Friday, August 31, 2012

Never take big positions in OPTIONS without hedging or straddle

Straddle with 1-2 month options when the stocks is in consolidation. This is a fine example why options with big positions are so dangerous. Even a small move like 10 dollars can wipe out 50-60 percent of capital money. Why would any one take such a risk???

Straddling would have eliminated the risk. During the consolidation phase stocks move within the 6 day window. Since the probability of the movement is in the trend direction and from this example even a minor change in price would eliminate most of the capital, one has to straddle position always.The market is too uncertain and one cannot guess which side it will take. So weekly options is a stupid idea.

Apple is down again to 658 has broken the 660 range.

Remember, this is a very important lesson. Never go overconfident and try to judge the market. The market can go any direction even with the best indicator may be saying otherwise.

Apple was consolidating on the 675 range. Look at what happened. In two days it is at 658. If you have call options your fingers are burnt.

Do not have big positions in OPTIONS. One way is to hedge your options with opposite options like a put. So that if your guess does not turn right atleast you have hedged your position. 

Do not take any trade without hedging it.

If you have stocks, then a stop loss does it. But in options a stop loss does not mean anything. Already you have 30 percent loss. And if you have big positions you are screwed.

You have to hedge your initial big OPTIONS position with an opposite options. Once the directions is established you can remove the hedge. Initially you need the hedge. Without the hedge it is pure gambling.

Take the same Near the money hedge for the same time period. Then any downside will be made up by the upside. This is only if you are taking a big position in options. If it is a couple of options or a single options there is no need. 

Once the direction is confirmed you can take away the hedge for a loss and continue on the options that are in the directions of the following trend. This way you would not have lost so much and would get into profits. I THINK THIS IS ONE OF THE BEST WAYS TO MAKE MONEY BY OPTIONS.


So....may be next time. Never trade weekly options when taking big positions. 

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