Banknifty Options Buying expiry hedge
Options trading strategies can be complex and challenging to understand, especially when it comes to hedged strategies. More ever, most strategies involve buying one leg and selling the other, which requires a large amount of funds (1.5 – 2 lakh for a single lot). You will hardly find hedged strategies specifically for options buyers with low capital.
However, this article will discuss a unique options trading strategy that is both simple and hedged, making it an ideal choice for options buyers, and, cherry on top – It’s hedged!
Option buying Strategy for low capital traders
The strategy involves buying both an In-The-Money (ITM) CALL option and an ITM PUT option in Banknifty on Thusday. The CALL option is bought one strike below the trading price of banknifty, while the PUT option is bought one strike above the current price. This ensures that both options are ITM.
For example: If banknifty is trading at 42450, we will buy 42400 CE and 42500 PE. It is important that we purchase both strikes (CE and PE) together.
Note that – This is an expiry day strategy and has to be only done on thusdays!
Strike selection
The price range for each strike should be between 90-110 RS. The total cost of both strikes will be around 180-220 Rs, which means to execute 1 lot, we will require just about 4500-5500 Rs. (considering lot size in Banknifty is 25). The following image displays stikes to be selected marked with yellow.
The price of the options can vary according to the INDIA VIX (Volatility Index).If IV is high (18-20) our strikes will be around 100-110. In low IV envoirnment (15-17) premiums will low low and the strikes we choose should be aroung 80-100 Rs each.
The strategy is best executed when the price of the CE and PE options is nearly equal.
Example of trade execution
Banknifty is trading at 41356. We will buy 41300 CE at 95 Rs and 41400 PE at 100 (Buy both strikes together). Total cost of trade = 95+100 = 195 (195×25 = 4875).
Stop loss
The stop-loss (SL) for this strategy should be set between 800-1000RS per lot. Meaning, if overall loss in this trade is around 1000 we would want to exit the trade. To achieve maximum results, we should execute the strategy after 1 PM.
Logic behind the Strategy
The logic behind the strategy is we are trying to contain banknifty in a range of 100 points. Since banknifty is a volatile index 100-200 points of move can be easily seen in either direction. Even if banknifty moves by 150 points in any direction, premiums will shoot up, since the strikes we choose were ITM. If you want to learn more about options geeks visit this page – Option greeks for beiggners
Important points to remember
- First, backtest for a few weeks, understand the dynamics of the strategy then only execute in real market.
- Book profit as per emotions. Many times returns are as high as 2-3x
- When market is trending, we can hold the trade till the end of the day. In my backtesting, I found that the return on investment is over 50% to 100% a lot of times.
- When overall trend of market is consolidation, it is better to exit early. Many times, it will happen that you will see profits initially but if held for a little longer, all greens turn red.
- Disclaimer: This strategy has been tested but does not guarantee results. Trade at our own risk. This is not my og strategy. I will call you foolish if you hold Dailybulls or its operators responsible for your losses.
