Introduction: Most F &O traders used to neglect the power of volatility and its implication in Future trade. Hope you have the idea of the covered call with put hedge strategy. I have found it to be the most successful and powerful strategy in Indian market but slight alteration is required for this. Any one can initiate this strategy with blind eye. As I said many times before, we the traders either lack the knowledge or we have the problem of plenty which always yield negative return for us. It is often seen that we learn the techniques but never allow yielding the positive result for us
To day I have experienced one of the most successful and thrilling experience from one of my client. Being blind folded in the skill of technical, fundamental from past couple of years he is playing only on covered call with put option strategy.This strategy I have already discussed in my book on Master Key to Futures & options. A also many such interesting strategies in the DVD course. I’ve also developed a calculator to find the actual volatility in option premium which is being given with the course to help you in making the right decision at right time.
Today my client has claimed that he has earned more than 70% per year from his capital just by following the one strategy. He too has admitted 50% failure in his trade decisions. It looks very impractical but this is the truth. I am going to describe how these things happen in real trade practice?
The strategy is “Buy current or next month future , sell the Next month Call option having higher time value and greater volatility and buy the put option of the current month having strike greater than or equal to (future strike – call premium received.) ”
1. On November 3rd I have bought Nifty future December at 4560, sold the 4600ce December at 188, bought 4400 pe November at 80.
On 9th November 2009 I close the strategy future at 4900, 4600 ce at 390 and 4400 pe at 12.50. Profit Rs340/- in future, loss Rs202 in 4600ce short and loss Rs67.50 in 4400 pe short. Net profit realized was Rs3525 in the strategy.
2. On 10th November bought Nifty future at 4880, sold 5000 ce December at Rs145 and bought 4800 pe at Rs75. On 17th November 2009 I close the strategy future at 5070, 5000ce at 200 and 4800 pe at 11. Profit Rs 190 in future, loss 55 in 5000ce short and loss Rs65 in 4800 pe short . Net profit realized was Rs3500 in the strategy.
3. On 18th November 2009 bought nifty future December at 5055 , sold 5100 ce at 209 , bought 4900 pe December at 102.On 27 th November 2009 I close the strategy future at 4965, 5100ce at 145 and 4900 pe at 135. Loss Rs 90 in future, profit 55 in 5100ce short and profit Rs33 in 4900 pe long. Net loss incurred Rs250 in the strategy.
Hence the total gain in this rise and fall tide I have made Rs7025-Rs250=Rs6775 profit.
Must read this very carefully .The trick is too simple. I have 3 months contract (current, near and far) open at a time. For 1st 2 week of the current settlement cycle I will initiate the strategy as follows
A. current or near month future long(i.e. 1st or 2nd month future long )
B. Near month option strike having higher volatility or time value sell (i.e.2nd month option)
C. Current month option having strike greater then equal to (future strike – option premium received) buy.
For the last 2 weeks of the settlement month I will initiate this same strategy with near and far month contact. This is because to avoid the unnecessary time value decay in the long options.
This position also has one more benefit. Since this is a spread position it attract less margin and you can have a better bargain with your broker regarding the margin and brokerage issue.
The positions discussed by me in the above section may required Rs60000 investment if you consider 12% margin on the nifty future long and options short. Out of which you will be getting 10% (i.e. Rs6000) capital in the way of net credit by selling the option and buying the option. Three to five speculations in a month with average positive return of Rs2000 will make you to earn Rs6000 to Rs10000 per month. This approximate estimate may yield Rs72000 in a year. Provide 30% of estimated gain for exceptional losses, brokerage, and tax. Now Your tradable capital of Rs60000/- can generate Rs40, 000 to Rs50000 by following this strategy. This is a rough estimation based on the performance seen by us in the month of November 2009 by following this strategy. However the actual figure may vary based on your implementation and market condition.
If you are a good speculator then each 100 point move in nifty you can close the profitable position and reenter again with 20 to 30 point fall. Provided your brokerage must be low enough. You too can form 3 such strategies with covered call with put long and 1 covered put with call long. This will increase your profit realization by 50% and reduce the loss risk by 80%.
Why I focused on Nifty for this strategy? This strategy also works in stock options and futures. However the stock options have the risk of exercise in case of a wild move and it has the greater possibility to become illiquid too. This problem will not be encountered if this strategy is playing the Nifty future and option alone.
Conclusion: if you are new to the Future and option trading then down load the Free E-book “Essential of Stock Trading” from our site and read the basic so option trading. After which you will get the grip to understand this strategy and apply it in more efficient manner. Some basic home work of finding the option volatility will prove to be highly beneficial while initiating this strategy.