Are you trading harder than ever, but still worried about volatility, loss, and risk-reward in the market? Ever tried hedging?
Hedge funds are considered to be one of the most promising return givers in the stock market. The risk involved in hedge funds is also comparatively less. Hedge funds are mostly backed by big financial institutions (both private and government).
In this article, we will discuss a very simple hedging strategy. Focusing on retail traders having very small capital. Key features of these strategies are:-
I Previous option of market movement
II Hedging using options buying.
III Loss is predetermined.
IV Intraday trading
V Trading only at specific timings
Are you ready to learn this amazing technique of hedging for retailers!
Let’s get started,
Table of Contents
The rule for hedging with small capital
We will initially set some basic rule before using this strategy
I Apply it only on bank nifty
II Trade only on a weekly expiry
III Scanning time should be around 2:00-2:15 P.M.
IV India VIX should be above 14 or above 15
V Buy only ITM CE and ITM PE
Presumptions for hedging strategy
Since any kind of trading and investing are based upon some calculated presumption. Similarly, this strategy is based on the volatility of the market and has some pre assumptions as follows:-
I Bank nifty can be volatile on expiry and can move 200 to 300 points after 2:00 PM
II If India VIX is greater than 14 or 15 then volatility is expected
III Minimum 3 months trading session should be used to evaluate the return from strategy.
Read more – List of top discount brokers in India.
Trade execution for hedging with small capital
As we are going to buy options on expiry, the premium will be our biggest risk factor. To reduce it we will trade only after 2:00 PM
For Eg, if the bank nifty is trading at 33210, then
I Buy ITM CE of 35100 and ITM PE of 35300
II Remember the intrinsic value of CE is 110 and PE is 90(only for this case; it depends on the spot price you select) but due to the addition of premium, it will vary and always be more than 200 (i.e. more than intrinsic value).
III The amount of premium you will pay while buying CE and PE will be your Max loss. So try to find the value of both CE + PE less than ₹ 230-240. There can be N number of possibilities. But remember to find the intrinsic value of both CE and PE and then only pay 20-40 points extra as a premium. Because the extra premium you paid is your maximum loss so try to keep it small as much as possible.
IV Once you have figured out such a trading opportunity just check whether India VIX is above 14 or 15 or not. More the VIX, more the volatility is expected. And as bank nifty will move the intrinsic value of one of your options will rise significantly.
V Once you have entered the trade paying 30 to 40 points premium. Then assume that premium as your stop loss. And from that point, any movement of bank nifty in any direction will give you profit.
VI You will incur loss only if the bank nifty expires at the same spot price that you considered while buying options or implementing your strategy.
VII, It is better not to exit manually, and wait till expiry. As we do not know, how much more points can bank nifty move before expiry.
A final word before implementing hedging with a small capital strategy
Hedging with such small capital is also possible. The only thing you have to keep in control is risk management and position sizing. Buying 1-1 lot of PE and CE will cost not more than 6000(I e. 240*25). If bank nifty expired even without single point movement you will incur a loss of 40 points Max (i.e. 40*25=₹ 1000). So, keep at least ₹15000 to implement this strategy for 3 months only on weekly expiry to gain a significant amount of returns.
I would like to thanks Nitish Kumar Sir for introducing such a nice trading strategy of hedging for retailers and small capital traders.
I hope you understand the basic concept of trading for a retailer’s strategy. If you need more explanation please comment below.
Finally, before making any investment and trading-related decision please consult your financial advisor. The trading strategy discussed here is purely for educational purposes.
We are glad to hear your comments, suggestions, and requests.
Happy investing and trading!