General Guidlines for Option Hedging Strategy

Hello Friends Below is some General guidelines for Option Hedging Strategy,I hope U all will be able to understand each & every thing by this.
Hedging Strategy
Explanation 1: How to decide what option to sell and when?
Always sell option of next month. Ideal time to sell is first & 3rd week of contract month.
Sell Call of about 100-150 points below the current nifty level and Sell Put of about 100-150 points above the current nifty level.
Check-out the nearest support/resistance levels and decide the levels to go long or short. The difference between short and long level should not be more than 100 points.
Explanation 2: How this works and gives profit?
Let's discuss the current call given which gave 475 points by selling 4800 call and 5100 put
Nifty level was around 4970. Immediate support was 4950 and resistance 5000
During the next 2-3 weeks nifty either remain between 4950-5000, or go above 5000 or go below 4950 (any number of points) i.e. 3 probabilities are there, either nifty go down or go up or remain between 4950-5000. No other instance can happen. Let's discuss all the probabilities.
1. If nifty goes above 5000 - go long in nifty and hold till it comes below 5000. Because if nifty goes above, premium of call of 4800 will start increasing but we will get more points from Nifty Future and premium of 5100 Put will erode fastly and that will be our profit.
2. If nifty goes below 4950 - go short at 4950 and hold till it comes above 4950. Because if nifty goes below, premium of put of 5100 will start increasing but we will get more points from Nifty short and premium of 4800 call will erode fastly and that will be our profit.
3. If nifty comes or remains between 4950 - 5000 after 2 weeks the premium of both the put and call will erode. Premium of both will keep on eroding day-by-day if nifty remains at current levels. At the time of expiry if nifty closes below 5000 and above 4950, we will have to give premium of 300 points (difference between strike price of Put and Call sold) and even then, we will get profit of more than 180 points
Note : Read the call very carefully which means :

Go short in Nifty Future at 4950 and hold it for as many time or days as it remains below 4950. If it again comes at 4950, exit at this level. Under such situation, you won't gain even a single point in future, but you will get so many points in premium erosion.
Go long in Nifty Future at 5000 or 5040 level and hold it for as many time or days as it remains above 5000 (whatever is the entry point). If it again comes at 5000, exit at this level. Under such situation, you won't gain even a single point in future, but you will get so many points in premium erosion.
Future Points level

These levels are neither support nor resistance levels. These are the points 20-25 away from the nifty spot level at the time of making position.

Rules: -

1 Work better for offline trade account
2 Do not enter before 9:30 and after 14:50 but Can exit any time
3 If Nifty open above the long point position (in case of gap up) then take the position and square off the position at same level. (similar rule for short)
4 If there are many whipsaws, then brokerage can be covered with the trade of 2 lot of Nifty. And one lot can be squared off after gaining profit.
5 Don’t wait for the expiry, square off your all position when target is achieved.
(Example this time Target achieved in only 4 trading days)

Example (Gap up and gap down)

Question: -

1.How managing gap up/down in opening. As per current position, have to short below 4950 or buy above 5000 (let us say). What should we do if tomorrow it opens gap up at 5050? Should we enter at 5050? And also what should we do if it comes to 4950 same day.

Ans : -
Under such instances you have to generally enter at around 9:05 and 9:15 hours in the next trading day according to the movement. Let's suppose, if tomorrow Nifty opens at 5020 and at 9:05 and9:10, it reaches 5040. Go long at 5040 and hold till it comes down to 5040 either same day or in future. It means you have to short nifty at 4950 and Long at 5040 (instead of 5000). In such situation you won't having any position between 4950 and 5040. But if on some other day Nifty comes between 4950 and 5000, you again stick to earlier rule i.e. go long above 5000 and go short 4950.

Suppose, we go long at 5040 and nifty always remains above that level during next 2-3 weeks or suppose at 5180 at the end of 1st week of Feb our profit will be around 190 points otherwise, it should have been 230 points. Under such situation, our profit may be few points less, but we will never go in loss.

Otherwise, if you wish to cover these 40 points, go long with 2 lots of nifty fut. till you get 40 points or exit at 5040 level and see if levels reach 5000. There are so many ways to cover left out points.
Question: -

Once you enter short at say 4950, what is the SL? I mean if u enters at 4950 and it goes to just 4940 and reverses to 4950, will u exit? Or say 4949 is the low of the day, where will u put SL?

Ans : -
If the time is 3.00 - 3.30 pm, I don't trade and wait for next day and don't bother about gap up or down. If it's time between 9.00 and 2.50 pm, I wait for 3-5 points. For example if i short at 4950 and it goes at 4945, my SL will be 4950. if it goes more than 20 points below 4950, my SL will be 4947 (3 points brokerage). Some times I have to trade 2-3 times in a single day like this and some time only once in a month. You have to trade as many times as it comes that level or if you want to avoid trades; your SL should not be more than brokerage for sell/buy trades i.e. 3-4 points. It's up to your risk appetite whether you want to take chance or pay brokerage