It is an offensive strategy.
It is an effective way of take profits and still maintain a market position.
A trader buys Rs100 call with Rs 3 premium. When premium rises to Rs.7, He will sell his position, thus making a profit of Rs. 4. Than he again buys a call at higher strike price of Rs.110. at a Rs 3. premium. Now he has paid the premium from his profit and still maintains the position. Is it not a better alternative to stop loss ?
This procedure can again be repeated at higher levels. Thus you are locking profits, while maintaining your position.
The markets may look overbought or oversold, based on some technical indicators. So the trader’s books profit. However markets are known to make significant price moves, higher or lower from these positions, traders can take advantage of theses blow – Offs.
It is an option version of ‘Let your profits run’
