Are you also in the dilemma if options trading is suitable for you or not? When it comes to busting myths about trading concepts, Stockbox has got you. In this blog, we have covered some major concepts relating to options trading and tips to successfully invest in it. Whereas it is easy to tag something as difficult if one only knows the half-truth.
So buckle up and get ready to learn everything about Options trading tips, its risks, and related concepts. Learn how to trade with confidence with our best Option Trading Tips in 2022.
Let’s get started!
What are Options Trading exactly?
You must have heard that Options trading is difficult to deal with. As it comes with great risks but so as the benefits to reap. With the right step-by-step guide, you can profit a lot from this concept.
Options Trading is a non-binding contract that gives you the choice to buy or sell specific security on a specific date, selling at a price agreed upon beforehand. The only difference between future contracts and options trading is that the former are binding in nature and the latter is not. Options trading gives you the flexibility to invest according to your decision of risks and benefits.
Let’s understand with the help of an example. Let’s say you want to buy a specific car model whose prices might inflate in the next month. But the given model is not available at the time of purchasing. It would only be available in the next month when the prices may hike. Therefore, the seller gives you the option to book your car model at a minimal amount and contracts to provide you with the same model at today’s price rate. In this way, you would not be at a greater loss than the minimal amount you paid. And in case of prices do hike, you get the car model at today’s rate. But the choice is yours to make.
In the same way, the options trading processes. An options contract is a non-binding contract that offers buyers the opportunity to sell or buy stocks at a specified time at a specified rate. The specified rate or the decided security is called the premium. Unlike future contracts, you do not have the obligation to buy or sell that has already been agreed upon.
There are two types of options: Calls Options & Put Options. Call Options are the ones that let the holder buy an asset at a fixed rate for a specified time period. Whereas Put options are the ones that let you sell an asset at a fixed rate for a specified time period.
Origin of Options Trading
The concept started somewhere in ancient Greece. This was initiated to check the Olive harvest. The concept of the bucket shop was famous by a man called Jesse Livermore. Jesse Livermore was famous for being a stock option bookie. Basically, he acted as an opposite trader of anyone who is booking a trade. If you would be speculating that the prices would hike of a particular stock, Livermore would be saying otherwise.
Even though Livermore’s theory did not have a sturdy background to support itself, he is still counted as one of the most notable traders in history.
What was interesting back then was that the stock brokers used to depict false artificial high prices of companies that would alter vanish. In the speculation of which people used these brokers to give the premium. These were called bucket shops which in today’s world is considered completely illegal.
Ancient ways of trading have been proved fatal and illegal. This is why most structures are built on the Chicago Board of Options Exchange (CBOE) which regulates the laws in trading practices. There is still some evidence of price fixing and collusion as unfair practices that exist in the market. The regulatory agencies try to prevent and regulate to the best of their expertise.
Top 5 Option Trading Tips in 2022
As a trader, we understand how many risks you are running on. But did you know that risks could be minimized with some careful steps and option trading tips? Yes, we have made a list of some core tips that alter the scenario and put you at low risk. Explore these successful option trading tips and sidestep the risks!
- Time Passes, Premium Loses
Why traders lose money lies deeply in the way they call and put options. Generally what happens is a trader buys in the time of a bullish market and puts when it’s time for a bearish market. They end up buying out-of-money (OTM) options.
Let’s understand with the help of an example. The NIFTY is priced at 17800. You purchase NIFTY call options of 18000 with an option premium of 100 Rs. This implies that you will make money at 18000 only. Now if you have to earn but recover the premium, you will start making even at 18000+ 100 = 18100. Thus, the even point would be 300 points away.
In order to be in the right direction, you have to-
- You have to be right in terms of direction
- You have to be right in terms of making a break even point- 300 points in this case
- You have to be right in terms of the short period.
That is why it’s highly unlikely to make these factors come true. Even if the market doesn’t act against you, you lose premium value. One of the key reasons why option buyers couldn’t make a profit and lost money, at the time is the fighting factor here. Buy monthly to avoid losing the time value of your premium. It gives you higher odds of benefiting.
- Don’t Buy Stocks to Average Down
This is one of the significant points that most traders fail to understand. When the price of a stock goes against you, you tend to buy more that end up an ugly destroyer of your riches. Averaging down the buy option might work in terms of a longer-term bull market. It would be foolish to do the same when time is against you.
The right way to trade is to never get too exposed to any trade that is leading to a loss of more than 5% of your trading capital. Think rationally and don’t take potential losses in the lieu of not accepting your losses. Take a step back and don’t average down your positions.
- Patience is the Key
Trading recklessly would fetch no good. As a trader, people get the urge to trade constantly which leads to potential losses. This is an act of foolishness that turns blind to realize that success lies in making good, solid, stable trades. You have heard this quote: Patience is the key to everything. It is quite the same in terms of trading too.
Focus on the game plan and wait for the perfect setup to strike at the right stock. Only once, do you trade smartly and plan in advance, you can focus on your rare good trades. Join Stockbox for the best option trading tips provider and get your profits aligned with the experts. Get real-time recommendations based on in-depth research.
- Stop your Losses Quickly
Accept your losses at an early stage before they become too large. Stopping the loss when it is placed at 1% of your capital is important. This vicious cycle of hope when there are severe losses already could prove to be fatal for any options trader.
As explained earlier, with time premium depreciates and loses its value. Every extra day, you hold your position and wear down your premium.
- Plan Your Departure
Planning your exit is just the right option trading tips that could save you from losing consistently. That is why if you hold a call or put for a long time and time goes gangsta you, move on to the next trade. If the time goes in your favor, you can break even the price of the premium and start gaining profits. But on the other hand, if it goes downside, there will be a significant risk.
Don’t wait up until the last moment and plan your exit in advance. Don’t be greedy and think rationally when you trade. Where your mind could toy with you with counterarguments that what if you make more profits, less loss, and sleep peacefully at night?
It’s not a statement you would hear much if you are a trader. Plan your strategy and stick to it all the way to the end.
Common Options Trading Mistakes to Avoid
Mistake #1: Your outlook and strategy don’t match
The ability to create an outlook for what you anticipate could occur is a crucial skill when starting to trade options. Technical and fundamental analysis, or a combination of the two, are two of the typical places to start when creating an outlook. Technical analysis focuses on evaluating market activity (mostly price and volume) on a chart and searching for areas of support, resistance, and/or trends in order to spot potential buy/sell opportunities. In order to determine a company’s value, fundamental analysis looks at its financial statements, performance statistics, and current business trends. In addition to a directional bias, a forecast often includes a timeline for long term.
Read out guide on – Technical and Fundamental Analysis
Mistake #2: Trading without a competitive advantage
Do you make your trading on the same indications that everyone else does? All you’ll do is find yourself in congested deals.
Our in-house experts analyse the technical features and investor sentiment of a variety of stocks, as well as the pricing and volatility of options.
Get tips for option trading only from the best option tips service provider and your tutor in trading, Stock box. Stuck somewhere and don’t know how to get out? Call us today for a consultation!