How I manage positions when view goes wrong
I am not a chartist and I take discretionary positions, which often go wrong. I am an option seller so my initial positions are always STBT in some options. The max loss on these positions are not defined, so it is necessary to fight back when my view goes wrong. In these situations, here is how I manage :
- Stop the bleeding.
- Take counter positions as per the real market conditions, not my view.
What happened today:
My view: 24000 is a strong support. Markets will defend 24000, and then become bullish because the global markets are extremely bullish.
What I did: I sold 2 lots of 24000 PE expiring next Tuesday when the markets opened around 24110.
Reality: Markets fell relentlessly and hit 24000. At this point I was in MTM loss of 7K.
I had 2 options: Accept loss and exit or fight back and recover some losses. I decided to go with 2.
The steps 1 took:
- Stop the bleeding : I bought 2 lots of Sensex 77000 PE expiring Thursday. Sensex and Nifty are 99% correlated, so it is possible to hedge one with the other. After that the markets fell further, but the Sensex PE arrested the loss, and the MTM loss was stuck around 6.5K - 7 K. With this hedging, the max loss of this combined position would have been ~14K, irrespective of how much the markets falls or rises. It would have given a small profit if the markets closed near 24000 on Tuesday.
- Counter positions : When the market hit 23900, I decided to try to recover losses. I sold DEC 25000 CE. I sold far dated options because if there is a big reversal I have time to exit. There was some volatility but then the markets fell again to 22820. The December CE gave good profits, but the MTM came down to -2.5K.
- Now I was praying for further fall, but instead the markets started recovering and there were some big green candles. When the markets went above 23865, I exited the DEC 25000 CE at a small profit.
- It seemed like the markets have bottomed out, So I sold DEC 23000 PE. Markets rallied upto 23920, and then stalled over there. So I exited this position at a small profit too.
- I tried to play with play intraday with some Tuesday expiry 23700 and 23800 puts too, but I did not hold on to them and exited them quickly, because the morning had already taught me a lesson.
- It was almost EOD, so I had to make a decision to carry the positions to Monday, or just take the loss and come back fresh on Monday. I decided to go with the second choice, since I don't trust the US-Iran was situation. So I exited both the Nifty and Senxex puts.
Overall I lost ~4.4 K including charges. But this is my punishment for taking the wrong view.
Lessons: When view as an option seller in short term options goes wrong, first buy some options to arrest the losses, then switch to longer term options for loss recovery. This strategy works for me, but every trader is different.