Are you looking at ways to make money in the stock market when it is slowly moving downwards? Options trading is an effective strategy to capitalize on the movement of stocks and other assets. In this blog post, I’m sharing my experiment with options trading during a semi-bearish market period. This also includes a time when market is slowly trending down. I will explain what I did and the results of my experiment so that you can decide if this is a good strategy for you. Read on to find out if this is something you should be doing to make some extra money on the side-lines.
A. Definition of Option Trading
Options trading is a form of investment that allows you to speculate on the future direction of a stock or other asset. Instead of purchasing the underlying asset itself, options traders buy and sell contracts that give them the right (but not the obligation) to purchase or sell an asset at a predetermined price in the future. These contracts are known as call options and put options. Call options provide the investor with potential profits if the price of the underlying asset rises, while put options can be used to hedge against losses if prices decline.
B. Overview of the Semi-Bearish Market Period
A semi-bearish market period refers to a period when the stock market is in a state of slight decline. Currently, the market is lazily moving downwards. The present market climate has presented an opportunity for traders to experiment with new options trading strategies to limit losses and maximize profits while playing the index on the downside. Thus, while a purchase in the cash market will be in red, they will make some extra bucks with options.
Are you confused??
Let’s get into my Lab…..
II. Experiment 1- (27th Feb, 2023)
The challenge of this experiment was to find a way to make money during the semi-bearish market period without taking on too much risk. I chose an options trading strategy, which would limit my losses if the price of the assets remaining in a certain range but also provides unlimited profit potential should prices decline.
For my experiment, I set an upper limit for the Nifty index at 17600 and a lower limit at 17000. Then, I bought:
17200 Put Option (PE) – 1 lot
17700 Call Option (CE) – 1 lot
Sold, 17500 Call Option (CE) – 1 lot
End of expiry on March 2nd if Nifty is in between – 17200 to 17500 then profit will be 1200/-. Loss will start from 17530. Maximum loss will be 8800/-. Maximum profit is unlimited with Nifty moving downwards.
I bought 3 lots of 2nd March 17200 PE @ 18.60
III. Conclusion and Further Exploration
A. Summary of Results
Overall, the experiment was a success. On 27th Feb, the profit was showing as 1220/-, while on 1 Mar, the profit had reduced to 25/- (Unrealised). Finally on 2nd Mar when all positions were closed at 17354 Nifty index level, the final profit I made was 1210/-.
Closing rates at 17354:
Buy -17200 PE – 0.70
Sell -17500 CE – 0.95
Buy -17700 CE – 0.45
Strategy 2 was less successful than Strategy 1, with the loss increasing as the Nifty index did not move downwards fast enough. On 1st March unrealized loss was 2340/- for all three lots purchased and this only increased on 2nd March.
B. Further Exploration
This experiment provided me with some insight into how to trade options during a semi-bearish market period and also showed me that it is possible to make money even in a bearish market.
- Understand the Market Dynamics of a Rangebound Market with a Downward Bias
- Analyze the Risk and Reward Potential when Setting Your Stop Loss as close as 108 Points
- Develop an Exit Plan for When Your Stop Loss is Triggered
- Monitor Market Conditions in Real-Time to Make Informed Decisions
Going forward I plan to further explore other options strategies for trading in bearish markets such as spread trading and straddles. Additionally, I will conduct more experiments with different stocks and trading strategies in various types of markets to help you better understand how to use options trading as a way of making extra money on the side-lines.
Moral: Hedged positions provide better returns than unhedged positions in a slow-trending market.
That’s it for this experiment on options trading during a semi-bearish market period. I hope that by sharing my experiment, you can gain some insight into how to make money in the stock market even when prices are declining. As always, remember to do your research before trading and never trade more than you can afford to lose. Happy trading!
Option Trading when Market is slowly trending downwards
When a market slowly trends downwards with no definite breakout and frequent reversals, it becomes difficult to take a plain option buy call. Simple call buying or put selling may wipe out the entire capital if a sudden move comes on the opposite side of the trade. On the contrary if there is no movement then the time value and no volatility will eat up much of the options premium. In such situation you may find that price has not moved against you but still you have gone bankrupt. In this blog post I have conducted an experiment with an Option Trading strategy that I thought could handle this kind of situation.
Overview of the Market
On 10th March 2023 Bank Nifty was at 40485. I predicted the upper limit at 41700 and the lower limit at 39632. All these are based on daily charts. As you can see the Index has hit the upper end of the trendline and is moving down. It is a downward trend but not a sudden drop though. The Stochastic plotted below is also showing signs of moving downward now.
Experiment 2- (10th March, 2023): The Option Trading strategy
Buy – 16th March 39300 PE @ 37.65 – 1 lot
Sell – 16th March 39500 PE @ 52.55 – 2 lots
Buy – 16th March 40100 PE @ 142.10 – 1 lot
I did not sell today Bank Nifty being at 39564 (Cash Market). Hence unrealized profit at EOD was 4774/-. I held onto on to my positions as the maximum profit was showing as 13134 if Bank Nifty closes around 39600 on expiry i.e on 16th March. If I would have sold it today, I would have got 4774/- which is far less than what I will get if I hold the position till expiry and if current volatility prevails.
Bank Nifty was at 39169. I closed the above positions at profit of 8296.25
Buy – 16th March 40400 PE @ 237.10 – 2 lots
Buy – 16th March 40500 CE @ 304 – 1 lot
Sell – 16th March 41700 CE @ 26.10 – 1 lot
Bank Nifty is at 39564 (Cash Market). Closed the position at the below price:
B – 16th March 40400 PE @ 837.25/-
B – 16th March 40500 CE @ 67.50/-
S – 16th March 41700 CE @ 15.10/-
Profit – 26,006/-
Strategy 2 produced better result. This was an unlimited profit with limited loss approach. Both the 1st and 3rd leg of the strategy made money. Thus, although leg 2 lost money, it was compensated by the other 2. The call option purchased was slightly out of the money and hence was cheap.
Strategy 1 could not compete with strategy 2. It was a limited profit limited loss strategy. The put option that was sold decreased the amount of profit as its price went up when market came down. Also, IV is high when market goes down. This increased the option premium.
Unlimited profit with limited loss strategy can be devised in a mildly bearish market when the market is slowly but steadily going down. It may cost more. But if option buying can be done on the side of the trend and some hedging position is created to cushion the opposite move, then that will give the best result. Hence people can use option trading to make money even when their investment portfolio is going to the red every day.
Moral: Buy options on the direction of the trend.
Useful Websites and Apps for Options Trading – Zerodha kite
Online Courses and Tutorials to Master Options Trading Strategies –