Hedging is the key…

On this teacher’s day, I salute the stock market, the greatest teacher. They say the best lessons are learnt when you lose money. So far the stock market has taught me so many lessons fortunately not at the cost of losing.

I pay my respect to 2  of my other teachers, Varun Malhotra & Promod Chawla. Varun who says invest for the long term, be a value investor. Promod who says, “It is a dog market. Sab Kutte Hein. Play like a gambler.”

I have learnt not to dabble in individual stocks unless you are privy to some inside information. I have learnt protecting  your capital should be your main aim, profits will come. But first protect your capital.

How do I protect my capital in this volatile market? It is a big question in all our minds. Answer is simple, hedge your bets by playing options.

We are at a juncture now that we feel market is going to rise. This is the time to buy NIFTY, but at the same time we would like to protect ourselves for further decline.

Buy NIFTY in lots of 25. Buy the put of the same price or the nearest price. To finance this put sell the 2-3% higher call and sell the 2-3 % lower put.

Right now NIFTY is at 7655. Buy a lot of 25 NIFTY futures at the current price. Buy the put at the nearest strike price of 7650 by paying a premium of 184. This has protected our capital from further declines. Now we need to finance this put.

1. Sell 7800 call at the LTP of 114.

2. Sell 7250 put at the LTP of 70.

By selling a higher put we have capped our profit at 2%. Well this is what we want, a 2% return in one settlement period of 1 month. Selling a 7250 put exposes us to a loss if the NIFTY slips below 7250. Well this is the risk we need to take. If you ask me this is the minimal risk one has to take.

The fundamentals of market are simple. NO RISK NO REWARD. By your skills you at the most can hope to mitigate and minimize the risk.

Reverse the above process if  you feel that markets are too high and bound to pull back, but at the same time you want to protect yourself against the market hikes.

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