3 key learnings in options trading for beginners
Options trading do get impacted by 3 aspects apart from directions, Shubham Agarwal explains here..
Many of us enter the world of options trading impressed by some or the other success story. Directional moves are what makes the equities one of the most exciting asset classes of all to work with.
However, when we come to Options one has to keep in mind one thing. While we are trading the same equities with same directions, Options trading do get impacted by 3 other aspects apart from directions.
Ignoring these 3 aspects would make it difficult to make money out of Options even for the champions of the directional trading.
Our 3 learnings are surrounded by these 3 aspects. Let us understand these 3 aspects and learn how to deal with them.
- Deal with Time of Trade when Buying & Selling:
We all know time related impact on the Options. Options lose value due to passage of time on a definite basis. Most of us are aware of it. Buyers now a days do not hold the Bought Option too long and Sellers sell Options to make money out of the time value related loss in the Options.
Input here is that the drop-in time related value in the Options is not equal for all the days. Lesser the days left for expiry faster is the rate at which premium will fall due to passage of time.
Learning: To make the most out of the Options, Buy Options when there is a lot of time left for expiry and Sell Options when there is very less time left for Expiry.
- Risk Premium in Options Premium.
Options premium just like life premium define the value of it as per the status of the underlying. If I have a bad health and my health is expected to have lot of ups and downs, my Life Insurance premium will be high. Similarly, a fit 20-year-old will have very less health-related ups and downs and very low premium.
Just like that, stock that is expected to go through ups and downs due to result or a policy decision or company specific event will have higher premium. Consolidating stock with no real events expected will have lower premium.
Learning: Unlike the life here the companies do transition from High Ups and Downs to no Ups and Downs when a specific event (results especially) is over. Due to this there will be a definite drop in the premium. So, while buying options and holding it through the result will have impact of lowering risk premium. Either avoid it or account for a total loss of premium before entering the trade.
- Underlying’s Sensitivity to Options Strike
Multiple Options are available to trade for the same stock, expiry and type (Call/Put). Out of 20s of Calls/Put, each Call/Put will behave differently to the same 1 Rupee movement in the Stock/Index.
Learning: Lower Strike Calls / Higher Strike Puts are more sensitive (Higher Moves in Premium) for any movement in stock. Higher the confidence Lower the Call Strike/ Higher the Put Strike we choose and vice-versa.
First published on 6 Jul 2024: prices, lot sizes and expiries are those of that time. They are illustrations for education only, not investment advice. Derivatives trading carries risk; read all scheme and risk documents before trading.
