A Second Strategy.
Most of we always try to find in which direction market will go we intend the market will go UP and it goes down and vice versa. We take a position when trades go wrong, we try to average putting more money and later we face margin call. This happened with me.
Now I am considering my following personal cases.
Say, I have a Capital of 2 lakh and trade with Zerodha for brokerage thingy.
There are many trading systems available in the internet and forums like TJ etc. Some of them generates BUY-SELL signal, some trend following systems etc. Many master trader here developed brilliant systems and they are available here in TJ for free.
Suppose I choose such a system that runs on Amibroker, MS, Metatrader or any other. It can be a simple EMA crossover system to more complex one. No matter. Just I shall read the thread of those trading systems and choose one which suits me or I think would be good because it is developed by very good trader or whatever the case may be doesnt matter.
What I want that the system is able to give some good real-time clue or signal so that I can catch the trend I shall know at least when I am going to buy or sell.
But here is a big BUT No trading system or method in the world is Holy Grail all we know this market moves as it likes. So even the most good trading system will also fail 20 to 40% and our stop loss will get hit. Anyway, assume the trading system is really a good promising one.
This is the point where I shall initiate this strategy and make my trade more promising.
Consider the following case:
Suppose NF is at 5551 and our system gives a BUY signal. People generally initiate the following trade.
Buy one lot NF @ 5551 and hold according to the system.
Instead, I initiate the following one:
Buy 3 lots just OTM call + 2 lots just OTM puts.
For NF @ 5551,
May OTM Call 5600CE is 70.50/-
May OTM Put 5500PE is 74/-
First Case The Trading system is right and Nifty moves to 5625
Trade 1. Naked NF Buy: Profit is (5625-5551)X50 = 3700/-
Trade 2 Option Strategy Return.
When NF will be @ 5625, as per OptionsOracle, The return is 2697/-
Well, about 1000/- less than the naked NF buy. But good profit.
Second Case What if the Trading system fails and Nifty goes down to 5485?
Trade 1. Naked NF Buy: Loss is (5551-5485)X50 = 3300/-
Trade 2 Option Strategy Return.
When NF will be @ 5485, as per OptionsOracle, The Loss is 725/-
See above, the loss is much reduced than the naked NF Buy. Digestable. At this point you can square off the position with less loss than naked NF buy.
Now consider the following third case. This is the most beautiful part.
As per OptionsOracle, as NF starts moving below 5495, your loss will start reducing. At 5495, this will give the maximum loss 747/-. Just compare this to the naked NF position.
When NF even moves below 5435, this strategy will again become Profitable.
When NF at 5425, Naked NF Buy will give a loss of 6300/- while Options Strategy will give a Profit of 226/-
So, instead of playing with naked NF, combining this strategy with a very good system, we can make very good profit and if the trade hits Stop loss, the loss would be much less. So the loosing trade is much much less loosing.
Buying 1 lot of NF takes a margin around 30,000/-. Just one set of this strategy consisting of 3 call + 2 puts will cost around 18,000/-
With a 2 lakh trading capital, just starting with 1 set of strategy is a good money management even if you are very much protected in a drastically wrong trade as explained above. Your maximum loss is just 747/- with unlimited profit potential.
Similarly, when your system generates SELL signal, just initiate the reverse principle.
Remember to square-off the trade intraday basis with whatever profit or loss, so that market volatility, time decay etc. can not badly affect it if you carry it next day.
Around 10 to 15 good trades may give you another 18,000/- total profit.
Then add another set. And then add another from your next profit. In this way, compound your trade.
And lets we all see what happens.
May God Bless all of us.
GG