2 Options buying strategies for trading at top: Shubham Agarwal

Shubham Agarwal

The negative sessions this week in the equity market has a lot of traders thinking of alternate strategies. Options trading is a must for these times. While Options Writing (Selling) is now a days used a lot, Option Buying is not a very popular trade these days.

In normal markets that may be the case but Selling Options only and not going for Buy options can hurt for 2 reasons.

1. If the volatility increases, the increase in risk will make the premiums go higher, hurting existing Options Sell trade.

2. Market has a tendency to become volatile in case of slight nervousness at the top. In such cases, Buying Options with limited loss will always help.

Following are such strategies that can help in trading at the top more efficiently.

1. Long Option (Call/Put):

As stated above, the market can start behaving very violently especially during any nervousness (small fall) around the top. This would bother the disciplined traders a lot. The stop losses may get triggered and then the stock or index could turn around. Bigger frustration comes when view is proven right but still there is loss in the trade.

Solution is to Buy a Call (Bullish) or Buy Put (Bearish) instead of Buying or Selling a future contract. The stop loss will still be there but it is observed in the futures trade. Keep an alert of stop loss in future price. When alerted, one would have an opportunity to review before making an exit. Remember, with every Rupee against us, the negative impact on Option premium will reduce giving us time to confirm the view is wrong before exiting.

Only thing to be careful about trading here is to restrict this strategy to the immediate 1-3 sessions trades.

2. Protected Futures:

This is one more strategy where the Options are bought but with futures. Trade is simple

Bullish = Buy Future + Buy Put (Strike Nearest to Current Price)

Bearish = Sell Future + Buy Call (Strike Nearest to Current Price)

This strategy does not look different when we compare it with Long Option. Also, with Future trade theere is a requirement for margins. However, this strategy come with fewer flexibilities.

Firstly, if the stock or index moves in our favour but does not hit the target one can Sell the protection bought in Call/Put and improve the protection by Buying a Higher Strike Put or Lower Strike Call than originally bought.

This will act as trailing the stop loss higher because if the Bought Future falls, the higher strike Put option will now give us more money to compensate for the loss of the Future.

The exit strategy remains the same once stop loss in Futures is triggered; we get out of both the positions, Futures & Options. Once again, with protection in the trade, we can be a bit flexible.

Finally, the basic utility of Options is to protect. We must make use of this especially at the top. Just one thing to be careful about is the time-related loss in Options. Holding Options for too long or in case of a big against move, we may end up losing to the extent of entire Options premium in both the strategies. So, please make provisions.

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