Trader’s Edge: A low maintenance trading strategy that can bump up your income

There are various reasons why one is drawn to stock trading. For some, it is greed, for a few, it is the thrill, while for some like Ravi Kumar Gupta (@compounddmoney), it is need that drives them initially.

Gupta, who has been investing and trading in the stock market for nearly 15 years, employs his own take on the Strangle strategy, which involves selling out-of-the-money Pt and Call options simultaneously.

Strangle is one of the simplest strategies that a trader deploys when he or she does not want to take any directional view on the market. The margin requirement also comes down as risks are relatively lower with this strategy.

After graduating from a college in Pune, Gupta was placed with an IT firm. However, a low initial salary, family responsibilities, and an education loan forced him to look for a secondary source of regular income. He zeroed in on the stock markets.

Initially, he invested in stocks based on tips and recommendations on TV. However, he soon realised that that was not working as he suffered losses. Within a few years, he turned to trading in Options.

In the early days, he did not have a fixed strategy. He looked at other traders for guidance. However, there was nothing that he could do as a side hustle along with his job. It took a while for Gupta to find a strategy that worked for him. He has not looked back since.

Gupta’s strategy is his own take on one of the simplest non-directional Option strategies. The idea is to book small profits every few days and never book a loss. In order to trade in Nifty the minimum capital requirement is around Rs 1.5 lakh, including adjustments. The setup is as follows:

Step 1: On the day you want to start trading, load the Option chain for either Nifty or Bank Nifty for mid-month expiry.

Step 2: For Nifty, find out which strike has a premium of around Rs 60-70 on both the Put and Call sides. Sell an equal lot of each.

Step 3: Every day, you need to check your position only once or twice for 10 minutes. Wait until you see a Rs 1,000 profit in either leg on Nifty – whether Call or Put – and book profits. At the same time, take another position on the same leg. For example, if your Call leg shows Rs 1,000 profit, the first book that, and then sell another Call that gets you Rs 60-70 premium. The put and call pair needs to be maintained so that your overall position remains non-directional.

Step 4: You also need to keep a watch on losses. If the market moves sharply, and either leg shows a loss of more than Rs 3,500 (or when the premium has doubled, which is when your loss will reach Rs 3,500 per lot), you need to adjust your trades by converting that leg into switching to a ratio spread. For example, suppose you sold one lot of 19,000 Calls at Rs 70 and that is now showing a loss of Rs 3,500 or more as the premium has doubled to Rs 140. Now, sell another lot of 19,000 Call pocketing the Rs 140 premium. At the same time, buy another call that has a premium slightly below Rs 210 (Rs 140 + 70). Now continue with these three positions until you reach breakeven and then square off.

Step 5: At the same time, sell another call that has a premium of around Rs 60-70 so that the pair is maintained. Also, keep booking Rs 1,000 profit on either leg notwithstanding what is happening with your adjustments.

Step 6: With contracts that are close to expiring, take a look at your pair. If both of them are in profit or near breakeven, square off and move to the next month’s contracts. For instance, if we took a position in February's contract in the first week of January, we need to move to March contracts as January comes to an end. If overall, it is in loss, wait for it to break even before rolling over.

Gupta is able to generate 4-5 percent returns every month. The strategy can also be employed in stocks and other contracts, he says, though beginners should stick to Nifty and Bank Nifty. Sometimes, there may be a lack of liquidity in mid-month contracts. Then you can wait for a couple of days before initiating or rolling over your trade. However, that’s very rare in Nifty as it is highly liquid.

Like any Option trading strategy, this is not devoid of risk. Risks usually arise from a sharp movement in the underlying stock’s prices. Gupta believes in managing risk by adjusting one’s trades instead of booking losses.

Trading in mid-month contracts and out-of-the-money Options makes it relatively safer as your trades are usually 1,000 points away from spot prices, which gives you enough wiggle room in case something goes wrong.

“After adjusting, you will get a breakeven point which will mark your safety zone. In case there is a very big movement in the underlying stock and one of your legs is again in loss, you can add another level of adjustment,” said Gupta. “Second-level adjustment hardly occurs once in six months,” he added.