The Cloundra Zero Risk Options Trading Strategy
The Cloundra Zero risk options strategy is a three-position, where we buy the stock, buy a protective PUT and write a CALL option at the same time. Generally, we seek to find situations where we can buy stocks that look like it is going up and the same time, buy ATM or slightly OTM Protective PUT and sell OTM Calls whose premium equals or exceeds the premium we pay for the puts. Quite often, the put we are buying and calls we are selling have at least 90 days or higher expirations. A short-term expiration can also be possible.
Our focus should be on trying to construct which provides a guaranteed profit at the time of entry.
Let’s understand this with an example.
Stock XYZ price is $40.00
- The $40 put is trading at $5.00 (90 days expiry)
- The $42.50 Call is trading at $5.80 x $6.
- We can Buy 100 shares of XYZ for $4000
- We buy 1 contract of PUT at 5.20 $520
- We Sell 1 contract of CALL at 5.80 $580
With this, we could no risk for one year, no matter the direction of the stock.
If the value of the stocks falls, our PUT contract will hedge the declining value of the Stocks, same time our CALL’s premium start decaying and that means we can keep our premium. If on the expiry the actual value of PUT is increased by 7.80 and the Stock price is decreased by $37.00. Our net profit will be calculated as follows.
Cost is $4520 == $4520
Closing value: $3700 + $260 + 580 == $4540
Net Profit: $20
If Stock prices increased and reached $42.50. our shares will be sold at 42.50 each, which means we will make 2.50 per share (250 + the premium of $580 we collected, netting a profit of $310. This is equal to 6% net profit over the 90 days.
If Stock prices go sideway and range between 40 and 38, then, then our net profit will be 580-520 == $60.00. and we can sell our Stocks at $40.
