Traders either take positions Intraday or even at times carry positions overnight. Overnight positions allows to capitalize on domestic factors or even global market movements outside regular trading hours, potentially causing significant gains. However, it also exposes them to heightened risks due to uncertainty. In this delicate balance between risk and reward, the importance of effective risk management cannot be ruled out.
Imagine a trader who decides to hold a significant position in a volatile asset overnight without implementing adequate risk management strategies. While the potential profits may be enticing, the consequences of an adverse market movement can be severe. Without protective hedge in place, the trader may find himself vulnerable to significant losses that can erode their capital.
Without proper risk management, traders may find themselves exposed to these gaps, amplifying their losses or missing out on potential profits. Do share your Risk Management strategies to safeguard your overnight positions that may help fellow traders.
I trade with naked ITM option 1 strike below the ATM for my overnight positional strategy. So if the market gaps against my position I won’t lose more than the premium paid. Also, the net exposure of that option is about 2-3% (depending on days to expiry) of my overall trade capital only.
@t7support Got it. So you partially hedge your position.
On my desk I used trade on Strangles, Boxes, and at times Equity F&O.
Strangles: Used to do weekly options (they were very much far off) as my ROI was capped at 1-2% (Annualized Return) so hardly used to buy the hedge legs. But later changed the strategy and moved to iron condor (after being questioned by auditors )
Boxes: They are always hedged so no action. Infact we used to be happy when due to any uncertainty, there was spike in the volatility.
Equity F&O: This was purely discretional. For naked buying of Equity Futures, a part of NIFTY was always being sold to create a hedge. Ideally it is modeled with correlation factor but as the capital allowed for Equity F&O was very less as compared to Box, we did not use any model instead just experience.
However, we also had option to hedge against buying or selling SGX Nifty (but we hardly opted for it as it involved currency risk, 3rd party had to do it on our behalf so margin was high).
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