Option price spikes: Why spreads and position sizing are important according to Zerodha's Nithin Kamath

Zerodha's Nithin Kamath has written that retail traders should vary bet size, that they should trade with as little as possible on 90 percent of trades, and that they should only trade with more when the odds of being profitable are higher

Trading fully hedged options strategies, such as spreads, and sizing positions appropriately are two suggestions that Zerodha's Nithin Kamath has given for managing sudden spikes in option premiums.

Spreads even protect traders from one of their biggest current fears—of being prey to stop-loss hunters, according to the posts shared by Kamath.

Over the past year, traders have been seeing their capital wiped out in minutes because of sudden price movements in options. These movements have come to be called injections and have chased away even the most experienced traders in the market.

Also read: These trades called ‘injections’ are wiping out crores of capital in minutes

There is a fear that these price movements are being caused by stop-loss hunting; i.e., when big players place orders to push asset prices sharply to one direction to take out the stop losses and then benefit from the resultant volatility.

Co-founder of India's leading brokerage posted on X his thoughts on how to survive these price movements, including a blog post on trading spreads by Sensibull's co-founder Abid Hassan.

He wrote that one way traders can ensure that they don't lose money due to volatility is to trade fully hedged options strategies such as spreads. He added that this alone won't help and traders will need strategies to manage risk and to size their positions appropriately, among other things.

Hassan's blog started with a note dissuading people who are worried about such price movements and market operators from trading. He wrote that if people still wanted to try their luck and trade responsibly, then they should try fully hedged options strategies such as spreads.

Spreads are "safer, easier to trade, and more importantly, more peaceful to sit on".

The reasons for this included limited loss, absence of volatility in trading profit and loss (P&L) and absence of worry about option Greeks. But the most important reason of all—considering traders' worry about being victims of stop-loss hunting—was that, in spreads, you do not need to keep stop loss.

The post said, "Your max loss takes care of the stoploss. No stoploss – no stoploss hunting."

On sizing positions right, Kamath shared an older post.

Also read: 'Astonishing' spike in Nifty 50 put option, premium shoots up 10x in minutes

Kamath had written that retail traders should vary bet size, should trade with as little as possible on 90 percent of trades, and should only trade with more when the odds of being profitable are higher.

Secondly, use longer-term moving average (MA) for bet sizing. For example, if 20-day MA shows a bullish trend and 50MA shows a bearish one, then buy one share. Otherwise, if 50MA is also bullish, then buy two shares.

Then, when investing based on fundamentals, change position sizing based on things you like. For example, if you value corporate governance, then increase your position size if the company scores well on that.