Iron condor

Think of it as being paid to promise that NIFTY will stay between two levels this week. If it does, you keep the fee. If it breaks out, you pay a penalty, but the penalty has a ceiling that is set the moment the trade goes in.

That ceiling is what makes this the first options strategy we suggest to someone new. The two open-ended versions on this site can lose more than they collect. This one cannot.

It sells two options, a call above the index and a put below it, and collects their premiums. Those are the promises. Then it buys two cheaper options a little further out, one on each side. Those are the insurance: whatever the index does, the sold option and the bought one on the same side can never be more than their distance apart.

The money comes from time. Every day that passes with the index inside the range, the sold options are worth a little less, and the strategy can buy them back cheaper than it sold them, or let them expire worthless.

It only sells when options are expensive, measured by where today's implied volatility sits against the past year. Selling cheap options is a poor trade even when the range holds.

Illustrative prices with NIFTY at 24,000, three days before a weekly expiry, one lot of 75 units.

Sell the 24,300 call

collect ₹40 a unit

Buy the 24,500 call

pay ₹19 a unit

Sell the 23,700 put

collect ₹38 a unit

Buy the 23,500 put

pay ₹18 a unit

Net collected

₹41 a unit, ₹3,075 a lot

Most it can make

₹3,075, if NIFTY ends between 23,700 and 24,300

Most it can lose

₹11,925, if NIFTY ends beyond 23,500 or 24,500

The strategy does not wait for expiry to find out. It books the trade once it has earned about half of that ₹3,075, and it gets out of a side the moment the index gets close to it. Most weeks end somewhere between the two.

These are the real rules, in the order the strategy checks them. Nothing here needs you to be watching.

1. 1

   Takes the profit early

   Once the position has earned a set share of what it collected (half, on the conservative version), it closes. Waiting for the last rupee is where most of the risk lives.

2. 2

   Gets out of a side the index is approaching

   Each sold option has a delta, roughly its chance of finishing in the money. If the call's or the put's delta climbs to the exit level, that side is closed before it can do real damage.

3. 3

   Stops when the premium doubles

   If buying the position back would cost twice what it collected, it buys it back. That is the ordinary stop.

4. 4

   Stops trading for the day after a set loss

   If the day's losses reach the daily cap, a small percentage of your account, it places nothing more until tomorrow.

5. 5

   Closes everything by 15:10

   Nothing is carried overnight. A gap at the open cannot hit a position that is not there.

6. 6

   Halves its size on risky days

   On expiry day, and when volatility is extreme, it trades half a lot's worth of risk rather than skipping entirely.

Adjustments, and why it does not make them

Traders talk about rolling an iron condor: moving the threatened side further away, or out to next week, to buy time. It can work, and it can also turn a small loss into a large one by adding risk to a trade that is already wrong.

This robot does not roll. When a side is threatened it closes that side, takes the loss, and waits for the next clean entry. That is a deliberate choice: the loss cap only means something if nothing is added once the trade goes against you.

Each strategy comes as conservative, balanced and aggressive. They share the idea and differ in how much they risk once in.

BANKNIFTY moves roughly twice as fast as NIFTY, which is why it only appears on the aggressive version.

• The loss cap is per lot. Two lots is twice the cap. The daily loss limit exists so a bad morning stays a bad morning.
• Brokerage and taxes on four legs add up. A strategy that earns ₹3,000 a lot pays several hundred of it away in charges, which is why it takes profit early rather than trading often.
• Options need margin. Your broker blocks money while the position is open, and the amount can rise during a volatile day.
• A backtest of options uses historical option prices, which are harder to come by than stock prices. Treat the listing's numbers as what they are: a simulation.

Premium

The price of an option. A seller receives it up front and keeps it if the option expires worthless.

Strike

The index level an option is tied to. A 24,000 call pays its owner only if the index finishes above 24,000.

Expiry

The day an option stops existing. NIFTY and BANKNIFTY have weekly expiries, and these strategies use the current week's.

Lot

Options trade in fixed bundles. One lot of NIFTY is 75 units at the time of writing, so a ₹40 premium is ₹3,000 per lot. Check your broker for the current size.

Delta

Roughly, the chance an option finishes in the money. A 0.15-delta option is about 15% likely to; the lower the delta, the further from today's level the strike sits and the smaller the premium.

Implied volatility (IV)

How big a move the market is pricing in. When IV is high, options are expensive, which is when selling them pays best.

Margin

Money your broker blocks while you hold a sold option, because you may have to pay out. It is returned when the position closes.