Over the last two years, NIFTY has shown high degree of volatility. Nifty fell very sharply in 2009 touching as low as 2539 and then rebound back to 5310 level. This continued setting of uncertainty is posing discomfort for every style of investor. Being right is already difficult enough, but the cost of being wrong can be so much higher with high degree of volatility in the market.
Trading in options has become difficult for retail traders and small investors who are ignorant of option strategies in high volatile market. For instance, NIFTY 5100, 5200, 5300 long call in March series have fallen today even when NIFTY is up 1.29% and all NIFTY put options have fallen very sharply. The option trading call that was recommended by many analysts and brokers yesterday was to buy 4600 put and 5200 call with assumption that one can gain on volatile move on either side. Yesterday’s closing price for NIFTY 4600 put was 63.05 and NIFTY 5200 call was Rs.31. Net investment of Rs.4700. Current value of combined NIFTY 4600 put and NIFTY 5200 call is Rs. 2650, loss of Rs.2050 in one day. Here is a modified option strategy which works best in volatile market.
The best method to trade in this kind of volatile market is short straddle with hedging.
|Option||Feb 25, 2010||Feb 26, 2010||Price change.|
|Short 4900 call||130.40||140||-9.6|
|Short 4900 put||168.90||105.0||63.9|
|Long 5200 call||31||24.90||-6.1|
|Long 4600 put||63.05||28.10||-34.95|
Total profit Rs.660
Many might wonder that the profit was too less, but one should appreciate the gain this trade has made even in volatile market. Buying only call or put is just a speculation and speculation seldom works in stock-market. Calculated risk management is the key factor in trading options. A smart option trader never buys just calls or put. He takes calculated risk and is prepared for any move which market makes. Calculate your risk before trading options. For instance, long call or put has premium risk, which means whole premium can be wiped if the market moves in opposite direction from the expected direction.
Narendar Rathod, Options Strategist, www.AssuredGain.com
Options Disclaimer: Options trading involves high risk and you can lose a lot of money. Investing in options involves high risk and may not be suitable for everyone. No statement in this blog should be construed as a recommendation to buy or sell a security or to provide investment advice.