The Power of Swing

In financial world, specially in stock market people want the spot price of any business or index to rise consistently without any downward movement. This is technically not possible. The reason being, people will tend to book profits at some point of time. When there is profit booking, stock will come down a bit and reverse back to its original trend. This will happen in any quality business not in a company which is sinking. This swing is factual and traders need to accept this before taking any position. Profit booking may occur for many season. These days, profit bookings happening very sharp due to uncertainties because of covid situation.

Accepting the swing in any quality business is the first step of defining a process of making money. No one should decide that the market will keep rising or it will keep descending. Now, defining the process for this swing means being unbiased. We should never be biased on any business at whatever be the pricing of the company being traded or whatever the news we see on the television. Being unbiased is not an easy step. Let's say when we see the stock or index declined around 10%, our emotions will say it will go down further or it will reverse back. This is the common word which will strike our brain most of the time in any violent move in the market.

A trader to be profitable should never listen these words hitting their brain. At any given point of time, he / she should be unbiased. We should never take a decision that the market will go up or down. We should be neutral and take a position in way we make money either if the stock or index go up or down. This is very expensive lesson a trader will learn in their journey. It is very important that the trader does not lose all their money by the time they understand this concept. Having the expensive lesson learnt without capital is of no use. So the concept is we should make money either the market goes up or down.

How is that possible ?. First, is that possible ?. Definitely yes, there are many ways the financial market gives these kind of opportunity else the big financial companies, businesses and banks will not be in the business of stock trading. One way for a trader in derivatives (FNO) market is selecting the strategy of Short Strangle or Short Straddle. This might require more capital compared to buying strategies in stock market. However selling far OTM on the nearest possible expiry is the best and easiest way of making money. Also this is another way of saving capital (which is more important).

Let's take the concept of short strangle. After taking the position at equal interval or at the same premium on Out Of the Money, if the market remains silent or neutral. The possibility of decay in premium is ok when the expiry is near. Market should stay within the range selected to make profit. Let's say the market is swinging in the range we have selected. In this case, the premium decay will be higher or sooner compared to the previous scenario. 

If the market falls around 2% after taking the position, in this case PE premium price will increase and CE premium price will decrease. Let's say next day, the market gains 2%. Now, the PE premium will decrease faster but the CE premium price will increase slower compared to the fall happened the previous day. If this process continues, then the premium can come down violently sooner. This is the power of swing.

The important thing is the trader should not close the position soon, when the market moves violently on the single side on a day (when the market is within their range). They should wait or should understand how to adjust the position during the swing to make more profit. So, a swing in stock market is healthy and have the capability to give more profits provided it is dealt properly. I wish every reader of this blog to understand the importance of swing in the market and understand how to make adjustments during the swing to make decent money. No quality stock or index will travel in a single direction and be prepared for that before entering.

Have a Great Day

B G Nareshkumar