For options trading strategies, I’m archiving a discussion happened on Harmonics, Fibonacci discussion arena of our slack group. Refer this –
This is a daily chart of Bank of India. It just got a huge fall leading into consolidation. (Sideways Movement). So after the first green candle occurs in these cases, I wait for 3 more candles to survive short-term volatility.
The first sign you see is a false breakout. So this can be avoided in above set of rules and create your option trading strategies.
This is called a pennant.
This is called a flag.
The trade setups with the flag are with high-risk high gain.
The trade setups with pennant are with low-risk high gain.
Which one will you choose for your options trading strategies?
Here is an example of High-risk high gain – Risk: Reward = 1:1 while, Low-risk high gain means Risk: Reward = 1:5 (let’s say)
Why does consolidation happen?
1. After a sharp drop, many sellers closed their positions. This causes a retracement. Many use Fibonacci levels to get assumptive barriers.
2. Now if the demand is as high as supply; then the fight between buyer and seller makes the consolidation like a flag.
3. Otherwise, it creates bullish pennant or a bearish pennant (pennant after that huge bear i.e. red candle) if there is an imbalance of supply and demand.
In this case of Bearish Pennant –
Most of the cases it breaks downside on this pattern because you can see the pattern of decreasing height (high-low) of the formed candlesticks that demand is low and supply is high. A Huge red candle is created when the new buyers leave their positions and new sellers enter!
How to trade before the breakout
One can go short in the middle of that consolidation keeping the 5 points above line as stop loss.
It mostly happens after this kind of candlestick formation. You can see a wick on the upside telling that bears dominated and created that spike.
Next day’s Best setup will be hence shorting it keeping last day’s high as a stop loss. High wick of candlestick always happens at the end of the consolidation (i.e. pre-breakout days). You just need to keep an eye end of the day.
What excepted next
As soon as enough sellers jump in, the price breaks below the bottom of the pennant and continues to move down.
Why I am writing this stuff in this answer
Instead of touching the futures; I bet (Every trade is a bet as it has a risk employed for a reward) on the fact that it won’t hit the stop loss. To be, safer I had a look at the price at the middle of the huge red candle. It’s 150. So the bet is – Bank India will not touch 150 and we bet on the downside.
As well as expiry is near, so theta (Option price decreases near their expiry exponentially.) will kill the value.
I sold Bank India 150 CE.
Those who are smarter will do this
- Sell Bank India 135 CE
- Buy Bank India 140 CE
In this case, the loss is limited but it consumed double margin.
It’s not the options strategy that has to be the best. It’s all about the underlying concept of the trade setup that matters.
Update: It went into profit.