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Last Updated : Sep 22, 2019 10:09 AM IST | Source: Moneycontrol.com

Nifty rallies from 10,705 to 11,274 in a single day; should you buy immediately?

Unless we are closer to the stop loss than the entry level, go ahead and take another trade with a higher strike short call. Chances are that the next move may come after a brief pause.

Moneycontrol Contributor @moneycontrolcom

Shubham Agarwal

The breakouts are good, but the aftermath of it brings along many questions on the immediate course of action. In case of an upward break out, for instance, tomorrow, should we buy immediately? Should we wait for some consolidation to confirm if it's a keeper? Is the tad bit softening for sure not a U turn?

In times like these options come in very handy. Yes, we know there is that limited loss unlimited profit argument. It does hold good in principal for a rather medium-term trade (10-15 sessions), where the price objective is twice as far as the premium.

Close

But when it comes to trade for a day or two, one needs to see the impact of deterioration of premium, where due attention to the downside in the price of the underling and time comes into consideration. So, to deal with them we will discuss a couple of approaches.

Partial Executions

The first approach makes it clear that after the big move has happened, the next round is approached with utmost cynicism. In such a case, the first step is to enter. Choose a slightly out of the money strike and buy a Call (in case of a preceding upward break out) with a ballpark underlying level that keeps the view valid. Once entered, all we can do is monitor. Any one out of three can happen till the end of the day. The next actionable is predicated on what happens.

In case the view materializes during the day, upon the intraday gain go ahead and Sell a higher strike option. This will create an unbelievably lower cost of the spread. In a way we have capitalized on the move and all that’s needed now is just leave the position to itself till expiry or till there is a view otherwise.

The other scenario is if the move otherwise happens. Remember our position, it is in an out of the money option with a ballpark stop loss in underlying. If that level does not hold, get rid of the option as failures of breakouts are way more lethal.

Lastly, nothing happens and the underlying hovers around the same level for the whole day, I would still say hang on. Unless we are closer to the stop loss than the entry level, go ahead and take another trade with a higher strike short call. Chances are that the next move may come after a brief pause.

Straps/ Strips

Strap = buy 2 Calls + buy 1 Put,

Strip = buy 2 Puts + buy 1 Call,

Now these are typically one day trades. We closed near the day high. We still have an inclination after the trade opens for the next day towards either a continuation or reversal of the entire erratic move that happened.

This happens typically when the development takes place towards the end hours of the market, or over night and the break out happens in the gap.

Whatever be the inclination, take a trade in that favor, meaning do Strap if Bullish, Strip if Bearish. Only with one modification, the single option in this case would be a bit farther out of the money so Put if Bullish and Call if Bearish.

The exit strategy, well if all goes to plan and the move we are inclined towards happens, get rid of 1 Put and 1 Call and follow the partial execution mechanism. If an unfavorable move happens, then the Put would more or less compensate the loss on Calls, since the failures are generally fiercer.

If nothing happens, well then time value loss on 3 options will not be a bucket load. No matter what though, get rid of at least two of three options bought by the end of the day.

1. Staggered Approach.
2. Strips/ straps.

3. Large Bull Call Spreads/ Larger Ratios for positional.

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

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

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First Published on Sep 22, 2019 10:09 am
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