never swim or trade naked

never swim naked.

atleast never trade naked.

if you are long, instead of buying 2 or 20 lots buy 3ce:1pe pr 30ce:10pe (or in that ratio). always trade hedged. that way, you use more funds, ofcourse, and a bit more in premium decay, but that is the insurance against trades gone wrong or adverse bluff moves.

always trade with a hedge...same instrument is advisable for amateurs. professionals have more sharp options. 

don't hesitate to skim or book adverse moves, if and when they come.

however, this strategy is only if you have a trading system, you know when and why to enter or exit, in which direction is the high probability. if you don't know that or don't know what to do in case of an adverse move, then hedging won't save you much. you have to find ways to recover cost of the hedging insurance.

i, per se, never trade naked. swimming i'm learning. bathing naked is ok.

hedgin BN with N : my views about sid's thread

following are my views about sidhdharth's thread

http://www.mudraa.com/trading/136566/0/interesting-hedging-technique-siddharth.html

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good strategy

but it has some serious traps. some of these i am listing below (as much as i can recall; i tried this strategy in many forms and finally abandoned)

1. what if BN and N start going saperate ways. we assume in this strategy that BN and N have positive alpha. that is, when one goes up, other also goes up, and vice versa. this doesn't happen always. also, the rate of change of both varies. i found many a times that BN moved much slower to N. e.g. if IT moves opposite to BN (which does happen many a times) and moves faster than BN (assuming it is not BN's day), then the situation i mentioned can come (and it did many times when i tried it). many times, N remained in a range and BN moved a lot.....i bleeded like hell!

2. brokerage factor has to be very low, otherwise whatever profit you get is eaten by brokerage leaving you gasping for breath.

3. you need a lot of buffer fund to fund this ambitious method.

4. one has to do this method for a long time to cover for adverse unforeseen moves in BN and N. if you quit after one or two negative trades you are dead. and having guts to keep trading even when u r bleeding requires a drunkered's head....very very tough.

overall, thrilling strategy but as difficult and unpredictable to control as is controlling a bull in a bull fight!

saw this thread and couldn't resist sharing my views.

however, with deep pockets this is a practical and doable and winnable strategy. can't be brushed aside.

only that we talking about playing with a monster of a method.

the right strike price for hedging with options

ganeshji,

strike price points to be used for hedging should be such

that u strike a balance between

- the premium u pay (keep it minimum)

- the movement (delta) of option viz. a viz. movement in spot. otherwise hedge won't be effective.

- ur confidence in correctly reading the sitaution and hence the amount of risk u don't consider as serious risk.

- the more speculative u r the more u hedge out-of-money. and more sure u r be at or in-the-money.

how much to safeguard?

dear ganeshji,

i am of the opinion that all ur money should be protected, not half.

2 nifty put options to hedge 2 bank nifty is what i recommend.

of course, this way you may not make money for small movement of BN,

but why play for small movement?

BN gives a move of 1000 points 8 out of 12 months.

and these moves can be gauged using indicators

(not option data of operators - one reason why technicals are indispensable).

out of 1000 move

assuming u manage to gain 800,

150 odd points will be the cost of hedging.

even that can be recovered if you can walk step by step in tandem with on-the-way fluctuations/volatility.

e.g. i booked BN profit at 9652 on 27th and bought again at 9496 yday.

this has resulted in my hedged nifty puts becoming "free of cost" till the end of october series.

i can take whatever "panga" with my godfather "mr.hedge" behind my back.

if u don't hedge all ur "wealth on the trading table" fear will get the better of you.

"never trade with scared money"

and

"never trade out of fear, never fear to trade."

Prepaid Trading - I

They say "Option trading is for the experienced traders only."

They say "Never trade naked options!"

The above statements are true lies!

True, because Options are more difficult to understand as compared to futures or Cash trading.

Lie, because these are more useful to inexperienced traders than experienced ones!

True, because naked options used recklessly are the fastest road to bankruptcy.

Lie, because hedged options are slow poison, and naked options, if used with caution, can be the shortest road to prosperity!

By not opting for the option of options

a new trader may miss out on the best feature of the option....

..........unlimited profit, limited loss!

Options became untouchables

when people who didn't read the "operational manual" of Options

started playing with it recklessly

and lost heavily!

They started saying

"my loss was limited...........to 100% of my premium!"

Onlookers believed all this over and above their perception that options were difficult to understand.

Thus, one of the most powerful and safe tools of trading became

"Only For Us"

for the select few!

Options are truely "unlimited profit, limited loss" provided you have read their "operational manual" (the do's and don'ts).

Those who have read it, know that trading with options is

....pre-paid trading, just like a pre-paid mobile!

Benefit of pre-paid mobile over post-paid is that in pre-paid you can control and limit your cost.

Similarly, option trading is a pre-paid trading wherein you can control and limit your loss

------------

Your technical indicators tell you that something is likely to happen in a particular direction.

You want to take the chance

but fear that your analyses may be wrong and you may lose money

or

you may be reasonably sure but fear of losing may simply make you a stone

like Arjun in Mahabharta!

Consequently, you opt out of the trade

only to see the trade eventually go your way....

....sans you!

On the other hand, if you knew options trading

you can buy a cheap "out-of-money" option and enter the trade!

If the trade goes the way suggested by your technical analyses

then you will double, tripple, quadruple your amount the fastest!

Otherwise, you lose a part of your small investment.

How much you lose depends upon how wrong your analyses went!

The loss because of analyses gone wrong, anyway, will be much lesser than when you would have invested in futures!

A naked option is the best way to learn with least money!

And it is also the fastest way to make a fortune!

You think you can't make a fortune by cheap "out-of-money" options?

I shall be sharing a few simple methods in the sequel to this article!

Keep watching this space!!!

Understanding Hedging - I

A farmer's wheat crop was almost ready for harvesting.

Almost...but not yet....

He knew that it would take around 2 weeks for the crop to be fully ready, cut, thrashed and transported to the market.

"If only I could sell my entire crop today!", the farmer thought with a sigh.

Reason?

The price for wheat in the market that day was "mouthwatering and unsustainably high".

This was probably due to the reason that the harvesting season had just started and the demand in the market was much higher than the amount of crop arrival in the Mandi in those initial days.

"I know I can't sell today. Can't do anything about the missed opportunity!" the farmer consoled himself.

If only he knew that he could ensure today's price without selling his crop - by just selling wheat futures lots in the commodity market!

(One of the reasons why farmers and their families should be educated!)

If the quantity of his crop was expected to be equivalent to 10 lots of wheat futures, then he should have shorted (sold) 10 lots of wheat futures in the commodity exchange.

If after 15 days, when his crop would have entered the market, the price of wheat falls, his spot loss will be offset by his equivalent profit in the futures lots (because he had shorted the lots).

(Similarly, if the price of wheat in the market rises, his spot profit would have been offset by his equivalent loss in the futures lots.)

This way the farmer can rest with peace of mind till his crop is actually ready for sale!

He is assured of today's excellent price and protected against wild unexpected swings in the price.

Similar situation generally occurs for medium term investors who don't want to sell the stocks they have in their portfolio before 365 days (to become eligible for long term capital gains tax).

But they are often faced with a dilemma when the price of the stock in their portfolio has already run up a lot, is severely overbought and is likely to fall.

In this case, the investor sees no fun in saving the tax while losing the earning (probably much more than the tax savings)!

Another situation may arise when the investor wants to hold the stock in anticipation of dividend or bonus shares etc. but is afraid of profit booking of market crash.

Fortunately, he has the option to short (sell) equal lots of stock futures. This way any decline in the spot price of his stocks will be offset by the increase in the value of the shorted lots of stock futures.

This is known as Hedging against future loss by locking the profits today!