A significant problem with most options traders is they start with some selling strategy (like a straddle) as the template.
But profitable options trading is about creating a different strategy, not continuing the same straddle. I call it Hit-and-Run.
Hit-and-Run Strategy.
It is a simple options buying strategy in which you shortlist a few stocks based on price action and open interest. Then you take a trade at open and book profits within 15-30 mins.
Before we learn more about ‘Hit & Run’ Strategy, let’s understand more about basics of options trading.
Options trading is a type of trading instrument that allows traders and investors to take advantage of potential price movements in underlying securities without purchasing the underlying asset itself.
Options are financial contracts that give buyers the right, but not necessarily the obligation, to buy or sell an underlying financial asset at a predetermined price within a specific timeframe.
With options trading, traders can benefit from both rising and falling markets—known as long and short positions, respectively—without having to own the underlying asset.
To begin options trading, there are some essential terms and concepts you should familiarize yourself with first. These include option types (calls & puts), strike prices, expiration dates, and time frames, premiums, volatility, Greeks (delta, gamma, theta & vega), order types (market, limit & stop orders), and margin requirements.
Option Types: Calls and puts are the two most common types of options contracts. A call gives the buyer the right to purchase a specific asset at a predetermined price on or before the expiration date. In contrast, a put gives the buyer the right to sell an underlying security at a predetermined price on or before the expiration date.
Strike Prices: The strike price is the predetermined price that determines whether or not an option expires in-the-money (ITM) or out-of-the-money (OTM). If an option’s strike price is below its current market value, it will be ITM; if it is above its current market value, it will be OTM.
Expiration Dates and Time Frames: Options have specific expiration dates that determine when they expire and can no longer be traded. Generally speaking, the further out an option’s expiration date is, the higher its premium (the price of the option).
Options can also have different time frames—weekly or monthly—which gives investors more flexibility in their trading strategies.
Premiums: The price of an option is known as its premium, which traders pay to purchase a contract on a particular underlying asset.
Premiums are majorly determined by two main factors: volatility and time frame. Volatility measures how much an underlying asset moves with respect to changes in market conditions, while time frame refers to how long an option is valid for.
Volatility: Volatility is a measure of the degree to which prices of underlying assets fluctuate over time. The higher the volatility, the more expensive an option will be because there is a greater chance that its price can move in either direction before expiration.
Greeks: There are five main “greeks” or risk measures used to assess options trading strategies: delta, gamma, theta, vega and Rho.
Delta measures how much a portfolio will change in value if its underlying asset moves by one point; gamma measures how sensitive delta is to changes in the underlying asset’s price; theta tells you how much time value an option loses in a given period; and vega tells you how sensitive an option’s price is to changes in volatility.
Order Types: Options traders can use different types of orders when conducting their trades, including market orders, limit orders, stop orders and trailing stops.
Market orders are typically used for quick trades as they are executed almost immediately at the current market price; limit orders allow traders to specify a certain price at which they want to either buy or sell an option; stop orders allow traders to set thresholds that activate when pre-set prices are reached; and trailing stops move with the asset’s price until it reaches its target point.
Margin Requirements: Finally, options trading requires margin—an initial deposit of cash or securities that a trader must maintain in his account. The level of margin required depends on the options contract and is typically set by the stock exchange or broker.
Options trading can be a complex and lucrative form of investing if done correctly, but it requires an understanding of the above terms and concepts before you can begin. Understanding these key elements will help ensure you make informed decisions when trading options.
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Then What is “Hit and Run” Strategy?
I look for stocks with solid price action setups and received good open interest on the previous trading day.
Open Interest (OI) is an important concept in trading that can be described as the total number of outstanding contracts or options with a given expiration date for a particular security.
Open Interest does not indicate the direction of market trend, but it provides insight into a specific market's liquidity and depth. It also reveals how many buyers are willing to take on long positions and how many sellers are taking on short positions.
For example, HDFC Bank was one of my favorite trades this month, which moved over 6% in a single day (one can imagine the returns in options buying).
I shared this trade in the live market on my Telegram Channel.
Image - HDFC BANK after 10-Nov Market Close
The above image shows the HDFC BANK chart. On 10th Nov, the price engulfed the last 6 trading days (consolidation days), and this activity occurred just below the resistance line.
This indicates the potential failure of shorts buildup, and if the price opens above the resistance line, the sellers will run for cover.
Image - HDFC BANK Futures and Open Interest after 10-Nov Market Close
If you observe the HDFC BANK Futures and open interest chart, OI has gone up along with an increase in the futures price, this indicates strong players have carried their positions.
Image - HDFC BANK on the next day (15 min chart)
On the next day, HDFC Bank opened with a gap above the resistance line.
After some time, it took support exactly at the resistance line.
After this, it blasted on the upside!
If we buy call options at this point in time, it will give good returns. Besides, there is no need to worry much about time decay, as it is monthly options.
I call this a ‘Hit & Run’ strategy.
I took many more such trades this month, and you can check my telegram channel to know more.
I hope this information is helpful.
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