Best placed Options strategy for slow, choppy market

F&O Strategy

We have been doing rounds in a fairly narrow range with the lower end restricted to around 19,500 and the upper end around 20,000 give or take a couple of 100 points. This makes options trading a lot more difficult especially when you want to trade direction.

However, with options trading no direction can also be capitalized. There are ways in which Options traders make money benefiting from lack of moves. This is by Options selling. But there are issues with a slow market.

1. Slow market is characterized by lower risk levels:

This means the premiums are low. Selling Options for a low premium means low return on investment.

2. Slow times mean no Direction but not necessarily no movement:

This is the choppy element of the slow market. It does not move out of the range but within range, it is fast moving. The moves are small but change direction very quickly. As a result, selling Options of the range does not help.

This means that simply selling 19,400 Put and 20,100 Call will not help because they are cheap and can hit the stop loss really quickly.

Solution: Protected Writing

After some range-bound times, we realize that the market is not in a hurry to make a big move. We have just established that higher Call and Lower Put selling is not fruitful. So, we sell the most expensive option in terms of time value.

At the money Options (with a strike price close to the current market price) are the options with the most time-related value stored in the premium (juiciest). But selling them means we are bound to lose big if there is a big move. So, we resort to Protection.

Strategy: Iron Butterfly on Index (Protected Option Selling)

Sell Both Call & Put (Strike = Closest to Market Price, Expiry = Closest)

Buy Higher Strike Call & Lower Strike Put (Same Expiry)

Strike for buying both Call & Put is a choice that we can make based on various factors. The easiest choice is Highest Open Interest Call Strike and Highest Open Interest Put strike, if you do not have any other analytics. But try to keep the difference between the Sell and Buy Call & Sell and Buy Put the Same.

Example:

Sell 19,750 Call & Put at 119/- & 106/-

Buy 20,000 Call & Buy 19,500 Put at 32/- & 26/-

Remember:

Maximum Profit = Net Premium Received (After Selling and Buying Options) (119+106-32-26=167/-)

Maximum Loss = Difference between Buy & Sell Strikes- Max Profit (250 – 167 = 83)

This example shows the profitability of the strategy. Important here is to make sure that we are ok with this pay-off. If the loss is too big, we can come closer than 250 points and settle with a little less profit.

But this will make sure that if Nifty remains in 500 points range with midpoint being the current level, we are more likely to make money.