Saturday, January 30, 2016

How we managed to book profits in Nifty Strangle in Jan-16

Last month my paid subscribers booked profit in following 2 pairs in Nifty and Banknifty Options.
Total profit made in both the pairs is 2% of the margin utilized. We could manage to earn some profits in highly volatile month, though many traders suffered huge losses in Jan 16.

Below are the details of Nifty trade out of both the trades.

On 6th Jan we began with pair trade in Nifty.
 This is how trade went.

Sold Nifty 8000 Call at 28
Sold Nifty 7400 Put at 31

This is called as Short Strangle Strategy. Read more about Strangle here.

This earned total premium credit of (28*75)+(31*75)= 2100+2325= 4425 (For one Lot)

Below is justification of why have I chosen 7400 and 8000 strike prices:
There was support near 7550 as it was earlier bottom in Nifty and there was a Demand Zone (Kind of Support) around 7381. Moreover this (7400) level was about 400 points away from 7784, on which Nifty was trading on 5th Jan.
Choosing 8000 for selling Call Option was relatively easier, as major trend in Nifty was down. And there was Supply Zone  (kind of resistance) on Nifty chart near 7909-7972 level.

 Read more about Demand and Supply to identify high potential trades here.

On 5th Jan IndiaVIX closed at 16.8
Immediately on 7th of Jan India VIX shoot up to around 19. This made Option premiums to shoot up. Nifty had gapped down on 7th of Jan. This was first bad sign for us.

After that Nifty fell continuously for 11 days barring 2-3 green candles. That was alarming. But we had no time to move out of 7400 Put Sold which was showing losses.

In the meanwhile 8000 Call Option had lost almost all the premium (which was profit for us) and was trading at Rs 5 on 12th Jan. It was difficult for Nifty to rise from this point to move all the way beyond 7600. Hence I decided to book profit in 8000 Call at 5 and Sold 7800  Call at 21.5. This gave me additional premium of around Rs 16.

We booked profit of (28-5)*75= 1725 in Nifty 8000 Call Option

While Nifty was falling, 7400 Put was showing notional losses and 7800 Call was earning us the profits.

On 18th Jan when Nifty was trading at 7350 we decided to close Nifty 7400 Put at a loss, which was trading at 103. At the same time rolled over this position to 7200 Put which we sold at 37.5. This decision was taken looking at increasing VIX which was then trading at 20.2. India VIX trading beyond 17 is always risky for Option Sellers. The global markets too were falling continuously.

Loss booked in 7400 Put: (31-103)*75= -5400

Premium earned in new position 7200 Put Sold: 37.5*75= 2812

Though, there was demand zone at 7381, we decided to close the trade, as zones can be broken in volatile markets. As a trader we have to have our risk management in place. Later, as all of us know, Nifty bounced from this level and closed above 7400 to end the series. However keeping 7400 Put alive would not have been wise from risk management perspective.

Finally on last day of the series all Options closed Out of the Money and combination of trade earned us profit. Below is the profit calculation:

Booked profit of (28-5)*75= 1725 in Nifty 8000 Call Option
Booked profit of (21.5)*75= 1612 in Nifty 7800 Call Option which expired worthless
Booked loss of  (31-103)*75= -5400 in 7400 Put Option
Booked profit of (37.5*75= 2812 in Nifty 7200 Put Option which expire worthless

Total Profit= 1725+1612-5400+2812= 749
Total margin required = 72000

% gain= 749/72000= 1.04%

So even after huge volatility and global uncertainty we managed to end month in profits. This is beauty of Options strategies.

Learn more about my Index Options Portfolio here.