I Strongly believe , to be Successful in Stock Markets you Require two things :
Edge means having your own Trading System , following your own consensus & Conviction.
Hedge is like an Insurance Policy , it will protect you from losing big and also maximise your earning potential over time without Destruction of your Capital.
I will be Sharing one of the Hedging Strategy here.
Example : Nifty on Friday (5th June) has closed around 10150. You are Bullish for this Weekly Expiry and what you to do is buy a Call Option of 10200 which is Trading around ₹120. Buying or selling naked Options involves high risk as its equal to betting.
If you win you win Big or else you lose Everything.
So buying naked Options isnt my Cup of Tea.
What will I do in this Scenario?
I would buy a 10200 CE (11th June Expiry ) at ₹120 and would sell a 10300 CE (11th June Expiry) at ₹80 to manage my risk.
Now there are 3 Situations which can happen :
1) Nifty continues to rise: The 10200 Call Option would give more profit compared to the loss of 10300 CE as the near term option value always rises Quickly.
2) Nifty goes down : Place a Stoploss for your Option .
Stoploss would be the price of 10200 CE - Price paid for 10300 CE. (120-80 = 40) and get out at Breakeven.
3) Nifty Expires between 10200 to 10300 : This is the place where you get Maximum profit.
As 10200 CE will go higher and 10300 CE sold will expire at Zero.
Using this Strategy you can minimise your losses and can maximise your Earnings.
Naked Options buying requires high expertise and only well Trained Traders can do that.
It's not Possible for a common Trader to do the same.
How much Margin does this Strategy Require?
Let's check Zerodha Margin Calculator for the same.
Zerodha margin Calculator by Default considers only the Monthly Options and I entered the same.
This Strategy would only Require a margin of ₹15k for 1 lot of Nifty.
From 1st June , SEBI has reduced the margin Requirement for Hedge Positions.
Before 1st June , this Strategy required margin of more than ₹80k.
So the Potential for Hedge Trading has increased Manifold.
You can do the same if you are BEARISH . You can use put options.( Bear Put Spread)
Important Rules for this Strategy :
Take Equal Quantity on both sides.
1) If you are buying 5 lots , sell 5 lots.
2) Enter both Trades at once & also exit both at once.
You can use the same for Bank Nifty as well as Stock Options.
Thank You for Reading the Blog , Kindly comment Below if you have any Queries related to this Strategy and also do comment if you want to write a Blog on any other Topic.