August 30, 2015

Simple NIFTY options trading strategy

This is one of my favorite plays on nifty options and takes advantage of time decay.

The trade is to short nearest call and buy the next call above in the series (100 point gap). Here the view is of limited upsides. This works best when premium difference is 40-50 points.

This is an example of a trade I took on Friday.

Here I took a short position in 8100 call and collected a premium of 164 points. To protect this position, I bought 8200 call at a premium of 115 points.

The premium difference is 49 points and is the maximum profit I can earn in this transaction. The maximum loss in case markets blast off from here is 8200-8100-49=51 points.

I am in full profit if expiry close is below 8100 while loss starts above 8149.

Note that as the entire premium is towards time decay, the position earns a small profit of few points everyday.

A bullish view or a view of limited downsides would require a different strategy - short 8100 put and buy 8000 put.

Warning: you must determine in advance the best case profit and worst case loss before initiating any such similar trade. In fact, this is true for any trade in the stock markets.

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