The minimal management options trade — Wide Ratio spread
Hi Folks,
In this article, we will look into once again a safe options strategy with minimal management but with a view towards the market. Nifty in the last few weeks has touched a high of 14753.3 and then came under severe profit taking and closed at 14372 which was roughly 380 points down. This is a healthy correction and was necessary if the markets had to resume the uptrend again. Given that the overall sentiment is still bullish and assuming that Nifty will continue its rise in February after taking a breather. Lets look at an options strategy called the Ratio options strategy which protects us even if Nifty in either of the 3 scenarios I.e. Nifty coming down or remains sideways or increases mildly. Out position will not be in profits only when Nifty increases very wildly on the upside.
We will deploy this on Nifty 4th February expiry I.e. the subsequent week expiry and the ratio spread which will be looking at would a ratio of 1: 5.
We will buy a slightly ITM call option and look to fund this with 5 far OTM credit call spreads. The reason to go for call spreads rather than selling naked call options is to get margin benefit.
Strategy
The trade taken is as below.
Pay off Diagram
- Probability of Profit: 83.44%
- Max Profit: Rs 43,256 (18.6%)
- Max loss: Rs -301,594 (when Nifty crosses 14,994 on the upper side)
- Break-evens: 14994 (Upper side). No break even on the down side.
- Margin requirement : Rs 2,32,530
We will be making a profit in case Nifty increases but stays withing 15000 levels. And we will not be making a loss in case Nifty moves down from current levels, we will be making a modest profit of Rs 2081.
Closing the trade
For profit: Prob of win — 83.4%
1. Square off on 3rd Feb (One day prior expiry) if Nifty is within the Break-even levels (or)
2. One can target 25% of the Max profit I.e. ~Rs10,814/- whichever comes first
For a loss: Prob of loss — 16.6%
1. In case the trade goes against us I.e. Nifty makes wild upside move beyond 15000 levels, we square off at a loss of 25% of max profit I.e. ~ Rs -10,814/-
We target a risk to reward of 1:1
Advantages of the above trade
1. Needs minimal adjustment, only in case of wide upside move by Nifty. We are protected on the down side.
This trade is for those who would be busy in their day to day regular jobs and may not be able to look into markets actively but want to target decent returns using the idle capital which they have.
In case, you want to chat with me or share some of your thoughts on improvements to the above trade, you can reach out to me on my blog : NIFTY Weekly Tips & Strategies — Top tips and strategies to generate regular income using Futures & Options (venkat-sujit-samrat.com)
Disclaimer: I am not a SEBI registered adviser. All the information provided by me are for educational/informational purposes only. Please do your own due diligence or consult your financial advisor before you make any investment decisions.
