What I do in this situation is book the profit in the puts position and again go down to a lower strike price. Let me explain with an example. Let’s say you bought 1 lot Reliance @ Rs 2000 and hedged it with 1 lot 2000 PE @ Rs 50. Say Reliance goes down 100 points to Rs 1900 and 2000 PE is going for say Rs 120 (you will incur increased time value decay, 30 bucks in this case, the further you go away from the strike price). You book a profit of Rs 70 in 2000 PE and purchase 1900 PE. Net loss till now Rs 30. Assuming the 100 point fall happens the very next day, 1900 puts should be available for around Rs 50 plus minus 5 bucks.
The main advantage of this strategy is if you get a bounceback. Say reliance goes back to Rs 2000 the next day, 1900 PE should be around trading around say Rs 20. You get a net profit of Rs 70 from the bounceback (Rs 100 profit from futures and Rs 30 loss in 1900 PE).
All in all, reliance is back where you started and you end up with a profit of Rs 40.
Had you retained your original trade, you would’ve still been in losses (2000 PE would be trading for less than Rs 50).
The downside to this strategy is if reliance keeps falling. Then you end up paying more in decay.
Hope this helps.
Cheers!
@trader_dude I am new to this too but how is that not hedging? Any strategy deployed to protect your downside is the definition of hedging.
Yes, this is the answer I was looking for but, now my concern is when reliance bounces back to its original 2000 price then do I need to square off the 1900 put and buy the 2000 strike price put again and let reliance go in my direction or I just square off both the positions and take my net 40 points profit…Whats the margin rule behind this strategy? will I be charged any penalty?
Can you shed some light on this?
The margin requirement for this strategy is very low, usually less than Rs 50k per lot (It is less than 30k for reliance) as this is completely hedged and max loss being only the time value. This way you can do multiple lots. Rs 40 in reliance FNO for multiple lots is very decent returns and should be booked.
If you want to go for more upside, one way you can do this is to start booking profits one by one as and when reliance goes up. Say you have done 5 lots. Then maybe between 2000 to 2100 at every Rs 25 interval you should book profits one by one.
I don’t move up in the strike price and keep fighting if there is a bounceback. It’s better to follow a target profit system per lot, Say once you get a profit of Rs 10k per lot, it is better to book it start looking for new trades.
No penalty if you keep a margin surplus. If it is a squeeze for you to do this strategy, you must always ensure that you’re always long on puts. Say when you’re switching over, it’s better to buy the 1900PE first and then sell 2000PE, otherwise in between the margin benefit goes away and you might incur a penalty. If the margin is not a problem, then sell 2000PE first and then buy 1900PE.
Hope this helps.
Cheers!
Better hedge your future funds with options or use FNO. That may work for you.
Hope you understood from above responses, few things I want to suggest
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never trade in futures directly - coz i. Stamp duty and other charges are huge ii. M2M losses on daily basis
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use synthetic futures using options - adv i. stamp duty is nominal ii.no M2m losses iii. you can change the positions immediately by counter balancing strategies
Long futures position: Buy calls and sell puts with the identical strike price and expiration date.
Short futures position: Buy puts and sell calls with the identical strike price and expiration date.