Stage-wise execution strategy for indecisive markets

After falling considerably during the last few weeks, many of us have different views on the market. Expectations built from the stocks and indices can now be big rooms on either side. We have not had a big correction since COVID times. However, we have fallen over 10% from the top. So, making up to previous top could be a big jump as well.

Either case would be good news for any directional trader. The only catch here is that there is no set consensus in terms of direction. The best way to observe this is the relative level of Index Futures Open Interest.

Open Interest which shows traders’ interest in the market is at one of the lowest levels when compared to similar time of past many expires.

The good part is that situations like this brings participation, and incremental participation brings bigger moves.

Moves are better for all of us traders. The only catch is low participation is because of lack of confidence on either side direction.

Stage-Wise Execution (SWE) Strategy on Options can be very useful in situations like this. We will see how SWE can help deal with indecisiveness without losing much.

Stage #1 Entry:

Entering any stock or index for a bullish or bearish bet without protection is not wise. But the Options are very expensive due to rise in risk premium. So, the best solution is to buy an Out of the Money Option (Higher Strike Call for Bullish or Lower Strike Put for Bearish). Benefit is that they are inexpensive. Take a view for the just end of the day. Stage #2 will indicate next round of action.

Stage #2 Add/Exit:

Since the Option is out of the money, it will be relatively cheap. Hence, one may not need be too strict with the stop loss. This will help to be a little relaxed to validate the view. In closing hour though, one must execute Stage #2. Here, if the view is still valid and one is making money on the Option already purchased, just convert it into spread. Add a Sell position of even Higher Call / even lower Put for Call / Put bought. If we are losing money, just let the Option go and exit. Small price to pay for entry for a big move.

Stage #3 Manage & Book:

The spread that we created is already better placed because our bought Option made money and then we Sold the Option. In this stage we Manage. In situations like current market, the move is always bigger and time consuming. The Sold Option will help in saving in loss of premium due to time or small opposite move. This stage will just manage the position. If we reach to the sold strike level, just Book the position and re-evaluate.

On the other hand, if one feels that anywhere within profits the momentum starts getting lost in our favorable direction, then manage. Sell the bought Option and Buy next higher strike Call / Lower Strike Put relative to the originally bought option. This will help book part profit.