NIFTY Put Spread for July Expiry– Safe Strategy — Day 04 and 05

What difference does a day make?

In case of stock markets it makes a real big difference. After NIFTY had moved down by about 175 points on June 27 and 28, it came back with a vengeance to gain 125 points and closed above 10700.

Fortunately for us, this move came a day after the Expiry of June contracts. Had this move come a day earlier, our Options Positions would not have shown the profit that they actually did.

Coming back to the Safe Strategy of this Put Spread, these big moves had no impact on our position.

It is almost as if nothing has happened.

True the strategy is not yet into profit, but it is not losing money either. More important is the fact that it does not matter if the market is going up or down. We are not concerned till it shows signs of going below 10500.

The present position of the 3 PUTS as of close on June 29, 2018 is:

NIFTY 10800 PUT —– Rs. 192 ( Buy Trade)

NIFTY 10700 PUT —- Rs. 142.50 ( Sell Trade)

NIFTY 10400 PUT — Rs. 53.45 ( Sell trade)

The difference between the BUY and SELL positions is Rs. 3.95 which is our notional loss at present.

This position will keep changing slightly every day but not likely to become alarming.

So we continue with this safe and sedate strategy unmindful of the day to day fluctuations of the markets.

Next review after two more trading sessions.

Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.

Comments

Vikas Gupta June 30, 2018 at 10:59 am

Margin required for this trade is approx 1 Lac. And this trade is profitable if and only if Nifty stays between 10391-10683. For outside of this range profit is peanuts. Considering the margin required for this trade, and bullishness of the market, does it look good to take position for this trade?

admin June 30, 2018 at 11:20 am

Dear Vikas,

The first point is that if NIFTY stays above 10800, you do not lose any money at all. With whatever bullishness market behaves and even if NIFTY goes to 11500 there will be no loss.

The profit range worked out by you is not right. There will be a profit of 0-100 if NIFTY stays between 10800-10700.

The profit will be 100 points if it expires between 10700-10400.

Again the profit will be diminishing from 100-0 if NIFTY ends between 10400-10300.

Below 10300 we lose money. For that we have to act when NIFTY shows signs of falling below 10500.

Maximum possible profit is 100 points. That is what the safe strategies can give.

I had written about this on one of my quora posts more than a year ago and one gentleman from Bhubaneswar has posted a comment somewhere on this site that he has been trading this strategy every month for last one year and never had a loss.

I told him that there was actually a loss on 3 occasions but he said he took early exit in those times with small profit. People trade strategies with big capital and are content with small though sure profits.

Thanks for sharing your thoughts.
Reply

Vikas Gupta June 30, 2018 at 12:23 pm

Thanks a lot for the prompt reply. It has cleared my all doubts. I would be very grateful if you can share the past one year data based on this strategy.

Thanks

admin June 30, 2018 at 2:26 pm

Dear Vikas,

That would be a bit tedious. Past is anyways past. Let us stay in the present and test the strategy for future. I am sure you will see steady returns. That will also ensure that you visit this site often.

Cheers.
Reply

RCK June 30, 2018 at 6:45 pm

Dear Sir,

I have two questions,
1) On what basis you selected these strike prices for the put spread ?

2) How are you calculating the profit points when the market goes up or down ?

Thanks & Regards,
RCK

admin June 30, 2018 at 9:32 pm

Dear RCK,

The PUT for BUY is to be ITM option.

First PUT for SELL is 100 points away.

Next PUT for SELL is further 300 points away.

Premium to be received should be equal to or greater than the premium paid.

Once the setup is done at slight profit no cost, it will ensure that there would be no loss in case of NIFTY going and staying above 10800.

Profit and loss on daily basis are calculated on the basis of their prices at the end of day. Now I am a seller of the BOUGHT option and Buyer of the two SOLD options. The difference in price is my notional gain or loss on the day.

I hope this clarifies.
Reply
RCK July 1, 2018 at 11:12 pm

Got clarified. Thank you!
Reply

Sha Navas June 30, 2018 at 8:04 pm

Dear Pramod ji,
This spread seems to be in profit. Why do you there is a notional loss at present? Value of sell positions is higher than that of buy.

admin June 30, 2018 at 9:33 pm

Dear Sha Navas,

Good to see you here again.

Now I have to buy the SOLD options and sell the BOUGHT options. Value of SELL positions being higher means I am in that much loss.

Cheers.
Reply

Rajesh Dhawan July 2, 2018 at 12:45 pm

This strategy cannot be called safe, because you are not taking into account the possibility of a major event while the market is closed and a gap-down would blow the bottom off the markets. Please do not suggest such strategies to common people, who do not understand the intricacies of options pricing and impact of black swan events on the options.

In stock markets, risk is everything. Please enlighten your readers about the same and make them better risk managers.

admin July 2, 2018 at 3:39 pm

Dear Rajesh,

Thanks for sharing your thoughts. SAFE is a relative word. No strategy is absolutely safe. Traders are always with some risk. This strategy is safe for a downside of about 400 points. If one is looking for more safety, one should not be trading.

In Civil engineering, when we design a bridge we consider following adverse factors:

Earthquake

Gale force winds

Flood in the river

When we consider these three conditions, another adverse condition is– A train coming on to the bridge at maximum speed.

But we ignore that factor. A combination of all the factors will make the bridge design too costly.

I have stated on the first day that this strategy is safe till NIFTY stays up to 10400. We have to take corrective action once NIFTY approaches 10500 level.

Once again, thanks for sharing your viewpoint.
Reply

Vikas Gupta June 30, 2018 at 10:59 am

Margin required for this trade is approx 1 Lac. And this trade is profitable if and only if Nifty stays between 10391-10683. For outside of this range profit is peanuts. Considering the margin required for this trade, and bullishness of the market, does it look good to take position for this trade?
- admin June 30, 2018 at 11:20 am
  
  Dear Vikas,
  
  The first point is that if NIFTY stays above 10800, you do not lose any money at all. With whatever bullishness market behaves and even if NIFTY goes to 11500 there will be no loss.
  
  The profit range worked out by you is not right. There will be a profit of 0-100 if NIFTY stays between 10800-10700.
  
  The profit will be 100 points if it expires between 10700-10400.
  
  Again the profit will be diminishing from 100-0 if NIFTY ends between 10400-10300.
  
  Below 10300 we lose money. For that we have to act when NIFTY shows signs of falling below 10500.
  
  Maximum possible profit is 100 points. That is what the safe strategies can give.
  
  I had written about this on one of my quora posts more than a year ago and one gentleman from Bhubaneswar has posted a comment somewhere on this site that he has been trading this strategy every month for last one year and never had a loss.
  
  I told him that there was actually a loss on 3 occasions but he said he took early exit in those times with small profit. People trade strategies with big capital and are content with small though sure profits.
  
  Thanks for sharing your thoughts.
Vikas Gupta June 30, 2018 at 12:23 pm

Thanks a lot for the prompt reply. It has cleared my all doubts. I would be very grateful if you can share the past one year data based on this strategy.

Thanks
- admin June 30, 2018 at 2:26 pm
  
  Dear Vikas,
  
  That would be a bit tedious. Past is anyways past. Let us stay in the present and test the strategy for future. I am sure you will see steady returns. That will also ensure that you visit this site often.
  
  Cheers.
RCK June 30, 2018 at 6:45 pm

Dear Sir,

I have two questions,
1) On what basis you selected these strike prices for the put spread ?

2) How are you calculating the profit points when the market goes up or down ?

Thanks & Regards,
RCK
- admin June 30, 2018 at 9:32 pm
  
  Dear RCK,
  
  The PUT for BUY is to be ITM option.
  
  First PUT for SELL is 100 points away.
  
  Next PUT for SELL is further 300 points away.
  
  Premium to be received should be equal to or greater than the premium paid.
  
  Once the setup is done at slight profit no cost, it will ensure that there would be no loss in case of NIFTY going and staying above 10800.
  
  Profit and loss on daily basis are calculated on the basis of their prices at the end of day. Now I am a seller of the BOUGHT option and Buyer of the two SOLD options. The difference in price is my notional gain or loss on the day.
  
  I hope this clarifies.
- RCK July 1, 2018 at 11:12 pm
  
  Got clarified. Thank you!
Sha Navas June 30, 2018 at 8:04 pm

Dear Pramod ji,
This spread seems to be in profit. Why do you there is a notional loss at present? Value of sell positions is higher than that of buy.
- admin June 30, 2018 at 9:33 pm
  
  Dear Sha Navas,
  
  Good to see you here again.
  
  Now I have to buy the SOLD options and sell the BOUGHT options. Value of SELL positions being higher means I am in that much loss.
  
  Cheers.
Rajesh Dhawan July 2, 2018 at 12:45 pm

This strategy cannot be called safe, because you are not taking into account the possibility of a major event while the market is closed and a gap-down would blow the bottom off the markets. Please do not suggest such strategies to common people, who do not understand the intricacies of options pricing and impact of black swan events on the options.

In stock markets, risk is everything. Please enlighten your readers about the same and make them better risk managers.
- admin July 2, 2018 at 3:39 pm
  
  Dear Rajesh,
  
  Thanks for sharing your thoughts. SAFE is a relative word. No strategy is absolutely safe. Traders are always with some risk. This strategy is safe for a downside of about 400 points. If one is looking for more safety, one should not be trading.
  
  In Civil engineering, when we design a bridge we consider following adverse factors:
  
  Earthquake
  
  Gale force winds
  
  Flood in the river
  
  When we consider these three conditions, another adverse condition is– A train coming on to the bridge at maximum speed.
  
  But we ignore that factor. A combination of all the factors will make the bridge design too costly.
  
  I have stated on the first day that this strategy is safe till NIFTY stays up to 10400. We have to take corrective action once NIFTY approaches 10500 level.
  
  Once again, thanks for sharing your viewpoint.

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NIFTY Put Spread for July Expiry– Safe Strategy — Day 04 and 05