Best trading strategies for volatile market: Shubham Agarwal

F&O Cues

Geopolitical forces for Indian equities have never been good. Most painful point here is that they are unpredictable and strike with no warnings. We are going thru somewhat same environment.

Biggest problem with the volatility is that it does not stick to a direction while trading. Commitment to a trade may turn out to be lethal here. However, it is not all bad because remember if you are on the right side of the volatile market, the momentum can yield enough return on the investment that could have come over a week or even a month.

To find the best strategy for such Volatile markets we need to fix following.

1. No big loss for missing out on a Stop Loss
2. Restrict big losses on Option Sell Trades
3. Maximize trading with even small amounts of capital.

Last problem first, we can take multiple exposures with small amount of capital by taking trades into Options. Imagine 4%-5% of the stock value giving a piece of directional move. This is possible using Options.

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Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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We will break trading into Directional and Non-Directional and handle them one by one.

Directional Trading during Volatile market:

Directional trading is the traditional ways of trading. Bullish and Bearish trades. As mentioned before multiple trades can be taken using Options. The Strike to select is always a question so, here we choose a strike that is closest to the current market price.

Buying options automatically creates 2 new problems.
1. The drop in premium to be dealt with due to passage of time.
2. Not only an Option problem but during volatility big gaps do make it impossible to trigger the stop loss.

Both of these problems can be solved by a simple modification. We all have a part of our trading capital deployed in intraday trades and a part in overnight positions. Try to move at least 60%-70% trades to intraday. This solves both the problems. Time is not a problem as the trade is closed during the day. Also, the Gaps will never be a problem either. We will be able to trigger stop loss as long as we are active in the market.

Now for those rest of the trades which we want to hold overnight. Simplest of the solution here is the readiness. We will be expecting a big move such that we are willing to hold on to a position in such a volatile environment.

One more modification will make this easier. Choose a higher strike Call or a Lower Strike Put. This will be cheaper than the one we are selecting for intraday. We do not invest more money into these options than what you are willing to lose. Now we are good to hold overnight.

Non-directional trading during volatile market:

This is basically option selling. Here the trade is simple. Majority of your winning will be due to directional move. The trick is to keep the losses on them known and 1:1. Best way to do this is by selling strike closer to current market price. Protect that by Buying a Higher Call or Lower Put 2-3 strikes away. Now, in worst case the losses will not be much bigger than maximum profit.

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