Shubham Agarwal details 3 options strategies to choose from when market is near top


Shubham Agarwal

Finally, after breaking away from a few months’ trading range, we saw a positive end to the wait. The reaction on the upside has broadened the horizon further for the indices as they were pushed into uncharted territories. While the break on the positive side is encouraging, rationally, it does bring fear into many traders while taking fresh trades.

However, with Options by your side, there are many possibilities of generating a fresh trade and take care of all such fears along with it. Typically, what I have resorted to are the following 3 strategies that have come in handy many times when restlessness creeps in especially after a run-up.

#1 Synthetics

It goes without saying that futures are the best instruments to capitalize on any move in terms of absolute profits. However, the leverage that we assume is a two-sided sword. This becomes even more significant when we are exploring uncharted territories.

With Synthetics what I have always aimed to do is let the future trade run exactly the way it does along with its exit strategy (Target and Stop Loss mandates). Just buy an at the money option open to the opposite direction (Buy Future + Buy Put). Hold the Put position till the future trade is open.

What this will do is predominantly create a synthetic Call out of your futures position. The reason to go for Synthetic Call and not a straightforward Call is that with the Put option tagged along I can keep fiddling with my Put strikes without disturbing the futures trade based on the intensity of my fear of going wrong or aggression.

While this will take care of most of your directional trades. One may be enticed to balance the trading portfolio by going against the ongoing trend and short the underperformers. This could be an apt strategy, however, when the undertone of the trend is so strong, I would not resort to the following trading strategy.

#2 Only Options

Simply convert all against the uptrend shorts into Buy Put option positions. This has a drawback that there would be a compromise in terms of absolute profits. However, these options trades would bring in a lot of flexibility.

For example, I want to run a short trade without a stop loss. I would go ahead and buy a lower strike Put where the premium can be considered as a loss. In case of a big reversal, I would have decent profits both on absolute and percentage terms.

The rationale for the option trade however lies in the fact that this ongoing rally if gives yet another spurt, I will never be killed by being on the wrong end of the sward.

#3 Resort to Balanced Option Writing

Finally, in such times when the consolidation depressed lower premiums (led by lower risk premiums) have sustained and a move has come, selling naked options could be lethal. Two-fold risk with possibility of going wrong momentum wise as well as on the risk premium front could end up creating dent. Hence, the final strategy is resort to balanced writing via Credit Spreads instead of naked Option Selling.

Credit spreads are basically an extra leg of Buy option of farther strike. For example, short 16000 put can be accompanied with buy position in 15700 put. This is done to make sure that in case the unexpected happens there is a limited loss.

These are few basic measures to long the market regardless of what height it is on with peace of mind.

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