Hedgeing in options

A

ashkbag

Guest
#1
Do u know about Hedgeing in options?

i've basic knowledge of options.but now i want to learn about spread options and hedgeing.i've an example:
right now i'm mildly bullish on TISCO with a target price of 310-312.today"s closing is 302.i would like to buy a lot of TISCO future and to sell a call with strike price of 310.
what i want to know is that,is this the right stratigy or is there any other stratigy available?
i am very much happy with less profit,but lesser risk.
i came to know that there are many stratigies avalable in Options.if some one know about them please let me know.
 
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#2
I trade in futures. I do not know about options.Dear respected Tradrji I would like to know whether you can guide me and other novice traders how we can hedge futures or any other cash stocks using options strategies in temporary adverse conditions. Also let me know which is better :- hedge using options or get out of the market by sqaring off the positions.
 

Traderji

Super Moderator
#3
Option trading and hedging is a very relative subject and differs for every indivudual.

There is many option trading strategies discussed elsewhere in this forum. if you want why don't you select any one single option trading strategy so that we can all discuss it here.
 
#4
Traderji said:
Option trading and hedging is a very relative subject and differs for every indivudual.

There is many option trading strategies discussed elsewhere in this forum. if you want why don't you select any one single option trading strategy so that we can all discuss it here.
Dear Traderji,
I would like to discuss the following strategies as described in options & futures strategies in bearish periods.
1. Buy a Put
2. Sell a Call

Suppose if I have purched one lot of Nifty futures say 1800 and the market today seems to be a little bearish & I want to hedge it against a minor risk for say a weeks time what is the best strategy that I can adopt? Which strategy of the above is more effective and also more cost effective? At what levels I should buy put or sell call. In the market there are many no of options available. How to decide which one is best the in this scenario.
Thanking you
gvnarendra
 
#5
Buy a Put

The simplest and most direct way of
restricting losses of capital appreciation is to use Stop-Sell prices. This discipline requires that one determine ahead of time the price at which they will sell a stock.

Put options provide the simplest, most direct and certain method of hedging against falling stock prices. A Put option is like an insurance policy. In the event disaster strikes in the form of lower stock prices, Put options become increasingly valuable. Therefore, they provide profit gains, which directly offset losses. In the event stock prices don't go down, Put options become worthless. But they have provided protection (at a cost) for a specified period of time.

This may sound like fairly expensive insurance, but it could be very cheap compared to experiencing a large drop in the price of your stock. It's worth noting that Put options of more volatile stocks will cost much more on a percentage basis than those of relatively stable stocks such as Exxon. To achieve downside protection, one does not necessarily have to buy one-on-one Put options for each and every stock in their portfolio. One may buy Index Put options, which reflect hedges against overall market price drops.

Selling Call options provides an alternative to buying Put options. This tactic simply involves selling a Call option on a stock or index that you own. Selling covered Call options is somewhat different than buying Put options. It has the advantage that someone is paying money to you for the right to buy your stock at a specific price for a given period of time. Major disadvantages are that they provide only limited downside protection. If the price of the stock goes down (or does not go up) and time runs out, the option becomes worthless. Then the money you received is all yours. You can use it to buffer the downturn in the price of your stock. However the risk covered is limited to the premium you receive.

The most important thing any trader has is their trading capital and this needs to be preserved. If a trade isn't panning out as expected give serious thought to selling out whilst the option still has some value.
 
#6
TradingPicks said:
Buy a Put

The simplest and most direct way of
restricting losses of capital appreciation is to use Stop-Sell prices. This discipline requires that one determine ahead of time the price at which they will sell a stock.

Put options provide the simplest, most direct and certain method of hedging against falling stock prices. A Put option is like an insurance policy. In the event disaster strikes in the form of lower stock prices, Put options become increasingly valuable. Therefore, they provide profit gains, which directly offset losses. In the event stock prices don't go down, Put options become worthless. But they have provided protection (at a cost) for a specified period of time.

This may sound like fairly expensive insurance, but it could be very cheap compared to experiencing a large drop in the price of your stock. It's worth noting that Put options of more volatile stocks will cost much more on a percentage basis than those of relatively stable stocks such as Exxon. To achieve downside protection, one does not necessarily have to buy one-on-one Put options for each and every stock in their portfolio. One may buy Index Put options, which reflect hedges against overall market price drops.

Selling Call options provides an alternative to buying Put options. This tactic simply involves selling a Call option on a stock or index that you own. Selling covered Call options is somewhat different than buying Put options. It has the advantage that someone is paying money to you for the right to buy your stock at a specific price for a given period of time. Major disadvantages are that they provide only limited downside protection. If the price of the stock goes down (or does not go up) and time runs out, the option becomes worthless. Then the money you received is all yours. You can use it to buffer the downturn in the price of your stock. However the risk covered is limited to the premium you receive.

The most important thing any trader has is their trading capital and this needs to be preserved. If a trade isn't panning out as expected give serious thought to selling out whilst the option still has some value.
Thank you Trading Picks. I would like to know the level at which we should enter in case of my prevous example.
Suppose I had long position in one lot of nifty futures at 1800, and the short term market may be looking down and may touch 1760. In this scenery at what level I should buy put or sell call options? Do I have to purchase the 'in the money' or 'out of the money' or the 'at the money' options? Please explain the underlying principle at which we can buy put or sell call options in this example.
Thanking you.
gvnarendra
 
#7
If I were you I would have purchased a 1800 PUT after I went long in the Nifty Futures.

This way my MAX LOSS or RISK would have been the premium paid for purchasing the NSE Nifty 1800 PUT. In case the market fell I would be proteced by the PUT. In case the market rose above 1800 my MAX LOSS would have been the premium I paid for purchasing the PUT.

Also if you hedge in this way most brokers would have waived off the initial margin that you would have to pay for the futures contract.
 
A

ashkbag

Guest
#8
yes,there r many many stratigies avalaible in options.i agree.but i want to be safe,no problem even if i get very reasonable profit,say 2.5-3% per month.
further,if any one has knowledge, how to do arbitrage only in options?like buy ACC call of 260 strike price of OCT. and sell the same call for NOV. please inform.E-MAIL:[email protected]
 
#9
TradingPicks said:
If I were you I would have purchased a 1800 PUT after I went long in the Nifty Futures.

This way my MAX LOSS or RISK would have been the premium paid for purchasing the NSE Nifty 1800 PUT. In case the market fell I would be proteced by the PUT. In case the market rose above 1800 my MAX LOSS would have been the premium I paid for purchasing the PUT.

Also if you hedge in this way most brokers would have waived off the initial margin that you would have to pay for the futures contract.
Thank you very much Trading picks. I was away so I was not able to ans your reply.
 

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