos_trader]

@Somatung -- thanks for your encouraging words.

@comm4300 -- thanks for your questions. I will answer those one by one.

1. Decision about entering -- yes, it is not based on technical analysis but based on news flow, imp events, observations and most imp - EoD data of option prices. For ex -- Next week a short gut for July (7900/8500) can be entered and premium of 760 earned. Around 10-15 July when Nifty is around 8200 (i.e. avg of 7900 and 8500), the position can be covered for about 650-660.

2. VIX - VIX is merely a number attached to volatility. I prefer to create position when markets are volatile so that high premium can be earned and cover when markets are relatively calm (markets do become calm after a volatile period).

3. Finances - I will explain with an example. Currently selling one CE and one PE Nifty requires margin of 39k. If you can earn 15 k premium per pair then your effective capital requirement per pair is 24 k (I do not consider this as over-leveraging). So, with a capital of 3.2 L I would sell 10 lots CE and 10 lots PE consuming 2.4 L and leaving behind 80 k in my ledger. (I have account with Zerodha and in past they have not debited my a/c with MTM in case of short gut).

4. Example of adjustment - Created a short gut (7900/8500) when Nifty was 8200. Assume that Nifty falls by 400 points to 7800 in 10 days then I would wait for 8-10 days more. Two days before expiry if Nifty is still at 7800, then I would use balance of 80 k (refer Q3) to add some bearish position like selling 4 lots of 7600 CE around 240. So if Nifty expires at say 7750 part of the losses are compensated by this newly added position (suggestions on this are most welcome).

5. Year 2008 like situation had occurred in global fin markets after a long gap of 80 years, so I have not back tested for that.

Thanks

pos_trader