Last Updated : May 24, 2020 07:55 AM IST | Source:

‘Use options to bet against or in favour of ongoing consolidation’

Options, despite being a perishable asset, can come handy in times of choppy consolidations.

Moneycontrol Contributor @moneycontrolcom

Shubham Agarwal

After bouts of volatility led by the novel coronavirus pandemic, we witnessed a decent rebound from the lows.

However, since last few weeks things have changed. Just like after every large set of moves after a huge event, this time also we are stuck in a range. While the choppiness has not stopped, in terms of absolute gain or loss over a period of last few weeks there is no significant change.


This kind of choppy consolidation has hit the market several times. It is peculiar in nature most of the times. The biggest I can recall was back in 2008 after the crash. Well, even then after significant fall breaking Nifty in a third of its peak value the consolidation lasted long.

The nature of such market is that previous bad new or good news has been so emphatic that while it created a big price move, further move becomes predicated to a solid trigger which may or may not come in a hurry.

The current situation is similar. We have been loitering around 9,000-9,500 territory roughly, keeping the index hold on to the gains. While these consolidations are painful, they are fun to trade as there are two key elements to them which makes them interesting.

1. Trading predictable bounds creates easy buy market or sell market scenario

2. Longer consolidation once broken creates a super move creating windfall

To monetize from the 1st element, one is precisely trading in favor of the consolidation, while the 2nd situation is a bet against the on-going consolidation. Let us see how options can help in either of these cases.

Betting in favor of consolidation

Here, we already know there are bounds that get more or less defined once a couple of gyrations are in place. Just to reaffirm this set-up, we can resort to reading Options Open Interest of Nifty and more often than not we would find these bounds populated with heavy put participation at lower bound and call participation at upper bound. (FYI: Look at 9000 Put OI in Nifty now). To trade this, we should take a Synthetic Option route. How? Well, the answer is simple.

For a Buy trade we would Go Long on Future and at the same time Long on a Put Option (Around CMP strike).

For a Sell trade we would Go Short on Future and at the same time Long on a Call Option (Around CMP strike).

This strategy serves two purposes. One is that we are protected just in case the consolidation gets broken out into a super move. We would always know the maximum money that’s at stake. Secondly, this strategy is very handy in adjustment as for an entire gyration from bottom end to top end we can hold on to the Future Position while shifting the Puts Higher and Calls Lower as the position keeps getting more and more profitable.

This is an apt strategy in current market as the moves are range bound yet significantly choppy.

Betting against consolidation

Here, let us remember, every move that comes near lower bound would look like the one ready to break out. So, carefully identify a trigger which the indices are shying away from while being in consolidation. For Example: In current situation similar level on the downside is 9000.

We have been holding on to this level for a while, even after a couple of breaches Nifty managed to come back. Yet, this could be one such trigger point.

So, if we are betting on such augmented moves post consolidation whenever the index looks failing to hold these levels, Buy a farther strike Call or Put. If we are betting in favor of Upward Breakout then Buy a higher strike Call other wise Buy a lower strike Put.

These would be cheaper with limited probability of profit but with larger potentials of profit. The reasons to do this is, we may not hit it right in first attempt. So just in case multiple attempts go in this brave call, we would not end up losing a lot. Also, one should humbly get rid of the option too as soon as indices get back into the range.

These Braveheart calls are against the ‘Follow the Market Trend’ philosophy hence avoid betting big. Yet, at times it could turn super profitable.

There we have it. Options despite being a perishable asset could come in really handy in times of choppy consolidations.

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

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First Published on May 24, 2020 07:55 am