OPTION CALCULATION OP FUT HEDGE ARBITRAGE.pdf

Tading

1. Option Calculations
mentorship option hedge,
future Hedge,Arbitrage
Q&A
ClassDated6
th
ofMarch
2021
1

2. What we are going to learn?
•1. Option Calculation
•2.OptionBehaviour
•3.Workingof Vix
•4.Howtomakesimplehedge?
•5. How to calculate maximum possible
loss in hedge?
•6.When we should take hedge and when
avoid?
•7.Whentoenterandwhentoexit?
•8. How to save our loss?
•9. When we can have maximum loss?
2

3. Save Loss by
Knowing the
option
3

4. Option was
designed as a
hedging tool.
4

5. Indexes Options
•There are two types of indexes options:
•1. Weekly option
•2. Monthly Option
•Both of them have specific behaviour pattern.
•Manypeople make mistake of buying naked weekly option as
positional.
•Theproblemiswiththepriceyoubuytheseoptions.Letsseeit
further.
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6. Understanding Option and its Strike price
6
➢BankNiftyFuturespotpriceis35380
➢Bankniftyweeklyexpiry10
th
March35800iscosting391.50
➢ItsimportanttoknowthatitisOTMandithasonlypremiumand
notprice.
➢ThispremiumstartsonlywhenBankniftywillreach35800
➢ThispremiumhasnovalueiftheBankNiftyspotisunder35800
➢Nowevenifthemarketfromitspresentpositiongoesupby500
pointsandtheFuturespotpricebecomes35880youwillstill
lossesmoney
➢youwillmakemoneyonlywhenitcrosses35800+premium
paid=35800+391.50=36191.50.
➢Onceyoubuythisoptionwithjustpremiumandtheprice
fluctuatesatthesameplaceoneortwotimes,itwilllooseits
premiumbecauseitsonlyHawa.

7. If you don’t know how to calculate chips and Hawa
don’t trade options.
7
Inthe4optionswecanseethatthe
deeperITMof34500strikepricehasmin
premiumandmaximumpricesoitworks
outcheapestforusevenifwepayhighest
forit.
Ithasgot225rupeesPremiumandrest
price.
(35380-34500)-1105=225
Youcanalsoseethattheincreaseor
decreaseismaximum%wiseinOTM.(%
wisenotpricewise)

8. Options Co-relation with Vix
8
All options are directly corelated to vix
Ifvixisinrisingmodethepremiumwillbe
addedtotheOTMveryrapidly. Only buy
option in rising vix.
ButthechallengecomeswhenVix
reducesafterwebuytheoption.Our
optionwillreduceinvaluewithout any
change in market situation.
IfvixisindowntrendmodeOTM’swill
loose premium rapidly. Only sell option
not buy

9. Defining Risk in Option Trading
9
➢DefineyourriskinIntradayandpositionboth
trades.
➢IfyouaredoingPositionalinBankNiftythen
buyITMandSellATMOption.
➢ForintradayBuyOTMandSellOTM.
➢IfyouaretradingonBollingerbandblastthen
buyOTMandsellfurtherOTM.
➢Withthiswecancalculatemaximumprofitand
maximumriskbeforehand.

10. Defining Risk in Option Trading
10
➢Supposeyoufeelmarketisuptrend.
➢WeneedtodefineriskinIntraday.
➢Lessertherisk,lesseristheprofit.
➢WewillnevertakeNakedoptionunlessand
untilitsatAVWAPorBollingerBandBlast.
➢[email protected]
sell36000CEourriskis391.50-316.05=75.45
Rupeestilltheexpirydaytill3.30pmthattoo
onlywhenthemarketclosesbelow35800
itself.
➢Arewesupposedtobearthelossof75points
theanswersisno.
➢Weneedtounderstand18hourgameofOption
behaviour.

11. 18 Hour Game of Option Behaviour
•18 Hour game says on Wednesday if you sell any weekly expiry
option at 3 PM near closing time. On Thursdaythis option
loosesall its premium because its OTM, irrespective of vix rise
or fall subject to it not getting converted into an ATM.
•Suppose market is at 35380
•And at 3 pm on Wednesday you sell 35800 CE and 34500 PE
and you get 60+60 =120 rupees premium. ( suppose) on
Thursday it will open at 2 rupees due to 18 hourgame.
•Say BN 10
th
March 35800 CE is costing 391.50 from Friday to
Thursday it will loose391.50/5 per day=78.5 Rupees per day, if
the market does not move much from its present position.
•Alsoifyoubuyanoption35800in391.50soifthe market stays
under 16191.50 you will loosemoney.
•But if you sell 36000 CE @316.05 then you will make money
even if the market goes upto 35875 itself. Because my net
purchase price will be the diff of premium which is 75 rupees so
now if the market crosses 35875we will make money.
•Youcansave that 75 points also by selling one additional lot.

12. How to trade in Big Volumes
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➢Checkthetrendfirstandsayitsuptrendbutyouarenotsureaboutbuyingoptionsointhis
casewewillbuyOTMOptionandaftercalculatinganddefiningriskwewillselloneOTM
option.Youcandoeven50lots.
➢ForIntradaykeepthetargetof40-50pointsonly.
➢Thiswillnotletyoulossesmoneymorethan25pointsevenifbankniftycrashesmorethan
1000points.
➢Ifyouareasmartplayerandyousellextralotyouwillcoverthelosspositioninprofit.
➢Thehedgedpositiondoesnotneedthatmuchmargin.

13. Example of Trade
13
Margin Required reduces drastically when you do a hedged position.( Future spot price is
35800)

14. How to Calculate maximum Profit.
14
➢Toknowthemaximumprofit:
➢StrikePrice35800+PremiumPaid 391.50=36191.50
➢StrikePrice36000+PremiumReceived316.05=36316.00
➢MaximumProfit=36316-36191.50=Rs124.50
➢Youwillnotgetmoreprofitthanthisnomatterwherethe
markettravelsto.
➢Inthiscaseyouhavemoneyprotectionandmoneyprotectedis
moneyearned.
➢IncaseyouhavealossintheIntradaysellonemorelotof
suitablestrikepricedependingonthedirectionofthemarket.
➢Thisisdonewhenmarketistrending.

15. What to do in a rangebound market?
15
➢Buy Monthly and sell weekly of same strike price.
➢Ifyoufeelthatthemarketwillgo500points up and down and if you can define your range in that
case this plan works. In the example we will buy 35400 Monthly and sell the same strike price
weekly expiry.
➢Thistradegivesalotofmoneyifthevixisintherangeof16-17

16. What to do in a rangebound market?
16
In a range bound market the weekly premium will dissolve
itself faster than monthly premium.
Iftherangeiswithing500pointsthemonthlypremium
willnotbedown by 50 % if the vix does not go down by
40% suddenly.
Ifyoubelievemarketwillfallthenthesamepositioncan
betakeninPutside.

17. How to handle a volatile market?
17
➢Inthissituationwetake4positionstwoincallandtwoinput.
➢IfthemarketgoesupwillmakeprofitincallbutlooseinPut
sideandtocoverthiswewillselladditionallotofput.
➢ThisstrategyisusedduringIntraday.
➢Thistradeneedssmallermargins.
➢Thiskindoftradewillgiveyouin1000quantity60000-
100,000/-
➢Ifthemarketstartsfallingyoucansellextralotofcall
36500/-
➢Pleasenotethatweneedtocarryovernightonly4positions
andanyextrasoldstrikepriceistobesquaredoffduring
intradayitself
➢Supposethetrendreverses,youwillnotloosemoneybutthis
indicatesatrapandyoushouldexitfromallpositionsinthis
caseandmakenewpositionthatsuitstheconditions
Its important to choose the Strike prices where premium is
equal both on call and Put side

18. Vix and 9 SMA
18
➢9 SMA of High works well in Vix chart
➢Oncevixcomesabove9SMAitsshoots and vice
versa.
➢It istobeusedon1HourChart.

19. Zone of Option Sell
using AVWAP as
Resistance
19
➢Theredcircleindicatesthezoneofoptionsellin
thedowntrendingvixbelowAVWAPonand
hourlychart.
➢Thiskindofoptionsellinggiveslotofmoney.
➢Ifoptioncalculationisincludedinthevixthevix
cancelsitsbehaviour.
➢DotforgettosellaOTMputinanuptrending
marketandsellaOTMcallinadowntrending
market.

20. Margin Needed Per Lot
20
➢MarginNeededperlotisabout1,15lakhs
includingextralotthatissold.
Ifyoubuyanadditionallotthenthemargin
requirementscomesdownfurther.

21. Hedging future
21
Suppose you take Bharti Airtel Future and
hedge it with any of the above 3 strike
price of Put it is wrong. Because it has got
only Hawa as it is OTM.
We choose the strike price with min Hawa,
570PEwehaveonlyabout 34 rupees
chips and 8 rupees Hawa. Ourenergy
shouldbespent to save this 8 rupees
hawaby selling call of Higher than the put
strike price.

22. Hedging future
22
We choose the strike price with min Hawa,
570 PE we have only about 34 rupees
chips and 8 rupees Hawa. Our energy
should be spent to save this 8 rupees
hawaby selling call of Higher than the put
strike price. He we will sell 580 CE in 7.10
now my maximum risk reduces to 1 rupee

23. Hedging future-
Adjustment
23
Now if Bharti airtel falls down from the
present position then both 570 pe and
580 CE Profit needs to be booked and we
will buy a put of 530 PE and Sell call of
550 CE.
Ifairtelisfurtherindowntrendwewillsell
onemorelotofcallandgetextraprofit.
ProTip:Whenyour
buyingOptionstays
with95%priceand
just5%chipsatthat
timeyoumustbookit
and adjustas
explainedinthisslide.
Youcandothesame
eveniftheliquidityof
thatoptionstarts
reducing.

24. Hedging Future of Bank
Nifty
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If we guy BN Future and we buy 37000 PE
it has 37000-35380=1620 rupees chips
rest Hawa of 459 Rupees
TocoverthisRiskwewillsellonelotof
37500CE@330.
BuyPEinLimit orderor it will fail. First Buy
PE then buy Future.

25. बाबानितीशकेब्रह्मवाक्य
कहतेहैंमार्कि टमें, रिस्कहैतोइश्क़है
सचतोयेहैर्क,विक्सहैतोरिस्कहै
ऑप्शनतोबच्चों, बसहिाऔिचचप्सहै
बेचहिा,खिीदोचचप्स, यहीबाबाकाटटप्सहै
बबनापरिश्रमयहााँ, हुआक्याकोईसफल
बबकाघिद्िािऔिडूबगयासबकै वपटल
मार्कि टमेंहिगलतीकीएकफीसलगतीहै
लूटजायेसबकुछऔिटदलमेंएकटीसलगतीहै
हेजपोजीशनहोजब, टदलकोसुकूनममलताहै
लक्ष्मीआयेघिमेऔिकामकाजूनूनममलताहै
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