If we were to look at Nifty as an indicator of market movement for the last 4 months, a small 4% range defines the entire 4 months. However, this does not mean that the index did not move. There have been choppy movements. As a result, a committed trade is most likely to be punished.
I could think of advice of a veteran Option Trader and on the same lines following are the practices that I have been using to deal with the difficult market like current market. Following are 5 ways to deal with such market.
1. Reduce the Positions: The first thing that we do when we are gambling with unknown is we bet small. That is exactly what this market poses us with. Best way to deal with a market that is proving you wrong too many times is to take more chances.
The idea is very simple too many trades will kick the law of averages in play. This law says that if you flip a coin too many times, the probability of a head or a tail moves very close to 50%.
The reduction of the position from 3-4 lots to 1 lot will help take 3 different bets. This will help in taking more chances on the market making way for the law of averages to kick in.
2. Reduce Conviction in Options: The meaning of this is buy options that are less sensitive to the movement in the stock/index. This means the reward and risk both are small for the given movement.
How to do this?
Higher Strike Calls and Lower Strike Puts are always less sensitive than their counterparts. This will help with reducing conviction. It does not end here. While we do not expect market to give big move in a hurry but if it does, on the positive side these low conviction options will act as a lottery ticket at the same time if the move is against us, it will still give a small loss.
3. Reduce Horizons: This is a very generalized approach, but it makes sense when the tides are turning every day. Consolidation does not mean no trend; it means lack of consistency in the moves. So, reducing horizons help.
Difficult markets like these are best dealt with on a day-to-day basis. Meaning the commitment to a trade is lost at the end of the day making us safe against tomorrow’s opposite move.
4. Use the Right Tools: Rather than being reliant on larger moving averages and short to medium term indicators move to smaller horizon tools.
a. Volume, Open Interest: These are easy to identify activity that is not usual. They are extremely efficient in finding smaller moves.
b. Order Book & Trade Data: This is what a lot of elite traders have been moving towards. Popularly known as Level 2 Data. Order and Trade data gives insight into a 10-15 mins move in the making.
5. Always Known Risk: No matter what happens, every trade should have a hedge in place and no over night sell positions in Option.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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