What could be a reasonable stop loss in options trading?

#1
If I am trading a NIFTY 1 lot(close to current NIFTY) generally my investment amount varies anywhere between 3000 to 5000/lot.

I use sharekhan basic a/c and the brokerage for options trading is >= Rs.100 per lot.

That means brokerage+tax = Rs.260 will go out of my pocket no matter what.

10% of 3000 is 300 already close to 260. That leaves me with little options.

I would like to request seniors to explain how they arrive to stop loss in case of options trading? And in general what % of your capital you would be ready risk, while trading options?

And do you use trailing stop-losses while trading options?
 

Capricorn

Well-Known Member
#2
I can only speak for myself. My stops are chart based on the underlying. I only take the trade if it satisfies my R/R.

No I do not trail when trading options because of time decay. If my target is reached I exit, or roll up. Cheers.
 

AW10

Well-Known Member
#6
My approach (may not suit everybody but it certianly suits me) is 2 way here..
1) Money mgmt based - x% of initial investment is risked. If this limits is exceeded, then get out.
I don't use fixed %based profit target for option position but let the chart dictate this for me. Till the time chart is not negating my view, I let profit run.

2) Chart based - I use the chart of underlying and Technical anlysis to form my view about the security (rangebound or trend). Accordingly, I select the option trade i.e. rangebound trades like straddle/ strangle etc. or Directional position with Calls/puts or spreads or synthetics.

When price action on chart tells me that my view is no more valid, I come back to option position and close them. Even if the stops or targets is not hit.
We got to understand that options are derivatives hence when trading it, we got to monitor the underlying.

Happy Trading.
 
#9
My approach (may not suit everybody but it certianly suits me) is 2 way here..
1) Money mgmt based - x% of initial investment is risked. If this limits is exceeded, then get out.
I don't use fixed %based profit target for option position but let the chart dictate this for me. Till the time chart is not negating my view, I let profit run.
Hi ,
Your post seems to be interesting, i followed your first option can you explain me the 2nd option that you provided. I wanted to know the practical way of performing it.

Regards
Oswal
 

AW10

Well-Known Member
#10
2) Chart based - I use the chart of underlying and Technical anlysis to form my view about the security (rangebound or trend). Accordingly, I select the option trade i.e. rangebound trades like straddle/ strangle etc. or Directional position with Calls/puts or spreads or synthetics.
Example of this approach - lets say my view on NIFTY on 30/April is that it is rangebound between 3300 and 3500.. so I enter into SHORT Straddle @3400 (i.e. sell 3400 put and 3400 call). Say I get Rs 300 for this and my stop is at 400 (i.e. I will buy both the options and close this position if combined premium is greater then 400 rs).
As long as market is in 3300 to 3500, I am happy with this straddle, no action required.
But lets say, market closes below 3300 level for some days and my view has changed from Rangebound to Downward trend.. Then even if my straddle stop of 400 Rs is not hit, I will decide to take action because the main reason for opening the trade is not valid.
Options gives various possibilities which may be
1) close the short put leg and leave short call leg as it is..(risk is high in this)
2) close short put leg and buy 3500 call...and create a bearish call spread with Long 3500 call and short 3400 call. Long call position will limit my losses.
3) Forget the complexity of adjustment, and just close the position without waiting for 400 Rs stop to hit.. So instead of taking a loss of 100 rs. I might cut my loss short.
4) If I want to be aggressive depending on my reading of market trend at that moment, I can close short 3400 put position and buy 3300 put and sell 3300 call.
This will leave me with Long 3300 put + 3400 short call + 3300 short call. This is really aggressive position but has very high rewards. Certainly that comes with very high risk of loss cause if market starts going up, then all 3 positions will loose money.
So I will be on my toes to manage my risk (by buying 3500 call, or by reduced position size with less contracts)

Hope this helps.. I am just giving some example, plz don't trade them without understanding the RISK.

Happy Trading.
 

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