Direction future trading , using option as stoploss

This thread is to gain your views on a effective stop-loss strategy I am proposing

I primarily trade in the banknifty , which has a average daily volatility of 100 points. (positional trader for 2-5 days max). I take a directional trade based on news and some technical analysis factors.
Problems I am facing
1) Fixed stop-loss of 200 points doesn't work always. Sometimes banknifty goes 200 points and yet changes direction. Also, I aim for 100 points and I am having a stoploss of 200 points , which is a bad risk to reward ratio(RRR).
(100 points SL gets hit very fast)
2)Averaging which is another idea after every 200 points , multiplies my risk even further.
Before I share my strategy, I would like to know your view on the above mentioned points and any possible solutions,

I do not get the point. Does this mean that you need first others view to create your own strategy you want to present here or what do you mean by that? If you really have a bullet proved strategy you would not need others view about it, don't you?

C'mon Dan, he is looking for guidance, it's just his way of asking for that .

I am sure you can guide him :thumb:

1. No idea if he is looking for guidance or just want to be sure that he is going to posts some thing he not will face many questions about it. So that's why I wanted to point out that specific comment. He may answer it and then let's see what is next. There are other option traders here in the forum which could guidance him as well.

2. Let's first see what others have to tell. But one thing I can tell for sure even now: Using the option as stop loss against the future will face the problem about what price you think you will get for your option? As market moves, doe's he want to do that stop loss with market order, as limit order in fast moving markets have no guarantee to be filled with options. That counts in India market as well as it does count in any other market in the world. That is just one point to consider in such scenarios when want to trade in this way. And I clearly can tell you: That is not a way I would choose. But that is personal choice and no rule written in stone. Take care and enjoy your Saturday / Dan

Ok. Then I'll stick my neck out.

Rebeck10, maybe you can consider a synthetic spread i.e. buy futures, sell CEs, if you think that the market is going up. If you buy BNF at 15100, you also sell 15100CE at the market price. This will reduce your profits but the delta and theta will help you cushion your loss in case of a whipsaw.

I am no expert and can not provide any charts for the same, just an idea off the top of my head. and waiting for Dan to chew my head off

@TP

Your mentioned spread is in general called: Covered call (http://www.optiontradingpedia.com/free_covered_call.htm). The covered call is often used in share/future portfolios, specially when market is expected to be sideways. But in this case this would not serve his plan/idea to use the option as stop loss against the future after that one has made some 100 or even 200 point in BNF in either direction. Guess you agree with that.

I don't know. I think it will depend on whether he is executing both the trade at once or legging in the option at a later stage

What would be the next problem by what you mentioned? Kindly test it for a certain time under different market conditions (specially with huge gaps and fast moves in high volatile markets) and then you quickly will find out, where you will face the problems with that idea which you can call leg in to a covered call. Moving on with what is told: Now you are short the call and you are long the future after you did it and market moves now down = Means your position is hedged and your loss starts to reduce. But that is not a stop loss, as a stop loss should cut my loss and not only reduce it. If market now jumps back to the up side, you will face loss on the short call, which is reduced through the long future. So this is a complete other concept which points in the direction to reduce loss, but has nothing to do with the concept to set a clear stop loss with an option (which the title of the thread suggest). Here seems to be a confusion in the ongoing discussion, which is interesting.

If Rebeck10 plans to implement a covered call at once to reduce risk on the future leg, then that is not valued as stop loss management and is not what the thread title suggest. It is valued as reducing risk on the future side by implementing the trade through a hedge strategy. And here we talk then on a different page and not on the stop loss page:

What is a stop loss: http://www.investopedia.com/terms/s/stop-lossorder.asp

What is a hedge: http://www.investopedia.com/terms/h/hedge.asp

Take care / Dan

Thanks Timpeass and Somatung for figuring out what my idea would be. :clap:
Timepass I really appreciate your spirit man and thanks for the answers.:thumb:

As the headline of my post suggested
the idea is
1) Buy 1 FU lot and buy 1 PE ATM lot (direction - bullish) (first- half of the month).reason time decay is less and atm almost move with 1 delta
2) Buy 1 FU lot and sell 1 CE ATM lot (direction -bullish) (second- half of the month). reason time decay is more and atm almost move with 0.5 delta

I will be posting trade snapshots tmmrw to further clarify this . Tell then let me know further views about this.

Along with the trade snapshots, it'll be more beneficial if you could also post those fancy profit/loss timeline snapshot from Options Oracle or whatever you are using.