Re: 1 lakh to 652 lakhs in 497 trading days - Winning 20% of Trade in NIFTY Futures -
Thank you Raj.
You have explained the theory of writing short strangle very well.
If one wants to keep the trade till expiry or whatever period and adjust delta,
Wastej and DanPickUp have explained ways in which this can be done. Wastej's method suggests use of futures to adjust trade while Dan's method suggests use of options.
Both have their merits and one may choose method one is comfortable with or the one that is more suitable for a given situation.
I am trying both these methods.
Would you like to comment on the theory of adjusting the trade/
Some Theory on how to Construct a Pair for Selling using the DELTA-NEUTRAL Strategy.
Delta - This is an Option Greek - "The amount that the theoretical price in Option will change if the market moves up/down 1 point".
Market today closed at 5979 (NIFTY Futures ).
The MAX OI at 5800PE-6000CE Pair and ideally it would be good to SELL this pair. But we want to know how much quantity to trade in this pair.
Let us calculate the Delta for 5800PE and 6000CE with the following parameters
Underlying Price , Exercise Price, Time to Expiry, Interest Rate, Volatility, Dividend
Underlying Price - I take the Futures current price
Exercise Price - It is 5800 or 6000
Time to Expiry - It is the number of days to Expiry expressed as a fraction of 365 days
Interest Rate - In the Options Chain the IV is calaculated using 10%. So we will use the same
Volatility - We will use the IV from the Options chain
Dividend - For Index it would be Zero because there is no dividend for Index. for Stocks you have to take the Average Dividend
IV - Implied volatility
So using the above values -
If we calculate the Delta then for
5800 PE -0.15 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 5800 PE will decrease by 0.15
6000 CE .49 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 6000 CE will increase by .49.
We can apply this Delta Neutral Strateg if we know the Range.
Using the MAX OI we know the Range for NIFTY is 5800-6000.
Now we have to make the Delta to Zero (more or less).
So we can say that .49 (Delta of 6000 CE) + 3 * -0.15 (Delta of 5800 PE) = 0.04.
That means For constructing our pair,
We have to Sell one Lot of 6000 CE and 3 lots of 5800 PE.
6000 CE Premium is 50.8
5800 PE Premium is 17.25
So our total Premium would be 50.8+3* 17.25 = 102.55.
So when the Market reaches around 6030, we can execute this strategy.
Tomorrow When the Market reaches around 6000,
The Delta for 6000 CE would be .54 and the price would be around 69.
The Delta for 5800 PE would be -0.12 and the price would be around 12.
So you might have to SELL 1 6000 CE and 4 5800 PE - with the Total premium of 117.
Delta - This is an Option Greek - "The amount that the theoretical price in Option will change if the market moves up/down 1 point".
Market today closed at 5979 (NIFTY Futures ).
The MAX OI at 5800PE-6000CE Pair and ideally it would be good to SELL this pair. But we want to know how much quantity to trade in this pair.
Let us calculate the Delta for 5800PE and 6000CE with the following parameters
Underlying Price , Exercise Price, Time to Expiry, Interest Rate, Volatility, Dividend
Underlying Price - I take the Futures current price
Exercise Price - It is 5800 or 6000
Time to Expiry - It is the number of days to Expiry expressed as a fraction of 365 days
Interest Rate - In the Options Chain the IV is calaculated using 10%. So we will use the same
Volatility - We will use the IV from the Options chain
Dividend - For Index it would be Zero because there is no dividend for Index. for Stocks you have to take the Average Dividend
IV - Implied volatility
So using the above values -
If we calculate the Delta then for
5800 PE -0.15 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 5800 PE will decrease by 0.15
6000 CE .49 - Which indicates that if all the other paraemets are same (mainly volatility), If the underlying increase by 1 point then the 6000 CE will increase by .49.
We can apply this Delta Neutral Strateg if we know the Range.
Using the MAX OI we know the Range for NIFTY is 5800-6000.
Now we have to make the Delta to Zero (more or less).
So we can say that .49 (Delta of 6000 CE) + 3 * -0.15 (Delta of 5800 PE) = 0.04.
That means For constructing our pair,
We have to Sell one Lot of 6000 CE and 3 lots of 5800 PE.
6000 CE Premium is 50.8
5800 PE Premium is 17.25
So our total Premium would be 50.8+3* 17.25 = 102.55.
So when the Market reaches around 6030, we can execute this strategy.
Tomorrow When the Market reaches around 6000,
The Delta for 6000 CE would be .54 and the price would be around 69.
The Delta for 5800 PE would be -0.12 and the price would be around 12.
So you might have to SELL 1 6000 CE and 4 5800 PE - with the Total premium of 117.
You have explained the theory of writing short strangle very well.
If one wants to keep the trade till expiry or whatever period and adjust delta,
Wastej and DanPickUp have explained ways in which this can be done. Wastej's method suggests use of futures to adjust trade while Dan's method suggests use of options.
Both have their merits and one may choose method one is comfortable with or the one that is more suitable for a given situation.
I am trying both these methods.
Would you like to comment on the theory of adjusting the trade/