Martingale Hedge Strategy
When we have running a trade-in loss; we have few options.
- Cut the loss.
- Deploy a hedge on the opposite side (like straddles, strangles).
- Cut the loss and do a reverse trade.
- Pray.
Option 3 looks awesome but you don’t know when the trend will go in favour of the old trade which you have closed. Let’s discuss our SunTV 760 PE trade which went to deep unrealized loss and reverted.
Few people cut SunTV; that’s option 1 and is fine.
Few people deployed SunTV PE buy or CE sell or futures sell keeping the PE sell open; that’s option 2 and is fine too.
Few people cut SunTV and sold it, then the trade reversed; that’s option 3. They are not only fucked in a downtrend but also fucked in an uptrend.
Option 4 is 90% of people. They pray.
Sometimes people are forced to go with Option 4 because if they cut the loss with unrealized loss than their margin will shrink not allowing them to take the trade back when they are supposed to get it back.
So what do we do when our Bank Nifty theta decay trade goes in loss?
As like other trades we have four options. But in the four options which we just discussed here is for equities and futures. Because –
Let’s suppose we are bullish on Banknifty.
Selling Banknifty 24000PE for 17th August expiry and selling Banknifty 24000PE for this month’s expiry will have a huge difference. Also, it is valid for stocks too.
Selling Suntv 760 PE for this month expiry and Selling Suntv 760 PE for the next month will have a huge difference but buying Suntv is buying Suntv.
Hence we can have the advantage of time value here!
On 10th Aug, BN 24500 PE which was sold at 48 and closed at 249 with a loss of 201 points. First is why you did that trade? What was the reasoning?
The answer is my model said it would stay above 24500 because of –
Then the issue with trump trigger a global market panic sells making our loss. We should have cut the trade based on what we have learnt so far. But I just kept it because I thought why the market is falling?
Is the reason is valid or nonsense?
The reason was nonsense. It was not gut feeling but the interpretation of data which was showing that institutions are taking out cash and dumping on the index. So it created a sell-off panic of retailers and giving better entry of institutions.
Till when the reason was nonsense?
Till Friday. It was easy to predict. I have closed all my shorts and asked the people who had the CEs shorted to close along with me.
Reason – Indian Investors don’t want to invest in Friday because there is a gap of the weekend. As Trump was making issues; no conservative trader or investor will take a position on Friday.
Our first target should be to recover 201 points and BN 24300 PE towards 17th Aug was available at 220 that time.
- BN 24300 PE has more probability of making money than BN 24500 PE.
- BN 24300 PE gives the same money which was being offered to bet on BN 24500 PE.
But BN 24300 PE’s profit is limited towards 220.
BN 24500 PE towards 17th Aug was available at 310 that time. It is riskier than “BN 24300 PE towards 17th Aug which was at 220” because of downside break even!
Our first aim is not to get in the loss at the first point. In the first case, it is 24190 and second case it is 24080.
Hence the bet on aggression. Now study this –
Our first trade – Selling BN 10 Aug 24500 PE at 48.
Break even = 24500-48 = 24452
Case 1:
Our next trade – Selling BN 17 Aug 24500 PE at 310.
Past loss – 201
Breakeven = 24500 – 310 + 201 = 24391
Case 2 :
Our next trade – Selling BN 17 Aug 24300 PE at 220.
Past loss – 201
Breakeven = 24300 – 220 + 201 = 24281
You are able to jump into the same trade keeping while bringing down the break-even each time. Isn’t this amazing?
This is only can be done using options only.
Even after 10 losses; if you manage to win just one consequent trade which it will on the assumption –
- The market doesn’t go down infinity and beyond. It has to retract a bit before going more down.
- The market always goes up in a longer period.
It will bring back all past trade’s loss in one go.
Note the term Market here.
RCOM, Videocon, Justdial are racing towards penny stocks now. They can go down. But NIFTY, BANK NIFTY, NIFTY IT can’t!
Because they are indices and their constituents get changed time to time shuffling bad companies with good performing companies.
In short, this is called – “Martingale Hedge Strategy”
This above reference tells the same things which are just told. If you need to scare someone with your deadly knowledge use this.
There shall be a PDF named “American Claims” and “Martingale Pricing” shared in the drive!
It’s not complex; I can tell you whole in a layman way. It’s just like mathematicians like to write in an absurd way so that you don’t understand. If you want to understand in deep (which is again no use; it is information like why Ashoka invaded Orissa and which date having no implication in a trader’s life). It’s about Q-martingale –
https://en.wikipedia.org/wiki/Risk-neutral_measure
If you need to know more and more –