One week ago, I had posted the 13 month performance of this simple strategy.
I had also mentioned that the setting up requires around Rs. 60000 as Margins for spread trades are quite reasonable.
Readers have some questions which I am answering here.
What is the setup?:
We BUY a deep In The Money CALL option in NIFTY for the monthly series.
Start date is one week prior to current series expiry.
For October Series, the setup shall begin on September 22 by BUY October 27 EXP CALL.
This BUY CALL would be about 5% ITM.
That way we pay very little time premium.
The other trade would be a SELL trade.
We SELL NIFTY ATM CALL for the weekly series.
On September 22, that would be September 29 EXP which also happens to be monthly series expiry.
On September 29, we do nothing with the BOUGHT CALL but exit the SOLD CALL and SELL another CALL for OCT 06 weekly expiry.
This goes on like this week after week.
How it works?:
In my book, PROFIT FROM NIFTY OPTIONS — ART OF DOING NOTHING , it is clearly established that BUYING deep ITM CALL option every month and doing nothing after that can be profitable over long term.
But traders are not long term people.
They want more action even when it is not beneficial to them.
This strategy is based on some extra action without hurting the profitability of ITM CALL BUYING too much.
SOLD weekly option helps is reducing the loss in the weeks NIFTY moves lower.
SOLD weekly option also gives some profit in case the week turns out to be flat for the index.
SOLD weekly option gives a loss when NIFTY moves higher by a big number in a week. But in that case, monthly BOUGHT CALL gains much more because that acts virtually like a futures trade eing deep ITM.
Theoretically, we should be getting profit in 75% occasions on weekly basis.
Reality is somewhat different from theory but the numbers tells us that the method works out very well.
It is two kinds of spread together.
It is a CALL spread where we are holding NIFTY ITM CALL and selling weekly ATM CALL.
It is also a calendar spread by expiry date difference where we are trying to take advantage of higher volatility of weekly options.
Example is from Zerodha margin calculator.
Selling SEP 29 CALL and BUYING deep ITM NIFTY 17000 CALL OCT 27
Margin gets drastically reduced with the spreads.
Not So Easy:
Looking at the results is always easy. Living through the trades while they are losing money is never easy.
It is tough to go through losing months like May and June. These are eventually compensated by August 2022 type of gains but one needs to keep the belief in the method and stay with the trades.
Let us watch the progress in the coming months too.