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Contra trades should only to be taken with caution: Shubham Agarwal

The best possible solution is to have a synthetic call in place where one goes long on futures and buys a Put of a strike slightly lower than the current market price.

March 16, 2020 / 01:13 PM IST

Shubham Agarwal

Every once in a while there comes a highly consensus-driven move. This week’s move was no different as everyone believed the only direction for the markets was downward. The fact that this consensus does not agree with the proceeding, medium-term up move creates unrest.

This unrest driven by consensus more often than not ends up amplifying the effect of the development and adds fuel to the ongoing volatility. By the virtue of being trend followers, we shall never question the price action, but at the same time, it is equally true that the market never rewards consensus.

Here one should not start taking contra bets aggressively as it is a classic case for creating a hedge in an attempt to try and fish around in any out of the ordinary move. Taking a Hedge is most ideal and shall be inculcated as a natural instinct as and when there are extremes. Whenever we are in extreme fear or in extreme greed.

  1. The losses are defined by the virtue of 'long put' which can be adjusted fast. In case our view in right then the Put is always going to 'Out of Money' and would typically have more liquidity.

2. More often than not when a bounce comes to the Option, premiums drop and due to the very nature of the implied volatility behaviour distanced Put would not be affected much due to the fall in implied volatility.