Firefighting a Short Iron Condor Strategy on Nifty50 on Expiry D
This is a strategy you use when you feel the markets will not rise or fall below a predetermined level within the upcoming week. Approx 9 out of 10 times markets remain range bound and the other single time it breaks out or breaks down. This strategy is when you have a feeling that markets will remain range bound and will not break out or break down.
We will be using Sensibull to analyze each of the strategies. If you have a zerodha demat account — their strategy builder tool is 100% free.
We have created a short iron condor by placing a 4 legged option strategy. We have used the Nifty50 index that has a weekly expiry on 03 Aug 2023. The split up of the legs are
· Buy 19350 PE for 13.65
· Sell 19500 PE for 37
· Sell 19800 CE for 39
· Buy 19950 CE for 13
Today is 28th July Friday and we have 4 more days to expiry ie. Monday 31st Jul, Tuesday 1st Aug, Wednesday 2nd Aug and Thursday 3rd Aug.
The maximum profit you can get out of this trade is Rs2468 and the max loss is Rs5033. When you hold this trade till expiry, you can be 100% sure that your losses will never exceed Rs5033 — that is the first guarantee you can count on for fixed loss strategies.
You will benefit if Nifty50 ends between 19451 and 19849 on 03 Aug 2023. Current price of Nifty50 is 19646. Which means we have 19646–19451 = 195pts protection downside and 19849–19646 = 203pts protection upside.
To take this trade the capital required is Rs47194 which can be funded via cash in ledger or pledging Gsecs or GOI bonds. Mutual funds, stocks and ETF could be pledged as well, but brokers require 50% of all funds to come from cash or cash equivalent holdings.
Firefighting Strategies on Iron Condor
This is where the topic gets interesting. You are already aware by now that the max loss you need to defend is Rs5033 over the next 4 days but most importantly on 03 Aug expiry day.
When to Fire fight?
Firefighting is really required only if Nifty falls below 19451 or surge pasts 19849. Even if daily swings of this magnitude happens, its quite common for Nifty50 to revert to mean. So our firefighting strategies can be deployed for a short duration of few minutes or intraday. All the firefighting strategies has to deployed on EXPIRY DAY only i.e. every Thursday. I do not suggest or recommend to do it on any other day as the risks of not closing a fire-fighting trade may cause your capital to get wiped out.
High Risk Firefighting
The firefighting strategies require naked option buying or selling so its best recommended that you do it after studying the risks associated. Most importantly these tactics has to be done within the day and should not be taken overnight which may otherwise wipe out your capital. Most importantly these tactics has to be done within the day and should not be taken overnight which may otherwise wipe out your capital. I have intentionally repeated that sentence with bold so that it gets your undivided attention.
How to Firefight?
There are only 2 loss making possibilities here
1. Nifty50 is above our upper breakeven of 19849
2. Nifty50 is below our lower breakeven of 19451
Let us assume that Nifty is trading at 19400 now which means it is below our lower breakeven as per (2).
From here Nifty50 has only 3 possibilities on 03 Aug Expiry Day
a) Stays below 19451
b) Climbs back above 19451 but not cross 19849
c) Goes above 19849
Conditions (a) & © is unfavorable for us, whereas condition (b) is an ideal case for us. If condition (a) i.e. Nifty Stays below 19451 happens we have the freedom to sell CALL options above 20000 all the way till 21500 intraday.
Image below shows the option chain of Nifty50 and the strikes highlighted in red are CALL options above 20000.
If we select to short sell any of these strikes — there are only 2 possibilities that could happen
1. Nifty will scale back up the lower breakeven of 19459 — then these CALL options will appreciate in value and we will incur a loss if we hang on. The idea is that we got Nifty50 back above our lower breakeven so that it profits us — so it makes sense to exit the firefighting position.
2. Nifty closes below 19459 which means the CALL options we sold becomes worthless (ie goes to 0) and we pocket all the premiums paid
Reiterating again that the firefighting has to be done only on expiry day where you have 100% visibility that the OTM CALL options are going to zero. On any day Nifty50 could make even a 0.5% move and drive up the options premium so high that you end up losing more.
Similarly if Nifty50 is above 19849 we need to short sell PUTS below 19300 and grab those premiums to offset the max loss of Rs5033.
How much premiums you should grab?
The idea here is not to use the option selling strategy for income rather to cover your max loss. The max profits you can target should match the max losses you will hit in the original strategy. Also do not be adamant that you need to recover 100% of the losses, even if you are able to reclaim only 50% — it’s still a WIN.
When to Exit the Short Selling Position?
As soon as Nifty is back in the favorable range, we should prioritize exiting the short selling position as the fire is doused. If you hang on to the short selling position anymore — you may get barbequed/incinerated.
We will be using Sensibull to analyze each of the strategies. If you have a zerodha demat account — their strategy builder tool is 100% free.
We have created a short iron condor by placing a 4 legged option strategy. We have used the Nifty50 index that has a weekly expiry on 03 Aug 2023. The split up of the legs are
· Buy 19350 PE for 13.65
· Sell 19500 PE for 37
· Sell 19800 CE for 39
· Buy 19950 CE for 13
Today is 28th July Friday and we have 4 more days to expiry ie. Monday 31st Jul, Tuesday 1st Aug, Wednesday 2nd Aug and Thursday 3rd Aug.
The maximum profit you can get out of this trade is Rs2468 and the max loss is Rs5033. When you hold this trade till expiry, you can be 100% sure that your losses will never exceed Rs5033 — that is the first guarantee you can count on for fixed loss strategies.
You will benefit if Nifty50 ends between 19451 and 19849 on 03 Aug 2023. Current price of Nifty50 is 19646. Which means we have 19646–19451 = 195pts protection downside and 19849–19646 = 203pts protection upside.
To take this trade the capital required is Rs47194 which can be funded via cash in ledger or pledging Gsecs or GOI bonds. Mutual funds, stocks and ETF could be pledged as well, but brokers require 50% of all funds to come from cash or cash equivalent holdings.
Firefighting Strategies on Iron Condor
This is where the topic gets interesting. You are already aware by now that the max loss you need to defend is Rs5033 over the next 4 days but most importantly on 03 Aug expiry day.
When to Fire fight?
Firefighting is really required only if Nifty falls below 19451 or surge pasts 19849. Even if daily swings of this magnitude happens, its quite common for Nifty50 to revert to mean. So our firefighting strategies can be deployed for a short duration of few minutes or intraday. All the firefighting strategies has to deployed on EXPIRY DAY only i.e. every Thursday. I do not suggest or recommend to do it on any other day as the risks of not closing a fire-fighting trade may cause your capital to get wiped out.
High Risk Firefighting
The firefighting strategies require naked option buying or selling so its best recommended that you do it after studying the risks associated. Most importantly these tactics has to be done within the day and should not be taken overnight which may otherwise wipe out your capital. Most importantly these tactics has to be done within the day and should not be taken overnight which may otherwise wipe out your capital. I have intentionally repeated that sentence with bold so that it gets your undivided attention.
How to Firefight?
There are only 2 loss making possibilities here
1. Nifty50 is above our upper breakeven of 19849
2. Nifty50 is below our lower breakeven of 19451
Let us assume that Nifty is trading at 19400 now which means it is below our lower breakeven as per (2).
From here Nifty50 has only 3 possibilities on 03 Aug Expiry Day
a) Stays below 19451
b) Climbs back above 19451 but not cross 19849
c) Goes above 19849
Conditions (a) & © is unfavorable for us, whereas condition (b) is an ideal case for us. If condition (a) i.e. Nifty Stays below 19451 happens we have the freedom to sell CALL options above 20000 all the way till 21500 intraday.
Image below shows the option chain of Nifty50 and the strikes highlighted in red are CALL options above 20000.
If we select to short sell any of these strikes — there are only 2 possibilities that could happen
1. Nifty will scale back up the lower breakeven of 19459 — then these CALL options will appreciate in value and we will incur a loss if we hang on. The idea is that we got Nifty50 back above our lower breakeven so that it profits us — so it makes sense to exit the firefighting position.
2. Nifty closes below 19459 which means the CALL options we sold becomes worthless (ie goes to 0) and we pocket all the premiums paid
Reiterating again that the firefighting has to be done only on expiry day where you have 100% visibility that the OTM CALL options are going to zero. On any day Nifty50 could make even a 0.5% move and drive up the options premium so high that you end up losing more.
Similarly if Nifty50 is above 19849 we need to short sell PUTS below 19300 and grab those premiums to offset the max loss of Rs5033.
How much premiums you should grab?
The idea here is not to use the option selling strategy for income rather to cover your max loss. The max profits you can target should match the max losses you will hit in the original strategy. Also do not be adamant that you need to recover 100% of the losses, even if you are able to reclaim only 50% — it’s still a WIN.
When to Exit the Short Selling Position?
As soon as Nifty is back in the favorable range, we should prioritize exiting the short selling position as the fire is doused. If you hang on to the short selling position anymore — you may get barbequed/incinerated.
