Analysis: Andrews Pitchfork on Nifty

Andrews Pitchfork drawn on Nifty chart. This too shows that we are hovering around resistance zone.

Education: How to Spot Sideways Market Early?

A big question many traders ask is… why do buy and sell signals fail sometimes?  My answer is this…most auto-signals usually fail in a heavily range-bound, and sideways market. It’s easy to spot a trending market but not so easy to spot/predict a sideways market before we are into it for a substantial amount of time. However, it’s all the more important to spot a sideways market so that we can stay away and avoid making losses. One way to spot this kind of market is by plotting 5 minute/day Exponential Moving Average (EMA) and 20 minute/day EMA on the chart. If it’s intraday chart then plot minutes EMA and if it’s daily chart then plot day EMA. Now, in a trending market, the two averages will be separated for a reasonable number of time/days. In a sideways market the averages will cross each other up and down frequently in a short duration. For example, if you find that the 5 minutes EMA line crosses the 20 minutes EMA line from below, and you get a buy signal as well, but in the next few minutes, before making a substantial move up, the price corrects down thereby making the 5 minutes EMA line to cross 20 minutes EMA line from up, then this indicates a sideways movement for the underlying stock.

I have two charts showing these cases. The first one, an intraday chart, showing clear trends. The second one, a daily chart, depicting a sideways market (see highlighted portion). See how the 5 EMA and 20 EMA lines cross over each other from up and down in a short duration. This is very useful in intraday trading. I promise to post a sideways intraday chart as well...

Education: Option Straddle Strategy

Overview

At this point, most of us think that Nifty could move significantly, either up or down, isn’t it? If this turns out to be true, then we should definitely take advantage and make profit in option trading. The Straddle strategy suits for a volatile market. However this strategy would end up in a loss if the underlying price doesn’t move significantly and stays at or near the initial price. This strategy has limited risk and unlimited profit.

How to Execute?

We buy a Call and Put of a stock with the same expiration date. Strike price could be same or different. For example, if Nifty is trading at 5300, and we think that it can move below 5100 or above 5500 in the short term, we can buy 5300 Call, assumed to be trading at 100, and buy 5300 Put, assumed to be trading at 100. In this strategy the maximum loss is 200. Maximum profit is unlimited. Suppose Nifty suddenly drops to 4900 at expiration or before, we would make a profit of 300 in Put option and lose 100 in Call option. So the net profit is 200 points per lot. Fantastic isn’t it?

How to Exit?

We can close the positions by selling the Call and Put options either before expiry or at expiry. 

Education: Calendar Spread Option Strategy

Overview

Have you head of the saying “Lull before the storm”? This is quite common in stock markets. Markets tend to be quiet, with sideways movement in a small range before big moves in either direction. So how do we deal with such markets? We know that options have time limitations. And, we are able to purchase options that expire in any of the three months (series) including the current month. So if we feel that the stock price will be quiet without much movement till the current month’s expiry and might give big moves up or down in the next month, we can opt for the Calendar Spread option strategy. This strategy takes advantage of time decay and gives return in short term even if the stock price moves sideways/in a range. It also gives us security in case the big move happens suddenly, before the expiry of the current series itself.

How to Execute?

We can either implement this strategy with Call or Put options. Let’s assume that we have analyzed the stock price to move in a small range for the current month, but expect it to give big move upwards in the next month. In this situation, we sell a slightly Out-Of-The-Money (higher strike) Call that expires in the current month, and buy the same strike Call that expires in the next month.  For example, if Nifty is currently trading at 5000 and we believe it might be range bound between 4950 and 5050 in this month, we can sell 5100 strike Call expiring in the current month, and buy 5100 strike Call expiring in the next month. So if Nifty remains in the range till the current series expiry, the 5100 Call that we sold loses premium quickly and we can cover it by buying at lower price, thus making quick profit. Further, if as per our expectation, Nifty breaks out of the range and moves up in the next month, we can hold the 5100 Call that we bought and gain profit too. However, in the event of Nifty breaking out of 5100 range in the current series itself, still the loss that we make in the short position of the 5100 Call (current series) is capped by the long position in the 5100 Call that is expiring in the next series. Good deal isn't it?

How to Exit?

In case the market remains range bound, we can leave the short position and pocket the premium. Depending on the market trend, we can then deal with the long option that expires in the next series. However, if the stock price breaks out above the range before the expiry of the current series, then we cover the current series Call option (short) and hold the next series Call option (long).

[Note: ‘Long’ means bought position and ‘short’ means sold position. In case we are long, we need cover the position by selling the option. In case we are short, we need to cover the position by buying the option.]

Hope this will be useful. Comments are most welcome. In my next education series post, I will discuss Bear Call Spread and Bear Put Spread option strategies, both of which are ideal for a bear market.

Cheers!

Education: Bull Call Spread Option Strategy

Overview

Traders and investors like a trending market because it’s a bit easy to take positions. Trend can be up or down. Up-trending market is referred to as bull market. Unfortunately, markets don’t always trend up. Most of the time, they move sideways. Also there are times in an uptrend where the market continues moving up, with some possibilities of correcting down sharply surprising all participants. Because option market is time-based, we ought to have strategies that consider both possibilities. Bull Call Spread is one such strategy where you can limit risk as well as profit.

How to Execute?

You buy In-The-Money (lower strike) call and sell a Out-Of-The-Money (higher strike) call both of which expire in the same month. For example, if Nifty is currently trading at 5000 and you believe that it can move up to 5200 before expiry, you can buy 4900 strike call assumed to be trading at 200 and sell 5100 strike call assumed to be trading at 100. Maximum profit is made when the underlying stock rises above 5100.

How to Exit?

You just need to sell the In-The-Money (lower strike) call and buy the Out-Of-The-Money (higher strike) call. You can exit any time before expiry or allow the options to expire.

Hope this will be useful. Comments are most welcome. In my next education series post, I will discuss about Bull Put Spread.

Cheers!