These are a few trade enhancements that help protect against option premium losses caused by volatility.
Agarwal Shubham
The Union Election 2024 results will be announced in little over two weeks. Once the event is over, it may surprise people, but in the meantime, there will be a lot of volatility in both futures and options prices. This could be going above and beyond typical trend-following fluctuations.
The following are some of the trade improvements that one may use to make sure that we are prepared for these known repercussions of the impending occurrences.
#1 Reduced Horizons:
As the event draws nearer, expectations for the result fluctuate quickly, making the trend very unstable. Large wagers at this time might have disastrous consequences.
During these periods, directional movements are often strong but fleeting, making it difficult to determine whether we are trading a trend or just a retracement. Because of this quality, it is essential to narrow the trading scopes. This adjustment will protect against excessive gyrations.
#2: Instead of using futures for positional trading, use larger spreads.
We could turn to spreads when the outlook is for more than five sessions. In other words, in addition to purchasing a call or put near the underlying's market price, we also sell a higher call or lower put to cover the call's cost and a portion of the option's time value decay.
When there is a strong expectation of volatility, option strikes that are near to one another often behave very similarly, and the premiums are also affected by the expectation of volatility. The Spreads become a bit less appealing as a result.
Larger spreads may be used as a workaround. In contrast to regular times, the premiums for distant strikes are expensive enough to provide superior finance during events. In addition, the interval between strikes would guarantee that a respectable amount of money would be available in the event that the transfer came to pass.
A greater difference between the purchased and sold strikes results in a larger profit.
#3: Additional Pro-Volatility Techniques
As everyone knows, the premium for options will increase as the projected volatility increases. As the event outcomes approach, the anticipated volatility is likely to increase. As a result, this premium movement behavior—which occurs regardless of direction—must be taken into consideration while formulating options strategies.
Use pro-volatility techniques to get around this oddity. Increase your single option trading. Be prepared to forfeit the whole premium if one believes that the deal may continue after the election.
#4: Steer clear of net sell option trades.
As was said before, premiums would at least increase in anticipation of volatility, therefore one should attempt to avoid net selling options.
Should one choose to exchange the juicy premiums in any case:
• Every single short option must have a position with it in the future. Purchase + Sell Call / Purchase + Sell Put • If we want to sell both calls and puts, we should purchase a minimum of a distant higher call and a lower put against it in order to limit our maximum loss to the difference between the purchased and sold strikes.
Even while they may not generate much revenue from event-driven excitement, these trade enhancements would protect against losing out on any volatility-driven option premium losses.
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