Literally, it feels like I Don’t Know!

As we enter Vikram Samvat 2076, the memories of last year still seem to be very fresh in our minds. A year of extreme volatility, events that shook the global and local economic corridors, a big concern that we faced in the form of slowdown, change in behavior pattern of the millennials which is changing the way we look and do business and much more. Being a polarized market, gains accrued out of Private Banks, Financials and Energy stocks; while PSU Banks, Metals and Pharma continued to lag.

But one common answer to the question about market’s move had been “D Don’t Know”. As simple as it sounds, it is tough for any trader to live with such an answer for a long time. Direction is what one needs to play out on. But with a market which lacks clarity on direction, is impacted a lot by constant event locally and internationally trading was difficult.

One good thing about derivatives, especially options, is that you can participate in case you have no clue on the direction. Simply, play the volatility. The most common strategies to play this out are, Straddles and Strangles. Also, we shall discuss a few more Spread strategies along the way to play volatility and have no view on direction.

Long Straddle, is a combination of a Long Call and Long Put option of the same strike and same expiry, mostly ATM. At the onset it is a Delta neutral strategy with Positive Gamma and Vega and Negative Theta. Any sharp move in the underlying will benefit the strategy, while time decay will hurt it.

Short Straddle, is a combination of a Short Call and Short Put option of the same strike and same expiry, mostly ATM. At the onset it is a Delta neutral strategy with Short Gamma and Vega and Long Theta. Any sharp move in the underlying will hurt the strategy, while time decay will benefit it.

Long Strangle, is a combination of a Long Call and Long Put option of the different strike and same expiry, mostly OTM. At the onset it is a Delta neutral strategy with Positive Gamma and Vega and Negative Theta. Any sharp move in the underlying will benefit the strategy, while time decay will hurt it.

Short Strangle, is a combination of a Short Call and Short Put option of the different strike and same expiry, mostly OTM. At the onset it is a Delta neutral strategy with Short Gamma and Vega and Long Theta. Any sharp move in the underlying will hurt the strategy, while time decay will benefit it.

Long Butterfly, is a combination of Bull Spread and Bear Spread. There are three strikes involved where in you buy a Call, sell two Calls of higher strike and buy a Call of further higher strike. While at the onset it is a delta neutral strategy, with negative Gamma and Vega while a positive Theta. So, while the gains would come from Theta any sharp move in the underlying or increase in volatility would hurt the position.

A short butterfly spread with calls is a three-part strategy that is created by selling one call at a lower strike price, buying two calls with a higher strike price and selling one call with an even higher strike price. All calls have the same expiration date, and the strike prices are equidistant. While at the onset it is a delta neutral strategy, with positive gamma and Vega while a negative Theta. So, any sharp move in the underlying or increase in volatility would help the position while time decay would hurt it.

A Call ratio spread is a multi-leg options position that involves buying and selling more options on the same underlying security with different strike prices and the same expiration date. At the start it is a Delta neutral strategy with negative Gamma and Vega and positive Theta. A large move in the underlying hurts while benefit keeps ticking in as time passes.

The put ratio spread is a neutral strategy in options trading that involves buying a number of put options and selling more put options of the same underlying stock and expiration date at a different strike price. It’s a Delta neutral strategy with negative Gamma and Vega and positive Theta. A sharp move in the underlying will be detrimental while time decay is the gain.

So, next time you feel, “I don’t know” where the markets are headed towards, you can use either of the strategies. If you know to more in-depth then do attend our FREE Seminar this week!

Happy Trading.

Cheers!!!