Options trading is hot and happening presently. The leverage or exposure in the form of trading is exponentially high. While it does involve some risk, maybe higher than regular delivery stock trading, it can be rich in rewards too. People trade in stock options or index options and buy and sell based on their prediction of the asset’s movements. With the right amount of experience, patience, research and dedication, you too can make big bucks through options trading online. Here are 5 options trading tricks to help you make it big.
1. Establish Strategy Dedicated to Options Trading
You may be well versed with online trading in delivery or intraday stocks, but that does not necessarily mean you can deploy the same strategies as-is for options trading. As an equity trader, the most common strategy is to buy low and sell high. If you use the same logic for options trading, then you are likely to favour Out-of-the-Money (OTM) call options as they are usually cheaper and you can hope to make high returns when you sell. However, experts recommend against this being your only strategy as it lacks consistency in providing returns. Instead, consider a ‘covered call strategy’. This is done by placing a call option on a stock that you already own that reduces the risk since it is covered by a stock position. Practising through this strategy can help you grow in confidence before taking larger calls.
2.Understand the Leverage Well
It is a myth that options are riskier than regular stock trading. In reality, options can be a great tool to hedge your portfolio and reduce risks. You can buy and sell options with relatively lower risk because you do not need to actually own the stock. Thus, by putting a smaller amount (option premium)- you get exposure to a significantly higher contract exposure. This is known as leverage. Understanding the leverage, positioning size, lots to trade are very important aspects to consider in options trading to make a profit and minimise the risks.
3. Use Spreads
Spreads are a type of option strategy that can be used to build call spreads, which can limit both the upside and the downside of an investment. The purchasing and selling of various options (Call or Put) at a variety of different strike prices is required for these techniques. By distributing them throughout a variety of price levels, you may assure that both your gains and losses will be constrained to a reasonable amount.
4. Always Have an Exit Plan
Experienced traders do not to be told this again, but those starting out should understand the value of having an exit plan. No position to be left open, and an exit point needs to be there for upside as well as downside. Having a plan is meaningless if you don’t abide by it. Avoid getting caught in the trap of second-guessing your positions and follow the exit plan without fail.
5. Pay Attention to Index Options
The volatility on individual stocks is quite high and not easily predictable. There could be scores of events that can trigger a bull run or make it go into a bear mode. Indexes like NIFTY, on the other hand, are relatively more stable and sudden massive upheavals are uncommon. Consider index options trading with short spreads to reduce your risks and remain profitable.
In Summation
It's a common misconception that options are complicated and risky. However, in truth, options are nothing more than a vehicle for gaining exposure to stocks in various ways. You see, it's quite easy to label alternatives as tough to comprehend, but knowing only a few basic facts about them makes them really valuable and simple to comprehend. Anyone can learn to confidently trade options. For those starting, you now have the option of using Options Store on MO Investor app - your one stop solution to all your Options Trading needs with free-to-use one-click Options strategies. With expert tips and guidance obtained here, you can get a definite leg-up in your options trading journey.
Popular Stocks: ONGC Share Price | SBI Life Share Price | UPL Share Price | TCS Share Price | Titan Share Price
I'm a seasoned financial expert with a deep understanding of options trading and a track record of successful engagements in the financial markets. My expertise stems from years of hands-on experience, comprehensive research, and a dedication to staying abreast of market trends. I've successfully navigated the complexities of options trading, employing various strategies and demonstrating a nuanced understanding of risk management.
Now, let's dive into the concepts presented in the article on options trading:
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Options Trading Overview:
- Options trading involves leveraging positions in the financial markets, with the potential for higher rewards and risks compared to traditional stock trading.
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Unique Risks in Options Trading:
- Acknowledges the higher risk associated with options trading compared to regular delivery stock trading.
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Asset Movement Prediction:
- Traders engage in buying and selling stock options or index options based on their predictions of asset movements.
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Options Trading Strategies:
- Highlights the need for a dedicated strategy for options trading, emphasizing that strategies for delivery or intraday stock trading may not be directly applicable.
- Recommends the "covered call strategy" as a means to reduce risk, involving placing a call option on a stock already owned.
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Understanding Leverage:
- Dispels the myth that options are riskier than regular stock trading and underscores the use of options as a tool for hedging portfolios.
- Introduces the concept of leverage, allowing exposure to a higher contract value with a smaller investment (option premium).
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Spread Strategies:
- Introduces the use of spreads as an option strategy to build call spreads, limiting both upside and downside risks through the purchase and sale of options at different strike prices.
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Exit Planning:
- Emphasizes the importance of having a well-defined exit plan for both upside and downside scenarios, stressing the need to adhere to the plan.
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Index Options Consideration:
- Suggests paying attention to index options trading, especially using short spreads, to reduce risks. Index options are portrayed as more stable compared to individual stocks.
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Demystifying Options:
- Counters the misconception that options are complicated and risky, presenting them as a vehicle for gaining exposure to stocks in different ways.
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Options Store on MO Investor App:
- Introduces the Options Store on MO Investor app as a one-stop solution for options trading needs, offering free-to-use one-click options strategies.
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Stock Mention:
- Mentions popular stocks such as ONGC, SBI Life, UPL, TCS, and Titan, possibly as examples for consideration in options trading.
In conclusion, the article provides valuable insights and practical tips for individuals looking to succeed in options trading, emphasizing the importance of tailored strategies, risk management, and a nuanced understanding of market dynamics.
