Trade for the Week - Analysis

A recap of the day for underlying of our interest;

NIFTY was moving to our advantage until European Markets opened and then we got back into positive territory. I got into NIFTY 5200 PUT at around 55 price in the morning. Did not square off during lunch time and could not create a full hedge also in the late afternoon. I created partial hedge not because I did not get time but because I was not convinced about European Market move (You are advised not to have such single sided position till you get enough confidence and your risk capital is high).

I got two interesting e-mails about today and we will discuss that here.

First, regarding stop-loss of 5360. Query was if NIFTY reaches this level; then PUT Option of 5200 would be almost worthless and 5300 would be less than half of original Premium... So isn't the stop-loss too far away?

Here my logic is... Option trading is not like intra-day where you have to square it off on the same day. In such case you do not have time for Index to recover (or correct) in the direction you want. However in case of Options, you get some time (in days) for such move and hence if you keep stop-loss very close then there are chances that one day or even couple of hours of adverse move will trigger it and you end up squaring off at the wrong time.

Hence going by the chart in previous post, 5360 is the level indicated by trend line and also somewhat closer to 200d EMA and unless NIFTY decisively crosses them, these levels are expected to hold.

Second e-mail which I received this evening is regarding squaring off of the trade today itself. One of you bought NIFTY 5200 Put at 56 and squared off at 68 making a neat 20% profit in one day. Now this is something very good... isn't it?

No, it is not. If you ask me I will say that Option trading is a risky business and hence accordingly your reward should be higher. 20% profit in one above lot is a sum of 600 Rs and you need to look at the profit in absolute terms as well. Since your stop-loss was almost 80 NIFTY points away (where you would have risked loosing something like 1500-2000 Rs of your original 2800 Rs Premium) your target reward should have been attractive enough for this kind of risk.

Now I am not totally against booking a small profit initially and gaining confidence. However, as we move along it is important that we keep above logic in mind and decide our targets accordingly.

US Markets are showing marginal negative move as of this moment and I will say that Fundamentals of our Technical trade is still intact. More tomorrow.

Happy Trading.