Travel with the Spot Price

Current market price of the stock or the current trading price of the index is called as Spot Price. Many traders and investors are busy in identifying where will the market go the next day. People will always spend more time in analyzing whether the market is bull or bear. Infact, the important thing to identifying is not the bull or bear market. It is important to travel with the spot. Yes, many hedge and fund managers are aware of this concept and they always keep their position unbiased all the time to win the market. Travelling with the spot is nothing but having the unbiased view. Even if the market moves up or down the next day, we should be able to book some profit and come out of it and stay with the spot again for the next day.

There are many hedging concepts like Straddle, Strangle, Strategies like butterfly spread and many more to say. But the important thing is to travel with the spot. If the spot price goes down or up, our positions should be around that price, we should never hold a position far away from the spot price. This adjustment will always help a trader (specially option sellers) to be in profit. I personally feel the best strategy with the automatic hedging is the short straddle. It is also important to be with the spot on short straddle. If the market makes a violent move, there are options to book certain profit and some loss and still stay with spot.

Let's take an example of a stock which is trading around 400. It is wise to have a short straddle at the strike 400 on the nearest expiry. If the trader is wise enough, he can take a short straddle at 390, 400 and 410 on the nearest expiry. This will help to book profit most of the time and to have less adjustments. There can be 3 scenarios on the market

The market moving higher, lower or stable

In the scenario of market moving higher, the 410 & 400 short straddle will be in profit and the PE on 390 straddle will also be on profit. The only position which needs to be looked into will be CE on 390. As an immediately effect, the CE on 400 can be at neutral with no loss / profit or it can be in a minor loss. As the time pass by, this position can also be on profit (provided with no much violent moves).

To stay with the spot in this scenario, when the market moving higher. It is wise to close the 390 strike (both PE and CE) and take the 420 short straddle when the market nears to 410. In an advance level, if we have multiple lots in 390 strike, it is wise to close all the CE positions and hold the PE positions as it will decay further.

When the market is moving lower, the exact opposite of the above can be performed to stay with the spot price. When the market is stable and do not move much, it is better to hold our positions as all the premiums will decay over time. A move of 0.75% or lower either up or down can be considered as stable market and let us not disturb our positions during these times. This will help us to take control over time & premium decay on short straddle. It is always important to have our positions hedged all the time. Short straddle is the best strategy to work on hedged positions.

I hope this blog brings information and importance of trading with hedge and short straddle. There are various strategies and i suggest to learn continuously and understand what will work for every individual and trade on those.

Have a Great Day

B G Nareshkumar