If one were to describe the current type of market, it would be easier to denote it with excessive volatility. The highly overbought zone, China-Taiwan tensions, record low fall of the Indian rupee, the energy crisis in Europe, and Jerome Powell’s statement in the recent Jackson Hole Symposium have all combined to create extreme volatility in the Indian markets.
The recent zig-zag moves in the benchmark index were quite difficult to handle. While the Nifty 50’s fall of over 2% in two days from the high of 17,992.2 jittered put option sellers, a mild recovery from there led them to again make some positions which were again ripped apart after Monday’s 2%+ gap down opening. Put writers didn’t even get a chance to exit their positions. But the severe fall brought back the confidence of an impending downtrend, which led to a build-up of huge short positions. As the high volatility would have it, today’s unexpected rally of over 2.61%, which also took out the previous swing high in one go as it was fuelled by short covering led call option sellers into a deep mess.
This is not an easy market to trade as both-sided moves are creating trouble to catch a sustainable trend. So what is the ideal way to sail through such highly volatile periods and survive till the time the markets restore their calm and gives clear direction?
Firstly, trading the Nifty 50 with hedged positions is highly recommended. Going long/short with naked futures or short options position might give a high reward but a hedged position would definitely be a savior in minimizing the losses. A hedged position could mean both a debit spread and a credit spread. These spreads limit the losses while trading options and can also do the same when coupled with a futures position. Hedging also reduces the margin requirements, hence capital utilization becomes more effective.
Secondly, identifying counter-trend zones from the overbought/oversold levels in an intraday time frame could be more rewarding. Trying to buy the highs and sell the lows which is an ideal trend-following strategy isn’t working in this type of market. The current regime is more suited for catching a buying opportunity after a noticeable dip and a selling opportunity after a sharp rally. As trends are reversing quite swiftly, oscillators such as the RSI, William’s %R, CCI, etc could come in handy.
Lastly, switching to monthly expiries might ease trading a bit. If you are not a very agile and swift trader, then taking a monthly view might be more useful as you would be able to steer clear of this day-to-day volatility. Monthly expiries also allow traders to trade distant levels with options and adjusting positions also is easier which is difficult for weekly expiry as premiums are quite low.
