Hi AW10,
u mention leaving naked short is alwatys a huge risk.
My point is how to reduce this risk.
Positionaltrader. To reduce the risk, you will have to buy further OTM options.
In the example where u sold 4600 Call, and 5000 PUT, both are ITM strikes and collected 475 points for you. It is guranteed that u have to give back 400 points (difference between both strikes) on settlement. So you are left with only 75 rs of max profit.
So to reduce the risk, when u buy further OTM options, say 4500 PUT or 5100 CALL, you will be compromising few more points of profit from remaining 75.
Personally, I don't see much value left in the trade now (maybe 50 points or so after adjusting for brokerage as well). It is still a decent low risk return. But in my opinion, one can still do better by trading directional spreads.
Income generation strategies generally try to look at the range where market will not reach.. and then try to collect premium from them.
Say if u feel that market is going to be between 4600 to 5000 for rest of Feb.
then u can sell 4500 Put @33 and 5000 Call @23 and collect 56 Rs. As long as mkt remains in this range, u keep whole of 56. You start making loss only when market falls below 4500-56 = 4444 or goes above 5000+56 = 5056.
That means, u have buffer of almost 250 to 300 points i.e. 5% to 6%on either side. In normal behaviour of market, even in worst case, this limit will not be hit. so u can afford to go unhedged on this but decide the level, if crossed, then you will take action .. say if mkt comes in 100 or 150 points of your breakeven point. Till then, no decision, no action. Just leave the position alone and timedecay to work for you.
Alternatively, u may like to buy the protective put at 4400 level right now and pay 20 rs from 56 collected. This will give u peace of mind but reduce your profitability by 40%.
This is just one of the approach. But you can come out with many others.
small idea may be silly one instead the levels i mention long above 4800 and short 4750
we will do bull call and bear put spread when ever nifty come to 4850 and 4700 range. with stoploss of 10 points in options spread.
Decisoin to take bull call spread does not depend on market level. But it depends on finding the right opporunity and right reward risk ratio for the spread that is acceptable to you.
Options position like spread/ short straddle /short strangle etc need time to show the result. So it is better to formulate your strategy carefully, specially the exit points.. and test them/ simulate them with historical data or atleast on paper trade.
ur suggestions ? else mention how to proceed nifty future in better way to reduce the risk.
You can use NFutures to manage risk during market hours only. It will not be able to hedge you for Gap situations. On the contrary, you might get caught on the wrong NF position with gap and end up loosing. During mkt hours, you can put stop trigger order for NF position to save u from a move beyond your decision points.
Hope this gives u some pointers to dig more into this topic.
Happy Trading.
