How to use Technical analysis & Options effectively in a volatile market?

The minute one utters the words ‘F & O’ or ‘Futures & Options’, we generally hear the following terms, ‘ risky’, ‘gambling’, ‘heavy losses’ etc. Well, futures is a highly leveraged market and hence it becomes extremely important for us to trade in the right trend to make good returns. With the India VIX index at a yearly high almost touching 18.5, only traders & smart investors with deep pockets can hold patiently and still exit with good returns. Hence trading in futures & options using technical analysis is a pre-requisite to having a profitable trading portfolio or else 99% of the time, one would struggle to make money.

However, instead of constantly trading in futures, one should also trade using options, especially when one is not very confident about the current trend of the market. The advantage in trading in options over futures are several, some of them include:

  • Limited losses when Buying Calls or Puts: The scariest thing about futures is that due to an unforeseen event like a war like situation or a natural calamity or even an important economic event like a Union Budget where the market cannot discount the event, markets could swing either ways leading to heavy losses if one trades without keeping a stop loss. In such a scenario, if one buys a call(bullish) or a put(bearish), one only carries a risk of losing the premium amount irrespective of extreme volatility. This strategy is called Long Strangle if different strike prices are chosen for both call & put option. If the same strike price is chosen for both the Call & put, it is called a Long Straddle. Traders generally will benefit tremendously on these 2 strategies at the time of quarterly results announcement or a major event like Budget or state election result announcement.
  • Ability to make profits in flat/sideways market: Futures are a great tool to make money provided markets are either trending bullish or bearish. However, there are times where markets can remain range bound to absolutely flat with hardly any movement. In such a scenario, instead of buying or shorting futures & having a frustrating wait to exit one’s trades, one can also Sell a call( flat to bearish) or Sell a put ( flat to bullish) and pocket the premium. However, Selling a call or put should always be done keeping a strict stop loss & is a more advisable strategy towards the end of the expiry where buyers have to fight the time decay element to make profits.
  • Excellent hedging tool against cash positions: If one is holding fundamentally excellent stocks in the cash market and are uncomfortable exiting cash positions at high levels (which can be found out through momentum oscillators like RSI, Stochastic etc.), one can atleast use option strategies like Buying an OTM Call (Synthetic Long call) or OTM put if the stock price is technically very overbought as per the momentum indicators. In case the market continues its uptrend, your losses in the options are offset by increase in profit in the cash market. However, if the market does come down, the losses in the cash market will be offset by gains in the option strategies.

It is unfortunate that in India, futures volume is a lot more than options indicating lack of knowledge in terms of practical application amongst market participants. However if one takes up a Basic Futures & Options course & learns about these simple yet very effective options trading strategies along with a basic Technical analysis course, one would never fear a bear market and making profits will no longer be dependent solely on luck ! With upcoming state elections & general elections in India coupled with global equity, crude oil & bond market volatility, smart option traders can leverage well with the right strategies & use this volatility to their advantage to still have a positive 2018.

6th February 2018

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