Option Selling Query

I am looking to trade in shorting options looking at the theta decay angle. For example the stock CMP is 2000 and i feel it will not go above 2300 so i would like to short this call while going long a 2500 call for protection. But I have seen that one gap up or wrong trade takes away all the gains plus more. Is there any way else to hedge or prevent this loss? How do experienced traders deal in this type of trade as even many times the stop loss will also not get triggered at any favourable rate.

Why not open a Put short and Put Buy to further hedge this position when you feel the price is moving closer to the short Call position?

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There are 2 ways to handle this

  1. stop loss model only works intraday, it cannot be applied for overnight positions because a gap-up or gap-down will ensure you dont have a choice to put the SL. So you may even take a naked short trade intraday with a stop loss - and ensure you close out the trade EOD to prevent huge losses.

  2. you can always go for credit spreads and never worry about stop loss. eg: sell 2300 CE and buy 2500 CE as per your example

this means you will have a fixed max loss & that losses will never exceed that amount even if you hold till expiry

at any point in time you felt you have got good profit on the trade before the expiration, you can square off & exit.

Experienced traders take the 2nd option but do engineer the spread correctly. i guess 2300/2500 spread is too wide that your max loss: max gain looks unfavorable.

Also they could play around with some other strikes intraday to adjust if your overnight position is in loss - its called firefighting.

PS: please do not take the trade unless you are sure on what you are doing, thats because stocks unlike index can surprise anyone very quickly


I could if it was happening slowly but worry is on those days when market gaps up or moves violently then it would not be possible.

Yes i am just looking at credit spreads nothing else…The issue is that for overnight even with the hedge the one bad trade or gap up will take away alot of past trades profits.Instead of 2300/2500 spread what would you suggest?

what is the stock?

Just general example

No it cannot be generalized for just value

because the lot size will be different for each stock hence the multiplier.

you can also use any online software to assess the risk:reward ratio, commonly used tool is @Sensibull

but i use a free tool Opstra | Options Analytics Software as i dont trade via zerodha

Wanted to know if i am just doing credit spreads in nifty/bnifty weekly options how does one reduce losses in times market breaks through s/r fast and unexpectedly…even though in credit spreads loss is limited but it could equal to 2-3 months of profits.

you can firefight intraday and reduce your losses

or rollup or rolldown based on your risk profile

So how does one exactly firefight and reduce losses to that extent for example if were doing a credit spread for example with bank nifty cmp 39000 and sell 40000 call and buy 40300 call my max gain will be in the range of Rs.200-1500 on average and max loss is 7500 for one lot.Now if i keep doing this 95 % chance i will succeed but one bad error and market were to zoom up i will lose Rs.7500 which is equal to 2 months of profit.
What firefighting would i be able to do that day and to what extent would i be able to reduce loss of i do not understand.

only experience can teach you what firefighting strategy to deploy
few of them i use are

  1. debit ratio spreads intraday ie S 3x39100 CE & B 4x39200CE if i feel the market is rising with high momentum. ratio spreads will work superbly during rallies & breakdowns

  2. sell naked call ie 42000 or 43000 CE intraday to balance of the loss incurred on the original position

  3. PE credit spreads to balance the loss on the original position ie S 1x38500 PE, B 1x38000 PE intraday

  4. sell OTM PE intraday to counter the loss incurred on original position intraday

======= important: i am not suggesting these ideas will work, it requires lot of testing & experience. Also sometimes its better to exit the position at a loss than firefighting and doubling the loss ============

firefighting will work best only intraday. if you carry it forward its no longer firefighting - its a new position

Yes I agree its a new position as i am only thinking about doing credit spreads positional and not intraday.

My whole point it is that none of firefighting methods will repair the loss of Rs.7500 by much so is it worth even considering this strategy where you will lose 2-3 months of profit on one trade?

What has your experience been in this strategy for index options?