Wanted to understand your thoughts on hedging a far OTM strangle? Because a spike in nifty/banknifty shoots these OTM prices sometimes

Question and Answer – Forum › Category: strategy › Wanted to understand your thoughts on hedging a far OTM strangle? Because a spike in nifty/banknifty shoots these OTM prices sometimes
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Raghu Staff asked 4 years ago
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Raghu Staff answered 4 years ago

I have been selling far-OTM strangles for the past 1-2 years now. If you write options that are sufficiently far away (2SD) from SPOT, there is nothing much to worry.
You can do one of these to reduce notional loss –

  1. Buy ATM options
  2. Buy/Sell futures so that it compensates you for the notional loss. However, this will work only if the number of sell lots (for options) are quite significant, say 1:5