Catch big moves with positional options trades

Who does not like quick results and fast money? All of us do, however there comes a time when indices are not exactly in uptrend or down trend. Such market status requires the shift to overnight trades.

Choppy markets will not let you commit to a direction even during a day. However, when we look at the same market from week over week perspective we do see increment. The focus of the discussion here is on such Big Moves. What makes it tricky to catch them is the ongoing choppiness in the market.

Now we need to commit to the direction for let us say a few days at the same time we need to ensure that choppiness does not affect us. Futures trade will not be able to solve this problem. Single Options Buy Call/ Put are an expensive bet due to reduction in premium on account of passage of time.

When to Trade?

There is not set time to trade. However, I would be attracted to trade when the stock is close to the recent low with a Buy trade and vice-versa. Remember the journey typically is from one end of the trading range to other end of the trading range.

How to Trade?

This is a crucial one. Simple answer is Positional Option Trades. Let us construct them by addressing every requirement one at a time.

#1 We need to accommodate lack of conviction

For obvious reasons we need to ensure that if the consolidation or choppiness ends up breaking out in the wrong direction, we should not lose a lot. Easiest way to do this is by creating a trade in Options with a Buy position.

By entering here, we can ensure the maximum loss scenario and the amount and account for it ahead of the trade. This accommodates for lack of conviction.

#2 Safeguard against time

We decide to Buy Call for a bullish trade or Buy Put for bearish trade. Remember the choppiness may take many rounds around the current price and waste time before making it into the target territory.

There is a predictable answer here. Hedge with Options for time. So, now we are creating a Spread. For a Buy Call we Sell a Higher Strike Call and for a Buy Put we Sell a Lower Strike Put. Such options that we are deciding to sell will lower the net premium that we end up paying.

#3 Earn Big for Big Moves

While the Spread trade now gives relief against time related loss in the trade, but profits are limited to the difference between Buy & Sell strikes minus the Premium paid.

To take care of this, improve the strike selection. Buy strike could be a Higher Call/Lower Put. This makes them inexpensive. Sell Strikes could be closer to the Target (even higher call/ lower put). This way difference is the same, but the net outflow is much lower.

This Positional Options Trade, due to lower net premium paid, can be held without stop loss. This also saves us from awkward false exit alarms.