Extra returns can be made by pledging portfolio stocks/ETFs/Mutual Funds to get collateral margin. This margin can be used to trade in options to make extra returns on top of portfolio returns. The trades we make have been worked on by studying past 15 years of data and aim for >99.9% accuracy. Reference data here.
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The rules are simple. The trades are on BANKNIFTY index options on expiry days (Wednesdays) and essentially call for selling call and put options that are 5% above and below the day’s opening value of the index. The catch is to not trade on days of major announcements such as election results, budgets etc., and not trade during periods of high market volatility (when INDIAVIX > 25).
Options are contracts between two parties on an underlying asset (such as a stock) where one party can buy/sell the asset from the other party at a pre-determined price on a future date/time.
For instance, say the current value of BANKNIFTY is 46000. You can decide to buy the BANKNIFTY at 46500 after 30 days no matter its value on that day. If the value of BANKNIFTY at the expiry of contract is 47000, you can exercise the contract and get to make a profit of 500. If the value of BANKNIFTY ends below 46500, you can choose to not exercise the contract since you will be making a loss.
The pre-determined value of 46500 is called the strike price. In order to get into a contract such as one described above, you will have to pay a premium to the seller, say Rs. 100. This will be your expense of getting into the contract. This premium will be received by the seller and would be their potential profit if the value of BANKNIFTY does not get to 46500 at expiry.
At Economy Mode, we sell option contracts that are expiring on the same day. The strike price for these contracts are 5% above and below the current value. We are essentially saying that at the end of the day, the BANKNIFTY will not go 5% above or 5% below the current value. And if we are right at expiry, we get to keep the primiums for selling these options.
The options we sell for the view that the BANKNIFTY will not go 5% above the current value are called call options. The options we sell for the view that the BANKNIFTY will not go 5% below current value are called put options.
Options are traded in lots. For BANKNIFTY, the lot size is 15 shares. So, you cannot sell just one share. You will have to sell a minimum of 15 shares for trading.
In order to sell options, you have to put a margin with the borker to cover any potential losses you may incur for the trade at expiry. The margin requirement to sell one lot of BANKNIFTY for us would be around Rs. 55,000.
The margin can be provided in the form of cash or collateral. At Economy Mode, only margins via collaterals are used.
We are not SEBI registered investment advisors. The trading calls from Economy Mode are live demos of our research strategy and should not be considered as investment advice. Please do your own due diligence or check with your investment advisor to understand if this is suitable for you.