After Reliance Industries’ AGM, the RIL GDR was up nearly 6% in International market. RIL on Indian market was up more than 10%.
How often have you seen a stock like RIL going up 100 Rs. in a day?
A lot of people have asked me about how to deal with stocks that are in news and there is super frenzy surrounded already? How can one trade such stocks?
Before I get to the answer, let us discuss what typically retail traders do in such situation:
- Buy RIL immediately once market is open. RIL opened at 1270 the day after its AGM.
- Some so called ‘smart traders’ look for shorting opportunities. They try to short the stock near 1275-1280
- Some buy far OTM puts thinking RIL will fall to 1200.
Here is what really happened:
- RIL opened at 1270 and traded near 1280 for a while until it went up and touched 1300.
- RIL closed nearer to 1300
With this, due to extreme volatility observed in the stock, options had very high IV. Ideally, sell the high IV options, but unfortunately, retailers bought options by buying PUTs.
As price remained near 1300, premium of 1200 PE eroded much quicker than anticipated, leading to retailers exiting the position in panic
Same happened with those who went short at 1275-1280. Price went higher, hitting stop loss.
Conclusion: Retail does not know what to do when such frenzy occurs in a stock. They end up losing both in short position as well as in options PUTs.
Question again is – How to Deal with Stocks in News?
First – Exercise inactivity. Emotions play big role in taking wrong position
Second – Do not trade at all. In that case do not trade in RIL at all for 2 days
Third – After 2 days, notice price action behavior and plot levels on chart. Notice where supply exist and where resistances are.
Fourth – Based on conclusion from 3rd step above, you can decide to buy ATM or near ATM put in RIL or if holding shares in account – buy covered call, or short intra-day based on levels
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