Market View And Options Strategy
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Market View and Options Strategy Is it possible to make money just by having a market view and no technical knowledge? The answer is may be YES. Example - Buy Calls in bull market and Buy Puts in bear market. (If Nifty is above 200 dma, then it is bull market and if Nifty is below 200 dma, then it is bear market.) Strategy - Buy one lot of Put at slightly out of the money strike price and square it off 2 days prior to expiry - every month. Assumptions •
In early March 2008, Nifty decisively broke down below 200 dma; and hence the strategy begins from March series.
•
One cannot time the market, and its difficult to assume that when the real declines may happen. Hence, a safer strategy - be persistent with strategy of buying puts when market is below 200 dma.
•
Entry Date - The puts are pretty expensive at the start of the series, and hence it would be better to buy puts at some later date. For the sake of simplicity - 05th of the month has been picked as date of buying puts. (If 05th is holiday, then puts should be bought on 4th)
•
Strike Price - One should take slightly out of the money puts. Example - if price on 05th of the month is 4921, then one should buy 4900 puts.
•
Buy Price and Sell price are end of day price.
•
Markets makes weird moves couple of days before expiry. Hence, position would be closed on Tuesday, 2 days before expiry.
•
Starting Capital = Rs. 50000 and Lot size = 100
Results - Profit and Loss Sheet of last 7 months Closing Strike Price on Price of 5th of the Puts month
Buy Price
Sell Price
Net Profit/Loss
March Series
4921
4900
201
65
-136
April Series
4647
4600
130
0
-130
May Series
5192
5100
96
258
162
June Series
4676
4600
109
428
319
July Series
4016
4000
185
6
-179
August Series
4502
4500
141
206
65
September Series
4352
4300
109
161
52
Net Profit
153
Cash Flow Statement Starting Cash Position
Inve stme Balan Booked nt ce Cash Amo Cash Position unt
Closing Cash Balance
March Series
50 000
2 010 29900 6500 0
36400
April Series
36 400
1 300 23400 0 0
23400
May Series
23400
9 13800 25800 600
39600
June Series
39600
1 090 28700 42800 0
71500
July Series
71500
1 850 53000 600 0
53600
August Series
53600
1 410 39500 20600 0
60100
September Series
60100
1 090 49200 16100 0
65300
Return
30.6%
Formula used above Ü Investment Amount = Buy Price * Lot Size; Balance Cash = Starting Cash Position - Investment Amount; Booked Cash Position = Sell Price * Lot Size; and Closing Cash Position = Booked Cash Position + Balance Cash What Lessons we can learn from this? •
There are many ways to make money provided one is persistent and disciplined with the strategy.
•
It is possible to have a trading strategy even when one cannot time the market
•
Simple Trading Strategies also work.
•
No trading strategy works 100% of the time. Even if it works - 50% of the time, it can be rewarding.
The purpose of the article is not to recommend any strategy but to provide food for
thought. Risk - The strategy may not work if Nifty trades sideways.
In early March 2008, Nifty decisively broke down below 200 dma; and hence the strategy begins from March series.
•
One cannot time the market, and its difficult to assume that when the real declines may happen. Hence, a safer strategy - be persistent with strategy of buying puts when market is below 200 dma.
•
Entry Date - The puts are pretty expensive at the start of the series, and hence it would be better to buy puts at some later date. For the sake of simplicity - 05th of the month has been picked as date of buying puts. (If 05th is holiday, then puts should be bought on 4th)
•
Strike Price - One should take slightly out of the money puts. Example - if price on 05th of the month is 4921, then one should buy 4900 puts.
•
Buy Price and Sell price are end of day price.
•
Markets makes weird moves couple of days before expiry. Hence, position would be closed on Tuesday, 2 days before expiry.
•
Starting Capital = Rs. 50000 and Lot size = 100
Results - Profit and Loss Sheet of last 7 months Closing Strike Price on Price of 5th of the Puts month
Buy Price
Sell Price
Net Profit/Loss
March Series
4921
4900
201
65
-136
April Series
4647
4600
130
0
-130
May Series
5192
5100
96
258
162
June Series
4676
4600
109
428
319
July Series
4016
4000
185
6
-179
August Series
4502
4500
141
206
65
September Series
4352
4300
109
161
52
Net Profit
153
Cash Flow Statement Starting Cash Position
Inve stme Balan Booked nt ce Cash Amo Cash Position unt
Closing Cash Balance
March Series
50 000
2 010 29900 6500 0
36400
April Series
36 400
1 300 23400 0 0
23400
May Series
23400
9 13800 25800 600
39600
June Series
39600
1 090 28700 42800 0
71500
July Series
71500
1 850 53000 600 0
53600
August Series
53600
1 410 39500 20600 0
60100
September Series
60100
1 090 49200 16100 0
65300
Return
30.6%
Formula used above Ü Investment Amount = Buy Price * Lot Size; Balance Cash = Starting Cash Position - Investment Amount; Booked Cash Position = Sell Price * Lot Size; and Closing Cash Position = Booked Cash Position + Balance Cash What Lessons we can learn from this? •
There are many ways to make money provided one is persistent and disciplined with the strategy.
•
It is possible to have a trading strategy even when one cannot time the market
•
Simple Trading Strategies also work.
•
No trading strategy works 100% of the time. Even if it works - 50% of the time, it can be rewarding.
The purpose of the article is not to recommend any strategy but to provide food for
thought. Risk - The strategy may not work if Nifty trades sideways.
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