HOW THE HARMONIC PATTERNS HELP IN OPTION TRADING AND VOLATILITYThe underlying chart gives us the data but it is important to look into the options chart for the trade.
We normally wait for the breakouts to happen in the underlying chart but they happen way ahead in the options chart. By the time we take a trade in the options, it would have been late in options pricing.
Below is the bank nifty options chart
You can see that the breakouts are happening in both charts.
Normally, the terminal bar price for a XACBD bearish butterfly pattern will be at the 1.618 fib ratio. However, for the shorts who enter at this level, the stop loss will be the next fib ratio i.e., 2 in this case.
Shorts who entered at 1.618 would have exited in a loss at 2 level, then the price reversed drastically. The long traders who thought there would be a short-covering are trapped mercilessly.
This pattern would have benefitted the traders who entered at point B (164.5) and trailed until 1.618 level ( D=197). The price pushed above until 2 (212) but hasn't closed above it and came down quickly. This trade would have given at least 20% for the longs.
What I've learned from the harmonics in the volatile and fast-moving scripts is that always mark stop-loss levels also and wait for the price action to proceed.
This post is just to show the importance of harmonics in options trading and for educational purposes. Give a like and leave a comment if this helps you.
Happy trading :)
