Delta Hedging investment model – Excellent Returns from Stock Market at No Risk!
For the past few years, Indian Stock market appears to be a Gambling Arena. There is no justifiable logic for its abrupt movements. One day Nifty rises 100 points and the next day dives by 200 points. An investor's investment bleeds whether in Equities or Mutual Funds (MF).
Why earning from stock market has become unpredictable?
The Long term & medium term growth stories in Equity as advocated by portfolio managers appears not convincing. Even blue-chips have become casualties wiping away their valuations. Under such circumstances, earning from the Stock market has become not only difficult but unpredictable, unless someone has infinite waiting period and patience.
However, Delta Hedging investment model can fetch excellent returns and at the same time limiting the risk to zero or negligible.
What is Delta Hedging investment model?
Simply said, hedging the investment means investing in two instruments (say A & B) such that if with change in market conditions, A's value falls, the B's value will rise to the same extent balancing the risk. But to earn from this pair of instruments, a positive difference has to emerge between their final values over a period of time.
How does Delta Hedging Investment model work?
So let us understand how it is done. A & B are 'Options' instruments otherwise known as derivatives. Options are of two types- 'Calls' and 'Puts' which are contrary in nature. With market rising, Call's value rises and Put's value dips and vice-versa. Calls and Puts come with a 'Strike price' which is like a target price. Once the Market attains the strike price for a Call, its valuation rises sharply. And if Market falls below the strike price for a Put, its value rises sharply.
The Calls and Puts also have an inherent nature of depreciating in value with passage of time. If in the case of Call, Market does not attain the strike price, the call's value continuously reduces to Zero by the time of its Expiry date. And the same applies to Put.
So in Delta Hedging model, for example, a Nifty Call (of strike price 5600) is sold off @ Rs 50 and a Nifty Put (of strike price 5200) is sold off @Rs40.
The objective is that their valuations should reduce to zero by the expiry. Then, if the Nifty remains range bound below 5600 and 5200, both the options become 0 on expiry.
And since the lot size of Call and Put are 50, the profit accrued on expiry is
50×50 +40×50 = 4500/-.
Each investment cycle lasts 45-60 days typically. The invested amount remains in investor's trading account and is not handed over to anyone else. Only trades are placed by the Technical Analyst. And the Analyst has in place the worst case scenario defined which will be a no profit no loss case. The net valuations are tracked on a real time basis.
Who can try Delta Hedging Investment Model?
However, it involves high level of Technical Analysis and experience to gauge the market range and pick right values of options to be positioned against each other in pairs. In the past, this model of investment has fetched on an average 24-30% per annum.
This article is written by Sanjay Sharma, who spends his leisure time on technical analysis of NITY and stocks. He is working for a top Indian IT company. He can be reached at firstname.lastname@example.org for further queries on this topic.
Disclaimer: Readers are advised not to try investing using this illustration as it is only an example. Such investment models are high risk and have greater chances that you would loose your money.
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