The three finest tactics in ambiguous market trends

 The three finest tactics in ambiguous market trends

Any trend-following system that attempts to track unclear patterns is likely to fail miserably. Purchasing options at these periods produces the ideal combination impact.

Purchasing options might result in a number of little losses as well as a few significant gains.

The equities market often goes through a period when the trend is unclear, particularly when a strong, expanding market has a significant decline, as is the case at the moment. From a peak of more than 20,200, the Nifty dropped to around 18,800. While the decline hasn't continued, the index hasn't started to rise either.

This is the period of difficulty for trend-following systems. Many traders decide to sell, at least in part, until they feel more confident. But among the alternatives, one is well situated. Recall that option purchasers are used to often being in the wrong.

I'll explain, but first, let's examine a few established findings.

1. There is proof that the majority of options expire worthless.

2. As time passes and the premium decreases, option purchasers face an adversarial situation.

3. Most significantly, the only people who may profit 100% from their position are option purchasers.

These three easily understood criteria serve as the foundation for two main conclusions:

A. Option purchasers will get a great return on their investment (limitless profit) at the expense of a little premium risk.

B. Option purchasers will have an extremely poor success percentage as a result of observations 1 and 2.

How is this beneficial?

Uncertain trends have a poor success rate in any trend-following method. Purchasing options at these periods produces the ideal aggregate impact.

Purchasing options might result in a number of little losses as well as a few significant gains. Similar traits also apply to unclear trends. Option purchasers profit because, when executed correctly, buy options provide substantial potential percentage returns.

Here's one instance:

1,020 Calls are trading at 20 with 20 days to expiration for Stock X, which is trading at 1,000.

In the event that the price drops to 970 in two days, the 1,020 Call would drop to 9. However, if the market rises above 1,060 within two days, the 1,020 Call would fall to 52.

This demonstrates that every option transaction will have a higher profit profile than a stock future. The option premium increases by 32 for the INR 60 rise and decreases by 11 for the INR 30 reduction. This implies that you may cease losing money if you are incorrect three times with the same objective and remain profitable if you are correct only one.

The main cause of a poor success rate during an ambiguous trend has been identified and fixed. The issue at hand is which choice to purchase. It goes without saying that a put option is selected for a bearish transaction and a call option for a bullish bet. Try purchasing the option with the nearest expiration. The last decision is which strike to use in this transaction.

Purchase a put option with a strike price slightly below the CMP and a call option with a strike price marginally higher than the current market price. This ought should solve the issue.