InvestorQ : What are some of the important rules and tips I need to keep in mind while trading in options?
rhea Babu made post

What are some of the important rules and tips I need to keep in mind while trading in options?

2 years ago

Like in the case of equities, you need to the requisite research in the case of options too. It is not just about odds and stakes. Options also entail a lot of discipline and in-depth study. Here are a few tips and resources to help you trade options.

Ensure that you trading platform is a comprehensive repository of options data

If you want to trade options meaningfully and profitably, you need to be equipped with a plethora of tools for the same. You need to be readily prepared with the options chain of available options contracts, key statistics pertaining to volumes, open interest, and volatility, Probability calculator to help assess the chance of prices, a profit/loss simulator that helps evaluate the potential risk vs. reward of a trade, macro data, sensitivity analysis, Black and Scholes Calculator etc.

You cannot trade options without understanding the options chain

The options chain is your most actionable sheet for taking decisions on what options to buy and what options to sell. This is where all options contracts for a particular stock or index are listed. The option chain includes vital information, such as the type of options available (calls and puts), strike price, expiration date, Greeks and more, and is found in the options chain. The best way to get an idea of an options chain is to look at the actual representation of an option chain on the Nifty index as below:

This is option chain is available on the NSE website and also on most of the broker websites as well as the trading platforms. The yellow shaded portion of the calls and the puts shows the contracts that are in the money (ITM) and the non-shaded portion represents calls and puts that are out of the money (OTM). This option chain gives you a quick idea of where the accumulation is happening and where the unwinding of positions is happening. These are useful inputs for option decision making.

Make use of options tools and other value ads

While fundamental metrics such as earnings, revenues, and costs can help analyze stocks, there are several important statistics that are commonly used to analyze options. These include implied (or forecasted) and historical volatility, the number of contracts traded in a day, open interest of, the prior day and the live OI, powerful tools that can help you analyze and select among the different options contracts etc. such as: In addition, you can use calculators like Greeks, Profit/Loss calculators, position simulators, probability calculators, worst case estimates, MTM estimates etc. All these are useful additions to your options trading arsenal which you can effectively utilize.

You are not an options trader unless you get a hang of the strategies

The intricacies of the options chain and the various tools available to analyze options, you might benefit from learning about combinations of options that can be constructed in order to potentially take advantage of your market outlook. However, the key to options trading is hybrid strategies and limited loss strategies where you can combine options or options and futures and create customized cash flow permutations. That is what options strategy is all about. Some of the popular options strategies include protective put, protective call, covered call, covered put, synthetic call, synthetic put, straddle, strangle, bull call spread, bear put spread, butterfly etc. Options strategies can be employed depending on your expectation for the market or for a particular stock or index. For example, in volatile markets you might consider a straddle or strangle strategy. In a range bound market you can consider a reverse straddle or a reverse strangle. Alternatively, if you want to generate income on a stock you own and have a neutral outlook, there's the covered call strategy. The list can go on and on.

Be very cautious about how you price your trades

Option trades get more complex because they have an intrinsic value that can change drastically over a short period of time. That is not like buying and selling equity wherein your intrinsic value takes time to shift. Hence buying undervalued options and selling overvalued options is the key in most cases. Given that trading options is relatively more complex than buying and selling stocks, it may be prudent to try a few practices trades before doing the real thing. Best of all, you can test your own strategies, develop your own methods to research options, and possibly find yourself more prepared to make a real options trade.


12 months ago

The answer to your question differs if you're an option buyer or seller. Here are important rules to follow whether you're a option buyer or seller. Trading as an Option buyer.

Trading as an option buyer isn’t an easy game as there are a lot of actors playing out opposite to you,time decay,rate of change of underlying(volatility) are worth a mention.

Still if you follow some rules as part of your trading as an options buyer, you can be one of these very rare successful trader being an option buyer. Here are some of the rules you can consider following in your trading as an option buyer.

  • Trade on the buy side of the options only when you expect a sizeable move in the underlying, As an example if you are expecting just a 20 point move in nifty or 50 point in bank nifty it isn’t a good idea to buy options because there is a less probability of making a profit as the move isn’t at least going to be near to the immediate next strike.
  • Select the right strike price Choosing the right option strike will increase your odds as some strikes will have a faster premium appreciation when compared to others.
  • Avoid buying into far OTM options often You should chose to buy far OTM options (>2% distance from LTP) only in a few rare scenarios where you are expecting big movements and these shouldn’t be traded more frequently.
  • Avoid Illiquid options At times it so happens that you feel you have a perfect view on a stock but when you check its options they are hardly traded, in these cases better not take a position as the risk you are taking here is 100% of the premium paid as in case your view goes wrong there will be no buyers to sell your option.
  • Don’t hold options for too much time in hope Options have a value for time and that can result in a loss for you even if your desired target is achieved but not in the time you expected it to come in, So set a time frame in mind that you are going to allow the position to be open.
  • Have an exit plan It so happens that you buy an option and it starts losing premium though the underlying isn’t moving anywhere but you will be a confused state whether to hold or exit, the best thing to do is have an exit plan before the entry and fix a stop loss level from your entry price where you will exit your position irrespective of anything else. This is aimed at saving the capital as in a few cases option prices move so rapidly that you don’t even get the time to exit so it is better to have a stop loss set in your system
  • Book timely profits, Do not wait more Booking profits on a timely basis is very crucial for your success as an option buyer, because option prices tends to cool off very quickly after a move this is because of the rate of change in underlying. option prices will appreciate quickly only when there is a rapid move in underlying. These rapid moves in underlying doesn’t come often and are limited and you should be booking your profit during this rush phase rather than waiting for more because it takes a just few seconds for the option prices to be cooled off.
  • Don’t risk heavy in a single trade This is very important rule to be followed as an option buyer as things can get tempting seeing the low premiums but we should also think of the other scenario that is when we lose it’s 100% of the money we put in that we are going to lose in a matter of few minutes sometimes. So size your option trades by keeping this in mind.
  • Have a limit on the number of trades This is especially required if you are a discretionary trader as there is no system that you are following and you are at freedom to place how many ever trades you want to so there needs to be some boundaries set so that you can limit big losses. This can vary from person to person and can be fixed based on your risk profile but keeping it to < 5 trades a day can work wonders for you. This will also increase the quality of your trades as you give more time before entering a trade rather than taking random entry and exit.

Trading as an option seller/writer

Trading as an option writers or sellers isn’t easy because you need to consider a lot of factors in deciding what option to sell.. Volatility and moneyness of an option strike are two important factors to consider among others.

While there are a lot of advantages being an option writer, there are cases where an option seller get to lose everything he gained in 1 single day because there is no cap on the premium appreciation of an option If you are around you could have seen cases where options are up by few ‘000 % in a day.

So you have to secure yourself from these rare cases to be able to have consistent profits and some of the rules below can be considered in your trading as an option seller or writer.

  • Prefer spread trading to naked selling, Being a spread trader can give you that peace of mind which is usually absent in the trading world. The reason is that your loss is limited to a certain amount of money irrespective of where the market moves. Though your profit is also limited you are in complete control of your risk and this is suitable if you are a trader who is more serious and concerned about risk when it comes to option selling.
  • Place stop loss for naked sell trades Being in a naked option sell trade without a stop loss is the worse thing that one can do in options selling world because you are exposing yourself to unlimited risk by this kind of position.
  • Prefer OTM strikes for option selling It is better to select an OTM strike when selling an option because it puts you in an advantageous position where the rate of premium appreciation will be lesser until that strike becomes ATM/ITM. Directly selling an ITM strike is risky for an option seller as the rate of premium appreciation is much higher in ITM options.
  • Have an exit plan You need to have an exit plan even for an options sell side trade either in terms of profit/loss or the timing till which you want to keep it open.
  • Book timely profits, Do not wait more Booking profits is also important in options sell side trading. When you are in profit why not book it or rather there are way to lock your profits also being an option seller explore them online and implement them in your trading. It so happens that people wait for an option to become zero rather than booking it at Rs.1-2 which they have sold it at higher price say > 15. you need to book whatever is on the table instead of waiting for more because in options trading it’s all a matter of few minutes for Rs.1 option to become Rs.100 and Rs.100 becoming Rs.1 option.

Dinesh C Nagpal answered.
2 months ago

If you are only buying the option (not hedging or writing it) your risk is limited to the amount of purchase. However, while the premium may appear to be small or big, the net value after multiplying it with lot size and total no of lots can be quite a bit.

While the max loss is capped in case the stock moves in the opposite direction, there is also a loss due to time decay which happens when a stock moves towards your expected direction rather slowly resulting in the premium of the strike you bought falling gradually as the settlement approaches

Hence, it is v important to use an Option Calculator before you initiate a trade and calculate the expected movement of the stock, towards your target, if it goes to towards your stop loss and if it remains sideways. The calculator will show you the range and you should be able to set your risk reward.

As a trader never initiate a trade if right at the start your Risk : Reward ratio is less than 1:2 else your PL CURVE will be a flat line


Abhishek answered.
11 months ago
Never attached emotionally and follow the stop loss

Nainsi answered.
10 months ago

Prepare good strategies .
Check warning signal.
Beware of changes taking place in the market.


Vinay Rawal answered.
3 months ago

Well, we need to know few things before entering into F&O, 1) Never enter in F&O initially when you have started investment journey in financial markets
2) F&O are the high risk high return derivatives, so should be only entered into after proper analysis of the same


Dinesh C Nagpal answered.
8 months ago

1st is the stock/index in a trend or is it ranging.

2nd what are the open interest on strikes indicating.

3rd what is Implied Volatility indicating

4th once you reconcile that part you can buy an option with the trend or write (short) an option(s) as overall trend is ranging.

And foremost, always have a risk reward assessment of your trade before initiating it.


9 months ago
Time is most important to trade