Timing matters
It is efficient to set trigger orders to initiate positions in the spot market. For instance, you could place an alert trigger order (ATO) to buy units of a Nifty ETF when the Nifty Index trades below a predefined level. The objective is to accumulate ETF units during sharp dips in the Nifty Index. You are not buying the units for a specific price target nor are you concerned about your trading horizon.
Options are dated contracts and wasting assets. That means an option’s time value will decay with each passing day and become zero at expiry. This means timing your position’s entry and exit is important. So, going long on a call option because the Nifty Index has declined may not be optimal unless you observe signs of a price reversal. Why? It may take a while for the index to reverse and move up by which time the option could expire worthless or could lose significant value because of time decay.
What about breakout trades? While futures contracts are good for breakout trades, as they move one-to-one with the underlying, options are good for price reversals. This is because the maximum you can lose is the premium paid to initiate the long option position. That means it is optimal to buy options on the first sign of a price reversal, not when the Nifty Index moves above a predefined (trigger) price and offers more conviction of a price reversal. If you use a trigger order for options based on price breakouts, you may have to pay a higher premium as the index would have to move up to trigger the order. That means paying more for time value and, perhaps, larger loss from time decay.
Then, there is another issue. If the Nifty Index were to gap-up on opening, the strike you chose to buy using the trigger order may already be in-the-money (ITM). That would mean paying for the option’s intrinsic value as well. The issue is two-fold. One, buying an ITM option may not be meaningful as the intrinsic value is fully priced into the option. And two, as the underlying moves up and the strike become more ITM, its liquidity reduces, leading to mispricing.
Optional reading
If you cannot initiate trades during market hours, you may have to place after-market orders. The advantage is that the order will not be filled if there is a gap-up in the underlying because of which the option price moves up sharply. Also, the order is valid only for a day. The flipside is that limit order may not be filled if your bid is very conservative. That said, after-market orders may be more useful than ATOs for initiating option positions.
(The author offers training programmes for individuals to manage their personal investments)
Published on March 28, 2026