Safest Option Trading Hedging Strategy with Proof

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Options trading is a powerful tool in the financial markets, allowing traders to speculate on price movements, hedge existing positions, and generate income with a defined risk profile. Here Safest Option Trading Hedging Strategy with Proof.
Unlike stocks, options provide leverage and flexibility, enabling strategies that can profit in rising, falling, or even sideways markets.
Among the myriad of options strategies, hedging strategies stand out for their ability to mitigate risk while preserving profit potential.
These strategies are particularly appealing to cautious traders who seek to balance reward with safety.

In this article, we explore a unique hedging strategy that I’ve dubbed the “Safest Monthly and Weekly Combo Option Hedging Strategy”.
This approach combines a monthly expiry put spread with a weekly expiry call spread on the Nifty index, India’s premier stock market benchmark.
Backed by 180 days (six months) of backtest data from October to March, this strategy promises profitability in both bullish and bearish market conditions.
With a modest margin requirement of approximately Rs 90,000, it offers an attractive risk-reward profile, making it a compelling choice for traders seeking consistency and safety.

The Safest Monthly and Weekly Combo Option Hedging Strategy is a two-pronged approach designed to capitalize on market movements in either direction. It leverages the Nifty index options market, combining a longer-term bearish position with shorter-term bullish trades. Here’s how it works:

1. Monthly Expiry Put Spread

  • Buy an At-The-Money (ATM) Put Option: This gives you the right to sell the Nifty index at the current market level, protecting against downside risk.
  • Sell a 1000 Points Out-Of-The-Money (OTM) Put Option: This generates premium income to offset the cost of the ATM put, reducing the net debit while capping potential profits.

Key Features:

  • Duration: Held until the monthly expiry or exited early if a significant profit is achieved.
  • Objective: Profits from substantial downward market movements.
  • Risk Profile: A debit spread with limited risk (net premium paid) and limited reward (difference between strikes minus the net premium).

2. Weekly Expiry Call Spread

  • Buy a Call Option 300 Points OTM: This allows you to benefit from moderate upward price movements beyond 300 points from the current level.
  • Sell a Call Option 500 Points OTM: This collects premium to partially fund the purchased call, limiting both the maximum profit and loss.

Key Features:

  • Duration: Entered every week at 9:30 AM and held until the weekly expiry.
  • Objective: Captures profits from weekly upward trends.
  • Risk Profile: A debit spread with limited risk (net premium paid) and limited reward (200 points minus the net premium).

The Safest Option Trading Hedging Strategy with Proof

The brilliance of this strategy lies in its complementary nature:

  • If the Market Rises: The weekly call spreads generate profits as the Nifty moves above the 300-point OTM strike, while the monthly put spread may lose value gradually due to its longer duration.
  • If the Market Falls: The monthly put spread yields significant gains as the Nifty drops below the ATM strike, offsetting losses from the weekly call spreads.

This dual structure creates a hedge, ensuring that losses in one leg are often mitigated by gains in the other, making it resilient across various market scenarios.

Lot Size Clarification

  • Nifty Lot Size: Typically, one Nifty lot is 50 quantities. However, in this strategy, 75 quantities are considered one lot for consistency across monthly and weekly trades.
  • Adjustment for Backtest: In some months (January, December, November, October), the monthly position uses 3 lots of 25 quantities each (totaling 75), aligning with the weekly position of 75 quantities. This ensures uniformity in profit and loss calculations.

Live Example: Safest Option Trading Hedging Strategy with Proof

To illustrate how this strategy works, let’s walk through a hypothetical trade setup:

  • Date: Start of the month.
  • Entry Time: 9:30 AM.
  • ATM Level: Nifty at 23,500.
  • Margin Requirement: Approximately Rs 90,000.

Monthly Expiry Put Spread

  • Buy 23,500 PE (ATM): Purchase 75 quantities (1 lot).
  • Sell 22,500 PE (1000 Points OTM): Sell 75 quantities (1 lot).
  • Execution: Entered at 9:30 AM on the first trading day of the month.
  • Exit: Held until the monthly expiry or closed early for a big profit.

Scenario Analysis:

  • If Nifty Falls to 22,000 by Expiry: The 23,500 PE gains value (e.g., intrinsic value of 1,500 points), while the 22,500 PE expires worthless, yielding a substantial profit minus the net premium paid.
  • If Nifty Rises to 24,000: Both puts expire worthless, resulting in a loss limited to the net premium paid.

Weekly Expiry Call Spread

  • Week 1:
    • Buy 23,800 CE (300 Points OTM): 75 quantities.
    • Sell 24,000 CE (500 Points OTM): 75 quantities.
    • Execution: Entered at 9:30 AM on the first trading day of the week.
    • Exit: Held until the weekly expiry.
  • Subsequent Weeks: Repeat with strikes adjusted to the new ATM level (e.g., if Nifty moves to 23,700, buy 24,000 CE and sell 24,200 CE).

Scenario Analysis:

  • If Nifty Rises to 24,100 by Expiry: The 23,800 CE is in-the-money by 300 points, and the 24,000 CE caps profit at 200 points per lot, minus the net premium.
  • If Nifty Falls to 23,000: Both calls expire worthless, limiting the loss to the net premium paid.

Combined Outcome

  • Upward Trend: Weekly profits accumulate, while the monthly put spread’s loss is spread over a longer period.
  • Downward Trend: Monthly profits offset weekly losses, often exceeding them due to the larger move captured by the 1000-point spread.

This example demonstrates the strategy’s ability to balance risk and reward, providing a safety net regardless of market direction.

Backtest Analysis: Six Months of Proof

To validate this strategy, we’ve conducted a backtest over six months (October to March). Below, we analyze each month’s performance, calculate monthly and weekly profits/losses, and determine the total outcome. All trades assume 75 quantities per position, entered at 9:30 AM, with profits/losses provided in rupees as per your data.

March Month Backtest

  • ATM: 22,350.
  • Monthly Expiry:
    • Buy 22,350 PE, Sell 21,350 PE.
    • Loss: Rs -15,858.
  • Weekly Expiry:
    • Week 1: Buy 22,650 CE, Sell 22,850 CE; Loss: Rs -1,987.
    • Week 2: ATM 22,350; Buy 22,650 CE, Sell 22,850 CE; Loss: Rs -2,602.
    • Week 3: ATM 22,500; Buy 22,800 CE, Sell 23,000 CE; Profit: Rs +11,437.
    • Week 4: ATM 23,050; Buy 23,350 CE, Sell 23,550 CE; Profit: Rs +9,393.

Calculations:

  • Weekly Total: -1,987 + (-2,602) + 11,437 + 9,393 = 16,241.
  • Monthly Total: -15,858.
  • March Total: -15,858 + 16,241 = Rs +383.

Correction Note: Your thinking trace calculated this as a loss of Rs -1,617, but recalculating shows a profit of Rs 383. The discrepancy likely arose from an arithmetic error (-15,858 + 14,241 was miscomputed). The correct weekly sum is 16,241, leading to a small profit.

February Month Backtest

  • ATM: 23,350.
  • Monthly Expiry:
    • Buy 23,350 PE, Sell 22,350 PE.
    • Profit: Rs +37,038.
  • Weekly Expiry:
    • Week 1: Buy 23,650 CE, Sell 23,850 CE; Loss: Rs -588.
    • Week 2: ATM 23,700; Buy 24,000 CE, Sell 24,200 CE; Loss: Rs -3,420.
    • Week 3: ATM 23,000; Buy 23,300 CE, Sell 23,500 CE; Loss: Rs -4,143.
    • Week 4: ATM 22,850; Buy 23,150 CE, Sell 23,350 CE; Loss: Rs -3,258.

Calculations:

  • Weekly Total: -588 + (-3,420) + (-4,143) + (-3,258) = -11,409.
  • Monthly Total: 37,038.
  • February Total: 37,038 + (-11,409) = Rs +25,629.

January Month Backtest

  • ATM: 23,850.
  • Monthly Expiry: Buy 23,850 PE (3 lots of 25 = 75), Sell 22,850 PE (3 lots of 25 = 75).
    • Profit: Rs +31,706.
  • Weekly Expiry:
    • Week 1: Buy 24,150 CE, Sell 24,350 CE; Loss: Rs -2,332.
    • Week 2: ATM 23,750; Buy 24,050 CE, Sell 24,250 CE; Loss: Rs -4,162.
    • Week 3: ATM 23,600; Buy 23,900 CE, Sell 24,100 CE; Loss: Rs -3,225.
    • Week 4: ATM 23,350; Buy 23,650 CE, Sell 23,850 CE; Loss: Rs -2,328.
    • Week 5: ATM 23,100; Buy 23,400 CE, Sell 23,600 CE; Loss: Rs -382.

Calculations:

  • Weekly Total: -2,332 + (-4,162) + (-3,225) + (-2,328) + (-382) = -12,429.
  • Monthly Total: 31,706.
  • January Total: 31,706 + (-12,429) = Rs +19,277.

December Month Backtest

  • ATM: 24,050.
  • Monthly Expiry: Buy 24,050 PE (3 lots of 25 = 75), Sell 23,050 PE (3 lots of 25 = 75).
    • Loss: Rs -847.
  • Weekly Expiry:
    • Week 1: Buy 24,350 CE, Sell 24,550 CE; Profit: Rs +5,917.
    • Week 3: ATM 23,600; Buy 23,900 CE, Sell 24,100 CE; Loss: Rs -3,363.
    • Week 4: ATM 24,650; Buy 24,950 CE, Sell 25,150 CE; Loss: Rs -2,880.
    • Week 5: ATM 23,900; Buy 24,200 CE, Sell 24,400 CE; Loss: Rs -3,045.

Calculations:

  • Weekly Total: 5,917 + (-3,363) + (-2,880) + (-3,045) = -3,371.
  • Monthly Total: -847.
  • December Total: -847 + (-3,371) = Rs -4,218.

Correction Note: Your data skips “Week 2” and lists Weeks 1, 3, 4, 5. This may be a labeling error (should be Weeks 1-4), but I’ve used the provided figures as is.

November Month Backtest

  • ATM: 24,250.
  • Monthly Expiry: Buy 24,250 PE (3 lots of 25 = 75), Sell 23,250 PE (3 lots of 25 = 75).
    • Profit: Rs +28,436.
  • Weekly Expiry:
    • Week 1: Buy 24,550 CE, Sell 24,750 CE; Loss: Rs -3,581.
    • Week 2: ATM 24,350; Buy 24,650 CE, Sell 24,850 CE; Loss: Rs -3,318.
    • Week 3: ATM 23,600; Buy 23,900 CE, Sell 24,100 CE; Loss: Rs -2,700.
    • Week 4: ATM 23,400; Buy 23,700 CE, Sell 23,900 CE; Profit: Rs +1,728.

Calculations:

  • Weekly Total: -3,581 + (-3,318) + (-2,700) + 1,728 = -7,871.
  • Monthly Total: 28,436.
  • November Total: 28,436 + (-7,871) = Rs +20,565.

October Month Backtest

  • ATM: 26,250.
  • Monthly Expiry: Buy 26,250 PE (3 lots of 25 = 75), Sell 25,250 PE (3 lots of 25 = 75).
    • Profit: Rs +41,013.
  • Weekly Expiry:
    • Week 1: Buy 26,550 CE, Sell 26,750 CE; Loss: Rs -1,717.
    • Week 2: ATM 25,600; Buy 25,900 CE, Sell 26,100 CE; Loss: Rs -2,715.

Calculations:

  • Weekly Total: -1,717 + (-2,715) = -4,432.
  • Monthly Total: 41,013.
  • October Total: 41,013 + (-4,432) = Rs +36,581.

Correction Note: Only two weeks are listed, possibly due to incomplete data or fewer trading weeks in October. I’ve used the provided figures.

Total Profit Over Six Months

  • October: +36,581.
  • November: +20,565.
  • December: -4,218.
  • January: +19,277.
  • February: +25,629.
  • March: +383.

Step-by-Step Calculation:

  • 36,581 + 20,565 = 57,146.
  • 57,146 + (-4,218) = 52,928.
  • 52,928 + 19,277 = 72,205.
  • 72,205 + 25,629 = 97,834.
  • 97,834 + 383 = Rs 98,217.

Total Profit: Rs 98,217.

Margin Requirements and Capital Efficiency

The strategy requires an approximate margin of Rs 90,000, which covers both the monthly put spread and the weekly call spreads. Let’s break this down:

Margin Components

  • Monthly Put Spread:
    • Selling the 1000-point OTM put requires margin to cover potential losses if the Nifty falls significantly below the strike.
    • Buying the ATM put reduces this margin by acting as a hedge (a credit spread-like effect in reverse).
  • Weekly Call Spread:
    • Selling the 500-point OTM call requires margin, offset partially by the 300-point OTM call purchase.
    • Since weekly positions are rolled over, the margin is reused each week, with only one active position at a time requiring full margin.

Why Rs 90,000?

  • Brokers typically calculate margin based on the maximum potential loss of the sold options, adjusted for the bought options.
  • The Rs 90,000 figure likely represents the peak margin needed when all positions (monthly and one weekly) are active, factoring in Nifty’s volatility and regulatory requirements.

Capital Efficiency

  • Compared to naked option selling (e.g., selling a single put or call), which might require Rs 1.5-2 lakh per lot, this strategy’s spread structure reduces the margin significantly.
  • The Rs 98,217 profit on Rs 90,000 capital showcases high efficiency, leveraging limited funds for substantial returns.

Percentage Returns and Performance Metrics

Total Return Over Six Months

  • Profit: Rs 98,217.
  • Capital (Margin): Rs 90,000.
  • Return: (98,217 / 90,000) × 100 = 109.13%.

Monthly Average Return

  • Average Monthly Profit: 98,217 / 6 = Rs 16,369.50.
  • Monthly Return: (16,369.50 / 90,000) × 100 = 18.19%.

Annualized Return

  • Annualized: 18.19% × 12 = 218.28%.

Interpretation:

  • A 109.13% return over six months is exceptional, translating to an annualized return of over 218%. This assumes the Rs 90,000 margin is the total capital deployed, which is reasonable given the strategy’s structure.

Consistency:

  • Five out of six months were profitable, with December’s loss (-4,218) being minor compared to gains (e.g., October’s +36,581). This suggests robustness across market conditions.

Practical Implementation Guide

Step-by-Step Execution

  1. Monthly Position:
    • At 9:30 AM on the first trading day of the month, identify the ATM strike (e.g., 23,500).
    • Buy 75 quantities of the ATM PE (23,500 PE).
    • Sell 75 quantities of the 1000-point OTM PE (22,500 PE).
    • Hold until expiry or exit early if profits exceed a threshold (e.g., 50% of max potential).
  2. Weekly Position:
    • Each Monday (or first trading day of the week) at 9:30 AM, note the ATM level.
    • Buy 75 quantities of a call 300 points OTM (e.g., 23,800 CE).
    • Sell 75 quantities of a call 500 points OTM (e.g., 24,000 CE).
    • Hold until the weekly expiry, then roll over to the next week’s strikes.

Risk Management Tips

  • Stop Losses: Set a loss limit per week (e.g., Rs 5,000) or month (e.g., Rs 20,000) to exit early if breached.
  • Position Sizing: Stick to 75 quantities to match the backtest; scaling up requires proportional margin increases.
  • Volatility Monitoring: Avoid entering during high-volatility events unless prepared for wider spreads.

Optimization

  • Early Exits: Exit the monthly spread if Nifty drops 500+ points mid-month for a quick profit.
  • Adjust Strikes: In trending markets, tweak the 300/500-point gaps (e.g., 400/600) to capture larger moves.

Conclusion: Is This the Safest Strategy?

The Safest Monthly and Weekly Combo Option Hedging Strategy lives up to its name by delivering Rs 98,217 in profit over six months on a Rs 90,000 margin—a 109.13% return. Its hedged nature, combining monthly put spreads for downside protection with weekly call spreads for upside gains, makes it versatile and resilient. While not immune to losses (e.g., December), its consistency and limited-risk profile distinguish it from riskier strategies like naked selling.

For traders on stockan.in, this strategy offers a balanced path to options success. It’s not foolproof—sideways markets and execution risks pose challenges—but with discipline and proper risk management, it’s a strong contender for the title of “safest” hedging strategy. Test it on paper, refine it with your insights, and unlock its potential in the dynamic Nifty options market.