Best trending option trading strategies: Shubham Agarwal

F&O Cues

Option trading is a convenient yet complicated subject. This is primarily due to the choices we are presented with while trading any stock or index options. Especially when we are trying to ride a trend with Options, the choices can be confusing.

However, I feel a solution can be found by classifying the Options on 2 scales

1.      Sensitivity: How much will the Option move if the stock moves a certain percentage.

2.      How big the time related losses will be for a given option.

While maximum volume in Options come from the strike closest to current market price (ATM). Most of the volume is concentrated in the strike 2-3 steps above and below the current market price.

Here is the classification of the same.

To get the best trending Options trade we need to match the view of the stock/index and the time it is expected to take to reach there. Yes, unlike futures while trading options we do need to take a trade with time in mind. For Intra-Day/ BTST it is indifferent but for short-term trades we need to define 2/3/4 sessions needed to achieve the target.

Well, once this is done then making the choice is easy.

For instance, the view is Intra-Day. You know that the impact of time value is low on both Higher and Lower strikes.

Second question is the sensitivity. Here the versatility of Options come into play. For a bullish trade, Buy Higher Strike Call which are less sensitive and less expensive if the view has less confidence. Typically, a contra trend trade or a reversal trade can be taken using the 1st kind of Options Higher Calls/Lower Puts on Intra-Day.

If the trades are supposed to be following an ongoing trend, choose ATM. Like it or not these are the best options. In terms of Liquidity as well as sensitivity.

This does not mean that the 3rd kind of Options Lower Strike Calls/ Higher Strike Puts are not useful. The unique high sensitivity + low time value impact is utmost important in the last few days of expiry. So, be it Intra-Day or BTST best Options to trade in the last few days of expiry are the Lower Strike Calls for bullish view and Higher Strike Puts for bearish trades.

Lastly, for the short-term trading strategies during the trending market we will take a slightly different approach. Most of us are not very confident on the time that the view would take, so let us improvise.

Buy Options with high sensitivity and low time value impact. Simultaneously, sell Options with low sensitivity and low time value impact. This will create a combination of options. It will require margin and it will restrict the profits up to the strike we are selling.

However, this will free one from accurately estimating the time for short-term trade. Also, in this Buy-Sell combination Options sometimes Lower Calls/ Higher Puts may not have the liquidity. In such case it can be replaced with ATM.

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