Options Trading Pro Tips

If you're an option buyer and want to make money then This is for you. If you are a beginner or you are in intermediate then this is for you. Then compared to the training that costs 50-60K. I will tell you Five points.

First Point

We have discussed many times that if someone buys the "out of the money" option, their chance to face loss increases. I'll simplify the concept of the "out of the money" option for those who don't know.

If NIFTY is at 17K and you buy any call above 17K it is out of the money. A retail trader often buys an impractical out-of-the-money option. And the reason behind it is because they are cheap.

Those calls may also be available at just Rs 15. That's why retailers buy it. But it's just a lottery that ends up causing them a big loss. I don't mean that you should never buy a deep out-of-the-money option.

Only buy it in the following situation that may arrive only 6-7 times a year. It has a great chance of making money. For this, you are required to get your estimates and anticipation right.

For example, if you had paid attention a few weeks ago to all the tension building between Russia-Ukraine you would've known that a panic wave may come along.

You have to understand that option prices increase due to fear whenever IV increases. If you had bought that option before the increase of IV, it's your profit.

So buy a deep out-of-the-money option only when you are planning a uni-directional big move within a short period. Always remember this.

Second Point

Avoid buying options on Fridays as much as possible. The reason is that a weekend is the biggest enemy of an option buyer.

A lot of institutions or big option sellers sell their options on this day. That's because there's something called TIME VALUE.

You must have noticed that you face a loss when on Monday the spot price is exactly what you bought on Friday. Because TIME in itself is valuable.

And the premium of the option you buy still expires on the weekend without stopping. So never repeat this mistake as an option buyer.

Third Point

Don't do average in option buying. Instead, you should change your strike if you're too confident. Meaning: suppose you bought a NIFTY put and NIFTY gapped up due to some reason.

But you still have conviction based on your chart and analysis that NIFTY may fall from here. So, don't take that option only, because your option is a bit out-of-the-money.

The deeper the out-of-the-money option, the quicker its premium will expire and increase just as slowly. Have you all ever wondered why this happens? That's because the seller and time value both are attacking plus it would become an out-of-the-money option after the gap up.

So let's assume that you bought a put of NIFTY at 16,500 and it closed on the same day but the next day NIFTY opens at 16,800. Don't average down 16,500 even if you want to buy put you can exit with stop loss if you want.

And even if you do want to buy a put, do it for 16,700 or 16,800. This way, you're saving both yourself and your conviction. You all must be excited to do option trading you still need a broker to do so.

Fourth Point

Everyone has hyped the word HEDGING so much in the past few years but you should note that HEDGING is not your weapon as an option buyer.

It's useful to you as an option seller but not as an option buyer. I'll tell you how. So let's take an example where you want to hedge and buy call and put both. In the first scenario, let's assume the IV is very high like nowadays.

Due to this, you're buying an expensive option. You're buying a Rs 50 option in Rs 100. What's the risk though? The risk is that when the IV comes down the extra money you gave will be of no use.

In short, you've lost a margin of Rs 100 already so now you need an effective move. Second option... The reason an option buyer buys is that he has restrained capital. 

Firstly you can't put in the strategies of option selling but while applying strategies of option buying, you reduce your returns.

So to take an overnight position as a buyer we must be expecting a massive move as discussed before secondly you will do intra-day as much as possible and thirdly you will play with stop loss.

Pay attention to your position size. Meaning: let's say you have Rs 1 Lakh and an option you see is worth Rs 10K per lot. So you shouldn't buy 10 lots, instead, you should buy a maximum of 2-3 lots.

How this will help you is that this 20K you invested will turn into 35-40K in itself. And if the market gaps down, your max loss would be 20K, and if you're losing more money because of deep out-of-the-money, exit as soon as possible.

So as an option buyer, your time, position size, and stop-loss rather than hedging is a more important tool.

Fifth Point

Option buyers are baited around a lot in the name of strategies. And you'll hear a lot about non-directional strategies.

Shall you trade on a long straddle? No. Because straddle and strangle are non-directional strategies. But to summarize non-directional strategies predict that a market will stay in a specific range.

I told you about the two enemies of option buyers: cooling-off IV and time. In any of these cases, your premium will expire.

So as an option buyer, you can diversify your position but don't venture too far away. Another important point is that an option buyer should become an option seller as soon as he reaches a capital of Rs 50 Lakh.

I know you may want to argue that there are traders who option buy even though they have crores. If in a population of 130 Crore, 5-10 people are doing something is it a good measure to know whether you can do the same or not? You have to understand that people who are doing this have backup capital.

I meant that they all have some alternate source of income apart from trading. So if you don't have a backup then that's the first reason to not do it. So you may still do option buying after Rs 50 Lakh of revenue but not every day.