Bottom Fishing Options Strategies.

Over 4% peak we saw in last couple of weeks back, however, we did see a bit of a halt this week. This does present an opportunity. Many of us must have missed out in participating in the rally that took Nifty to 26000+ levels.

However, buying into a rising market is totally different than buying in making bottom fishing attempts, hoping for it to turn around. Bottom fishing is coming to the levels that feel like price where the stock or index could stop falling. The difficulty here is that it could very well be an attempt to catch a falling knife.

There are a couple of strategies that can help with bottom fishing by managing risk in a much better way with the help of Options There are 2 different trades based on the amount of time we are willing to hold on to the position.

1. Saving Capital if the fall continues and bottom fishing goes wrong.

2. Saving against time taken in the trade (Trading options this is a difficulty)

Strategy: ATM Bull Call Spread

ATM: The strike we select will be close to the current market price. Since we want maximum action best place to be trading in options is in ATM strike.

Bull Call: Bull Call gives the Option type and the transaction type. Bullish position in Call option can be created by Buying a Call Option.

Spread: Spread means having a simultaneous Buy and Sell positions in 2 Options of the same stock or index, same type and same expiry but of different strikes. In our case we will be buying a Lower Strike Call and selling Higher Strike Call.

Example: Stock at INR 1000 stock with a Target of 1050

Buy 1000 Call

& Sell 1050 Call (higher strike).

This trade will have the Maximum gain of INR 5 (1050-1000) - Net Premium Paid. Maximum loss will be Net Premium Paid.

I still recommend exiting this strategy if your stop loss or target in the stock gets hit. One could get a better reward at a much lower risk in this strategy compared to trading in the stock or stock future.

Trade #2 for Immediate Trade

This most of us are familiar with. This is one of those situations when any stock has fallen by big 7%-10% and we are looking for a rebound just tomorrow. Only difficulty here is that what if tomorrow again we fall by another 10%.

Strategy: OTM Call Buy

OTM: The strike we select will be higher than the current market price. The strike should be 2 step higher than current market price.

Again, exit this strategy upon rebound on the next day. If rebound does not come, even then exit triggering time stop loss.

Both these strategies are best as per me because in case if the fall continues, we don’t get out of pocket.

Trade #1 for Time Consuming Trade

As we all know market has 3 different directions. One is down, one is up, and one is sideways. There is a good possibility of the sideways market to unfold after a big move on the downside. In such case there is a possibility of preparing for 2 problems.