In other words, there is an options strategy if you have a bullish view on the markets. For a bearish view, there are different strategies that can be exploited and if your view is that of consolidation in the markets there are different sets of options trading strategies that can be adopted. This flexibility and variety of options strategies available is one of the most important factors why derivatives traders are attracted to options trading. And while it is true that derivatives traders are attracted to options trading owing to the variety in strategies available, this very availability of multiple strategies in options trading is also one of the reasons why options traders do not make money consistently in the markets.
What is this means is that very often traders are likely to adopt a wrong strategy that can lead to losses. Most beginners lack the understanding of the basic concepts of options trading and tend to adopt an options trading strategy that is too complex. The selection of an options trading strategy is crucial for a profitable outcome. It is important that one keeps strategies as simple as possible. The complication is never profitable. It is also important to categorise yourself as an ‘options day trader’ or ‘positional options trader’.
Day Trading in Options
One of the biggest problems while trading options is the decay in time value. When a trader opts to buy and sell options on an intraday basis, understanding the impact of time value on options prices becomes even more relevant and often will determine whether the trade is profitable. It is advisable that options traders when going for intraday options bets, use options with as little time value as possible. Also, it may be wise to opt for those options where the delta is as close to ‘one’ as possible.
When it comes to day trading, if the chances of profitability have to improve, it makes sense to go for a near month, in-the-money options of highly liquid stocks. Why in-the-money? That’s because in-the-money options have the least amount of time value and have the greatest delta when compared to out-of-the-money or for that matter at-the-money options. Traders should also note that the more popular the underlying stock, the smaller the bid-ask spread will be.
Popular Options Strategy
Once the trader has done the required homework and classified himself as a day trader or a positional trader, the focus should be on understanding the underlying market trend and whether the target stock or index is trending. To understand the underlying trend, technical analysis can be useful while price volume breakout, put-call ratio, and open interest data can come handy while doing so.
Put Call Ratio
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September 14, 2020