Always have a plan

ITC, the stock that has the butt end of jokes for almost a year now. Since December 2020, except for one occasion, the stock has been in a tight range of 20 odd rupees. Traders long in this stock were at their wits ends since the stock wouldn’t even hit their stop losses for them exit from it justifiably. Traders like me who don’t mind dabbling in options, have made decent money out of this sideways movement from what we call straddles and strangles.

But these strategies are naked. They can produce unlimited loss if not monitored properly. For a stock that was stuck in a range, rangebound strategies made sense. But what if it had broken the range?

A common way to deal with runaway options premiums for option sellers is to make adjustments. There are videos on YT of traders using up to 50 options to manage one sold call that had gone in the money. As dumb as it sounds, deep pocketed among us can do if they fell compelled to do so.

But what if we aren’t one of those? Simply taking an SL and accepting a loss is one. What if the option went so far in the money that it no longer has a reasonable liquidity? Should you bite the bullet exit at any point? Or may be hope for the market to reverse? What if there is literally zero liquidity? Then can you borrow money to somehow physically settle the contract?

There are numerous things that can go wrong in a trade. Best be prepared…