Bargain hunting made easy with Options: Shubham Agarwal

F&O Cues

Shubham Agarwal

Indian Equities have been taking a hit since the beginning of 2024. The week gone by brought us down to one of the lowest levels for the month so far. Many of us might have missed out on opportunities to trade at these levels when they were trading last time around.

This triggers bargain-hunting activity. The opportunities are generally plenty, so what to trade is not a very difficult decision but how to trade is difficult. This is because of the fall in the market that has recently taken place along with the nervousness.

Let us discuss a couple of ways to deal with this difficulty by bargain hunting with the help of Options. There are 2 different approaches to this based on how much time we are willing to hold on to the position.

Approach #1 Positional Big Bets to Be in the Trade for days if not weeks.

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Many times we may end up creating the trade for bargain hunting while not having a clear idea of the time it could take for the trade to close. So now, we have to take care of 2 difficulties.

1. Safeguard of capital if things go wrong for overnight trade it will go wrong big.

2. Safeguard against time value-related loss if we are bargain hunting with Options.

Strategy: ATM Bull Call Spread

ATM: The strike we select will be close to the current market price. Since we want maximum action best place to be trading in options is an ATM strike.

Bull Call: Bull Call gives the Option type and the transaction type. A bullish position in the Call option can be created by Buying a Call Option.

Spread: Spread means having simultaneous Buy and Sell positions in 2 Options of the same stock or index, same type and same expiry but of different strikes. In our case, we will be buying a Lower Strike Call and selling a Higher Strike Call.

Example: Stock at INR 100 with a Target of 105

Buy 100 Call

& Sell 105 Call (higher strike).

This trade will have a Maximum gain of INR 5 (105-100) - Net Premium Paid. The maximum loss will be Net Premium Paid.

I still recommend exiting this strategy if your stop loss or target in the stock gets hit. One could get a better reward at a much lower risk in this strategy compared to trading in the stock or stock future.

Approach #2 if it is a trade to catch a dead cat bounce.

Most of us are familiar with this. It is one of those situations when the stock has fallen heavily and we are looking for a rebound just tomorrow. The only difficulty here is that what if tomorrow again we fall by another 10 percent.

Strategy: Higher Strike Call Buy

Higher Strike Call: The strike we select will be higher than the current market price. The strike should be 2 steps higher than the current market price.

Again, exit this strategy upon rebound on the next day. If rebound does not come, even then exit triggers time stop loss.

Both these strategies are best as per me because if the fall continues, we will still not be punished.

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