Break out strategy is best applied when some important news is to be announced, that can bring large movements in markets in either direction. This strategy uses Nifty options, both call option and put option, traders generally buy out of money call option and put option just before the news is to be announced.
Breakout Strategy with example:
Let’s take an example, when the results of general election 2009 were to be announced. Nifty was trading around 3900 level, we advised to buy nifty 4000 call option and nifty 3800 put options. Condition was to execute this strategy with same quantity. Next day when results were publicly announced nifty was trading higher by 5% and hit the upper circuit in few minutes of trade. In next few minutes nifty future went 9% higher. In this strategy total (combined) premium at the time of execution was 120 and next trading day we were getting total premium (premium from nifty 4000 call + nifty 3800 put) in excess of 520. Therefore getting more than 4 times gain using this strategy, so the point is in stock markets are lots of events in which large moves are expected but direction is not clear, in those cases traders can implement this breakout strategy. The only drawback this strategy has is, if market gives pause after the news announcement then you may end up in losses. So it’s better to select the event which is more important to the markets.