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How to detect and trade in ping-pong market set-ups with options

One of the direct effects of the headline-driven market is that none of the developments last long. Positive or negative news gets digested fast and gets ready to unwind the very next day.

May 17, 2020 / 07:59 AM IST

Shubham Agarwal

Since the outbreak of COVID-19, the term fluid has started getting tossed around for describing the state of affairs. Be it stability of economic situation or any other regulated activity. Out markets have not been spared either from turning 'FLUID'. Meaning, we have turned into a lot more headline-driven mode.

What this change is, the very forecasts and long-term anomalies that drive the stock prices and the indices created by them take a pause. Longevity of any trend becomes a challenge. Hence, we are referring to it as ping-pong market.

We meet with such ping-pong markets at least once in few years where we continue to have daily big moves but more or less in a sequence of one day up and one day down.

I have had the opportunity to observe a few of them and out of learning from those we will discuss how and what of ping-pong market set-ups.

How to detect ping-pong Market setups?

Well, there are a few common characteristics I have empirically come across that could help:

> Low Open Interest: More often than not despite of the huge moves the Indices are witnessing Nifty futures OI has always taken a hit. Either we would have lower participation as compared to recent history or the reactions to it go dead, meaning the trend of change in Open Interest is neither increasing nor decreasing.

Current Situation: We are trading futures market with Nifty futures Open Interest at multi-year low.

> Directional inconsistency: One of the direct effects of the headline-driven market is none of the developments last long. Positive or negative news gets digested fast and gets ready to unwind the very next day.

Partly because of lower open interest the moves are also choppy as with lower participation we end up with lack of unwinding pressure, which keeps the moves sharp yet short lived.

> Last and the most obvious one is the known uncertainty, be it Big Financial Crisis of 2008 or the recent COVID-19 led unknown. Such events have capability of changing the entire global landscape by the time they are resolved

Till the time they are adapted to though, the low commitment to the market led by low participation and lack of forecasting power becomes a reality.

Such situations call for a slightly different approach of trading. The best way to handle this ping-pong market is to do what market is doing.

> Zero commitment: While the market is not even respecting the activity of as recent as previous trading day, neither should we. Keep the bias meter completely open. What has worked for me is not being Bullish not being Bearish for medium term. No bias at all. Whatever directional bias is concluded is just for now.

> If the view is of such tiny term so should be the trades. Restricting all the trades only to the intraday basis or rather keeping it even shorter is something that has worked always for me. As in no case there is a scope for disaster.

> Lastly, the best suited vehicles for such transactions can be Options. Consider a trade where we bought a future at 10.00 am and at 11.00 am suddenly some headline pushed the market against us not leaving an opportunity to exit at our desired Stop Loss.

Hence, in such situation options are the best, all u can lose is already on table. We will never leave it to expire but the draw downs are always restricted.

Such kind of ultra-short-term approach helps in cashing in on multiple opportunities presented by choppy as well as hollow ping-pong market yet safeguards from mishaps keeping our trading book immune from ongoing crisis.

(The author is CEO & Head of Research at Quantsapp Private Limited.)

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

Moneycontrol Contributor
Moneycontrol Contributor
first published: May 17, 2020 07:59 am