Let’s keep it simple, in market there are people who want quick buck and some who would need monthly stable income.
A lot of my friends ask me as to what is the safest strategy in option trading to earn a 4% profit monthly?
I ask them normally what they mean by safest strategy
a) the strategy has a high win probability
b) the strategy is not open to unlimited loss
Now let’s go into details of strategy planning.
It can be called “Max pain iron butterfly plus iron condor strategy” Or simply ” Max iron” ( my own name) in simple terms.
- Now we know only option sellers make money consistently and buyers only few big wins. That is true….
- We all know that most deployed option selling strategy is short strangle at 9.20 or 9.30.
- what makes this short strangle best strategy. Needless to say, it works well when view of the market is range bound.
- Known fact that Short strangle constructed on Thursday with 400/450 points away on either side from current market price, on weekly Nifty, has a win probability of more than 70%.
- But when market turns crazy and trends in one direction then sometimes gives a violent directional move. To get protected from this, we can opt for iron condor replacing short strangle.
- Now we know that iron condor shortcoming compared to short strangle is that it reduces the reward amount by 5–6 times compared to short strangle.
- We know that around 40k is required to deploy iron condor of 1 lot in Nifty and a win would give 1k profit per week for 450 points short strangle but if trade goes wrong, it would incur 3k loss. What this means that just 1 loss out of 4, would wipe away the profits made in other three weeks in a month. What this means for us as trader is that it’s bad reward to risk ratio.
- Now we know that compared to iron condor, the iron butterfly strategy yields amazing reward to risk ratio. For one lot, a winning trade could give max profit upto 4k per week and loss would be just 300–400rs.
- Now if we construct a short straddle with 400 points away from market price on either side. Hedge this by buying strikes at 450 points away from market price – hence it completes iron condor setup.
- Now also we create another straddle at maxpain point or at strike having highest sum OI of both CE and PE. Hedge this to make a butterfly, by buying immediate next/two level strike from straddle point. This makes Iron Butterfly setup.
Say Nifty is trading at 16600
Sell 16200 pe and 17100 ce.
Buy 16100 pe and 17200 ce.
This completes iron condor setup with 900 range 16200-17100= 900 points
Say max pain is at 16600.
Sell 16600 pe and 16600 ce.
Buy 16400 pe and 16800 ce.
This completes iron butterfly setup.
In opstra below strategy payoff graph looks like this
This is one of the simple strategy with high win probability compared to just iron condor and gives a regular and consistent profit in weekly options. Hedged and safe strategy anybody can deploy to make regular money.
Now what do we do when market is highly trending?
Here we do the strike selection based on the short term trend of Nifty. Strike selection need not be symmetric distant from market price always , like shown in the example above. Or we can just stay away when the market is very much volatile/trending in a direction.
Please note: Always make sure you your own backtesting and this article is just for educational, purposes only. Never deploy any strategy without proper backtesting. Let me know in comments if you need more information and live trade details…