Weekly Bank Nifty options Strategy

An investor would consider this measure to understand how much they stand to lose as the result of a decline and decide if they are going to use a hedging strategy like a put option. By purchasing a put option, an investor is transferring the downside risk to the seller.

In general, the more downside risk the purchaser of the hedge seeks to transfer to the seller , the more expensive the hedge will be. Downside risk is based on time and volatility. If a security is capable of significant price movements on a daily basis, then an option on that security that expires weeks, months or years in the future would be considered risky and would thus would be more expensive. Conversely, if a security is relatively stable on a daily basis, there is less downside risk, and the option will be less expensive. Call options give investors the right to buy the underlying security; put options give investors the right to sell the underlying security.

Once an investor has determined on which stock they'd like to make an options trade, there are two key considerations: the time frame until the option expires and the strike price. The strike price is the price at which the option can be exercised. It is also sometimes known as the exercise price.

Hedging strategies: call option with put option - Theta

Options with higher strike prices are more expensive because the seller is taking on more risk. However, options with higher strike prices provide more price protection for the purchaser. Ideally, the purchase price of the put option would be exactly equal to the expected downside risk of the underlying security. This would be a perfectly-priced hedge. However, if this were the case, there would be little reason not to hedge every investment. Of course, the market is nowhere near that efficient, precise or generous. For most securities, put options have negative average payouts.

There are three reasons for this:.

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Because the expected payout of a put option is less than the cost, the challenge for investors is to only buy as much protection as they need. This generally means purchasing put options at lower strike prices and thus, assuming more of the security's downside risk. Investors are often more concerned with hedging against moderate price declines than severe declines, as these types of price drops are both very unpredictable and relatively common.

For these investors, a bear put spread can be a cost-effective hedging strategy. In a bear put spread, the investor buys a put with a higher strike price and also sells one with a lower strike price with the same expiration date. This only provides limited protection because the maximum payout is the difference between the two strike prices. However, this is often enough protection to handle either a mild or moderate downturn. Another way to get the most value out of a hedge is to purchase a long-term put option, or the put option with the longest expiration date. A six-month put option is not always twice the price of a three-month put option.

When purchasing an option, the marginal cost of each additional month is lower than the last.

In the above example, the most expensive option also provides an investor with the least expensive protection per day. This also means that put options can be extended very cost-effectively. If an investor has a six-month put option on a security with a determined strike price, it can be sold and replaced with a month put option with the same strike price.

This strategy can be done repeatedly and is referred to as rolling a put option forward. By rolling a put option forward, while keeping the strike price below but close to the market price , an investor can maintain a hedge for many years. Adding extra months to a put option gets cheaper the more times you extend the expiration date. This hedging strategy also creates an opportunity to use what are called calendar spreads. Calendar spreads are created by purchasing a long-term put option and selling a short-term put option at the same strike price.

However, this practice does not decrease the investor's downside risk for the moment. If the stock price declines significantly in the coming months, the investor may face some difficult decisions. They must decide if they want to exercise the long-term put option, losing its remaining time value , or if they want to buy back the shorter put option and risk tying up even more money in a losing position. In favorable circumstances, a calendar spread results in a cheap, long-term hedge that can then be rolled forward indefinitely.

However, without adequate research the investor may inadvertently introduce new risks into their investment portfolios with this hedging strategy. When making the decision to hedge an investment with a put option, it's important to follow a two-step approach. First, determine what level of risk is acceptable.

Then, identify what transactions can cost-effectively mitigate this risk.

Bank Nifty option strategy

As a rule, long-term put options with a low strike price provide the best hedging value. This is because their cost per market day can be very low. Although they are initially expensive, they are useful for long-term investments. Long-term put options can be rolled forward to extend the expiration date, ensuring that an appropriate hedge is always in place. Keep in mind that some investments are easier to hedge than others. Put options for broad indexes are cheaper than individual stocks because they have lower volatility. It's important to note that put options are only intended to help eliminate risk in the event of a sudden price decline.

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Hedging strategies should always be combined with other portfolio management techniques like diversification, rebalancing, and a rigorous process for analyzing and selecting securities. Charles Schwab. From a simple Price-OI equation rise in price and fall in OI gets labelled as Short Covering, but looking at the longs in recent history, it does look like a profit booking drive for many of those who lost OI alongside price rise.

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Slicing the futures into sectors we could see, most of the sectors this week witnessed unwinding this expiry. Cement stocks had shorts of ACC hidden in it with notable additions. Similarly, the week of expiry saw rise in Implied Volatility for Nifty as well. It could be the upcoming result season led excitement getting priced in. Finally, large number of aggregate futures booking profits and unwinding at higher levels indicates expectation of slow down. Heavy built-up at in multiple expiries indicate a struggle sustaining above Recent rise in the IVs in Nifty options indicate increment in risk assumption for Nifty.

Modified Put Butterfly is a 4-legged strategy where 1 lot of Put close to current underlying level is bought against that 2 lots of lower strike Puts are sold and 1 more lot of Put is bought but closer to the Put sold strike.

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This keeps the lower but constant profits in case of downward breakout. This is a fairly risk averse and a universal strategy. Simply Save podcast: Home loan rates have fallen, but borrowers may not get the benefit. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express writtern permission of moneycontrol. Know More. Shubham Agarwal. Related stories Shubham Agarwal. Waiting to buy during a correction? How about making additional returns from this 'intention'?

He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Watch more Heat's up, so are the sales of AC companies.