The main reason is typically in such times, volatility is very high, news flow is not in favor of the market in general, more than price uncertainty, your mind actually is under lot of stress, just looking at what is going on. And it is in such times that you need strategies that will lower your overall risk in terms of your positions. And even the psychological stress part, you need to keep that in check. So this is where I feel that covered call writing comes into play, it's extremely helpful to create a strategy that will limit your risk on the downside, and you would be in a position still to try and anticipate bottom in the market http://casinoslots-sa.co.za/entropay.
Now for using covered call writing as a hedge, you need to select the right instrument. The first requirement in my opinion is that of, let's say stock futures or index futures, it should be highly liquid. Now usually futures whether it is index futures or stock futures, they have good volumes. But you need to worry about the options volumes because you may have seen this stock futures would be having good volumes, but when it comes to option volumes, options are not that liquid. So which is where some of the stocks in F&O segment in our market, they don't have good volumes in option segment, so make sure you check this first that whichever stock or index features you are selecting, they should be highly liquid. You should also have a basic understanding of what options is and the basics of options which is how Delta and Theta impact option pricing. Now in case you don't know about how Delta and Theta are impacting your options price, you won't understand much that I'm gonna explain in subsequent slides, and the next video. So I would actually request you to go back and see the video on part one, part two, part three, and options trading where I have actually explained these concepts. So I've put the link to those videos in the description box below. So look at the chart here. Now two things that make it difficult to identify bottom in the market is volatility, and the impact of that volatility on your trading mindset. Now look at how this chart is trending down, look at the frequent gap openings that you are getting, sometimes price opens lower and rallies during intraday. So this particular scenario becomes extremely difficult to trade. If you are attempting to buy at this point or this point or any of these given points without a proper hedge in place, then let me tell you 90% of the time you will exit the trade because the trading mindset is such when we see prices moving lower. So in case you're attempting to catch the next up cycle, and you're somewhere here or you're somewhere here, this covered call writing strategy comes in very handy because once you create a covered call writing strategy at this place or at this place, and even if the price goes on to make low, a new fresh low or the next few days, you would still be able to generate some returns or actually limit your overall losses. So that directly has an impact on your overall trading psychology, and you intend to stay much longer in that position, rather than if you don't hold a properly executed hedge for your positions. So I will just outline some steps for you that will help you create a proper hedge for your position. The first step is to identify the right instrument. Make sure that for your particular instrument, there is high volume in options segment. The second step is to actually open up your covered call riding position that is you need to enter the stock or stock futures or index futures, depending on what you are trading, take a note of spot price. Third step is strike price selection. When it comes to call writing, this should be one to two strike prices away. So hypothetically, let's assume you want to enter X Y Z, the spot price is 10,000. Your call option selection that is strike price selection should be one or two strike prices away which is 10100 or 10200. Step four, take a note of your options premium that you will be receiving while you're writing call options, and take a note of options Delta and options Theta value. Step five, you need to calculate how much you stand to lose if price of your stock futures or index futures falls by 1%, 2%, or 3%. Step six, you need to put a rupee value to the potential losses that is 1% lost, 2% loss, or 3% loss, you need to define it in terms of rupee that is how much rupee or how much dollars you're going to lose if the price were to fall 1%, 2%, 3%, that is your stock stock futures or index futures. And last step would be to use options to hedge or offset at least 70% of potential losses that can come about in case your asset will fall by 1% 2% 3% or more.
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