Following trade is for educational purposes only. An Iron Condor is an option strategy, where the expected outcome for next week is range-bound.
A CE option mentioned below is a European Call Option, while a PE option is a European Put.
A hedger always buys these options and a speculator mostly sells one.
But when the speculator only sells these options, the risk involved is unlimited and the margin requirement is also high. This is called naked option selling. When both CE and PE are sold, it is called a short straddle.
In combination with this, if we buy much farther CE and PE, the short straddle becomes an Iron condor. Here, the idea is to capture the option premium in a range-bound market with reduced risk and margin compared to short straddle.
The spread between buy and call leg is based on optimum use of margin. Since the option premium is credited to us in advance, it is also a credit spread.
Since this week the view is bearish , we are taking only the CE leg of Iron Condor. As the week progresses, additional trade may be added.
Please leave a comment if you need further clarification on the following trade
My concept of trading is not to be an overnight millionaire, but a disciplined method to grow the wealth that you own. Please leave a like if you like the trade ideas :)
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When you do not get a good entry and the index moves too fast in the expected direction, wait for mean reversion for capturing a good entry :)
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If someone missed the morning move, Sell 35400CE, Buy 36000CE after mean reversion is complete.
It is aggressive though, but there is short buildup, So it should work.
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I am not SEBI registered adviser, please learn the concepts well and consult your financial adviser before taking up any trades. This post is for educational purposes only.
Feels like a good approach according to current market situation. I wanted to ask, how far should we go to hedge our naked position? Like is there Any particular rule you follow for "hedging distance"
muhd_nihal
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@architk, Are asking about the spread of 600 points? (36300-35700)
@architk, The idea is not to be protective about your sell position with a hedge, but to capture more premium with less margin and increase your ROI.
Naked sell of 35700CE x1 lot
Margin=1.33L, Premium= 2.25K
Spread of 100, x6 lots
Margin=1.35L, premium= 2.1K
Spread of 600, x4 lot
Margin=1.19L, premium= 6.75K
Less margin, more premium, improved ROI
If the index moves against expectation, adjust the position the same way a naked sell is adjusted.
So the actual risk is not the same as a pay-off graph, as we intervene and alter the position when such an event occurs.
architk
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@muhd_nihal, Thanks for explaining. Also you are talking about intraday margins right? Because if you take this position overnight then you might need a little higher margin.