Dear TrueCompanion,
Knowing well i am intruding, i will attempt to answer.
A naked position is taking a one sided view - the market is going up or going down. And this increases the risk, and hence the possible reward as well as loss.
With options, typical strtegies are based on where you expect the market to go (primary view) and a hedge (taking the opposite view)...
I will try to illustrate this a couple of strategies:
1. Bull call spread - you use this stratgey when you expect the market to move up. So in accordance with this view, we buy a call (say 4200 call). Now, knowing from past experience that our view doesnt always turn out right, we hedge (take a bearish view as well, but at a higher level) - so we sell a call (say a 4300 call)
2. We expect the market to move out of a range (say 3900-4100 range on Nifty). So we buy a 3900 put a 4100 call...(a strangle)... Now to hedge against the view being wrong and resulting in a lot of loss, we sell a strangle (e.g. sell a 3700 put and a 4300 call)
In essence, trading on only one view is being "naked"... And balancing this naked trade with the opposite view is hedging.
Please try and read "Futures, Options and other derivatives" by Hull (available from PHI in a low priced edition) for a better understanding. Please feel free to ask any further questions/strategies for your view of the market.
Regards
-r |
Online
Moneycontrol 
