One of our readers purchased PUT options in Infosys just before the Q4 results were announced. After results, Infosys fell almost 20% giving large profits on the PUTs purchased. Our reader is a wise trader. He has questions on the trade. Here is his email:
I was lucky that
1. I got a sell signal on Tuesday and took the trade.
2. My stops did not get hit in the rise of Wednesday and Thursday
3. I benefited from the fall on Friday
Having said that, given the volatility of Friday, it was a high risk trade and could quite easily have gone the other way.
Under these circumstances, the three options I have going forward is,
1. Do not trade high volatlity events at all
2. Trade the event, but only by buying call or put options hence limiting downside risk but paying high IV in premiums, or
3. Continue trusting my signals, and trade them with futures, and expect that, over time, the percentages would work out in my favour.
I am still in favour of option no 3. From a trade management perspective, is this sound thinking ?
I do not trade news events. But if you do trade them, then option 3 – trade with futures is the best way, since call and put options command large premiums which inevitably drop after the event. The important point is consistency. You have to take all your signals, to enable probability to work in your favour. The mechanical systems that we run, ignore news events, continue to trade just as in option 3 above. We expect that the negative impact will be balanced out by the positive impact over a long period, giving us a net positive edge,