It is going to be an election year and I believe all of us shall be prepared to handle high volatility periods in and around monthly expiry, Union Budget, and Assembly Elections, says Shubham Agarwal of Quantsapp Private Limited.
Shubham Agarwal
It is that time of the year when the expectations are high, not with respect to market performance but volatility.
Assuming volatility would be on everyone's mind, I just wanted to discuss today a bit on alteration to the normal trading style during periods of high volatility.
It is going to be an election year and I believe all of us shall be prepared to handle high volatility periods in and around monthly expiry, Union Budget, and Assembly Elections.
Let us start with the factor that governs the inorganic movement in premium, Implied Volatility (IV). I say inorganic because it is due to IV the Option premium could go up or down with neither price nor time moving.
The gradual upticks in IV as we approach the event, a sudden drop in IV post-event and rise in actual price movements in an aftermath of the event could turn many of our standard option trades into a disaster.
To tackle with all those three characteristics of High Volatility, three basic moderations in the Option trading strategies is advisable.
#1 Avoid Short Gamma in the first three weeks of expiry
Gamma is name of the compounding element in Options that make the premium deliver multi-fold returns in minutes. Basically, avoid shorting single options in the first three weeks of expiry at least.
Reason being, sensitivity to the slightest sentimental turn is huge, which makes options vulnerable, from not only price perspective (compounding against us) but also due to higher assumed risk that would push the IV higher, in turn pushing premium higher.
In short, the possibility of this double whammy creates shorting Options uneconomical despite higher premiums.
#2 Only Buy or Buy & Staggered Sell
Other modification is not so much of modification but the learning from #1 and making it work in our favor. It would make sense to prefer Long only options bound by not only price but also by time stop loss.
Well, we do have situations where a single option trade may not materialize to the fullest neither does it hit predetermined stop loss in a short span.
In that case, have a solution ready right, at the time of entering the trade of augmenting it, with same quantity same expiry sale of a Higher Call for a Call or Lower Put for a Call or a Put bought.
#3 Avoid Ratios to trade the moderate bias
No matter how moderate the view is, avoid Selling options in ratios at least up to the last week of the expiry.
Remember, due to higher IV premium will always be attractive enough to be enticed to sell multiple options of very farther strikes.
But, they command such higher premiums in midst of volatility because there is a higher probability of those farther strikes also to be reached by the underlying price and ruin your P&L despite the view being right.
Finally, I know I am repeating myself but cannot reiterate this enough that when trading in options, there would always be a thin possibility of a very big loss. So, let's be proactive, be adaptive andthereby error-free in option trading.
(The author is CEO & Head of Research at Quantsapp Private Limited.)
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