nifty index 50 gap

Jul21-W4: Gap openings deserve strike correction

Last week’s movement by Nifty index 50 was unexpected. On July 16, it left an impression of scaling all time high. But July 19th came as a surprise with a heavy gap-down opening. The market never really recovered from the shock and went very low on Tuesday. I did expect such a downfall in such a scenario.

However, I did not react appropriately on both days. On Monday morning, I did the right thing by leaving 15450 put options as it is. The put option later recovered completely and in fact became profitable. That was the moment when I should have closed it and taken a safer strike.

On Tuesday, the market started punishing me for my mistake. It kept falling relentlessly and at one point of time, I was looking at a loss of more than Rs. 4,000. This is equivalent to approximately 0.63% of deployed capital. The options’ LTP was also trading more than 200% of price at which I had sold them. It all meant that I should have taken the loss.

The only thing that kept me holding on these strikes was my blog post wherein I had mentioned that the market should pause around 14600. I held my nerve and luckily, the market started retreating. At around 14650, I exited my put options at loss and moved to safer strike.

This entire headache could have been avoided if I had done made correction on Monday itself. But I thought that since Wednesday was a holiday, theta decay would be brutal on Tuesday. However, option greeks are tough to anticipate. It seems that vega rose so much that even my call option was showing loss.

Lesson noted. Also, I need to respect my stop loss and if possible, book it when LTP doubles from my selling price rather than waiting for it to triple. There is a rule of thumb that if loss is more than 2% of capital, trade should be closed. Pro traders keep it at 1% or even 0.5%. I am not entirely sure if the rule applies to the style of trading I am doing. I am not sure if I am trading anyway.

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