Three Unique And Profitable Options Strategies (Part 2)
After exploring various options strategies over the time I have been trading, I’ve discovered a method that stands out as both rewarding and low-stress. This approach has enabled me to generate a continuous passive income by selling weekly options on Nifty. In this Part 2 of our series, I’ll delve into the details of this strategy, its consistent returns, and why, for me, small but steady profits are the key to successful trading, particularly as capital grows.
The Strategy’s Returns and Realities:
While the returns from this strategy may not boast the astronomical figures seen on social media platforms, ranging from 100–500% annually, they are, in absolute terms, substantial. I consistently achieve returns in the ballpark of 20–22% per year. While this might seem modest to some, especially newer traders, it’s crucial to recognize the power of small but reliable profits, especially as capital accumulates.
The Weekly Strangle Approach:
Begin by choosing Nifty as the underlying asset. Nifty, being a broad market index, provides a diverse representation of the Indian stock market. You can also choose a S&P 500 Index.
Execute the strategy consistently every Friday at 3 PM, ensuring a systematic and disciplined approach to market entry.
Target a 5–6 delta strike for both the call and put sides. The 5 delta strike is strategically chosen to align with a 1.5–2 sigma range at expiry, providing a high-confidence interval (90–96%).
Utilize naked strangles, selling both a call and a put option without holding an offsetting position in the underlying asset.
Expect the Probability of Profit (PoP) to consistently exceed 90%, indicating a high likelihood of the options expiring out of the money.
Understand the trade-off between a high PoP and a lower expected payoff. Typically, the payoff ranges from 0.5–0.6%, leading to an approximate 2% return per month (considering four expiries).
Key Parameters and Expected Payoff:
- The PoP remains high, but it comes with a trade-off — a lower payoff, typically around 0.5–0.6%.
- Considering four expiries in a month, this approach yields approximately 2% monthly, translating to a 24% annual return before taxes and commissions.
- The strategy embraces simplicity, requiring minimal intervention. However, certain weeks may witness market momentum breaking the strangle’s range.
Managing Challenges and Losses:
- While the strategy boasts an 86% accuracy in my experience, approximately seven out of 50 weeks may witness the strangle’s range being breached.
- These weeks of losses can be effectively managed by either adjusting the strangle to minimize losses or employing a strict stop loss at 1%.
- Accounting for occasional losses, the net annual return typically lands around 20%.
Conclusion:
While the returns may not dazzle at first glance, this strategy offers true passive income, surpassing the yields of many other asset classes. For comparison, rental income from real estate typically hovers around 2–3% annually. Importantly, this approach aligns with my lifestyle, requiring minimal directional analysis, and allowing me to maintain a healthy work-life balance. Stay tuned for Part 3, where we’ll explore further nuances and potential enhancements to this non-directional, stress-free strategy.
