Hi AW,
needed some suggestions for I think, one impetuous mistake of mine..
Holding 2 lots of 5000CE @ 145...What should be the right method to cover the impending risk? writing a 5100CE or buying a 5000PE or any other strategy..?
Would really appreciate your reply.
Regards,
To answer your question - first you need to decide what is your current view about the direction of the market ? (I am keeping it simple by skipping time perspective here)
Doesn't matter, if u were bullish 2 days back when bought the call. We must be flexible to change our view on market, if required, based on current reality,
Buy CALL strategy works well in strongly bullish market. It doesn't have great track record in mild bullish or sideway market. Timedecay will eat away the premium everyday when market is not going up.
Thats where, you can use Spreads to safegaurd against timedecay etc.
So, if your view is still bullish, then u can sell 5100 CALL and atleast reduce part of risk from 145 to lower amount and safegaurd against time decay. Say if you get 70 Rs for this spread, then your investment risk comes down to 145-70 = 75 for the potential profit of 100 (5100-5000).
If your view has changed to Bearish, then you can sell 4900 CALL say at 160 and collect money from market. Your gain in this case will be (160-145) = 15rs.. but if market goes up, then your risk will be
100 rs (5000-4900).
If you are buying 5000 PUT that means your view has changed to bearish. then why hold a bullish long position and loose time premium on it. Rather stay away from market and let the trend develop.
In sideway market,, long option positions are risky.
By selling 2 OTM calls (as suggested by someone), in my view, u will just recover your initial investment but block lot of margin capital. You will not make any profit.
With the same margin capital you can create spreads that can easily give u 1.5 to 1 reward, risk ratio. for example on bearish side - 50-49 long put spread giving 100/40, 51- 50 put spread giving =100/55, 51-50 credit call spread giving (115-72)=43/100.
Otherwise, simplest and best will be to take small loss and search for new opportunity. If you are not sure then atleast cut the position size to 1 lot and satisfy your ego to some extent, and preseve your capital to some extent.
My personal view on your position - it will come into profit only when market goes above 5000+145 = 5150 level.. So far, market has not gone beyond that level, so there are resistance zone to overcome before it reaches there. Personally I don't see that kind of strenght in the mkt now, otherwise, 5111 level should not hold for 5 days, and 5077 for 4 days. now even 5050 is holding from last 3 days. With each passing day, like a freezing ice block, this resistence zone keeps getting stronger and stronger, and it will need lot bigger force/impact to break.
Yes it can go there but question is when.. and can u wait that long. Else take action and trade what you see. Do fall in love with your position, but be ruthless with it. Better search love somewhere else.
Happy Trading
