Range is getting formed - NIFTY View For Week 21-24 Dec

In this newsletter read my view on Nifty and how Options strategies can make 3% a month consistently. A real traded example. 

Merry Christmas to all readers. 

I had indicated at a bounce in Nifty, in last week's newsletter. Nifty has given an upmove from low 7551 to 7852. Global markets traded mixed in last week. Since the FED announcement about rate hike was already discounted by most world markets, there was no much reaction after the actual announcement on 16 Dec. 

Let's try to understand where Nifty is heading! 

Technical Overview: Last week Nifty made high of 7852 and low of 7551. A range of 301 points with a longish green candle. This weekly candle has formed a Piercing Pattern along with last week's candle. This pattern suggests a possible trend reversal for short term.  

Moreover, Nifty has also formed a Double Bottom on daily chart. Bottoms of 8 Sep and 14 Dec have reacted from same level. 

Let's understand the broader scenario. Major trend in Nifty is down. But Nifty is trading near its support. This support is now formed near low of 7550. For Nifty to resume its downtrend, need to break this support. Nifty has resistance near 7922-7979 and 8231-8336. For Nifty to start a new uptrend it need to cross resistance at 8231-8336 with conviction. 

Here is my view: I fee Nifty will remain range bound for some period, say a week or two. This range is between support at 7550 and resistance at 7979. 

Areas are marked on chart given below

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An Options strategy that can make 3% consistently month on month. 

This was traded on 2 Dec 15 

Major trend in Nifty was down. However Nifty saw a pull-back rally from 7730 to 7979.  

On 2 Dec Nifty was trading near 7930 at closing hours. There was good resistance to Nifty in the range of 7950-8000. My analysis with the help of Demand Supply theory convinced me that Nifty can see some dip from this level (bearish view). 

I took this trade: 

Sell 8100 Call @ 65.40 

Buy 8200 Call @ 38.60 

(In this case instead of selling ATM call I went slightly OTM for higher safety) 

The premium received (Credit) for one lot of Nifty is as follows: 

Premium Received @ 8100 Call= + (65.40*75)= +4905 

Premium Paid @ 8200 Call = - (38.60*75)= -2895 

Net Premium received = 4905-2895= 2010 

As expected Nifty moved down.  

On 7 Dec Nifty was trading near 7775. 

I felt that I should close the trade as it was making profits of around 3% 

Lets see the profit calculations when trade was closed on 7 Dec: 

Options prices were as follows: 

8100 Call @ 23.30 

8200 Call @ 11.80 

8100 Call Profit (Which was sold) = (Sell Price - Square Off price)* Lot Size= (65.40-23.30)*75 = 3157.5 

8200 Call Loss (Which was bought) = (Buy Price - Square Off price)* Lot Size=(-38.60+11.80)*75 = -2010 

Net Profit= 3157.5- 2010= 1147.5 

Net premium paid for this pair was 36000 (approx) 

%  Profit for one lot = 1147.5/36000= 3.18% 

This trade has earned 3.18% in only 5 days. 

Click here to know in details about how Credit Spread are traded. 

I run a advisory portfolio based on Options Hedging strategies in Nifty and Banknifty. Name of this portfolio is Index Options. This portfolio is designed to earn comparatively conservative returns of 2-5% per month. 

Click here to know more about Index Options portfolio 

Click here to check Index Options past Performance. 

Click here to subscribe to this newsletter for Free.       

                                                                                      

How to trade Credit Spread with a better risk reward

After Short Strangles the strategy I like most is Credit Spreads.

Read here how to trade Short Strangles with high probability wins.

Credit Spread is a hedged pair of Options with limited loss and unlimited profit.

Don't pay much attention to the words limited loss and unlimited profit as that does not create realistic picture of the trade. However by definition there is limited loss and unlimited profit.

Credit spread can be traded with either both puts or both calls.

Credit spread is a directional strategy. This means you need to have a directional view for trading this strategy.

For Put side Credit spread the view should be bullish or very bullish
For Call side Credit spread the view should be bearish or very bearish

In the end of this article read the points to understand when to trade Credit Spread and what are do's and don't s

This is how Credit Spread should be traded-

Put Side- (Bullish View)
Sell ATM (at the money) or slightly OTM (Out of the money) Put
Buy further OTM (Out of the money) Put

Let me explain- suppose Nifty is trading near 7600. You feel that Nifty has fallen a lot and trading near its support. Nifty is about to be bottomed out or at-least it will give a bounce of say 200 points from here.
ATM Put (say 7600 Put) will deflate fast as Nifty starts moving up. Sell this Put to earn (collect) the premium.

To protect (hedge) this Put, buy a Put which is further OTM (say 7400 Put)

Premium of 7600 Put (Premium which you receive) is more than premium of 7400 Put (premium which you pay).

So, what you receive, is more than what you pay. Net Credit. Hence the name Credit Spread.

If Nifty expires above 7600, both Options expires worthless (becomes Zero).
What you earn is difference between the premium of both the options.
That is your net profit.

If your view goes wrong and Nifty moves down, the loss is limited.
The 7600 Put (which is sold) starts giving unlimited loss. This is protected by 7400 Put which starts earning unlimited profit.
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Call Side- (Bearish View)
Sell ATM (at the money) or OTM (Out of the money) Call
Buy further OTM (Out of the money) Call

Let me explain- suppose Nifty is trading near 8100. You feel that Nifty has seen a good run up and trading near its resistance. Nifty is about to face resistance and can fall by say 200 points from here.
ATM Call (say 8100 Call ) will deflate fast as Nifty starts moving down. Sell this Call to earn the premium.

To protect (hedge) this Call, buy another Call which is further OTM (say 8300 Call)

Premium of 8100 Call (Premium which you receive) is more than premium of 8300 Call (premium which you pay).

So, what you receive, is more than what you pay. Net Credit. Hence the name Credit Spread.

If Nifty expires below 8100 both Options expires worthless (becomes Zero).
What you earn is difference between the premium of both the options.
That is your net profit.

If your view goes wrong and Nifty moves up, the loss is limited.
The 8100 Call (which is sold) starts giving unlimited loss. This is protected by 8300 Call which starts earning unlimited profit.

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Let take an actual example:

This was traded on 2 Dec 15

Major trend in Nifty was down. However Nifty saw a pull-back rally from 7730 to 7979. 

On 2 Dec Nifty was trading near 7930 at closing hours. There was good resistance to Nifty in the range of 7950-8000. My analysis with the help of Demand Supply theory convinced me that Nifty can see some dip from this level (bearish view).

I took this trade:

Sell 8100 Call @ 65.40

Buy 8200 Call @ 38.60

(In this case instead of selling ATM call I went slightly OTM for higher safety)

The premium received (Credit) for one lot of Nifty is as follows:

Premium Received @ 8100 Call= + (65.40*75)= +4905

Premium Paid @ 8200 Call = - (38.60*75)= -2895

Net Premium received = 4905-2895= 2010

As expected Nifty moved down. 

On 7 Dec Nifty was trading near 7775.

I felt that I should close the trade as it was making profits of around 3%

Lets see the profit calculations when trade was closed on 7 Dec:

Options prices were as follows:

8100 Call @ 23.30

8200 Call @ 11.80

8100 Call Profit (Which was sold) = (Sell Price - Square Off price)* Lot Size= (65.40-23.30)*75 = 3157.5

8200 Call Loss (Which was bought) = (Buy Price - Square Off price)* Lot Size=(-38.60+11.80)*75 = -2010

Net Profit= 3157.5- 2010= 1147.5

Net premium paid for this pair was 36000 (approx)

%  Profit for one lot = 1147.5/36000= 3.18%

This trade has earned 3.18% in only 5 days.

If you are a conservative trader and happy with 2-5% returns per month with a small risk, suitable options strategy is the way out.

I provide advisory for conservative traders / investors who wish to earn relatively safe returns by trading Options. Name of this portfolio is Index Options. Click here to know more. 

Lets understand the loss scenario as well:

Had my view went wrong and had Nifty gone up and would have expired say at 8300.

8100 Call Premium = 150 (approx)

8200 Call Premium= 120 (approx)

Loss= (120*75)-(165*75) = 9000-11250 = -2250

This tells us that one loss making trade in Credit Spread can eat up profits of many trades. However, there is always an opportunity to cover up your losses by rolling up the strike prices.

I teach all these practical aspects, in my Options Course. To know more details of the Options Course click here.

Points to Note:

1. Use Credit spreads in extreme case scenario near turning points. (Nifty is too oversold and it is too overbought)

2. If your view goes wrong, losses can be substantial in Credit Spread

3. You can roll the Strike Prices in case Nifty is going against your view

4. Risk Reward Ratio is not very favourable in Credit Spread

5. Demand and Supply theory can be good way to understand the turning points of Nifty.

6. Credit spread gives substantial gains pretty quickly

7 . Margin required in Credit Spread is almost half of what it take for a Strangle

If you trade both the Credit Spreads (Call side and Put Side) at the same time it becomes Iron Condor. Click here to read how to trade Iron Condor.

Hope you like this article.

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PRESSMN (Pressman Advertising Ltd.) Breakout-Consolidation-Momentum

Check PRESSMN daily chart below.

This is a classic pattern.
Broke our of all time high on 2 Dec. In consolidation since then.

Today regained the momentum.

Target of 75-90-110 possible

#Fastmoving #Mediumterm #Cash

Prime Cash Portfolio