Have you ever wanted to learn more about Futures and Options? In today's article, we explore the same strategy which is executed through both Futures and Options on NIFTY 50.
We also compare the performance between our two models over the last 1 year to decide which one is better and why.
What is Nifty Long-Short?
Nifty Long Short is an index-based trend following investment using 'Nifty50 Futures'. Please read this link to know more about it.
How Does Nifty Long-Short Future Based System Works?
It is a 3X Leverage system, which is always in a position (either long or short).
1Lot of index futures (50 units) costs approx Rs 9L. We take this 9L position with a capital of 3L only.
To understand it deeper you can read this link.
How is it different from an Option Buy System?
An Option is an instrument where the buyer pays the premium and he has the right and not the obligation to complete the trade, while a futures trade is an obligation for both parties. So, in an option, the risk for the buyer is limited but the payoff is unlimited.
For our study, the underlying system for both future and option-based strategies is the same. They both use the same signal generated from the system to take either a long or short position. The only difference being for Option buy we have fixed risk capital per trade (limited downside). We use 3% capital per trade for the trade (which can be tailored based on the risk appetite), and in the future, we take 3x leverage.
What does the Nifty Long Short Option strategy look like in practice?
In this example, we start with 5L capital. Per trade, we will use 15k as premium (3%) which is the maximum we can lose.
Let's say the system generates a Long signal, then we will buy the ATM Call Option (CE) worth 15K for the current weekly expiry. That means that it will square off at the end of the week. For the Short signal, we would have bought ATM Put Option (PE) worth 15K for the current weekly expiry.
Now we wait. If the underlying signal continues till the day of weekly expiry then we will roll over the same position to the next week ATM CE/PE options. In case the signal changes we exit (whether at a profit or a loss) and take a new position based on the new signal.
NLS Future Vs. NLS Option Buy Performance Comparision
We started NLS Option Buy Model on 8th Feb 2021 and recently on 7th Feb 2022 we completed one full year and we are happy to share our findings and observations.
Btw 2021 was one of the worst years for this system of trend following. The Nifty 50 Index chopped both the ways for many months in a row.
Performance Measurement
Deciding on the winner
Looking at the chart and the figures we can clearly see how the options strategy beats the futures strategy.
It may have a lower win rate but thanks to the better payoff ratio due to limited downside, the strategy does better than the Futures strategy in the long term. You can diversify your NLS exposure to both Future and Option mode and take the benefit of both the system.
