The projected movement in a specific stock or index is exploited using various options trading techniques. Buying and selling puts and calls, or both, at the same or different strikes of stocks or the index, are all possible in an options strategy. Traders can do this in order to profit from many perspectives on the underlying stock or index, including:
- Bullish – Expected trend-up movement
- Slenderly bullish – Mild upswing anticipated
- Neutral – Expected movement within a range
- Bearish – Expected downward movement
- Slight bearish – Mild downturn anticipated
How to Form an Opinion on the Market or a Specific Stock
On the basis of technical analysis, fundamental analysis, or anticipated news, opinions on a stock or index are formed. In my experience, while trading options, a viewpoint based on technical analysis is the most effective. Am I slanting? Maybe, the majority of the time, making money in the stock market is difficult enough. Adding a time component makes it considerably more difficult.
All the fundamentals and news are frequently included in charts and current prices. Particularly so in India where insider trading is prevalent and certain people have a better education than others. This is demonstrated by the fact that stocks move wildly days before any significant relevant news is released. Knowing what they are doing, which we can find on the charts, is the only way to defeat these insiders. Stocks move due to fundamentals without a doubt over the long term, but it is debatable whether they do so for the same reasons in the near term. Option trades only last a month, thus they have little to do with long-term fundamentals. This brings up several crucial time-related difficulties, which we will now talk about.
The significance of Time to Expiry when Choosing Options Trading Techniques in India
The most crucial thing to keep in mind when trading in India is that the options for the current month are currently the most liquid. Therefore, if the anticipated movement does not occur by the time of expiry, the options expire worthlessly. Regardless of how certain one is in a stock’s movement. The fundamental reason why Indian options buyers must cope with time-to-expiry difficulties sets these strategies apart from ones that are effective elsewhere. Options with global far-month expirations that are several months or even years away are quite liquid. As a result, we will only talk about trading tactics in this blog post series that are especially beneficial to Indian traders.
On the Internet, there is a wealth of excellent material on the subject for traders who want to learn various trading methods. The goal of this blog post series is to make you a better trader rather than a derivatives expert. Hence, we will avoid getting into specific theories and instead focus on actual trading challenges and concepts. If you’d like a theoretical explanation of tactics, you can reference common textbooks on choices that truly dive into pay-off diagrams.
The time element mentioned above hence necessitates codifying some specific unwritten standards that Indian traders should adhere to. You would have a much better chance of succeeding in the Indian options market if you follow these guidelines. These are the guidelines that shrewd Indian traders have learned via experience in the Indian stock options market.
Utilize Option Trading Techniques that also Include Selling Options.
The selling of options is a key component of the most effective methods in the Indian environment. Traders take this action to lower their net investment. Even if the news they have is accurate, traders and investors should keep in mind that it could take some time for the price to move in the desired direction. However, they will nonetheless lose money if they exhaust their time on a particular option. Option purchasers should keep in mind that option sellers are very intelligent individuals and that there is a very high likelihood that they have factored in fundamentals and anticipated news. Sometimes the amount of sold options may even be two times that of the purchased options. This is covered in more detail in many of my YouTube videos.
The Minimum Net Investment Should Be Made, and Returns Should Be Calculated on a Net Investment Basis.
Investors and traders should keep in mind that they can lose money even if the stock goes in the direction they anticipate. This is especially when adopting strategies that entail buying options. This may occur if we employ a very costly method. and the favorable movement is not sufficiently significant to make up for the high cost. This may also occur if the seller has priced in the anticipated movement of the stock and very expensive options have been purchased. Traders must always keep in mind that the odds are always stacked in the option seller’s favor. This is because he or she likes to price in every imaginable market event and stock movement. All of the tactics covered in this blog post series aim to reduce the net investment.
Consistently sell high implied volatility as a covered call or a straddle.
Here in this blog post, the implied volatility idea was covered in great detail. There and in this blog post on unique circumstances, it is discussed that selling options offer the best chances for financial success. Again, it’s crucial to keep in mind not to sell naked (or unhedged) options and to take protective measures if unhedged options are about to crash. The task of the option buyer is made more challenging by selling high-volatility options since it raises the threshold at which he can be profitable. Additionally, times of high volatility are followed by times of low volatility. As a result, the option buyer loses both precious time value and the volatility premium.
Watching Market Conditions while selecting Options Trading Techniques
Always keep in mind that markets trend just 30% of the time, hence range-bound movement strategies are essential for traders.
We can not use options buying to profit from range-bound movement in stocks or the market. It’s crucial to keep in mind that consolidations come after trending moves, which then trigger more consolidations. 70% of the time, the market trades within a trading range with no discernible up or down moves. Market trends only occur in the market 30% of the time. A trader can now express an opinion on the range-bound market thanks to the options market.
Traders must bear in mind that, as we covered in a previous example, it is less crucial that your perspective be entirely accurate than that you adjust your approach consistently over time. The market may start trending when you are set up for a range-bound market, or vice versa. Even the best traders in the world can experience this. It is crucial for a trader to recognize this right away and adjust his strategy accordingly. Of course, it helps in these situations to have purchased less expensive options and sold the more expensive ones.
Watch out for well-publicized options trading techniques because they cost more to implement.
Sometimes It’s Worth It to Use the Opposite Approach
Financial media frequently recommends option techniques in an effort to “assist” retail traders. I wish it were so easy. For instance, they frequently suggest a technique called buying the straddle during the budgetary period. This entails purchasing a call and a put with the same strike price. The straddle ends up being very expensive and it is hard to make any money by taking it on because everyone tries to jump on this apparently money-making bandwagon. There are additional situations in which we strongly advise buying calls or puts to lower risk. Since the market would have already discounted the full anticipated price move, it makes sense to act in the opposite at these times; of course, this must be done with proper hedging.
Avoid engaging in options trading unless you have a solid understanding of technical analysis and access to charting data.
As I already mentioned, in my opinion, technical charts are the only way to consistently profit from trading options. Due to the lack of liquidity associated with the longer-term options, this is especially true in India. I think that only charts can provide a realistic picture of the price movement anticipated over the course of a month.
Making Money with Options Trading Techniques does not Depend on Market Timing.
I want to emphasize that trading options are not about predicting market movements. Even though having an opinion on the market is crucial, buying or selling options or methods solely because you think the market is rising or falling is a little oversimplified. Once you have a viewpoint on the industry, it is crucial to ascertain how long the anticipated movement might last. The implied volatilities of the relevant options should then be ascertained. The trader should then think about the ramifications of his deal failing and have a backup plan in place to minimize damage. In other words, you must calculate the risk-to-reward ratio clearly. The winner of an options trade is similar to the winner of a chess game. Here too, he may not have the finest insight. But he would bet when most of the factors were in his favor.
Getting an Early Start on Information
To make a wise judgment when trading options, we can do the following exercise:
- Form a viewpoint about the stock or the market.
- Calculate how many days it will take for the view to appear.
- Use a credit strategy (one that deposits money into your account) as often as feasible as opposed to a debit plan (one that takes money from your account). Even if the market or the stock does not move as much as you had anticipated, a credit strategy still works.
- Determine the implied volatility of the relevant options.
- Consider the worst-case scenario in the event that the plan fails.
- Calculate your trade’s breakeven point and, if you can. Try to make it risk-free if things start to go your way. You can start taking profits on some options and purchasing or writing additional options with various strike prices.
We are now ready to join the fascinating realm of options trading techniques. We now know the aforementioned tools and a market perspective. In each instance, we will first outline a plan before demonstrating how it is put into practice in the Indian setting. This blog post provides an explanation of how to evaluate option strategies using Options Oracle software.