(Examples are from Indian Stock Markets. Strategies should work in US Markets as well. For Index strategies, replace NIFTY with SPY or DJIA.)
In most of the answers here, it is mentioned that monthly income from Option Trading is not possible.
I think, we have to work harder to find a way.
Ask, and it shall be given you; seek, and you shall find; knock, and it shall be opened to you: ( Gospel of Matthews- New Testament )
If you seek hard enough, you can even find God.
We are only looking for something as mundane as monthly profits in Option Trading. Certainly, it should not be as difficult as finding salvation.
Those who deal with Options are traders, not investors. Options are a tool for hedging the portfolio, but used more as speculative tool of trade.
Looking for regular monthly return from a speculative tool is actually ignoring the full potential of the Options. But we are happy to be in our comfort zones and a profitable month adds to the comfort.
Hence, the search for another holy grail.
Do Such Strategies Exist ?:
I can straightaway say Yes or No.
But none of them would be a right answer.
Please bear with me for a long answer. I have tried to describe four different approaches to achieve it.
How To Go about It ? :
Strategy 1:
One of my friends thought of earning monthly income by writing covered calls. He began from December 2014 Contracts.
The stock chosen: Reliance Communications
Reason : High Premiums as the stock is highly volatile.
He bought 2000 shares ( Lot Size ) at an average price of Rs. 100 during November 2014. He then sold Call for December 24 Expiry for Rs. 7.20 for Rs. 100 Strike Price.
What happened after that ? :
He earned the premium of Rs. 14400 ( 7.2% profit ) but the share price fell to Rs. 80 by the end of the month.
Got the monthly income but lost out on portfolio value.
The share price over next few expiry dates was:
January 29, 2015 : 79.10
February 26, 2015: 67.70
March 26, 2015 : 60.10
April 29,2015: 61.10
May 28, 2015 : 64.40
June 25, 2015: 57.95
July 30, 2015 : 68.65
Aug 27,2015: 55.20
Sep 24, 2015 : 64.40
Oct 29, 2015 : 76.65
Nov 26, 2015 : 74.70
Dec 31, 2015 : 88.40
See the volatility. After a year the price was slightly better though lower than the purchase price. Selling covered calls every month for appropriate Strike Price would have given some sort of monthly income.
But did it work out?
No.
My friend got scared when the price fell below Rs. 60. He sold the stock and booked the loss.
Probably he was right. Today it trades around Rs. 35–36.
Selling covered calls generally looks profitable but does not protect you from capital erosion when price goes down.
Same friend came up with another strategy. We back tested it for two years. Did paper trading for two months. Apparently it was profitable. I did not follow it further, but he traded for few months with this method. Then started deviating from the strategy and again lost money. The fault was not with the strategy, it was in implementation. I will describe this strategy here. It may work.
Another Strategy :
Strategy 2:
This is to be executed on the first day of monthly expiry contracts of NIFTY.
NIFTY contracts for May Expiry will open for trade on Monday, February 27.
Current Nifty is 8939.
What is to be done?
If NIFTY is around 8900, SELL both PUT and CALL of 8900 for May Expiry.
Buy 9200 Call and 8600 Put for March Expiry.
You are trying to earn Time Decay premium from the sold options.
As the volatility is higher in the current month options , the bought options are insurance against volatile movement in either direction.
One can exit at a profit of 20–40 points. Profit of more than 50 points is not likely.
Do not trade without protective bought options.
My Preferred Strategy :
Strategy 3:
This strategy does not give any loss when you are wrong. Even if you are wrong by a huge margin.
But profits are capped. And there is a probability of loss which needs to be managed actively.
Example is here:
This is from my another answer:
My Preferred NIFTY Trade :( on Jan 18, 2017 )
As of now, NIFTY is at 8456.
I would Buy NIFTY 8500 PUT Feb 23 for Rs. 151 and
Sell NIFTY 8400 PUT Feb 23 for Rs. 115 and
Sell NIFTY 8100 PUT Feb 23 for Rs. 44.
The trade set up gives an initial cash flow of Rs. 8 ( Rs. 600 for 1 lot of NIFTY )
If NIFTY stays between 8400 to 8100, the profit will be 100 points i.e. Rs. 7500.
There is absolutely no loss in case of going wrong.
The small profit of Rs. 600 stays with me even if NIFTY goes to 9000.
I was terribly wrong in market direction. NIFTY did go to 8970 and closed at 8939.
Loss in this trade —- ZERO.
More about this strategy here:
If Nothing Works Then How To Get Monthly Income From Options:
Reliance Communication did not work in spite of high premiums received as the stock crashed.
Second strategy of my friend works but needs to implemented strictly. If some of the readers have time to test it further they can do it. There is no new strategy. Market is the sum of total knowledge and trading wisdom. What you are doing today, someone must have done before.
Still worth having a look.
What should work ?:
Strategy 4:
It is a fact that over a period of time, markets move upwards.
So be invested in a NIFTY or any Index ETF.
This ETF is the cover. Now sell covered calls of Index at around 4–5% higher Strike every month.
This will give regular monthly income. Occasionally, the portfolio may decline slightly, but the Index is not as volatile as individual stocks, so it will not make much impact.
You will keep getting your monthly income. Occasionally, the Call will be exercised. In that case also, you will make a profit.
Keep on doing it.
Welcome to the monthly income from Options.
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