This is how BANKNIFTY moved yesterday.
This is just what I mentioned in my yesterday’s post. One day up, another day down kind of moves eat away the option premiums. That is what we are looking for. But if the down move continues, premium on sold PUTS will rise and we lose there. BANKNIFTY PUT 30300 which we bought will mitigate the loss to a considerable extent.
It is a balanced trade and most likely outcome is that we have a reasonable profit or a small loss at expiry.
This is the position at closing prices yesterday:
We stay with the trades.
Do nothing. Let us see how doing nothing works.
Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.
Comments
Sajeev April 9, 2019 at 11:41 am
Hello Pramodji,
In the options sold you have hedged using Bank Nifty, while selling options of HDFC, ICICI and Kotak. If Kotak Bank has a sharp fall (for company specific reasons) especially since its earnings season then Kotak could have a sharper fall which might not be reflected in Bank Nifty because its company specific (not sector specific) and also because weightage of Kotak is around 12% in Bank Nifty. Why not just sell 1 Put and buy another put 1 to 2 strikes away in the same instrument for hedging?
Replyadmin April 9, 2019 at 12:03 pm
Yes it can happen. If one starts planning for every eventuality in life, then there is no place left for doing anything worthwhile. This is the problem with strategies. Try to make them ironclad, you give away whatever profit possibility was there.
This kind of event will happen once or twice in a year not every time. I am content to make profit in 7-8 months in a year if it is profitable on overall basis.
Cheers.
ReplySajeev April 10, 2019 at 6:42 pm
While one cannot plan for every eventuality it is prudent for consistent traders to plan for high probable ones. I have sold options for a couple of years but the unfortunate part of option selling is that eventuality that you have also referred to, which when it happens, wipes out many months of profits especially when the derivatives have different underlyings which means different thetas, vegas and in case of any singular event like earnings surprise, maybe inversely correlated deltas. These are positions which can generally be managed only through automated systems.
Exotic derivative spreads can net gains for many months and years only to have a single event take it all away – Niederhoffer and LTCM are good examples…
Anyway just my two bits since losing money is always painful, irrespective of whether its happening to me or someone else…
Wishing you a profitable month.
Replyadmin April 10, 2019 at 7:06 pm
Thanks for a very enlightening comment. I wish every votary of options writing should read it carefully.
ReplyI will add further. Even with automated systems, things have gone wrong for big instututions/ traders.
And in India, we are never trading strategies. These are independent trades which we believe will work as a strategy.
Let us see how it works out.
Cheers.
Vivek April 10, 2019 at 8:40 am
Just a query.. why do you avoid option selling when this can be done with limited loss( spreads)
Replyadmin April 10, 2019 at 8:53 am
Thanks for the comments.
There are multiple reasons for avoiding option selling. I will write a post about it over the weekend.
Cheers.
Reply