We have spoken of this particular concept many a times in our earlier sessions.
The idea is from diffusion model i.e. whoever takes a position after the trend becomes clear through a price move will be punished for his lack of effort in getting into early in other words looking for easy money by following traditional technical analysis. But this doesn’t work well for options whether it’s buying or selling. Especially our focus of this post it identify such late lateef sellers who think selling an option in whatever situation works for them which isn’t true.
Take this example,
Let’s say the market tipped significantly lower from the opening minute and all of the crowd is invited into call selling and at a point the market stops moving lower and still the crowd doesn’t believe in a big rise and continue their call selling thinking that market should continue in the same direction but hardly they give a thought on the ability of the market to surprise them.
Now suddenly the market gives a surprise upmove out of nowhere trapping all the call writers. usually these moves are quick and sharp not allowing sufficient time for writers to make exits.
The same scenario can happen with put writers.
These scenarios are a very good R:R opportunities for option buyers in the size of the move, Identifying these opportunities is not that easy given the kind of volatility the market shows at times which makes it difficult to time these moves. However the good part about this is if you can capture a 1:2 R:R on the successful trades then you can very well be on +ve side with a 50% hit rate.
Some execution hacks
Identify a swing point as SL(Refer below) and enter 2 lots with a defined risk.
Let’s say based on the swing the SL is 217 then make an entry at 235-237 with 2 lots and keep a target of 257 for 1 lot and hold remaining for 1:3 i.e 297 or the 1 SD on the other side above vwap. This particular hack will help you avoid losses even if your trade goes wrong some of the times.
Identifying a low risk/high probability entry opportunities.
Step 1: Find a strike with “day high change in OI” preferably after 10:15 AM which is ATM/ITM or max one strike OTM but with a healthy premium. (Healthy premium for #nifty means atleast 120 bucks at any given point in the week)
Step 2: Assess price action and confirm if it’s showing strength after such event of “Day high change in OI”.
- As mentioned earlier in our posts for assessing strength one of the reliable thing to look at is a reversal back from 1 SD below vwap, in other words failure to go below 1 SD below VWAP with a day high change in OI somewhere near 1 SD.
- Use Boll % B indicator with a reading above 50 on a length of 20 if Chart Tf is less than 3 mins and 10 if chart tf is > 3 mins
Step 3: Once you confirm about the strength as per step 2 execute as per the execution hack mentioned above to have a minimal risk.
We will post some examples every saturday for this strategy for you to get more familiar with this concept.