Future-Option Combo strategy for almost risk free profits. (

[AndrSvyatEi]

I dont trade in F&O's nor do I trade much in cash too.

I just struck with this idea and thought of posting it here to have all you guys' opinion on it.

Supose a certain stock or the market in general is in a certain trend, uptrend or downtrend, not moving sidewise. Lets assume its going upward. Now, you buy a future (of stock or nifty) at certain price, say Rs X and you buy same value (total value of future contract) of put option at strike price of Rs X and pay premium of Rs Y. Now, if the price moves up as predicted by you and you close your future position at price Z, then you make profit on your future contract and you lose preminum paid on put contract since it expires worthless. So, the effective profit will be Z-X-Y and you will brekeven at X+Y price of the future contract. In the unfortunate event of your predictions going wrong and your stock or nifty declines, so you will make a loss on the future contract, but you can exercise your put option and sell the stocks or nifty at Rs X effectively nullifying your loss in future contract. In this case, you would only lose the premium paid in put contract.

The reverse can be also true in case stock or markets is trending downward and you sell a future contract and buy a call option and protect yourself from increase in prices.


Could you guys please comment on this strategy. Are my assumptions correct?

[Angelotago]

>50% correct...the delivery brokerage will kill most of the profits in cash.
> a month has @ an average 20 trading sessions...so a hit on bulls eye is needed bcause time decay will erode most of the options gains....http://www.traderji.com/images/smilies/smile.gif

[AnthdoniHew]

Isnt that equivalent to buying a CALL (or PUT)? In this case there is no margin to be paid on futures position!
There are lots of strategies. Some risk free ones are,

1. Buy Futures, Buy PUT and short CALL (Same Strike)

2. Sell Futures, Sell PUT and Buy CALL (Same Strike).

Your profit in the first case is, CALL - PUT - (Futures - Strike). You need to take the trade only when it's positive (You've to make profits, dont you?). You can work it out for the second one. Your profits are going to be limited (very limited), just better than interest, and, is for Very large volume players.

[AnmilesMom]

BTW, your option on indices cannot be exercised as they are Euro type. Exercising an option is normally a last resort, as selling the option in the market will give you time value premium in addition to just the intrinsic value which you would get by exercising.

www.cboe.com (http://www.cboe.com) has (or had? I havent looked at it for quite sometime), some good learning material on Options (Chicago Board of Options Exchange).

[AnthonyRem]

Why dont u try on covered calls