Two ways option trading can help investors stay afloat in choppy market waters
Conviction is a funny thing. The frivolity lies in the fact that it may not necessarily be following the trend. With the behaviour of the market of being more of a topsy-turvy than of a straight line, the bouts in one direction do some time turn out to be too much in certain occasions.
When one tries to lead the market rather than following it by calling a bottom when things are going down or calling a top in a rising market, the confidence is expected to be low.
Let us discuss solutions that would cater to a rather dated move and another one that keeps the upside open but more of on the go kind of trade. Both of them would address the aforementioned two problems.
First, let us handle the longer time duration trade. Typically, keeping a stop loss and adhering to it is a major issue as more often than not the reversal happens right after our stop loss get triggered.
On the other hand keeping option premium as a sunk cost would not be too prudent. The easiest way to deal with this is to create an OTM vertical spread.
While the trade keeps the upside wide open. It has to be closed in one – three sessions, else the time value decay of two lots would come to bite.
On the other hand, if that violent move did come up. The loss on one option sold gets covered by one partially while the other buy starts making money.
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