Note: Part of my newsletter sent to my subscribers sent on September 14, 2015.
Refer my email dated: SEPTEMBER 10, 2015
You can find it here:
I had written to take this trade:
For example consider this trade right now:
Sell: 24-Sep-15 PE 7,700.00 at 152.00
Buy: 24-Sep-15 PE 7,600.00 at 115.00
Why? Because INDIA VIX is at 24.88 – which is great for option writers.
Max profit in this trade is if Nifty is above 7700 on 24 September 2015, the expiry day – which will be 152-115 = 37 points and max loss will be 100-37 = 63 points.
So now either you lose 63 or make 37 – there can be no other loss. But what if Nifty goes up tomorrow by 100 points and VIX drops? You will be in 10-15 points profit in one day and close the trade. Thatâ€™s it – all worries gone and you made a quick profit.
This is what happens when you hedge your positions.
Right now INDIA VIX has fallen to 24.56 and
24-Sep-15 PE 7,700.00 is at 92.00
24-Sep-15 PE 7,600.00 is at 67.90
So the position is making around 13 points profit. 152-92 = 60 and 67.9-115 = -47.1
60-47.1 = 12.9
This is a return of 1.3% in 4 days.
Those who traded, may close the position as this is considered a good return in 4 days itself.
As you can see INDIA VIX was 24.88 and today its 24.56 – so not much of a fall – BUT Delta & Theta made the profit. Nifty moved 100 points up and 4 days passed.
What if Nifty had fallen 100 points?
Depending on VIX, the loss would still be 10-15 points BUT for a naked seller it would be 60 points and thats huge.
He would have stopped out with huge loss in just 4 days with Nifty moving 100 points only. But the hedged trader can wait for Nifty again to go up and take his profits. In any case the max loss is 63 points.
Frankly most of these kind of trades make money.
I hope you understand why my emphasis is on hedging.
Enjoy the profits.
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Dilip Shaw, Founder
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