Option Selling strategy with least risk

Key Note: All trades mentioned in this document are on Nifty ONLY

Open note

-???????Target to earn 1.5 to 2% return each month on deployed capital

-???????This is actually an OWS (Option Wheel Strategy) but purely based on Nifty

• Nifty has absolute liquidity
• Can roll up or down with utmost ease

Base Logic

Nifty is a bundle of 50 stocks and moves based on the movement of its constituent stocks, as per their respective weightage. We build a portfolio that will move in line with the Nifty movement. Very obviously, the portfolio should hold top weightage stocks of the Nifty

Thumb rules

-???????Never mix this up with the option buying approach. Option Buying is to be carried out in a separate account. This is needed to avoid any kind of confusion and manual error in buying/selling

-???????Option buying will be done purely for hedging purposes

-???????Strictly no copy trade. Each one has its own trading style based on their risk appetite

-???????No FOMO

-???????No Option Put Selling on Stocks

-???????Strictly no small-cap or penny stocks

-???????Most important: No love or emotional attachment with any stock. Should be ready to part ways with stocks when the situation presses for it

Base criteria

-???????Minimum capital 25 lakhs

-???????Buy stocks from Nifty 50. More emphasis on stocks with high weightage

-???????Avoid stocks that have mind of their own and do not specifically move based on the Nifty movement (ITC is one classic example. It hardly follows the Nifty)

Approach

-???????Accumulate stocks as per nifty weightage and capital that is in hand

-???????Buy 8 to 12 stocks with good enough diversification

-???????Verify and confirm that there are no open positions against any of the stocks

-???????General approach is one lot to be sold for every 3.5 to 4 lakhs of capital deployed

• Choose the call strike where the premium gives a 1.0% return
• Sell no. of lots as per capital deployed
• Choose the Put strike that gives a 0.5% return
• Sell exactly half the number of lots that were sold in Call side
• Weekly protection should be bought for Put side option sell, to save from any Black Swan event. Protection for the Call side is optional as Portfolio plays the role of being a great hedge for the Call side. May buy weekly protection on the Call side if there is a need to reduce the margin needed
• Just track the trade to the last week of the monthly expiry and close them
• No rolling up at the Put side or rolling down at the Call side unless there is a clear indication available to do so

-???????Trade Exit

• If Nifty reaches the Call strike, fold up all trades and also sell off the portfolio. Book profits everywhere. Entire cash in hand now
• If Nifty hits Put side strike, exit the Put sides and roll down the Call side to make up for the loss booked in Put Side. Strictly no further Put sell unless the market takes any strong support in the bottom
• If Nifty stays within the range, it is a no-brainer, just pocket the premium and move to next month's trade the same way

-???????Nifty Hitting Call Strike leading to portfolio sell-off

• Keep bare minimum cash needed in the trading account and move all capital to the savings account. Choose a bank that gives a better interest rate for S/B acct
• Start selling Puts at a strike that gives a 0.75% return
• Select the Call position that will give a 0.5% return
• Now Call options should be half the quantity of Put positions
• Mandatory weekly protections for both Calls and Puts
• If the Nifty hits the Put strike, time to buy back the portfolio based on how comfortable one feels about the Nifty situation
• If the Call strike comes under pressure, fold the Calls and roll up the Puts to match up for the loss incurred on the Call side

-???????Boring!!

• Yes. This is how it will be. May not need any adjustment even once a week. Except for weekly option buying, no other trade is mandatory
• The more boring it is, the more successful the trade is!
• Discipline is the key to success here

-???????Bonus income

• Dividends
• It is fine to sell Calls of stocks ONLY if enough stocks available in holdings
• The Call strike should be away higher than the gap between the Nifty and Nifty Call strike that was sold (in percentage terms). Ex. If Nifty is at 15000 and the Call option of 16500 is selected which is 10% away, the Stock’s Call position should be at least 10% away from its spot

-???????Real returns

• If followed diligently a 2% per month return is very much possible with the lowest risk

Drawback

-???????This approach restricts us to Nifty 50 stocks with very little space to buy growth stocks

-???????It should be fine as long as we add a few stocks outside Nifty 50. But, got to ensure that the stock is beta or high beta to Nifty movement

-???????Maximum 2-3 stocks outside Nifty50 could be added

Closing comments

• There is no price for trading discipline
• Avoiding overtrades and sticking to trade discipline will let us have a peaceful sleep and a happy trading experience
• This is NOT a holy grail strategy. This is a less risky trade approach with enough cover to cushion the losses

Happy trading!

Disclaimer: The above is based on my trading experience. I'm not a certified analyst. Do your own research and backtesting before taking any position. Profit or Loss, both are completely yours!