What is hedge position in trading ?
Hedging means taking counter position against your original position to offset risk and reduce or limit losses.
@ShubhS9 You mean
Bought 5 quantity for 1000
cmp is 600
So I am buying 10 more quantity to reduce my loss.
Is this the rite ?
Say Nifty is Trading at 10000 and you are bearish and think Nifty will go down so you Short Nifty Futures, in this trade you make profit as long as Nifty goes down, but what if it doesn’t? Shorting Futures carries unlimited risk so to limit your losses along with Shorting Futures you Buy 10100 Call Option, what this does is turns your unlimited risk trade into limited risk trade if Nifty starts moving against you.
What I explained above is just tip of iceberg. It’s little complex thing to understand at first but once you get hold and if you give time in exploring and understanding, hedging is really interesting concept.
Is it good to sell ITM Calls or Put of NIFTY?
E.g - Jun 11000 PE was trading at 1600 on the 1st day of expiry and last day close was 710.
Here do we lose entire money as Nifty has not crossed 11k or will get (1600-710)?
You should chose which Option to trade based on your analysis and strategy.
If you had Shorted that Option you would’ve gained 1600 - 710 = 890 * 75, if you would have Bought you would’ve lost 890 * 75.
Here the question I am asking cause the position is in the ITM, for OTM it will be clear profit without STT.
I Assume you mean Buy a 10100 CE Option to Hedge a Short Future .
Yes. Thank you for pointing out the error.