Butterfly - A risk free trade

I am new to option trading, and have came across the strategy which seems too good to be true!
That is
Selling 2 Banknifty 20500 calls of June expiry @ 998
Buying 1 21000 call @ 740
Buying 1 20000 call @ 1255

So, the net premium of the trade is around 1, or 0. (one of the strategy building sites shows no loss for this trade, and maximum profit is 10,000).

But is it possible in real world? Am I missing something in this calculation?

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Yes & No.

Basically spillages, taxes and brokerage.

This works in normal tight ranged markets, except that you would just be blocking your money for 1 month. Sure there wouldn’t be any loss but there wouldn’t be any profit either if prices move beyond that narrow range.

In your case “some” money is to be made if BankNifty stays in between 20100 to 20900, else below and above that there’s nothing. For Bank-nifty this range is bollocks.

Capture

However this is a good strategy for range-bound markets.

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I have already tried this in USD INR , lets see how it unfolds on expiry day.

But still, paying just for brokerage and slippage seems quite amazing. Shouldn’t one be trading multiple butterflies with different strike prices? That would increase the possibilities of getting the prices in Butterfly body.

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This is good for FX Futures… no doubt.

I do short gut spread though

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How? Explain it

How this is going? Are you making profits?

Good day.
Option writing is a system. A system is an activity which can provide a profit or a return because it has an edge. In case of option writing, the edge is 2 out of 3 times the options expire worthless. Reading the odds is important, this can mean 2 out of 3 months or 2 out of 3 times you take a position. 2/3 converts to 68% probability. which is probability that prices will stay within 1SD of the present average price. (Unable to understand, Visit Varsity) Edge of this system is 18%. Read on, you will see how.

Compare this to a Monkey Trading. If A monkey (a computer) is blindly buying and selling a at regular intervals of 1 day, then probability of making money is less than 30% or 1/3. This kind of monkey trading can increase the odds up to 50% if technical or quantitative pattern seeking is used in buy sell decisions. The odds are not still more thanks to Options and the Volatility. Read on, Market is ZERO SUM you will see.

Option writers take the money away reliably, from equity traders and option buyers alike. Reliably, like how amazon, apple, reliance and our girlfriends (hope you are not single :rofl::rofl:) take money away from your wallet reliably. They have an edge… Competitive advantage. This advantage is psychological in Trading, you will see how in next para.

The edge is calculated by subtracting the baseline (monkey trading) 50% from the 68% of the option writing probability giving 18%. Now multiply the edge with the money that your are investing, that is the competitive advantage of Options Writing.

Looks as if I am saying everyone should write options. Hold yourself, and think about the odds. Can you predict the perception of volatility of the market? Without being able to see the Volatility. That is 3 levels of beliefs that you have to predict. Real volatility, Markets Perception and the Writer’s Perception. We retail traders are in market trading beliefs, not prices or value. Answer for why the competitive advantage in Trading is Psychological.

It is fascinating to trade as fundamental, technical and quantitative trader and finally distill it by writing here. We can move to higher plane if we strive for it. Firstly we need to practice thinking in probabilities.

Option writing works especially well because the option writers understand volatility and the probability better than option buyers and equity traders. If the option buyers realize the volatility is their friend too, and that volatility can negate the impact of theta, the belief on option as a system will increase. Oh, our friends equity traders might end up suffering though.

@pankushri
To answer you, you can find out that @Joe_Chris is making money 2:1. If joe writes options worth 30,000 INR for 3 months, he will make 30,000 INR for 2 months and lose 30,000 INR in 1 month or more. He can average it out to an year, that is (460,000-430,000) 120,000 INR which is 10,000 INR per month. This 10,000 INR is achieved only 68% of times. (Think probabilistically, because the writer or betting that the siren called Black Swan is very, very rare, and it is) Not a bad returns for 30,000 risk. @Joe_Chris, your insights would be valuable here.

Option writers or buyers need not take the money from each other, when our friends the equity traders who use their technical, quantitative, fundamental analysis to move the prices and give their money to option traders. We are straddling, Strangling , or spreading their risks as profits on our plates. We all have to remember trading is a ZERO SUM game.

Happy Trading.

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The best option selling strategy on paper will fail if the writer cannot make educated presumptions on the minimum he should target, in terms of Rupee value based on strike and moneyness.

In USDINR- I don’t write options less than 30p, unless its extremely safe and far out of the money.

Given that this instrument has little liquidity before the seasonal movement of the pair, I trade short guts in the beginning and keep following the movement of the USDINR and pick up strikes provided I can write them for a minimum paisa value.

Such a strategy can not be replicated in either N/BN because vega can destroy your set-up.

USDINR has a predictable range and I have never made any losses for any month, by trading short guts and short strangles. In fact this instrument is my favorite, perhaps because I have had better fortune. The key is to ensure your average sell price is beyond a minimum- based on delta. You have to target high volatility days and sell at the hottest hour.

If you happen to sell at competitive rates, perhaps target near month options as well, you have already built in a winning start.
For eg. in USDINR, by picking up short guts for more than 1 rupee each, and the width of the Futures movement is only 2.25 rupees, the set up is already gamed for fair success.

Adding short strangles to the mix, makes the overall credit quite insulated from high vega.

Come on @Joe_Chris
You must not have shared the strategy here:rofl::rofl: I am going to take the opposite side of you. Jokes apart.

Could you reconcile what is happening behind the scenes, when you point out that N/BN destroying the writers due to their Vega, and USD/INR Vega not doing the same. Precisely, What makes Currencies less volatile? Can something change this market structure, any examples with charts?

Perhaps you could try a BN short guts backtest and compare it with even its step sibling - the NIFTY.

Yes.
U r calculating the PnL based on LTP but that’s not the price u will get while trading.
Ur orders will be filled at ask-bid prices. Just check the bid-ask spread, it’s quite big.

Hope this was helpful.

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BNF options are fairly liquid and even assuming 5-10 points deviation from LTP, the maximum change that can happen to the strategy is around 30 points (which I don’t think will happen). If you look at 20500 CE, even though there is spread of 29 points but if you place order at 990 levels, it will get executed surely.

How did it go?