Before writing the strategy, here are some rules you must follow:
1. You must be alert and stay on top of corporate announcements OR you should know how to interpret Open Interest data. This article will help you understand how to interpret Open Interest data.
2. You must not get greedy and be ready to book profits that accrue (anywhere between 25% to 300+%).
3. It is possible that this strategy can result in a loss. However, the loss will be marginal.
4. This is much more than a trading strategy – it can even be converted to an investment strategy.
5. You must patiently wait for a chance and not jump into any trade where you feel bullish. Remember, that your trade must be backed by data or information.
6. You must not invest more than 5%-10% of your capital in this strategy and that too you should spread it across different trades.
CASE STUDY OF THIS TRADING STRATEGY (for better understanding)
I usually track corporate announcements for opportunities.
On 26 October, I came across an announcement about Lupin. One of their drug had gotten FDA approval. Though the pharma sector is in doldrums, this news had the potential to jack up Lupin’s price by about 5%-8%. At that time Lupin was available at 990 and I tweeted about it.
Then, I scouted around for call options.
At that time Lupin 1100 CE 30 Nov was available at 11 and Lupin 1200 CE 30 Nov was available at 3. One Lupin lot is made up of 400 shares. These were affordable and I did expect the the price to rise on 27 October, the next day.
Tracking call options with a very high strike price may not sound appealing, but when the underlying starts moving, the premium on all strike prices multiplies rather quickly.
On 27 October, the stock price was muted and ranged between 998 and 1008. TV channels too did not flash the news about the FDA approval. BUT the call option premium started moving EVEN though the price was muted. The premiums were:
1100 CE 30 Nov premium jumped to 17 and closed at 14 while 1200 CE 30 Nov premium jumped to 4.5 and closed at 3.80. Typically when a share price is stagnant, the call premiums are either muted or lower than their previous close.
The higher call premiums indicated that operators were maintaining the price while picking up call options. Therefore, something was up.
It was possible that Call writers were happily shorting because they knew this was a nothing stock that would rotate around 1000 levels. Curious to check what was going on, I held on to the options.
Today the Lupin results were announced. The 1100 CE jumped all the way to 45 (300% gain) while the 1200 option jumped to 15 (400% gain). The call writers had panicked and were covering up their shorts. After
Had any of you invested, you would have made 100%-400% on your investment inside 1 week!
So how can you tell trending stocks to try this strategy? Here’s how:
- Track corporate announcements,
- Read my blog post on how to interpret Open Interest data, link is provided upstairs.
- To practice this strategy buy very distant calls because these are available very cheap. An investment in the 1200 CE Lupin lot on 26 October when the price was 1000 would have costed you Rs 1,200 and the same could have been booked today for Rs 6,000!
- Do not be greedy with this strategy unless you are 100% sure about the stock. If you are 100% sure the stock will move up, hold on to your cheap call. For example, L&T 1420 CE 30 Nov, is available at 2 bucks (1 lot = 750 shares). The stock is selling at 1234. If it starts rising, it can zoom to 1300-1400 in 2-3 trading sessions and at that time the CE should appreciate by 300%-400%.
- If you want to use a tool to predict trends, use this TREND PREDICTOR on this site. For best results, read the guide on the tool page and use the tool only after 1.30PM or 2.00PM because at that time the Open Interest data gives a more or less accurate picture. The later the better. 3.00PM data works the best.
Well, that’s it. Give this strategy a spin and give me a shout if you need help. Thanks for reading this article.