Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How to Construct a Bearish Option Strategy with Hedged Puts?

1 min read

In this tutorial, we are going to learn how to construct bearish hedge options for a price structure with crowded short term longs.

Crowded Short term longs in Hindustan Unilever witnessed from the Price Structure point of view and those crowded longs are reaching a kind of Euphoric state as the price started trading currently above 2320 levels.

Now lets try to understand the price structure and how one can build a trade setup with reference to the current market sentiment.

Since May month onwards one can see multiple layers of price compression followed by reaching the euphoric state with a gap on 17th July 2020. Price is reaching an extreme where short term trend reversals are possible as the multi layers of price compression is nothing but crowded short term traders reaching the euphoric state. Hence liquidation odds are possible with the given market sentiment. And also the trade inventory goes long to too long

In-Order to play for this Crowded Price compression setup one can consider using Slight OTM Puts hedged with x3 times of near OTM Short calls. Thing could bring some cushion for traders to manage the theta decay in the Put Options.

Spot Price : 2330

Entry

Buy 1 lot of 2300PE (near ATM Puts) – 30th July 2020 Expiry at 51.55/Lot

Hedge Protection

Short 3 lots of 2360CE (OTM Calls) – 30th July 2020 Expiry at Rs45.15/Lot
Buy 3 lot of 2500CE (OTM Calls) – 30th July 2020 Expiry at Rs12.75/Lot

Total Margin Required for Hedged Position : Rs1,88,000 (Approx)

Strategy Breakeven Point: 2375
Exit on Hindustan Unilever testing 2200 and 2100 levels.

Strategy Risk Level : Moderate Risk Level and Risk increases if Hindustan Unilever starts moving above 2375 levels.

HUL Spot ExpiryExpiry DateProfit/Loss
2,000.0030-Jul-201,03,695.00
2,025.0030-Jul-2096,195.00
2,050.0030-Jul-2088,695.00
2,075.0030-Jul-2081,195.00
2,100.0030-Jul-2073,695.00
2,125.0030-Jul-2066,195.00
2,150.0030-Jul-2058,695.00
2,175.0030-Jul-2051,195.00
2,200.0030-Jul-2043,695.00
2,225.0030-Jul-2036,195.00
2,250.0030-Jul-2028,695.00
2,275.0030-Jul-2021,195.00
2,300.0030-Jul-2013,695.00
2,325.0030-Jul-2013,695.00
2,350.0030-Jul-2013,695.00
2,375.0030-Jul-20195
2,400.0030-Jul-20-22,305.00
2,425.0030-Jul-20-44,805.00
2,450.0030-Jul-20-67,305.00
2,475.0030-Jul-20-89,805.00
2,500.0030-Jul-20-1,12,305.00

The strategy has protection up to 2375 levels. If Nifty goes beyond 2400 levels it requires exit on the hedge until then, No strategy adjustment is required.

Strategy update on 23rd July 2020 – Closing the Strategy on 33,000/- Gain

Here is the updated position

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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8 Replies to “How to Construct a Bearish Option Strategy with Hedged…”

  1. How is this strategy with Zero loss below 2500? Buy 1 lot 2300PE and sell 4lots 2500CE. This has higher Probability (86%) of win .

  2. Good one sir.
    I don’t have time to trade daily.
    Do you have algo trading or robo trading like that?.

  3. hello sir, i have question about this hul setup ? in your hdfcbank artical you were bearish, so created bear put spread, now same on hul why you using 3 leg setup.. why not same as hdfc bank we will buy atm put or sell otm put.. what a different.. which is more safe to use ? pls reply

    1. When you are expecting a vertical crash from the Euphoria it is better to use hedged futures when the directional bias is strong rather than vertical spreads.

  4. Hindustan Unilever limited is going to announced its June quarter 2020 results on Tuesday 21st July. What’s your opinion to construct a bearish put options strategy ?

    1. I was aware about the event. Regardless of the event outcome I was bearish due to the euphoric nature of the crowded trading setup from the short term traders.

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