Author: SS | 19th March 2021 | Read Time: 3-5 mins
Thursday, 11.45pm….it’s almost midnight, can barely keep my eyelids open—but my instincts overpower me to quickly jot & share what just hit my mind…I can share a Strategy or 2 with you all!!
The write up given below may seem to be tough to understand for people who haven’t done Derpo…its actually not meant for them and I am sharing it with my Derpo students…. but then you and I know, how much respect is there for intellectual property rights here in India…so people would be forwarding it to every Tom, Dick and Harry…
Hence I decided to share it with the public via QForum…
So I am warning the non-Derpo readers here to avoid reading this write up as they may not understand it in full spirit…
They will either feel that I lack the ability to explain , which is not true because I am writing this for my Derpo students who have experienced the discussion with me in class and so can relate to it…
Or they would act upon it in a wrong manner in terms of trading and burn off their fingers…you know very well–half baked food is difficult to digest and injurious to health..the same holds good for knowledge…
I mean, it’s not rocket science what I’m sharing, but I feel that to understand the strategy(/ies) one needs a certain level of connect to me—to soak-it-in in the intended context & spirit…
Strategy 1–Actual vs Synthetic Calendar Futures:
Can be done throughout the year using weekly or monthly expiry options…but would be hurt a little if there is too much movement after the trade is entered .
Scenario 1–
We are bullish based on OI structure and skew percentile discussed in class…some may even use their technical tools to act as a supplement.
- Buy futures current month
- Sell call option current month for a strike 200 points above or below futures
- Buy put option next month for same strike
Greeks—
- Positive delta (if u choose higher strike) or zero delta if u choose lower strike
- Positive theta…good
- Negative gamma….bad (too much movement will hurt as it did when market collapsed 300 points from Monday to Thursday this week)
- Positive vega…bad because of positive delta , we want futures to rise but if that happens, IV will fall and we will loose due to positive vega.
Scenario 2-We are bearish
Do opposite
This time we wish market to fall as we have negative delta and this will also help us in terms of vega as IV will rise when market falls.
Note 1– Scenario 2 is specially recommended when there is a very big event ahead…you enter the trade way before the event and square off way before the event unfolds …by that time IV will get swelled up and the positive vega will help a lot.
Note 2- There is no need to put any stop-loss in these trades…well ofcourse you may put a profit target….
Daily IV % sqrt (no of days held) * margin blocked.
Note 3- You got to monitor the trade closely …it will keep on swinging from profit to loss and so you need to book profit when the target is achieved.
Note 4- Margin required would be roughly 60000 and u will usually earn around 5% per month on this trade.
Note 5- You need to do it regularly to achieve that return of 5% per month on an average.
Strategy 2- Gut and Strangle Combo Calendar-tone (Mixed Sauda)…..wait for the next writeup…..
I looked at the payoff diagram of this in opstra and found it very similar to a calendar spread.
So I did more reading and analyis and it mostly boils down to put call parity
since (f+,c-) is (p-) . The trade (f+,c-,p+) and replaced by (p-,p+).
In opstra both (f+,c-,p+) and (p-p+) show same profit probability ,risk reward ratio , vega , delta and gamma.
The theta was a bit different (not sure it matters much , needs more investigation).
But now assuming the sort of synthetic aribtrage is equivalent to put calendar ,
I think extreme moves on either sides hurt , and stop loss should be thought about unless we have some good adjustments to do in case we start losing.