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Can you please explain how one can be right about buying a call or put during the beginning of trading week? What data will help to make the exact decision of buying a call or put? In the current context, the markets aren’t tiring, and we would have a cash burn had we bought puts. So how to choose between call and put?
Sudarshan
First and foremost, it is important to know the prevailing trend. In that sense, you have the answer in your question itself. The market is clearly bullish and it’s ideal to buy call options rather than buying puts.
There is a common tendency among participants to think contrary to the existing trend and expect an imminent reversal. For example, one might feel that Nifty 50 has run up too much and it’s ripe for a correction or a trend reversal. This thought might lead a trader to buy puts.
But one should understand that the market is at its peak for a reason and usually, the probability of the trend continuing is higher than a reversal. Another situation can be a stock hitting record highs. We will be tempted to think that the rally is heating up too much and so, we anticipate a reversal. But as you might have seen, in most cases, the price will keep going up. The price goes up since the company is doing well and the rally will continue as long as the company does well. Hence, there is a reason.
So, it is important to know the trend and take positions along with it. You can read our F&O Tracker, where we analyse derivatives data and suggest what traders can do.
If you go along with the bull trend and keep buying calls, you will be wrong only once — when the trend actually reverses. Whereas, if you attempt to predict the top and buy puts instead, you will be right only once and be wrong most of the time, leading to the cash burn. No trader can get all the trades correct. So, with proper risk-management, even if you make one or two losses, net-net, you will stay profitable if you trade along the trend. After all, trend is your friend as traders would call it.
Send your queries to derivatives@thehindu.co.in
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