Shubham Agarwal
Most of the Option Traders quit trading after first few trades. Because the ones that stay longer do not leave. Weird observation but it has a reason. The reason is that many times the losses in Options is not because of wrong view but because of errors.
These errors come from one or the other point crucial to Option Trading going out of sight. We primarily concentrate on the direction of the stock or the index. Well, guess what, it is just on the check listed points.
Let us discuss 7 important points that make a simple check list for us to follow
1. Trend: Never overlook this key criterion or reason for trading that needs mentioning at the beginning.
a. Buying Calls / Selling Puts: Bullish Trend Expectation
b. Buying puts / Selling Calls: Bearish Trend Expectation
2. Horizon: I have a price target of Rs 110 for a Rs 100 stock. If we are trading in Options we need to know by when do we expect this Rs 110 to come around because Option prices are not only affected by price but also by time.
a. If 1-2 sessions: Buy Call or Buy Put
b. If more than 3-4 sessions: Buy Call + Sell Higher Call or Buy Put + Sell Lower Strike Put
3. Volatility in Options: While this is a bit complex but a simple check will be easy to implement. Remember two things
a. Volatility in options is range-bound.
b. Volatility Drops >> Option Premium Drops
So, if India VIX is close to its recent high try not to just buy options. Resort to Buy Call + Sell Higher Call or Buy Put + Sell Lower Strike Put. This will help if volatility in options falls, Buy and Sell Options will compensate for the premium dropped due to a drop in volatility in options
4. Event: Event trading is a subject in itself. For this please trade options normally if there are no known events in sight. If you have results or big policy decision tomorrow, please do not over trade.
5. Time Left for Expiry: Option premiums drop due to faster passage of time closer to expiry. So if you are in the week of expiry, it is wise to not hold the option for more than one day because a drop in premium due to passage of time will be very high.
6. Liquidity: Although we have come very far in terms of liquidity but be careful especially while trading stock options. Avoid options that do not have 50-70 lots worth of volume with first one hour. Lack of liquidity could cost you your profits.
7. Ban List: There is a limit to which Futures and Options contracts can be created in a symbol. Many popular stocks go in ban list, where no fresh positions can be created. Beware of those stocks and try not to indulge in trading those.
These seven points are not enough but they are at least a good starting point in avoiding any loss due to errors.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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