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Puts are Costly than Calls Arbitrage Opportunity


Puts are Costly than Calls – Arbitrage opportunity:

Nifty is currently at 7450. Considering 7450 as ATM (At The Money) here are the prices.

31-Mar-16 PE 7,450.00 158.50
31-Mar-16 CE 7,450.00 109.20

There can be lots of reasons why one call is costlier than puts (70% of the times), and why puts are costlier than calls (30% of the times). Every time the reason can be different but this time I think since Nifty was falling sharply since long, the Puts became costly and it will take some time for both the Options to get normalized.

But we are least bothered about it, because those who love arbitrage here is an opportunity:

Do ATM credit spread on the Put, and with the money you get buy a near Call. Three things can happen now:

1. If Nifty does not move then there is nothing much to lose as you did not pay anything from your pocket.

2. If Nifty goes up – great you make money for free. Best situation and very likely. πŸ™‚

3. If Nifty goes down there can be loss. Right now it looks very difficult that Nifty will fall suddenly. But if that happens you must be ready to take a stop loss. Remember that credit spread means there is a protection so the losses are limited.

Disclaimer: Since the above strategy is Free For All – No support will be given on this. Please trade on your own risk. I am very busy helping my paid clients grow their income.

For those who have done my conservative course – What to do now?

Stop Loss Hit In Strategy 1 After Long Time.

So basically this unexpected swift movement of Nifty caused some damage and our Strategy 1 hit a Stop Loss after a long time. Remember my article of “6800 Bottom For Nifty” – well it reversed from there and how. πŸ™‚

Please do not panic. The success rate is 80% anyway and as traders we should know that sometimes stop loss will be hit and we have to take a small loss. Those who are seeing this Stop Loss for the first time must be overjoyed. Why? Because earlier when they used to take stop loss (when they traded on tips or on their own) – the stop loss took away months of profits. But here with our highly conservative strategies, the losses are small and manageable. At max we go back 5-6 days. So we get enough time in the same month to recover our losses by trading Strategy 2.

Remember when you called me and inquired about the strategies, I told you the same that there can be losses but they will be far and few and small and manageable. This is the time to experience it. This is pretty normal and may happen 2-3 times a year.

Strangely some of my clients do not see losses for a long time. But lets not count them. Even I consider myself an average trader. But I have learned to control greed – that itself makes me much better than 80% of the traders. The rest the conservative strategies and discipline takes care.

Today I am happy with even 1% profit in a month. When I make only 1%, I tell myself 1% return a month is 12% return a year, which is much better than Fixed Deposit in a Bank, and is certainly much much better than losing money trading.

Fact is over a period of time we know we will make more than 12% a year. πŸ™‚

When VIX is high usually I do not go to Strategy 2 if the SL is hit. We are still getting great premiums – so why not just shift the whole Strategy 1 to new strikes with 7400 as ATM?

Do that now if the stop loss is hit. Please shift the whole Strategy 1 to 7400 as ATM. Those who did not trade can still trade Strategy 1 now.

When we started this trade, VIX was high – but now it has fallen. Because of this the losses also gets small.

That’s the beauty of this strategy – if VIX falls then we also lose less even if the momentum of Nifty movement is high.

Once the movement stops – there will be calmness for months and we keep making money again for months.

Keep trading and enjoy the journey, and please do send me feedback by email.

Many Thanks.

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Hi, I am Dilip Shaw, owner of this website. I am a trader like you. I have been trading since 2007, but lost a lot of money till 2010. I then stopped trading and studied options like college exams. Started trading again from 2011 and never looked back since. I did a lot of research, read books and did countless paper-trading before being profitable. You can read about me here.

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This course helps you learn to trade conservative option strategies for monthly income. Once you finish the course you can start trading immediately. You can start trading from any day. No need to wait for expiry. You will make profits consistently.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 4 comments… add one }
  • DEBASIS March 3, 2016, 3:57 pm

    Dilipda,

    Thanks a lot… made 1000 rs …just in a span of 10 minutes

    Bought 7500 CE 99.45 (squared off 107)
    Sold 7450 PE 135.45 (squared off 129.45) Hence Profit (7.55+6) X 75= 1016.25
    I could not understand one thing… suppose I carried forward for tomorrow and NIFTY
    comes down to 7400.. I would have made loss.

    The more NIFTY comes down the more I loose and if NIFTY goes up 7450 and above I
    profit

    So profit is unlimited loss is unlimited too.

    Isnt it a risky strategy??

    Looking forward to hear from you.. is it that my understanding is totally wrong. Shall be
    grateful for your learned advice

    Debasis

    • Dilip Shaw March 3, 2016, 6:04 pm

      Nice to know Debasisda that you made money out of this idea.

      If you carried forward and Nifty would have moved up then you would have been in more profit. But yes if it falls, you would have lost.

      I asked to do a Credit Spread in Put. But you sold a naked Put. Anyways, if it was a credit spread, your losses would have been limited but profit unlimited on the upside.

      Hope that clears.

  • m s rao March 4, 2016, 8:27 am

    Dilip ji,

    Namasthe.

    Learning points from this post :

    ‘ Even I consider myself an average trader. But I have learned to control greed – that itself makes me much better than 80% of the traders. The rest the conservative strategies and discipline takes care. ‘

    Plz correct the following line :

    Under sub title ‘ Stop Loss Hit In Strategy 1 After Long Time.’

    in 3rd para

    ‘ This is pretty normal and many happen 2-3 times a year. ‘

    as

    ‘ This is pretty normal and may happen 2-3 times a year. ‘

    ThanQ.

    M S Rao

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