hedgin BN with N : my views about sid's thread

following are my views about sidhdharth's thread

http://www.mudraa.com/trading/136566/0/interesting-hedging-technique-siddharth.html

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good strategy

but it has some serious traps. some of these i am listing below (as much as i can recall; i tried this strategy in many forms and finally abandoned)

1. what if BN and N start going saperate ways. we assume in this strategy that BN and N have positive alpha. that is, when one goes up, other also goes up, and vice versa. this doesn't happen always. also, the rate of change of both varies. i found many a times that BN moved much slower to N. e.g. if IT moves opposite to BN (which does happen many a times) and moves faster than BN (assuming it is not BN's day), then the situation i mentioned can come (and it did many times when i tried it). many times, N remained in a range and BN moved a lot.....i bleeded like hell!

2. brokerage factor has to be very low, otherwise whatever profit you get is eaten by brokerage leaving you gasping for breath.

3. you need a lot of buffer fund to fund this ambitious method.

4. one has to do this method for a long time to cover for adverse unforeseen moves in BN and N. if you quit after one or two negative trades you are dead. and having guts to keep trading even when u r bleeding requires a drunkered's head....very very tough.

overall, thrilling strategy but as difficult and unpredictable to control as is controlling a bull in a bull fight!

saw this thread and couldn't resist sharing my views.

however, with deep pockets this is a practical and doable and winnable strategy. can't be brushed aside.

only that we talking about playing with a monster of a method.

the right strike price for hedging with options

ganeshji,

strike price points to be used for hedging should be such

that u strike a balance between

- the premium u pay (keep it minimum)

- the movement (delta) of option viz. a viz. movement in spot. otherwise hedge won't be effective.

- ur confidence in correctly reading the sitaution and hence the amount of risk u don't consider as serious risk.

- the more speculative u r the more u hedge out-of-money. and more sure u r be at or in-the-money.

how much to safeguard?

dear ganeshji,

i am of the opinion that all ur money should be protected, not half.

2 nifty put options to hedge 2 bank nifty is what i recommend.

of course, this way you may not make money for small movement of BN,

but why play for small movement?

BN gives a move of 1000 points 8 out of 12 months.

and these moves can be gauged using indicators

(not option data of operators - one reason why technicals are indispensable).

out of 1000 move

assuming u manage to gain 800,

150 odd points will be the cost of hedging.

even that can be recovered if you can walk step by step in tandem with on-the-way fluctuations/volatility.

e.g. i booked BN profit at 9652 on 27th and bought again at 9496 yday.

this has resulted in my hedged nifty puts becoming "free of cost" till the end of october series.

i can take whatever "panga" with my godfather "mr.hedge" behind my back.

if u don't hedge all ur "wealth on the trading table" fear will get the better of you.

"never trade with scared money"

and

"never trade out of fear, never fear to trade."