The market has a habit of testing your will, temperament, and grit constantly. It happens to all of us. You wait patiently for the perfect entry after a breakout, catch the retracement with both hands, and enter at an excellent price. After analyzing momentum and option data, you decide to take a naked call. The market gods smile upon you, and profits appear immediately. You feel confident, energized, and validated.
Then reality strikes. Your stock approaches resistance and halts. Blinded by profit and confidence, you watch as the market retraces, as it always does. Suddenly, 80% of your profit evaporates. Panic sets in. Your structure remains bullish, but short-term derivatives data turns bearish. You make a hasty decision and square off the trade. Minutes later, the stock resumes its natural path upward, leaving you frustrated and sidelined.
Sound familiar? Sometimes we exit too early and watch the market rally sharply. Other times we stay too long and book losses. This is where decision-making with derivatives data becomes the cornerstone of successful trading.
Markets don't travel in straight lines. Retracements are inevitable. Your actions must be predetermined in your setup or strategy. Consider this scenario: You bought a 295 call after analyzing FNO data and momentum. The stock zooms to 303. Your option chain analysis reveals significant call writing at 305, marking it as key resistance. The overall data remains strong, suggesting a move to 315.
What do you do here?
Instead of booking the trade or entering emotional turmoil, you can sell the 305 call. Your naked call trade now transforms into a bull call spread. Remember, your 295 call is already in healthy profit. By selling the 305 call, you've given yourself time to think, analyze, and react. Most importantly, you've gained mental peace.
Why This Works
If the market retraces, the profit reduction in your 295 call gets partially offset by gains in the 305 call you sold. If the market continues upward, you remain in the trade, accumulating profits from the 305 to 310 rally. Yes, the 305 call sale caps your maximum profit, but trading isn't about maximizing a single trade. It's about process and consistency across multiple trades.
When a process helps you stay calm, read data clearly, and act rationally, that process increases your chances of becoming consistent in the market.
Building Your Process
Here's one possibility:
Buy call at the right entry point. If the call doesn't perform immediately but data remains positive, sell a call two strikes away from your position. If the call performs well and approaches strong resistance without breaking through, sell calls at the resistance level to protect accumulated profit.
This is just one approach. Possibilities vary with different strategies and market conditions. However, the most critical element remains constant: read derivatives data and act accordingly while keeping greed and fear at bay. Your trade must evolve as the market evolves. Rigid positions lead to emotional decisions, while flexible strategies built on derivative data lead to consistency.
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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