Here are best bargain hunting Options strategies

F&O Strategies

Shubham Agarwal

Over 3% fall in little over a week, Equities have been struggling for a while now. However, this does present an opportunity. Not all of us could participate in the way up. For most of such missed out opportunities this is the second chance.

However, buying into a rising market is totally different than buying in a falling market, hoping for it to turn around. After the fall, we do come around the levels that seem 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.

Let us discuss a couple of ways to deal with this difficulty by bargain hunting with the help of Options. There are 2 different approaches to this based on the amount of time we are willing to hold on to the position.

Approach #1 for Time Consuming Trade

A lot of times we may end up creating the trade for bargain hunting while not having a clear idea on the time it could take for the trade to close. So now, we have to take care of 2 difficulties.

1. Saving Capital if the fall continues and bargain hunting 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 100 stock with a Target of 105

Buy 100 Call

& Sell 105 Call (higher strike).

This trade will have the Maximum gain of INR 5 (105-100) - 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.

Approach #2 for Immediate Trade

This most of us are familiar with. This is one of those situations when the 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 any case if the fall continues, we will still not be punished.