I congratulate all of you being the member of the smart finance family. After extensive research on various market conditions using different simulation techniques we have derived and devised the strategies. But many case I have experienced that traders find it difficult to follow those strategies in the way it has come, I do appreciate this type of thoughts but in this note I am going to describe you few hidden gems of the strategy. Why is it formed? How one should follow this strategy?
Before entering to various questions and answers on strategy I want to specify few important things on risk assessment.
That is before entering the trade you must and must know that how much money you are going to put in risk by entering into that particular trade and in the worst case how much you are going to lose.
For example if I am telling you to buy SBI future at 1355 stop loss 1320 short term target of one week is 1450 considering the lot size as 250 the money in risk is 250 X 1355 = Rs 3,38,750/- this is called as ‘open trade’ . In this case trader is exposed to high degree of loss.
Benefits of this open trade:
Draw backs of open trade:
So my conclusion is protect your capital like a mother protects her child. Take my words in white paper the day you will learn to protect your money from loss from that day your money will grow.
Take the second case take the above mentioned sbi position in a strategy;buy sbi future at 1355 stop loss 1320 short term target of one week is 1450 and cover buy 1350 put option of the same month at Rs 15 considering the lot size as 250 the money in risk is 250 X Rs 20 = Rs 5000/- this is called as a covered trade . in this case trader is expose to maximum loss of Rs 5000/- which is the time value component of the put option plus the difference of the put strike and the future strike . trader will derive the breakeven point once the sbi future touches Rs 1375/- beyond this price his profit is unlimited.
This is a common fact money taken in debt will never yield you the maximum return because of high interest cost and low security. So it is my sincere advice don’t initiate the trade using the brokers’ intraday exposure on your money. if you are a broker don’t encourage your clients for doing jobbing take it as a warning from my side don’t kill the client for few rupee , if you do so one day you have to shut your shop this is a fact whether you accept it or not .
Don’t ever enter to the F&O trade if you don’t have sufficient money. My point is quite simple if you have 2 lakh rupees as idle money and you don’t need it at least for 6 month period then put that money in the trade or else not.
Now come to the discussion of strategy:
FAQ-Sometimes you say ‘sell one lower strike call or higher strike put option and buy two lots of higher strike call or lower strike put option’. Why?
A-This is called as 2/1call or put spread. This type of strategy is formed on the basis of delta neutral theory. We see when one call or put option become just in the money or at the money that moment ‘the time value’ of the option used to be very high because at that time the ‘delta’ value will be in its pick . If other technical parameters suggesting short term upward move in the script with consolidation at higher level at that junction this type of strategy stands very much successful.
Benefits: loss risk is very low. Profit will be unlimited in case of huge up move or down move.
Draw backs: in range bound market yield curve is –ve . cost of carry is high.
As compared to its draw backs its benefits are well appreciated .
While following this strategy one should follow a calm approach . observe the price movement for few moment . then initiate the sell side once the sell order is through then in immediate action buy one lot of the buy side and wait a while buy the 2nd lot with a bit lower price than the 1st lot.
While booking profit; Sell one lot of your profit component then buy the loss component and sell the remaining lot of your profit component.
This is not a rule but a good practice parameter
FAQ-When you recommend to sell a call option in stead of that if I buy a put option to save my margin; will it’ve the same result in strategic trade?
A- In the context of this strategy we take the position based on the time value and delta neutral theory. Though the meaning is same but in a consolidated market ‘when the implied volatility’ will fall both the call and put will lose the time value in same proportion. At that time if you’ve sold the call option it is good for you as you will buy t in a very lower price but in stead if you’ve bought the put option it would’ve lost most of the time value. Hence it’ll result more loss.
So I conclude don’t manipulate the 2/1 spreads for margin better initiate this trick in its very original form.
FAQ-Always is it advisable to take 2/1 strategies?
A-In some counters when the strike price varies more than 30 points the delta of upper strike used to be very low. So in that case one can also initiate 3/1 or 4/1 spreads.
FAQ-What is the significance of selling a call option and buying a future (covered call strategy) or selling a put option and a selling a future (covered put strategy)?
The covered call or put strategy says have the stock in hand and sell the call. Same as the covered put. While implementing it in future the trader keep it in mind that he will take the benefits of time value in the option. When the option will become very much in the money its time value will reduce. This reduction in time value will be the profit for the trader and increase in the intrinsic value will be offset by the increase in the future value. Best time of initiating this strategy is the beginning of the settlement month. One caution is that - don’t hold this strategy for a long period better exit it either with small profit or small loss.
Major draw back: high cost of carry, high margin requirement. But very good for short term trade.
FAQ-Is there any market specific strategy?
A-The strategy is always market specific. Before the strategy gets initiated the technical elasticity of the underlying is thoroughly analysed. If the option price follows the technical trend then it is use full for the trader or else not. But it is not wise to say these strategies are the fine print for this market. Since market is dynamic in nature so as the strategy.
FAQ-What one must and must follow while initiating your strategic recommendation?
A-The first parameter is the loss risk one must see in a strategy. Second is holding period of the strategy. Third one should know how to enter a call and exit it. No need to be hurry if you miss the chance in one counter you will get few more in the same day. Always follow the recommended price.
FAQ- what is open interest and how is it significant?
If the underlying stock price rise with the rise in the open interest then it is an indication of a bullish signal provided the stock should be in premium with respect to the spot. If the open interest decrease with fall in price and stock is in discount then it is a bearish signal. If this rule violates then be cautious market may take an U turn any moment.
FAQ- what is put call ratio and how is it significant?
Put call ratio is the net put open interest divided by the net call open interest. The rise in put call ratio indicates a put built up which is a bearish signal provided the market should continue falling trend if not then rise in put call ratio may be a speculative phenomenon. It does not confirm the bearish trend. Fall in the put call ratio with rise in the underlying script price is considered as a bullish trend.
If you have any further queries feel free to mail us.