In order to master the art of option buying, every trader needs to master these top 3 Option Buying Basics. Without the basics, making money out of option buying is impossible.
Often, new traders enter into Options Trading with the hope of making quick money, but we all know what happens in the end. They end up losing all the money they had. This primarily happens because of two reasons: 1st is due to lack of knowledge, and 2nd reason is lack of discipline and risk management.
Options trading is a skill that can generate enormous returns if you do it with discipline and knowledge; on the other hand, options trading has the ability to take out every rupee that you have in your account if you do it without proper knowledge and guidance. So, before doing options trading, ensure that you have adequate knowledge about Options Trading to protect your capital.
In today’s article, we are going to take a look at some of the options buying basics that every trader should keep in mind.
Selection of the right strike price is an essential thing for the option buyer. Strike price matters a lot in option buying because even if you bet in the right direction and choose the wrong strike price, it will be of no use. When it comes to choosing the right strike price for option buying, there are two concepts that you need to understand.
The option is made up of two values, 1st is called intrinsic value, and 2nd part is called extrinsic value. The intrinsic value of the option is the value or points by which the option is in the money. Extrinsic value is nothing but the time value that is associated with that option. On the expiry day, the extrinsic value of the option becomes zero.
So, whenever you are trading in options, make sure that you are not buying deep out-of-the-money options because they have only extrinsic value, which will go to zero on the day of expiry, and there is more possibility that that particular option will expire worthless. Often, many new traders make this common mistake, and they lose a lot of money due to this.
Which charts to look at..this is the most common question raised by new traders. New Options traders get confused about whether to refer to the spot chart or the options chart or the futures chart.
The answer to this question is simple. You need to refer to the spot chart, and according to the spot chart, you have to set your stop loss or target on the options chart. The reason behind preferring the spot chart is everything a trader needs to know is available on the spot chart, and futures and options charts follow the spot chart. Sometimes options charts may give you false information, but almost every time, the spot chart will show you the correct price action levels.
Putting everything you got in one trade is a blunder. When trading options, you should only put 25 to 30% of your capital in one trade based on how good the opportunity market is offering to you.
Often, many traders put all of their capital in one trade, and when they book a loss, they end up losing a big percentage of money. By pre-defining the amount of capital deployed per trade, you can manage your risk very well. Also, you should pre-define your stop loss so that you can take the correct position sizing. When it comes to position sizing, you need to define your stop loss first, and then only you can take that trade.
I hope that through this article, you were able to understand Option Buying Basics. In order to succeed at option buying, you need to keep in mind these top 3 option buying basics. If you like this article, don’t forget to share it with us across all your social media handles.