Controlled trading with options after rise: Shubham Agarwal

Market becomes very tricky to trade when in just a few trading sessions we turn from majority of the down days to a 5-7% sprint from the recent bottom. Call it recovery or reversal, there will always be a feeling of being left out.

More importantly, we will have difficulty finding trades after such a move. This is not because the stocks are not rising but the traditional strategies may not be fit for accommodating that fear of height after such a rise. We end up reducing the positions or just avoiding to trade. That may not be just the right way.

The biggest fear is to go grossly wrong. Every trader’s biggest fear is what if the price I buy is the highest high? Well, there is no certain way to identify that. However, we do have a way to fight this fear. This can be done with the help of controlled trading.

Controlled trading we are talking about here is not controlling the number of trades we take. Instead, the control over the amount of money we can lose in any trade. Losses can have 2 different characteristics.

1. Measurable
2. Tolerable

Measurable is a myth because we all know after buying a stock, it can not go below 0. However, Tolerable is where the game is. Known and economically viable maximum loss trade can give us all the peace of mind in the world, despite of how high we buy.

Following controlled trading strategies can be taken whenever we are a fearful at the top.

#1 Buy Option Trade with Time Control

We all know Options when bought creates a pay-off where we can with all confidence say there is no more than premium that can be lost in that trade. This makes it a known-loss strategy. So, when Bullish just Buy Call Option and Bearish just Buy Put Option.

This is not that complicated, but still, it comes with challenges. The value lost due to time and changes in risk premium does impact the money we make. But as we have always been saying provide for entire premium but set-up a trade in Buy Option with time control. If we are not at the target or stop loss in the underlying within 3-4 sessions, take control and just exit the trade.

#2 Buy Future with Protection Control

In case there is a big move that one does not want to miss, then go ahead and Buy that Future. Run the trade with a stop loss like you would do during the day. In case the entire rise does not come but the futures are still in profit, Buy a protection (Put) in the last half hour.

Closing time option premium is often discounted for the loss of premium due to the passage of a day, Hence, it would be a little less expensive. Now, the Future with stop loss is Future with protection. This way in case if during the night hours something horrible happens, we do not get crushed.

Next morning, exit the protection and get back to Futures with a stop loss. This will keep you in control of the loss at all times.

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