Here is a clever trading tactic used by one of my friends who is an Army Major just retired from short-service commission.
He calls this Reconnaissance Ambush Trading!
This he does with a team of Options and Futures.
Whenever his TA (Technical Analyses) suggests that the market is going to make a big move
he gets ready but doesn't deploy his "futures" straightaway!
Instead, he "sends in a reconnaisance team of commandos" to "test the waters"!
He buys an "out-of-money" call or put option (as the case may be)
and waits....
This option is like a reconnaissance mission which is used to determine the enemy forces disposition, intention, composition and capabilities without exposing the troops to danger.
He uses option as "cover" for his main "cash" troops!
If the option goes in his favour, that's what his TA predicted and that's what he wanted!
He is in a profitable position and all he needs to decide now is whether he should reinforce his winning position to make it big or just let the option run alone as far as possible.
If the option goes against his TA
he doesn't mind it!
This is precisely the reason he sent in his "options" before his massive "cash" troops!
There is a strong chance that market is bluffing and will give him more juicy position to deploy his big backup cash reserve!
Since he has an "out-of-money" option position, the loss is much lesser and limited as compared to the adverse movement in the market.
e.g. a 100 point fall results in a 25 point option bleeding. But a full recovery with futures or bigger option will result in net 75 point profit!
So, he patiently waits till the tide turns
and then he goes all out on the offensive either with bigger "in-the-money" option or with futures!
In his words
"When I get the signal, I send in the option squad. On the basis of information I get from this core team, I decide whether and when to send my entire company in the battlefield! Many a times, these Option commandos are enough for the assignment!"
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