Shaky at the top, keep a hedge handy: Shubham Shubham-Agarwal-March-2

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A decent rise followed by a slowdown in momentum gives jitters to the long traders. Especially, if one is a short-term trader there is a big possibility that one would be more intrigued to either book profit and be on the sidelines or at least slow down a bit.

The scary part is the kind of rise that we have on our back in recent weeks and months. Since the pandemic lows, we have had this pattern of rise and digest and rise again. It is not so cynical if it seems a little too easy and predictable to be happening at these current even more elevated levels.

So, we take this ongoing lull as an opportunity to revisit the few of the simple modifications that one should keep handy at all times.

On other words, in the hunky-dory times the kind of dent the September expiry week made recently could be taken as one indication that there could be a pullback or a serious halt in the uptrend.

A similar situation could be on the downside as well, where we are trading a juiciest shorting opportunity and suddenly there is a violent move upwards piercing the recent swing high. Go ahead and initiate a trade modification.

This trade modification is nothing but Operational Hedges. What we mean by this is that here we are not buying Puts against portfolios but we are intentionally selecting a set of strategies, which can save us from any move that is surprising and is out of ordinary.

Let us look at some of the modifications listed below:

Partial Exits on Vertical Spreads:

Remember, most of these times of pullbacks/ respite from up/down trend could have a phase of consolidation. So firstly, handle it by resorting to a Vertical spread by instead of Buying Single Call or Put, Sell a lower Put or Higher Call against a Put or Call bought.

Secondly, remember there would be gyrations that could touch an unfavorable extreme before materializing your move.

Consider a Bull Spread is executed and the stock hits its lower extreme, while the trade thesis still being intact. In such a situation, cut the Sold option leg as it has delivered its value and hold on to the Bought Option. This will augment the profitability optimising the gyration.

Index Hedge at all times:

It is wise to have an opposite facing (directionally) position in the index where a Bearish Strategy is executed with the preceding trend being up and vice- versa.

This will help us in cheering every opposite move if not with a big pay-off, at least with a little reward as there is some compensation due to the index hedge.

Mix of long and short:

Lastly, always in such times keep a trading portfolio mixed of Longs and Shorts. In any market set-up whatsoever there always is a pack of winners and a pack of losers.

I don’t equally proportionate Longs and Shorts but in recent times we could find at least one Short against 2 Longs in the recent 10800-11500 range.

Finally, tactics like these are nothing but an urge to be agile enough and adapt to every minutest mood swing in the market and thereby take some profit off of every market set-up possible.

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

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