By adding options to trading, investors can even make gyrations a profitable trade

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undefinedThe biggest reason why traders make money in the equity market is volatility . The series of ups and downs in any direction makes trading worth.

But, when the direction goes out of the equation and the ups and downs are restricted in a tiny range, it becomes difficult to carve out profits.

For such situations adding an option to the position could work really well. It may not bring in a lot of profit but could certainly bring a smile despite no or adverse move.

During the gyrations within a range, there comes a moderation in any and every directional view that we hold. To optimally trade the consolidation, a short Option can become very useful conjunction to any trade that we intend to take.

Let us understand how an add-on position of a Short position in consolidating times can benefit a directional trade taken in normal times in either Futures or Long Options.

Case #1 Long/Short Future + Short Option

Ideally, any positive view would be traded with a Long future while a negative view with a Short Future.

While the Trade still remains the same, but the journey from the Entry to Exit may be time-consuming and more often than not the movements are less likely to be out of ordinary in favour. So, we may add a Short Call to the Long Future and a Short Put to short Future.

The selection of strike is simple. Choose a strike that is closest to the price objective. Now, while the stock/index takes its own sweet time to reach the price objective, the persistent depreciation of time value element in option premium with every passing moment would keep adding positive value to the trade pay-off.

Now let’s say, if the stock/index does not move in the desired direction and hits the stop loss, we would square up the trade with at least a little less loss than the stop-loss loss adjusting for profit from the short option.

And, if neither of these pans out and the stock/index just runs away in the desired direction, there would still be profitable.

There would be a little less profit than if it was just a future alone, but Profit from future would most certainly be higher than the loss from short Option.

Case #2 Long Option + Short Option

“Buy a Call when positive and sell a Call when negative” is now common knowledge.

However, in times of consolidation, if these Long Option positions are not intended to be squared up during the day, it is prudent to have a High Short Call or Lower Short Put against every Long Call or Long Put position carried forward.

In most of the cases, the positions in the Long Options are of the strike around the underlying price, which holds the highest amount of time value. Hence, a longer holding period could kill the profitability if the move does not come in time.

So, a compensating Short position may be in a slightly distant strike would always help the longevity of the trade and aids overall profitability of the trades.

Trade the gyrating consolidations with a short Option Plug-In to every directional trade and Improve Profitability.

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