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Fine tune your options strategy pay-off with staggered execution; here's how

We need to decide on Action Points and Action Plan, considering the god, bad and ugly scenarios possible.

SHUBHAM AGARWAL | 22-Aug-20
Reading Time: 3 minutes

Options strategies, once a taboo, are now being easily understood as well as better utilised by many of us option traders. Rising awareness has brought one good change where not many budding option traders are turned away with effect of bleeding time value of first option brought.

Having said that, there still is a bit of shying away from the traditional Bull Call Spreads and Bear Put Spreads . These are super risk averse but they do lack that enticing rate of returns. To make these traditional strategies interesting, let us discuss some of the fine tuning that can be done on them.

Now let us take a simple example of Bull Call Spread where we Buy a Call and Sell a Higher Strike Call. While the actionable still remains the same but what changes is when you execute them. The point that I want to drive is that instead of creating both positions simultaneously we create it at two different points in time.

It is not that none of us have resorted to it yet. Many Option traders do use this as a remedy of last resort. Meaning, we bought a Call and the view goes wrong, we end up creating a loss-making position so instead of squaring it up, exit strategy is used is to Sell a higher strike Call.

This will salvage a part of premium on table right now at the cost of margin deployment and yet keep the position in place but with profit potential capped to the Short Call strike.

However, we are not discussing these Alterations. We are talking about a predetermined, preconceived trade that gets executed over a course of the life cycle of the trade. There are situations where a Capped, Positional Trade is what we want to execute but not right away. Let us understand with simple example.

Let us say we spot a stock. The stock is in momentum and created a trigger for 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 head room of 10%. So ideal strategy is Bull Call Spread.

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 the god, bad and ugly scenarios possible.

So, @ 100 if we have a forecast of price action till 110. First action point would be 100 and the action would be to Buy 100 Call. 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 set-up 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, Buy a Call if does seem approaching target, review if we feel there is a potential, Short a Higher Call instead of Booking current the position. If things do not work out clear the current position.

One the other hand, recently there have also been a trade where I created a Bear Put Spread considering downward momentum could take time and may even go in for a pull back. 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 few days left to expiry, I decided to cut the sold leg as there was no more benefit for the stuck margin. Fortunately, there was a turn around and I could ride the momentum much better with the single bought Put.

Either ways, I believe these Strategy Augmentation or Fragmentation techniques led by staggered execution can augment your returns especially in stocks where momentum materializes.

(The author is CEO & Head of Research at Quantsapp)

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Learn and read more about option strategies from Quantsapp classroom which has been curated for understanding of option strategy builder from scratch, to enable option traders grasp the concepts practically and apply them in a data-driven trading approach.

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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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