The equities market frequently enters a phase where the trend is unclear, especially when a vigorous, expanding market falls dramatically, as is currently happening. The Nifty dropped from nearly 20,200 to roughly 18,800. The decline has not been continued, but neither has the index begun to rise.
Trend-following systems suffer in these conditions. Many traders opt to withdraw, at least temporarily, until confidence returns. However, when it comes to possibilities, one is really well-placed. Remember that option purchasers are accustomed to being incorrect a lot of the time.
Let me explain, but first consider some well-known observations.
1. There is evidence that the majority of options expire with little value.
2. Time is the adversary of option purchasers, as premiums decline with time.
3. Most crucially, only option purchasers have the opportunity to profit completely from their position.
These three criteria are simple to grasp and serve as the foundation for two
A. Option purchasers will receive a tremendous return (unlimited profit) for their risk (limited premium risk).
B. Observations 1 and 2 will result in an extremely low success rate for option buyers.
How does this assist?
Uncertain trends have a poor success rate in any trend-following method. Buying options at such periods offers the ideal combination effect.
Buying options can result in many little losses as well as a few large winnings. Uncertain trends have comparable features. Option buyers win because, when they are correct, a buy option transaction is the ideal place to be since the potential percentage returns are substantial.
Here’s an illustration:
Stock X is now trading at 1,000, and the 1,020 Call is trading at 20 with 20 days to expiry.
If the price falls to 970 in two days, the 1,020 Call will fall to 9. However, if the price rises above 1,060 within two days, the 1,020 call will fall to 52.
This demonstrates that every Option trade has a higher profit profile than a stock future. The option premium decreases by 11 for every INR 30 decrease but increases by 32 for every INR 60 increase. This means that you may be incorrect three times with the identical goal and stop loss and still not lose money.
The main issue of a low success rate during an uncertain trend has been resolved. The question now is which choice to purchase. We are all aware that a call option is selected for a bullish transaction and a put option for a bearish trade.
Purchase the option with the nearest expiry date. The last decision is which strike to use for this transaction.
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Purchase a call option with a strike price that is slightly higher than the current market price and a put option with a strike price that is somewhat lower than the current market price. This ought to suffice.
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