We are going through a tough time in our Option Buying Series for the current month. Option Buying is like that, it is very satisfying when good trades come through and very frustrating when they go bad.
Many traders do not have the stomach for it. They are fine with the profit but the ups and downs of each day are too much to bear for them.
Such traders look for safe trades.
Safety is a relative term. Nothing is absolutely safe.
A strategy is basically a combination of trades ( two or more) which prevents a big loss. Naturally there is a big compromise on profits also.
On various requests from the followers on Quora and the participants in the F&O Workshops conducted in the past, I am listing out a safe strategy through NIFTY PUTS for July Expiry.
This series will run along with our regular series on Option Buying Trades.
NIFTY closed at 10741.10 on June 21, 2018.
For creating the PUT Spread, following trades will have to be taken:
Buy 1 Lot NIFTY 10800 PUT —- Rs. 163
Sell 1 Lot NIFTY 10700 PUT — – Rs. 121
Sell 1 Lot NIFTY 10400 PUT —- Rs. 46.50
Here is the chart showing the closing rates for the above options on June 21, 2018:
It can be seen from the Bid and Offer prices that these trades are feasible.
There is a credit of Rs. 4.50 as the Sell Price of the two options is slightly higher than the buying price of 10800 PUT.
What Can Happen ? :
One outcome can be that we are absolutely wrong. NIFTY goes up and keep going up.
In that case, we lose nothing.
Even if NIFTY goes to 11500 in July ( not that I would like it to go there ), the worst case is that all the three PUTS expire worthless. As we got the money fm t sold PUTS, there would be no loss.
How nice it would be to not have a loss when terribly wrong?
If we are right and NIFTY moves down:
Our profit will be in the range 0-100 points if NIFTY stays between 10800 to 10700.
Our profit will be a fixed 100 points if NIFTY stays between 10700-10400.
Our profit will start reducing again and will be from 100-0 point if NIFTY stays between 10400-10300.
Loss would come if NIFTY goes below 10300 which is about 440 points away right now.
And that can be managed.
We exit if and when we see NIFTY going towards 10400.
Or else, when NIFTY approaches 10500, we buy 10300 PUT and lock after profit and loss.
But this management comes later. As long as NIFTY s staying in a range 10800-10500, we do nothing.
This trade would require margin for the two SELL trades.
It is possible to consistently make small profits every month ( most of the months) without undergoing the stress involved with the Option Trading.
The set up is to be created few days before Expiry of current month contracts for Next month Expiry.
Otherwise it will not be possible to set it up at zero cost.
Remember, we want no loss in case we are wrong. For that it is essential to get the strategy set up at zero cost.
It may be feasible to get these prices or slightly different on Friday ( June 22. 2018) and the trades can be initiated.
We shall be monitoring these trades on day to day basis from Monday ( June 25 ) onwards.
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.
Niloy June 22, 2018 at 10:36 am
Thank you sir. Your posts are really great. However, most brokers do not allow shorting of index options in delivery; ICICI allows it but the margin req for 1 lot is coming at around 60k and the brokerage is also very high. Is there any other way or a strategy that involves multiple long positionsReply
Manoranjan June 23, 2018 at 3:52 pm
All brokers will allow shorting Options . You will require around 60k for each lot of Nifty option short. This is the requirement from exchange to mitigate Risk . This strategy requires you to short 2 Lots so the margin Requirement is around 120k
admin June 23, 2018 at 7:17 pm
Thanks Manoranjan for the reply.Reply
G2 June 23, 2018 at 6:45 pm
Sir, can we do call spread also with this making money in both ways? 🙂Reply
admin June 23, 2018 at 7:16 pm
I wish making money was so easy.Reply
Yes, we can go far the CALL spread also. Risk reward will be same. With a similar set up we shall be buying a 10700 CALL and selling 10800 and 11100.
Maximum profit will still remain 100 points. Only change is that the 100 point profit will be available for the entire range from 10400 to 11100. And margin requirements will become double.
Ritesh Kumar August 13, 2018 at 6:37 pm
please continue this safe strategy along with options series for coming September 2018 expiry also, as a lot of readers are inclined towards relatively safe strategy too.
admin August 13, 2018 at 7:28 pm
I will be posting it for September Expiry soon.Reply