Options Characteristics to consider for Profitable Trading
Leverage: Allows a trader to control a large position with relatively small investment
Flexibility: Offer a wide range of strategies to manage various market conditions
Risk Management: Traders can hedge their existing positions to limit potential losses
Income Generation Strategy: Few strategies can generate income in addition to capital gains
Limited Risk, Unlimited Reward: Risk-Reward profile is distinct for certain option strategies
Volatility Trading: Strategies can be implemented to capitalize on market volatility
Time Decay: Options have a finite lifespan, and their value erodes over time specially OTM
Liquidity: Some contracts are highly liquid; entry & exit has minimal impact on P&L
Derivative Nature: Options provide a way to gain exposure to an asset without owning it
Complexity: Option is complex compared to other asset class, needs deep knowledge
Typical Life-Cycle in an Option Trade
- Analyze current Market Situation
- Choose an Appropriate Strategy
- Construct & Check the Pay-off Diagram
- Execute & Monitor the Trade
- Make Adjustments as per Plan
- Exit the Trade as per pre-defined Crieteria
Broad Market Index Analysis - NIFTY
- Analyze the Global Market Situation
- Follow the Activities of Domestic & Foreign Instituitional Investors
- Take note of Economic Data & related News
- Keep Track of Derivative Data
- Follow the Events & Results of Corporates
- Keep Track notices of Central Bank & Exchange Regulators
Trading Strategies - Bullish Market Situation
- Short Term Market View is Bullish
- Choose Strategies for High IV situation
- Look for Strategies for Low IV situation
- Check Strategies for Medium IV situation
Trading Strategies - Bearish Market Situation
- Short Term Market View is Bearish
- Choose Strategies for High IV situation
- Look for Strategies for Low IV situation
- Check Strategies for Medium IV situation
Trading Strategies - Range Bound Market
- Short Term Market View is Range Bound
- Choose Strategies for High IV situation
- Look for Strategies for Low IV situation
- Check Strategies for Medium IV situation
Trade Exit Strategy
- A Pre-determined RoI % of the selected Strategy
- Define a % of Max Profit of the Strategy, e.g. 30%
- Market View absolutely gone wrong, better to exit
- Trade has lost it’s Edge/USP due to situation change
