Table of Contents
What is happening in the markets?
Normally, after a large trend has passed, there is a period of pullback or just plain old consolidation.
What happening in market nowadays is that Nifty has cooled off from 18,400 in recent months.
However, the last few weeks have been unusual in that the Nifty has been moving in large fluctuations, attempting to recover and get back on track before giving up.
Consolidations, particularly choppy ones like the ones we’ve been seeing for the past three weeks, can produce misleading signals. Vertical spreads, on the other hand, could come in handy with Out of The Money (OTM) options.
On a daily basis, the movements have also been relatively large. However, if we look at the total change in the Nifty for December, it is nearly zero so far.
The difficulty of being stopped out in an unfavorable fluctuations is the most painful, especially when the trade ends up becoming a winner after being stopped out solely because of that temporary move.
Should we not keep Stop Loss to avoid this?
No, on the contrary, every trade in these types of uncertain times should have a well-defined loss strategy in place.
Answer lies in Vertical spreads
What happens in fluctuations in Market?
What are OTM Vertical Spreads?
How booking partial profits work?
Ideally, I would not advise anyone to take additional spreads in consolidation, but doubling these spreads has recently worked for me, with half of the quantity booked as soon as the spread doubles and the rest held at zero risk.
Nonetheless, I would leave position sizing to the trader’s conviction, but OTM Vertical spreads are worth noting as a tool to avoid being arbitrarily stopped out in volatile markets.