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Find Best Strategy for Option trade in Options & Futures.

Option trading strategies are lucrative, but this article talks about Strategy Augmentation or Fragmentation techniques, which can improve your returns especially in momentum stocks.

SHUBHAM AGARWAL | 23-Oct-21
Reading Time: 3 minutes

In times when the markets have more or less been unidirectional, it makes sense to get a bit creative especially when it comes to commitment to trade. Commitment here means that getting into and holding on to trade through all the thick and thin.

So, instead of taking a rather medium-term trade and holding on to it for a rather longer period by keeping a deeper stop loss generally works well in stocks and indices may not have a mammoth rally behind them. However, after a huge rally, it becomes very difficult to convince ourselves to make such a medium-term commitment in case we see a bit of turbulence.

Here staggered Option trade execution comes in handy. We are talking about a predetermined, preconceived trade that gets executed over a course of the life cycle of the trade via Strategy Augmentation or Fragmentation.

Strategy Augmentation:

There are situations where a Capped, Positional Trade is what we want to execute but not right away. Let us understand with a simple example. Let us say we spot a stock. The stock is in momentum and has had a big rally. Now our analysis says there could be a big fresh move. Now our forecast of the move is such that in all practicality it will take a few days to materialize. Let us say a headroom of 10 percent. So, the ideal strategy is Bull Call Spread (Buy a Call & Sell a Higher Strike Call).

This is usually a choice of a slightly longer-term trade (more than 2-3 sessions) because the time value decay in Option bought can be partially compensated by the Option Sell trade at the cost of forgoing any further gain above the sold strike.

But, considering the price movement right now, an entry in a Single Call would be more beneficial looking at the momentum in the prices.

In this situation Preconceived Staggered Execution becomes handy. In an attempt to do this Systematic Strategy Augmentation. We need to decide on Action Points and Action Plan, considering good, bad, and ugly scenarios possible.

So, at 100, if we have a forecast of price action till 110. The first action point would be 100 and the action would be to Buy 100 Calls. Now since the stock is in momentum, we may decide to delay the execution of a 110 Call Sell.

So, for the second action we decide the action points. Let us say those action points are 102 and 99. Considering the setup these are two action price points in place either one of them is hit we will Short 110 Call.

I have been practicing this for some time now. One way I have been using this staggered execution is by creating a spread only in momentum. Meaning, after you Buy a Call if it does seem approaching target, review if we feel there is potential, Short a Higher Call instead of Booking current the position. If things do not work out, clear the current position.

Strategy Fragmentation:

There have also been trades where splitting the strategy has also worked. There has also been a trade where I created a Bear Put Spread (Buy a Put & Sell a Lower Strike Put) considering downward momentum could take time and may even go in for a pullback. Luckily or Unluckily there was a pullback. My spread cost was my stop loss.

Now, the Bought option lowered in Premium but the sold option came to almost Zero. With a few days left to expiry, I decided to cut the sold leg as there was no more benefit. Fortunately, there was a turnaround and I could ride the momentum much better with the single bought Put.

Either way, I believe this Strategy Augmentation or Fragmentation techniques led by staggering execution can augment your returns especially in stocks where momentum materializes.

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SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

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