TT,
few points from my side
1. option selling (deep) is like collecting peanuts infront of a road roller. this is not a buy-n-forget strategy.
2. if you consider brokerage, the net profit would be around 1000 rs. they charge 100rs for each transaction.
3. money management is a tough task here. even though you need only 1 lot nifty money to wtite one leg, you need some kind of m2m money in the account, else your broker will auto-square off your option if it moves opposite direction by 'x' amount. because broker wont sit idle watching the position go completely out of your direction and you are sitting on huge loss and there is not enough money in the account.
4. even though nifty may expire within the range, what happens during the 60 days window is anybodys guess. some times even a 100 point opening gap up may result in some good points loss (even though its covered by other side option), and yr broker may square off that leg. you need to have some kind of stoploss for yourself. you cant keep watching it go up and up and finally auto-squared off. as usual any trade should have a stoloss however small/large it is. else your account will be blown out in no time
5. collecting 20 nifty points in 60 days... i guess there are other good strategies documeneted in this forum. i am not saying other methods will GUARANTEE you 20 points in 60 days, but over a period of 1-2 years , they will beat this number and most importantly u dont need a huge capital nor receive phone calls from broker. i completely disagree with the statement that we need a income generator in the product-mix. end of the day its same rupee however you get it. i have seen some ppl who follow just one method through out their career and earn money.
6. personally i would prefer covered call writing over this. its only direction, so your risk is halved. and then when it moves up, your stock also goes up !! yes, you can miss out some big moves and lose money because of that. in such case you need to keep rolling up your calls. you can do same thing in this strategy too
Bandlab
Your concerns are valid. Let me address them with what I know.
Option writing is a dynamic activity. Option writers don't write and wait till expiry to count their profits and losses. Seasoned option writers pick the time to write the options. Many second month options do get written on the expiry of the current month options.
For example, the options of April that I have taken as an example were quoted at the following rates:
4400PE: 70/- and 5600CE at 10/- on 25 February the day the Feb options expired. That gives you a total of 80/-. Today they are valid at around 27/-. When you have extracted the maximum (60% or more) from it in 10-12 days you can always close the position and pocket the profit and use the margin to write the next options at an opportune moment.
In options writing, it is always difficult to write down the complete strategy in the beginning. A seasoned options writer knows when it is time to book out.
Coming to stop loss, unlike in equity, the method to prevent losses in options are much varied. It will not be a straight number. Time is on the side of the option writer. Sometimes time is used as a SL. Other times, covering with NF, converting it into a spread, closing the profit leg and opening another one on the same side with better premium (buy back the 4400Pe and short 4600PE as the mkt moves up) are some things I can think of.
Yes you certainly need cash for MTM. You have to provision for this when writing options. But like I mentioned earlier you can use your idle portfolio for the margin. You don't need to plonk 50K cash for margin. It is a way to generate income on portfolio.
Covered call is good if you already own the stock and don't expect the underlying to move too much. But covered call using the NF as the underlying has its own share of risk.
As far having an income generator in the product mix, each of us have to take a call on that. For me income generation in some of the accounts where I cannot devote much time (my parents' account for example) to it is a good idea. If I can post even a 3% return in that account for the time devoted to it, it puts a smile on some faces.
