NIFTY TRADING AND REAL RISK MANAGEMENT
What is Real Risk Management?
Many analysts or traders tells that Size of Position, Stop loss as Risk Management, Is that true?
To me risk management is how safe you are trading with Indice or Asset that you have chosen and they key details that you understand.
Let's take trading OPTIONS as a problem and discuss the risk management around it.
What are Options?
1. Options are neither assets or Indices or commodity, they are contracts and don't hold any value to them and it's a zero sum game.
2. But Options are the most traded derivatives in the world and 80% of India's liquidity lies with them.
3. According the Black and Scholes, Options should not have a Stop Loss, So how do we manage the risk around them?
Risk Management
1. As options are mathematical products and derived from a formulae, we will use the same math to solve it.
2. Option Premium = Volatility + Intrinsic Value + Time Value.
The risk management principle in Options
1. As options have Time Value and it's decays as expiry approaches, so by Selling Options you can address the Theta/Time Value
2. 90% of the Option traders looks at IV and fails to look at Broad Market INDIAVIX, So use IndiaVix as an Input and Identify the right options to Sell/Buy
3. Intrinsic value movement can be addressed by using Breadth tools and your technical analysis.
On the above I didn't talk about SL or Position sizing, Risk Management is understanding the Product that you are trading and definately not anything else.
Many analysts or traders tells that Size of Position, Stop loss as Risk Management, Is that true?
To me risk management is how safe you are trading with Indice or Asset that you have chosen and they key details that you understand.
Let's take trading OPTIONS as a problem and discuss the risk management around it.
What are Options?
1. Options are neither assets or Indices or commodity, they are contracts and don't hold any value to them and it's a zero sum game.
2. But Options are the most traded derivatives in the world and 80% of India's liquidity lies with them.
3. According the Black and Scholes, Options should not have a Stop Loss, So how do we manage the risk around them?
Risk Management
1. As options are mathematical products and derived from a formulae, we will use the same math to solve it.
2. Option Premium = Volatility + Intrinsic Value + Time Value.
The risk management principle in Options
1. As options have Time Value and it's decays as expiry approaches, so by Selling Options you can address the Theta/Time Value
2. 90% of the Option traders looks at IV and fails to look at Broad Market INDIAVIX, So use IndiaVix as an Input and Identify the right options to Sell/Buy
3. Intrinsic value movement can be addressed by using Breadth tools and your technical analysis.
On the above I didn't talk about SL or Position sizing, Risk Management is understanding the Product that you are trading and definately not anything else.
Penafian
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