Friday, August 16, 2019

How to make 500 Rs Daily with 10k capital by option selling

Yes this is possible but needs some experience and a broker offering good leverage.
This is about option writing which 90% people don’t think of trying due to high capital requirements.

Let’s do some Maths behind why buying an option has probability of success merely 33% whereas if you sell an option the probability of success is 67%.
Lets try to understand what an option is.
In lay man’s term it is a contract signed between buyer and seller to buy or sell an underlying asset at a price known as strike price in stock market terms.
A simple example:
You want to buy a house which costs 50 lakhs as on today and you know government is going to announce a policy which can increase/decrease the price of the house . There are 2 parties involved in this deal you and the developer. Please note the price can increase or decrease after the policy announcement date say in next 30 days. don’t forget this :p
  1. You
    You want the price to decrease so you are expecting the value of underlying asset the house to fall.
  2. Developer
    Developer wants the price to increase so he is expecting the price of underlying asset to rise.
Now you don’t like uncertainty so does the Developer so you both sign a deal or contract that you will buy the home at 50 lakhs by paying a premium of say 25k so you bought a CE (call option) of strike price 50 lakhs with validity of 30 days post the policy is announced.
Similarly the builder signs a deal that he will sell the home at 50 lakhs by paying a premium of 25k so he bought a PE(put option) with validity of 30 days post the policy is announced.
Two possibilities of outcome
  1. Price IncreaseSuppose after the policy is announced the new price of the house is 55 lakhs so the contract you signed CE (call option) for 25k is now worth 5 lakhs and you save 4.75 lakhs on the increase price.

    Since the price is now 55 lakhs the developer would not want to exercise the PE he bought as the market price is higher than the price he agreed to sell at (strike price 50 lakhs). So developers 25k premium is now worthless.
  2. Price DecreaseSuppose after the policy announcement the new price of the house is 45 lakhs so the contract the developer signed for 25k is now worth 5 lakhs and he saves 4.75 lakhs due to this abrupt fall.

    Since the price is now 45 lakhs you would not want to exercise the CE option as market price is cheaper than price you agreed( strike price 50 lakhs) to buy at. So your 25k premium is now worthless.
This summarizes the derivatives and how it is a hedging instrument to cater volatility in the price. Now lets see the derivatives in the stock market and how time value of the contract plays a role.
So coming to the point how to make 500 daily from 10000 capital for that you need to understand a little more.
In stock markets also similar contracts like one we saw above are executed between two parties and they are of 3 types ITM( In the Money) OTM( Out of the money) and ATM( At the money options).
The most interesting thing here is the time value of the contract and this is why 90% option buyers loose money. ATM and OTM options have 0 intrinsic value which means they just have time value so as the options near expiry their premium erodes drastically. This is how we can make money selling options.
Now the usual question is, Why do people buy options even though their probability of success is just 33% ?
Simple answer capital requirement the capital requirements for buying an option is dirt cheap you can buy Bank nifty and Nifty options for as low as 500 INR or 10$.
Why in this world they don’t sell it even though probability of success is 66%?
  • Capital requirements are huge needs 50K to sell a single lot of option worth 60–70 Rs or 1$
  • A lot of patience is needed.
  • Max safe returns you can make in an expiry is around 5–7% and with leverage 20%.
  • Unlimited Risk the most dreaded word used when people talk about option selling yes the risk is unlimited but with proper option strategies one can have control on the losses.
80% of the option expire worthless and i.e. why more than 80% option buyers loose money.
Now you just have 10k and you thought you could not write an option but that’s not true any more. Below is a screenshot of one of my student who made 7.5k using 10k capital selling options.
Few Points to consider:
Yes making 500 from 10k capital is fairly achievable, making it everyday please read the below rules.
Rules for option selling
  • There are 22 trading days in a month and with modest accuracy of 65–70% you will be profitable 15–16 days and will loose 6–7 days just ensure you don’t loose more than 300 if your target is 500 so at the end of the month you will be net profitable. There is no holy grail or anything like 100% accuracy.
  • Have the positions hedged or deploy a strategy like Bull Call Spread, Bear call spread, Iron condors etc. by hedging trades you would know maximum loss you can incur in that trade.
  • Try to have high level view of the trend and macro economic factors.
Now you would be wondering Vinay just said that you need 50k to write a single option there is this broker called Astha Trade that gives good leverage for option writing i.e. 20X so you can sell Nifty and BN option at just 2500/- INR . I use this for just selling options and don’t recommend for Options buying. You might feel 35 Rs is too much for per lot but believe me for option selling this is the best in industry that offer leverage.

Open a paperless account in less than 5 mins and get 12.5% discount on brokerage. Usual charges 40 Rs per lot account opened through below link charges are 35 Rs per lot.

Also get trade ideas on my free telegram channel.

Happy Investing !!!
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