discussion on "diamond rule of booking profit"

thank u all for the healthy and enriched discussion (http://www.mudraa.com/trading/104685/0/diamond-rule-of-booking-profit-js.html) which sometimes i desperately miss despite knowing that we have a lot of sharp, experienced and fiercely talented minds in mudraa

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i would like to share my views one by one on what has been opined here

dear mr.arora,
u said


"Dear JS
I have tried this method several times.It does not work well.What if the market is struck in a range for next few days or reverses.Suppose you square a call at 200 with a put at 100 and in next few days both become half,your profit will shrink to half as mostly happens.You cannot decide optimum point at which you will book your call as Nifty has its own ways.
suppose your call at 200 becomes 150 next day and languishes there for a long time ,as sson as it touches 180 you would be tempted to book and curtail your loss,and lo it would soon touch 250 leaving you repentful."
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dear mr.arora,
u r right
but i think i need to clarify a few things about this rule.
1. if the market gets stuck in a range after we "book profit" the way i shared above? = well, if you see the rally pausing, why not square off totally!
"don't catch a falling knife" we say during bear runs or sell-offs.
similarly, we can say "don't catch a rising spike"
but what if the knife has stopped falling and the spike stopped rising?
there is no harm in that case.
as u said, if the market enters range after we take reverse option position, then who stops us from winding up everything especially when we are sure that the rally has stopped or ended or paused for the time being and that we will not lose potential profit by squaring-off prematurely!
2. if the market reverses, the reverse option position will soon gain as much as u will lose - the only condition being that u buy at-the-money or in-the-money option and not out-of-money option. i have noticed that majority of the opinions shared in this thread are based on fears caused by "out-of-money" positions.
3. as far as judging the appropriate time to "book-profit" is concerned, i beg to state that while it may not be possible to exactly pinpoint the moment, it will be suffice to judge it approximately. this rule is actually a strategy which can take care of the gaps in timing. no timing is better than rough timing.

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dear hvm
u said

"I feel if the underlying secuirty is volatile than these strategy would work.
Further, taking JS example, when gain from Call value exceeds the Put premium than one sell off the Call Option and wait for Put option to sell when Bank nifty comes down."

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hvm, u r right, this rule helps when the rocket is still moving but we have fear or indication of it falling.
but i somehow don't agree ur second line (or i have not got u) = e.g. during upmoves, when the call still keeps moving up and the benefit from its rise exceeds the loss from the put's decline (with which we "booked profit"), even then don't square-off the call. this rule applied then also. this is a multiple stage rule. who knows it may be a big big rally and may continue to go. at that time we should again buy a at-the-money put of new cmp.
i think everyone still remembers the rally of may 2010 when the nifty went 1000+ points in a single rally. had we known this rule we could have minted money.


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alkaji
u said
"sir insted of buying an option...can we short sell option.... consider... if i bought 4900ce when nifty was trading at 4925 n when it came to 5000..insted of buying 5000pe ..wouldn't be it better to write 5000ce insted... coz if mkt remain range bound..  value of option will become less day by day.....hence we will gain anyway.... 
also u mention that operators do short sell but with proper hedging...... just my view... plz gide!!"

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alkaji, i don't agree that we should short sell option.....................the reason = if the rally continues further, we would lose in the short sell. the beauty of the reverse option is that if the rally continues, the reverse options evaporates soon.
we can counter the fear of losing premium in case of range-bound market by actually winding up everything (as i said while replying to mr.arora)

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dear sv
u said"Future of this month long and next month short/ this month short and next month long?
Can also be used as hedging straregy.
Comments please."

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dear sv,
hedging future with future is a "rahul dravid" patience strategy and one is likely to get it wrong many times. also, it is recommended only during down runs.
otherwise, hedging future with future is like writing ur own cheque in your name. we want others' cheques in our name.
future against future is a safe game but it goes nowhere......it is too safe. why not square-off actually if we are to do this.
if at all u do that u need to pitch a different future (stock or index) against original future........but it is complicated and slippery."

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dear sim,
u saidthis rule I tried, but in reverse order, when my SL Hit I hedge it with another one at the money,,,,  BUT now the Loss is fixed and the profit on one can be booked at the swing"what we end up is we book the profit leg and wait for opportunity on the loss leg holding it,, we should have a mind set to close both together!"

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dear sim,
in reverse, an "ON" will become "NO". this rule is only for "booking profit" but not for "booking loss". may be i will chalk out one for that condition.
when u book loss with a reverse option, ur original option is already in-the-money. in that case, if things still go in the same direction, ur profit with new option will be less than ur loss with the original one.
if u see this rule with opposite lens, it will give opposite inference.

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