Lesson:4 The 5 Market Situations You Should Avoid Aggressively Trading

Many experience trader knows best time to trade options i.e. higher IV, Higher premium same time higher IV doesn't mean good for selling option. Example: Yes bank IV one year ago trades near 30-32 but from last 4 months IV normalize around 60. Lots of issue and practical understanding will discuss for IV why is it happen and what trader should do. Today will focus more on in which situation trader should not take aggressive position.

Key Points from Today's Lesson:

1. Buyouts and Mergers/acquisition

1. During such event huge volatility expected in the market, underlying stock will move any side depends on pricing of deal and synergy taking place.
2. Better to wait for finalize deal first, wait for valuation and how deal falls
3. Most of trader try to trade where stock trade sideways after initial jump in price involve few difficulties like.....
4. The option market knows this as well- as soon as event is announced and stock price jumps, IV sudden to spark much or disappear. Example: Cairn India Merge with VEDL and during deal period IV huge to trade near 100 after deal it reach to 40.

Many times after deal announced sometimes deal may not happen or could change completely - Example: IBULL HOUSING and Lakshmi Vilas Bank in ratio of 100:14 but at current rate IBULL is still at premium near 40% better to trade Opposite side so deal might happen or not may not create big problem to portfolio.

2. Low Liquidity

1. Being a trader do trade minimal or limited trading
2. Decide why am I trading is there big opportunity or should I just pass it up
3. Low Liquidity makes trade difficult to average out soon
4. For big Position it take much more time to make full position, Many time Open interest consist 10-20% alone, very difficult to get out of the position. Example: MRF having almost zero liquidity I trade 5 lot of CE or PE, it is very much difficult to book entire position.
5. Due to Low Liquidity trading, need lot of Margin to earn potential profit, As trader can't easily book position have to have stand up for more time

3. Low Implied Volatility

1. Low Implied Volatility gives return if market trade in narrow range even if option premium not much high, but don't do aggressive trading when IV seems Low.
2. Make sure that during such period position size doesn't exceeds 30%
3. Do make position during such period like complimentary position, opposite, laddering or uncorrelated stocks.
4. One can make Vega Position during such Low IV period, In case any Sudden move came in market provides chance to make position bigger.

4. High Implied Volatility

1. Many times stock have High IV due to some pending Announcement Like FDA approval for any pharma company, Result Session, Unseen or unusual situation like CCD owner died suddenly stock started LC, Moreover Company Like RBL Bank is involved for transaction made.  During RBI Policy banking sector trade Higher IV. Company like DHFL, PCJ or ADAG group having lot of negative news trade at higher IV. Better to take calculated risk rather than designing big position just because of higher IV.

5. Strong Rallies

1. One side rallies always difficult for option trader who do short option trading particularly Net premium Credit trading.
2. Strong rallies have low IV, low liquidity, and a Up move in the stock price.
3. After such rallies do expect sharp market correction
4. The key is to practice patience and shift your mindset not to participate aggressively  

Conclusion: 

1. In above market situation take light position, have proper allocation and size and be ready for unforeseen market changes
2. Moreover, Don't stop trading during such time period but be cautious, don't be aggressive.  
3. Make plan for sudden unexpected move Example: Rating agency reduce Target of TITAN LTD next day TITAN open below 10% and sudden move expected in IV, such time option trader need to prepare for such opportunity as IV was at 40+ in 3 days IV came to 30.

Happy Reading

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