Riskfree FNO Trading Strategy

Long 1 lot futures contract
Sell 1 OTM  Call
Buy 1 ITM  Put
With this strategy we can earn monthly up to 12% without risk

Example-

Suppose the Infosys stock is currently trading at Rs.935 on February6 . If the trader is neutral to bullish and he setup this trade by writing the  call option of 1020 for Rs2.7 while simultaneously he buys the 1000 put for Rs.67.


Buy 1 Lots of FEB 1000 PUT : 67
SELL 1 Lots of FEB 1020 CALL : 2.7
Buy 1 Lot of infosys Future at Rs.935

If the stock price rally to Rs.1020 or above at expiration date, his maximum profit is Rs.10,250
On the other hand, should the stock price plunge to Rs.900 instead,he has profit of Rs.250
However, should the stock price remain unchanged at Rs.935, while his net profit  is still Rs.250
So,he is in profits regardless the movement of the stock.



Position Will be Closed on or Before FEB,2017 Expiry
Maximum Loss Risk Involved in the trade  : 0
Maximum Profit Potential : RS.10,350
Return if stock remains unchanged : RS.350



During FEB Expiry    


PAYOFF GRAPH
                                        
      



   

  Underlying Value at Expiry    Total Profit and Loss

                            1075           -           ₹ 10,350
                            1047           -           ₹ 10,350
                            1029           -           ₹ 10,350
                            1019           -           ₹ 9,925
                            1010           -           ₹ 5,250
                            1000           -           ₹ 575
                            991             -           ₹ 350
                            982             -           ₹ 350
                            972             -           ₹ 350
                            950             -           ₹ 350
                            900             -           ₹ 350

IMPORTANT NOTE
Exclusion of transaction costs during calculation
For ease of calculations, we have not taken into consideration the transaction cost that would be incurred by the investor upon entering the above strategy.
Investors are requested to calculate their brokerage and transaction charges as per applicable to them prior to entering any transaction.




4 comments:

  1. what happens to that one lot of long future ?

    ReplyDelete
  2. square off along with the call and put options

    ReplyDelete
  3. How is the profit 5,250 at price 1010? wouldnt the cost of Put 6,700 be deducted from total profit? I would appreciate if you share detailed calculation

    ReplyDelete

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