[airbus]

Anyone doing hedging by buying CE and PE? I know someone who does hedging by selling CE and PE, but since selling requires much larger margin than buying, I am wondering if I can try buying both CE and PE together, say Nifty 15400 CE and 15000 PE for the same expiry date.

[SmartCat]

Originally Posted by airbus

Anyone doing hedging by buying CE and PE? I know someone who does hedging by selling CE and PE, but since selling requires much larger margin than buying, I am wondering if I can try buying both CE and PE together, say Nifty 15400 CE and 15000 PE for the same expiry date.

It's called hedging if you buy a put option to protect your portfolio from a big fall. When you buy both put and call option, it is just speculation. With this trade, you will make money only if NIFTY makes a large move either on the upside or downside.



If you buy 15000 PE and 15400 CE, it will cost you Rs. 17,000. Your breakeven levels are 14772 and 15628 - only beyond these levels, the trade will become profitable. Take this trade only if you expect a big move (up or down) between now and 25th Feb.

Do some Google/Youtube research on options trading before you dabble with it. Use virtual trading platform like www.sensibull.com or https://opstra.definedge.com/ to understand how options work. Since it is a virtual trade, you won't lose money while experimenting.

[SilentEngine]

Originally Posted by SmartCat

One option is to invest in stocks that offer dividend yield equivalent to liquid funds returns. Right now, if liquid funds are offering 4% returns, invest only in stocks that offer minimum 4% dividend yield. Such a list contains 30+ stocks as of today
https://www.screener.in/screens/3296...-Yield-Stocks/

Even if stocks tank, you will still get the returns that you were getting in liquid funds anyway (as dividends). But out of this shortlist, stick to business brands and consumer brands as mentioned before. Such companies will have stable dividend payout year after year.

Remember that high dividend yield stocks are not on the radar of most investors & traders. So these are underpriced even in an overheated market. But yes, you might see a temporary 'red' in the portfolio as even these stocks will fall. But then, since these are dividend yield stocks, you will be paid minimum 4% for waiting for stock prices to recover (which they eventually will).

How about selling a 'secured put' against these dividend yield stocks? You will miss out on any immediate dividends, but option premiums collected will more than compensate for that. Added benefit is that you will eventually own the stock at much lower price than buying outright right now.

Taking it to next level - invest the funds in a liquid fund, and then use that as collateral to write the options. Not only will you get the 3.5%-4% pa return on liquid fund, you can also get additional 1% return each month by collecting the premiums. One can potentially do this perpetually as long as the puts stay OTM. Of course this needs substantial account size to start with (at least 5L per lot depending on the stock), and lot of patience, but anything wrong with this line of thought?

[SmartCat]

Originally Posted by SilentEngine

How about selling a 'secured put' against these dividend yield stocks? You will miss out on any immediate dividends, but option premiums collected will more than compensate for that. Added benefit is that you will eventually own the stock at much lower price than buying outright right now.

That's how I got started with options - cash secured put and covered calls. These are the safest options strategies and can be incorporated into a long term stock investment strategy, and is not considered to be speculation. Warren Buffett rakes in billions by selling cash secured puts.

Be Like Warren Buffett: Sell Put Options
https://www.forbes.com/sites/baldwin...h=20e6226420af

Taking it to next level - invest the funds in a liquid fund, and then use that as collateral to write the options. Not only will you get the 3.5%-4% pa return on liquid fund, you can also get additional 1% return each month by collecting the premiums. One can potentially do this perpetually as long as the puts stay OTM.

It has been statistically proven that selling put options regularly over a long period of time will give roughly the same returns as buying stock. The put option price incorporates everything, including the prevailing interest rates. So there is no extra returns to be had by selling put options as a standalone strategy. If there really was any edge here, then no investment bank or hedge funds will buy stock. They will just sell put options.

You can do backtesting yourself at https://opstra.definedge.com/.

However, you can improve your trading returns by tweaking your strategy a bit and not blindly selling put options every month. Eg:

1) You can avoid selling puts during results month. After results announcement, a stock is likely to see big moves
2) You can avoid selling puts when volatility is high (based on India vix, as in March/April 2020)
3) You can sell puts only when overall markets are in a general uptrend.

Of course this needs substantial account size to start with (at least 5L per lot depending on the stock)

Instead of selling naked puts, you can sell put spreads instead. Eg: ITC put spread. Note that margins needed on put/call spreads are very small



If you are interested in options strategies, check www.tastytrade.com. It is CNBC like "Live Television" on options trading (from 7:00 PM to 2:00 AM). You can also look up Tastytrade's Youtube channel for past videos

[SilentEngine]

Originally Posted by SmartCat

That's how I got started with options - cash secured put and covered calls. These are the safest options strategies and can be incorporated into a long term stock investment strategy, and is not considered to be speculation. Warren Buffett rakes in billions by selling cash secured puts.

Be Like Warren Buffett: Sell Put Options
https://www.forbes.com/sites/baldwin...h=20e6226420af

I agree.
Especially now that stock derivatives are physically settled and not cash settled, it makes more sense to use these strategies, instead of just speculative purposes. On that topic, it will be interesting if similar physical settlement ever becomes possible for index also (may be using ETFs).

It has been statistically proven that selling put options regularly over a long period of time will give roughly the same returns as buying stock. The put option price incorporates everything, including the prevailing interest rates. So there is no extra returns to be had by selling put options as a standalone strategy. If there really was any edge here, then no investment bank or hedge funds will buy stock. They will just sell put options.

I didn't mean to suggest this as a complete alternative to owning stocks. It was more of a thought on 'how to buy' the stocks, and what do do with surplus cash, like what @saket77 was asking earlier. Basically delay the buying till it comes to an acceptable price range, if one feels the market is overvalued currently. And while you are waiting for it, why not collect some premiums? Assuming bulk of funds are already invested in stocks/mfs/liquid funds etc, and there's additional fund that one wants to deploy eventually on stocks, this can be an option.

It's what i am doing off late. Main attraction for me was that, it reduces risk compared to buying outright. If a stock runs away too much or something changes fundamentally which makes that stock no longer attractive, one can always pick another stock next month.

However, you can improve your trading returns by tweaking your strategy a bit and not blindly selling put options every month. Eg:

1) You can avoid selling puts during results month. After results announcement, a stock is likely to see big moves
2) You can avoid selling puts when volatility is high (based on India vix, as in March/April 2020)
3) You can sell puts only when overall markets are in a general uptrend.

From a long term investor's perspective, if the underlying premise doesn't change - on why one is selling puts in the first place (which is, to own that stock at a lower price), with proper risk mitigation strategy in place (no leverage, use your own money, use only the amount that can be forgotten for a year or two), i think small dose of volatility once in a while can actually be an advantage, to help earn more for doing the same as earlier!

And as you rightly suggest, I stayed away from this in March/April 2020 though. That requires courage at a different level, although in hindsight it was the right time to buy!

[SmartCat]

Originally Posted by SilentEngine

Basically delay the buying till it comes to an acceptable price range, if one feels the market is overvalued currently. And while you are waiting for it, why not collect some premiums? It's what i am doing off late. Main attraction for me was that, it reduces risk compared to buying outright.

From a long term investor's perspective, if the underlying premise doesn't change - on why one is selling puts in the first place (which is, to own that stock at a lower price), with proper risk mitigation strategy in place (no leverage, use your own money, use only the amount that can be forgotten for a year or two), i think small dose of volatility once in a while can actually be an advantage, to help earn more for doing the same as earlier!

If your intention is to buy stock at a particular price, and collect premiums till then, then it is perfectly rational strategy. As I mentioned before, you can also sell put spreads instead (if you don't want to commit 8L capital towards one stock). We can call it the "cash secured put spread".

[swiftnfurious]

I see there are lots of WhatsApp & Telegram groups which offer paid services now a days. Have used some of these services in the past and the calls are reasonably good, if proper time is dedicated for it.

However want to know whether these are supposed to be SEBI approved ? Want to know if there is any complaints forum one can reach in case they don't provide the service as committed, in terms of number of calls, time duration etc.

[airbus]

Originally Posted by SmartCat

With this trade, you will make money only if NIFTY makes a large move either on the upside or downside.

Today I took a trade by buying both call and put. Here is the result:



I was a pure investor until Covid hit us. I realized that if I want to do trading full time at some point of time, I need to learn to make some money even if market goes down. I tried scalping for few months and result was encouraging. Then started learning options and it was buying only call or put. The idea of buying both call and put was taken from a friend who does option selling of both call and put.

[shivshanker]

Originally Posted by SmartCat

If your intention is to buy stock at a particular price, and collect premiums till then, then it is perfectly rational strategy. As I mentioned before, you can also sell put spreads instead (if you don't want to commit 8L capital towards one stock). We can call it the "cash secured put spread".

Guruji... since you know so much about the call and put market, how about a Zoom call for some of us who are a bit technically challenged?

Agreed, guru purnima is far away, but even if you want to accommodate me for a 1:1 discussion, would be much appreciated

[SmartCat]

Originally Posted by shivshanker

Guruji... since you know so much about the call and put market, how about a Zoom call for some of us who are a bit technically challenged? Agreed, guru purnima is far away, but even if you want to accommodate me for a 1:1 discussion, would be much appreciated

Since it is likely that I might ask for a thumb as gurudakshina, its better if we do a AMA (ask me anything) on options right here on this thread. I'm pretty sure there are others who dabble in options too, who might pitch in with their responses. If there is enough (open) interest on this topic, I'll move out the options related posts to a new thread.

[SLK]

Hi -

I have a question on a derivative strategy I've been thinking about. While I do understand derivatives and hedging as a subject, but I'm new to trading derivatives.

Trade: Sell a call and a put with adequate spread to have a graph that looks like this. The current spot is around the middle of the flat.



Of course, if the price stays in the middle, there is a good gain from the premiums collected, but once the FUTURE price reaches the edge of the flat, I would like to take a short/ long position in a FUTURE to lock the profit at that level.

The risk is, the FUTURE exposes me to a downside risk as well, i.e. if the price starts moving back to the middle of the flat, I'll have to square-off the FUTURE and this process could repeat multiple times erasing the entire margin, OR am I over thinking? and this seems completely doable?

The margin required for this trade are also very high, but doable.

[SmartCat]

Originally Posted by SLK

The risk is, the FUTURE exposes me to a downside risk as well, i.e. if the price starts moving back to the middle of the flat, I'll have to square-off the FUTURE and this process could repeat multiple times erasing the entire margin, OR am I over thinking? and this seems completely doable?

You are not over-thinking. What you fear will happen. A stock will not keep trending downwards or upwards steadily. It might fall 3%, rise 1%, stay unchanged, rise 0.5% and then fall 4% in a span of 5 days. If you try to protect your short strangle with futures, you will end up with losses in your futures position (between day 2 and day 4). And if the stock reverses bigtime, you will see a bigger loss in futures.

Naked short strangle is not recommended in stocks, because of frequent large moves. Go for short iron condor instead. Premium collected will be lower, yes, but the margins needed will be 33% lower too. Your long term return on capital is likely to be similar in short strangle and short iron condor.

But if you want to stick to naked short strangle because of its simplicity, do not bother about "management" of position. Just use 'targets' and 'stop loss' instead, on the combined position (short PE, short CE, together). For eg: if you have collected Rs. 20,000 as premium, set a stop loss of Rs. 2,000 (MTM loss) and target of Rs. 5,000 (MTM profit) for this position. The premium collected/target/stop loss numbers are just examples - you should choose numbers you are comfortable with.

Another strategy is to just exit the positions when a short option strike is breached. Just because a short option is breached, your position will NOT be at a loss all the time. You can even exit this position at a profit, especially if the short option is breached after many days of entering the original position.

[iamitp]

Really happy to see this thread on my daily newsletter. I started trading derivatives in December 2020 after the doubling gains in equity from Covid levels. I was tempted by the lure of making money when stocks are going down instead of only making money till then with 'buy & hold'.

An important point I missed about derivatives was the need to be accurate about direction, magnitude and timing. So without doing my homework on option strategies, greeks, risk management etc., I sunk in money from December to February on purely directional hunches. To cut the long story short, I lost close to 3 Lakhs in these 3 months which was a third of my net portfolio.

It was bitter pill to swallow and I have spent the past month learning more about options on Zerodha Varsity modules. Plan on reading up more, signing up for virtual trading on Sensibull and make take baby-steps towards profitable derivatives trading.

[itsmb]

While I am primarily an Option seller, option buying can certainly help traders in unimaginable ways. Stay with me for some time to explore the beauty of Option buying.
1 Scenario 1 - Long/ Short Future.
This is the most common Strategy used by Speculative traders, while it gives you unlimited returns if your speculation is right; it also exposes you to large losses if you go wrong. Lets understand with some pictures.

This picture explains what happens when you enter a naked Long/ Short position in Nifty Futures. It can be clearly seen that both Profit and Loss potential are Unlimited, also the Margin required is 1.7 Lakh Rs. Now let me introduce a Savior called long Option in the same strategy.

Voila, while my profit potential still remains unlimited my losses have been capped in both the cases. Before you miss another small detail, margin requirement has also reduced by seven times.
2. Scenario 2 - Short Straddle/ Strangle.
These to are the best strategies to earn decent profits in a range bound market, most option sellers enter one of these two strategies in weekly Nifty/BNifty. Pay off graph for reference.

As expexted, Straddles and Strangles give you a decent return on Weekly/ Monthly basis and also protect you to a certain movement in the market, again let me introduce a small magic.

Once I introduce Long Options in the strategy it no longer remains Straddle/ Strangle but Iron Fly/ Iron Condor. Did you notice that Maximum loss has been capped, don't miss the margin requirement also.
These are the most popular examples how option buying opens another prospect in trading. Option trading is a vast topic, not much can be discussed here.
Happy Trading.

[SmartCat]

Originally Posted by itsmb

Voila, while my profit potential still remains unlimited my losses have been capped in both the cases. Before you miss another small detail, margin requirement has also reduced by seven times.

You don't need to use futures here at all. You get the same payoff chart when you buy a call option or buy a put option. By bringing futures into the picture, you are unnecessarily adding one more trade.

Originally Posted by iamitp

It was bitter pill to swallow and I have spent the past month learning more about options on Zerodha Varsity modules. Plan on reading up more, signing up for virtual trading on Sensibull and make take baby-steps towards profitable derivatives trading.

Found one more virtual trading platform:
https://neostox.com/