The easiest trade to do is go short on both Call and Put. It can be done but still, avoid taking it overnight and even during the day keep a strict stop loss
A mega event will go down in the coming week and we have been talking about the crafts of modification of our regular trading system since the last few weeks.
It is time to hit the final nail in the coffin to seal this demon of an unpleasant upsurge in choppiness by taking final adaptive trade approach for the next 4 sessions post Exit Polls.
We will talk about two windows of trade closure: Number one, here we intend to close the trade before the result of the event, while the other one would be intended to trade the event with entry before the event and exit after the event.
As far as the first one is concerned, we know that the expectation of volatility is on the rise. In simple words, the premiums of options are fattening without any impact of the underlying price. The figure to gauge this is an index called 'India VIX'.
Now, pre-event a lot of excitement could increase or decrease depending upon the consensus fear element among participants.
In case one feels that there is a possibility of a rise in such excitement, in that case, one may Buy both Call and Put options with an intention to get rid of them in a day or two but before the event.
On the other hand, if it looks like that most of the event uncertainty is out (many might feel after the announcement of exit polls). Remember, the event is still not over.
So the easiest trade to do is go short on both Call and Put and it can be done but still avoid taking it overnight and even during the day, keep a strict stop loss.
For the second set of trades, a typical event-based trade could be used in which we add up both Call and Put premiums of a strike close to the current market price which will help us in gauging what would be the maximum expected impact from the event.
For example a 100 CE + PE = 20 with stock @ 100 pre-event, it means the expectation is the stock could see volatility in the range of 80 and 120.
If we feel the event has the capacity to outdo this premium of 20 upon the outcome, we would simply Buy both Call & Put and otherwise Sell both of them.
But as always, since it is an event while selling both Call and Put, do Buy a Higher Call and Lower Put few strikes away to keep the losses known and finite.
As far as the directional bets are concerned to calculate the target premium, use any available calculator, input the strike price we intend to buy along with days to expiry post the event. The target price as the underlying price, zero in the interest rate and 15-16 percent in volatility (assuming it is Nifty/Bank Nifty option).
This last input of 15-16 percent on normal days implied volatility (volatility input) in options premium and after the event, the same is going to happen to our option as well.
Now, after inputting these parameters if we are still making money in the Option bought, given that the target gets hit, go on and Buy that Option.
Lastly, what brings about the rise in premiums is the expectation of either side moving, which lives on till the beginning of the outcome or when we start trading on May 23.
There has empirically been a very small window of a few minutes on the day of event announcement when the binary is out and participants start building consensus on direction and that is the time when the premiums collapse.
Hence, adhere to pre & post event trade protocols and be watchful on the event day and get rid of your volatility trade as soon as both Call & Put options start dropping together.
(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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