Derivatives by their basic definition mean predictions about market in coming times.This means all the events of present and expected events of future are discounted or taken into account in an option’s valuation.Valuation of an option is easier when market is in a trend because then one has to only see the momentum of the prevailing trend and estimate the longevity of that move.But when market has no definite sense of direction and there is not much of a trend taking place then predicting future and valuing option becomes a very difficult task.Traders end up discounting all the news and this makes for too much noise in trading.Noise here means noticing wrong signals and making wrong predictions on options.In our NSE we could sometimes see a clear trend and follow it.But as researches all over the world claim any market is in a trend for only 30% of its time,remaining time it is choppy market moving both ways simultaneously.Options derive their value from the underlying and if underlying itself is not able to hold a clear view about its future then its derivatives are bound to fall all over the place.This also happens in our index and stock options.When nifty or any other stock is making a clean move in one direction one could see a high volume of trading in that underlying’s derivatives.However once that underlying loses its direction futures contract fluctuate too much and options normally lose most of their normal trading volume.As I have said in my earlier posts each time an option contract loses its value and falls it will need a bigger move to go back to its previous level.Since in choppy markets underlyings keep moving up and down options fall and their bounce back becomes very difficult.In this scenario eroding time value also add into the pain of a trader.
This gives a very hard time to traders.One more harm is when a trader keeps his position standing overnight.The next day market can start anywhere or be completely range bound.For a call option to make a positive move,if kept open overnight,its underlying has to rise in coming days.Suppose underlying stays at the same level where you bought its option at then in coming days due to lack of underlying’s up-move and eroding time value the trader will lose money.This is what is happening in options these days.We have seen our market in a clean and clear bull trend for a long time.Sentiments were so high and in one direction that there was heavy volume in almost all stock futures and some of the stock options were matching up with index option’s volume.Ever since this market fell in january08 there is very small volume in most stock options.Stock futures are highly traded in normal times but currently even they are seeing some very unusual trading days.The biggest problem today with the market is about its future status.No body know where will it be in next three months.We have often seen in last two months that marker starts with a gap and soon that gap is filled in again and mostly it closes at the same level it started from.This kind of days have very negative effects on options.Each time an underlying goes up there is a gain in its call options but soon there is a contradicting move in underlying,it falls, and then its options are bound to lose value too.Within a day there are so many ups and downs in almost all stocks that their options often stay at the same level where they started from or lose value.As a result of this zig-zag market at present there is very few stocks that have active traded options.Stocks like RNRL used to have good volume in previous trend but now they have lost their sheen.Most of the traders who make strategies and take position to benefit from options lose money because their is no direct relation between options and spot market now.Sometimes a big move in nifty also doesn’t cause its options to move much.
This can be analysed with a different point of view- suppose there is a rise in nifty and you see that there is no corresponding rise or a very small up move in its call options you can interpret that market is not very sure of this rise.Which means there is soon going to be a fall in nifty from its current level.Normally one could trade in puts in this kind of conditions but at present even that can not be done with much profitability.As there is no conviction even on the downside.Shorting options can be a very good move in this type of markets.When everything moves around to find its ground options lose value each day and writers make money.But for that one has to have strong portfolio or a big size of trading money.Not a solution for every body.Not at-least for me.
In this kind of market with my experience I can say the best way to trade is to keep the trading intra-day.One could try making money in swing trading but that is not possible in choppy markets.My idea is to trade after the first hour of market.let the market chose its major direction for the day and then when options start to make move take position.Here one should take care of the time factor.Most often we have seen that market takes a swing in the second session or more often in its last hour.If one has an open trade try not to keep it open till its last hour of the day.Sometimes there is a big swing in the last hour or so and one could be tempted to use it in options but remember this swing is just a reaction to the previous move of the day.This swing is intraday.For intraday trading one uses indicators and other such technical tools in their intraday form so a trade that was signaled by an intraday indicator has to be so.Don’t make an overnight trade based on an intraday indicator.Try booking profits as soon as you can.Waiting for trades to gather some more profits is a dangerous greed.So book it fast.Don’t trade in calls and puts simultaneously,rather chose your side of the market.Trade either call or put.Avoid stock options as much as you can.There is very less volumes in them.Adjust your stop loss as per your taste.If you want to make a swing trade then make sure you give enough time to the trade to come to its expected level.
On the whole when market is in choppy condition as it is at present try to make small trades and remain intraday most of the time.Don’t trade much rather wait for the market to come back to their normal nature.Keeping the capital intact is much better than losing it trading un-necessarily.
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