DAN has rightly said- before u become an option pro- pl answer this question
What kind of option trader do I want to be?
- Direction of the market.
- Volatility in the market.
- Time frame of our option trade.
- Choosing the strategy.
- Margins for the strategy.
- Choosing the strike level/s.
- How to implement a strategy.
- Entering the market.
- Adjustment of our option trade.
- Stop loss of our option trade.
- Exit strategies for our option trade.
- Money management and risk reward ratio of our trade.
All of you who happens to be in option trading know that problem: What kind of option strategy should I use and On what kind of parameters / criteria should I build up my decisions which r practically implementable for me? Do present market context support me to implement ?
the objectives should be
Regular Income
Minimum Risk to the Capital
Regular Opportunity for trading
u must have a simple trading plan with payoff & various strike, prepared before you enter an option trade.Also be ready to change , as new condition of market evolves.we should have knowledge about what kind of order possibilities we have to enter or exit a trade in the market. As we now have an idea about the different ways we can implement a whole option strategy in the market.
Basic of structurally choosing strategy, as well as directional hints r given above, only i can add some hints.
1] ADX shows strength - use it in directional trade.
2] bollinger band gives 2sigma holding support pt,with 95% probability - may use it for underwrite.As BB visualise present volatility - can be used for judgmental bias for volatility, as well as when low volatility ends ,-whether expiration can be build up within present expiry.
3] use break even pt extensively in option plan & very clear about ODD in your favour or not. Software helps not only time but for visualisation(u have to fight best here)
...........................................
remember - 1st understand scenario, then TA hat, then only option strategy HAT to take a potential trade.NEVER learn from below 5 yr experienced option trader, never take a low probability trade,master pay-off curve.
no1- what type option trader ,u want to be and on what condition of nifty/stock that happens in india.
spread strategy easily playable.
if u could find out some event may not happen,very low probability - practice underwrite option.
pl use any software or good platform like IB where strategy can be checked .
mind it - option can not be applied everywhere,-actual price move within expiry definitely limited.
AT support/resistance or imp pivot futuristic scenario preparation helps.
normal expectation by participant in form of implied volatility mostly wrong -learn to trade against it, ie. high IV sell option ,low IV buy option.Use volatility expansion -contraction cycle.
EFFICIENT MARKET WHICH NOW COMING TO INDIA, will provide great opportunity to swing based option trader.
ROLLING CONCEPT IN OPTION to be learnt last ,after profitable strategy implementation.
INTRADAY option is very easy to convert from successful intraday trader- simply define the day quickly , UP PLAY CALL,downday -use put , last week ,we get excellent opportunity both put and call respectively, formation of trend = use option.
but if u r not already a successful intraday ,nor a swing - trying in option will bring bigger loss, - math base arbitrage or delta neutral strategy u can try , provided gone through 6 month software based paper trade.
warning : OPTION IS A WEALTH DESTRUCTION TOOL
............................................................
As per TNSN2345-.. the first step in trading is first be a conventional trader(use TA/mm/stoploss)...from a successful conventional trader then try to reach out for mastery in financial product like OPTION trading.
It trains then your mind Risk/reward - reason behind potential trade,if trade behaves NOT correct -how to take RECTIFICATION . Then mathematical analysis with scenario preparation will be EASIER to implement , as well as then u will be trained to quicker action , based on time sensitive product - also with leverage product ,U MUST derisk better.
It helps-How to convert your losing trades into winners
- Capital guaranteed trading.
Yes in OPTION ,ur outlook has to be changed.
So for simplicity ,when we start from stock trade,we have only two views to profit, bullish or bearish . It is just a plain view of the Underlyings reaching a particular price up in case of bullish view and a particular price down in case of bearish view and by a 'specific time'. For every system of ours, this is important that the view has to be till a specific time, either 10 mins, 30 mins, till EOD, for 3 days, a week, a month etc.
But since we are no God, we can't exactly define the end of the 'specific time' nor can we define that our entry is just the right time and move will happen exactly after we have taken a position.So we need a confirmation too that we have indeed caught the best entry position and that too WITHOUT incurring loss..so the question is how do we do it.
When we arrive at a decision point (and say our view is bullish) we generally enter long, we generally enter at a point where the bears have just thrown out but are the bulls ready to charge ?generally no. Though ideally we should have entered after a pause to let the exhausted bears, breathe easy and cool down and just as the bulls show signs of charging.
But most of the traders are not so paitent to do so, and since we want to be in the market, we take long position just when the bears have climaxed and then hold on our position till the bulls start charging....this waiting period of waiting and hoping that our position will flourish is the culprit and lot of things keep running in our minds during this time.......hence even when there is small up move, we tend to exit as we are restless, particularly we were kept waiting for so long for the bulls to charge.
Alternatively if the bears decide to march further down south, there are high chances that the position is held on using hope, since you are married to the position as you have been holding it and pray- the holding strategy does not allow you to exit even you know that the movement is not in your desired direction.
Best thing(theoretical plan) is to enter just when the bulls are ready to charge (in case of bullish view) or just when bears are ready to attack (in case of bearish view), in actual we can succumb to our urge to enter the market and 'Get into the Action' and 'Get the first hand feel'
This can be controlled /modified by ENTERING NEUTRAL POSITIONS. Yes ENTER NEUTRAL.
So by a 2way trade( like writing AT THE MONEY -call & put) I initiate the trades in Neutral Gear that means that the ignition of my car is ON and I am standby in a Netural Gear. I may have a view, but since I did not for sure knew when that would likely be triggered, I entered Neutral - so I am in the market and already in the action.....till the time the market is moving in a limited range,(small range bound market) my setups were not in much loss nor in much profit.
As the time passes, and conviction as per my system, charts and price action suggest that the desired directional movement has started,crossing an initiation period , I CLOSE THE LOSS MAKING POSITION And than now I have a directional position, as per the trend in the market.
So I do not spend my time and energy to keep analysing, which side is right and then move to that side, BUT I AM IN THERE sitting on the fence all the times with one leg on each side, and swings my legs merrying in the air. The moment one side shows action, I pull out my leg from the other side Quickly.
this Netural position help you to be in the market, but without bearing any loss as you are market Neutral,As you exit your loss making position Quickly. you develop habit of exiting trades in early loss - another requirement to be a successful trader.
- It helps to hold your positions for long time, since after an move in your direction, if there is a pause, you can reinitiate the opposite position and then again get back to the market neutral position, keeping the original position in profit.
Most important: when you are having a market Netural position, and the movement subsequently happens in the OPPOSITE direction of your anticipation, you can exit your loss making position (the position which you originally wanted to hold ) and continue with you NOW profit making position (originally which you did not anticipate to be in profit). This is how due to Flexibility ,original loss making directional bias,can turn into profits. This is despite the movement happening in the opposited direction to your anticipation.Thus the original set up was exited midway and loss making trades where shun out, holding just the directional profit making position and profiting from the momemtum of the fall or in some other cases would be a bull run.
So flexibility ,thinking out of box is key theme for option trader.The above techinques given large room to accomodate, right decision making errors and hence would advise it to starters, till they have developed a good strike rate sytem which gives high probablity of right signals on entry. Even today, I am stuck on lot of occasion when my system though it me some indications and I do not have conviction on that indication, I enter a Netural Trade first only to then release the loss making trade out and continue holding the profit making trade till the end of holding period.
.................................................. ...
With a comment from Xray27, i am concluding views as option learner. Enough hints on how to trade option given-(personally i trade directional bias)
TOP 10 TRAITS OF SUCCESSFUL OPTION TRADERS
1.They Are Properly Capitalized
2.They Have A Low Tolerance For Risk:The best options traders will only trade when there is a low risk high reward scenario.
3.They Trade Only When The Market Provides An Opportunity
4.They Have A Trading Plan
5.They Have A Risk Management Plan
6.They Can Control Emotions.
7.They Are Incredibly Disciplined
8.They Are Focused
9.They Are Committed: Options trading takes a great deal of commitment. Any time you have your hard earned money at risk, you should be trying to get the most out of your investment
10.They Have Back Tested Their Strategy
What kind of option trader do I want to be?
- Direction of the market.
- Volatility in the market.
- Time frame of our option trade.
- Choosing the strategy.
- Margins for the strategy.
- Choosing the strike level/s.
- How to implement a strategy.
- Entering the market.
- Adjustment of our option trade.
- Stop loss of our option trade.
- Exit strategies for our option trade.
- Money management and risk reward ratio of our trade.
All of you who happens to be in option trading know that problem: What kind of option strategy should I use and On what kind of parameters / criteria should I build up my decisions which r practically implementable for me? Do present market context support me to implement ?
the objectives should be
Regular Income
Minimum Risk to the Capital
Regular Opportunity for trading
u must have a simple trading plan with payoff & various strike, prepared before you enter an option trade.Also be ready to change , as new condition of market evolves.we should have knowledge about what kind of order possibilities we have to enter or exit a trade in the market. As we now have an idea about the different ways we can implement a whole option strategy in the market.
Basic of structurally choosing strategy, as well as directional hints r given above, only i can add some hints.
1] ADX shows strength - use it in directional trade.
2] bollinger band gives 2sigma holding support pt,with 95% probability - may use it for underwrite.As BB visualise present volatility - can be used for judgmental bias for volatility, as well as when low volatility ends ,-whether expiration can be build up within present expiry.
3] use break even pt extensively in option plan & very clear about ODD in your favour or not. Software helps not only time but for visualisation(u have to fight best here)
...........................................
remember - 1st understand scenario, then TA hat, then only option strategy HAT to take a potential trade.NEVER learn from below 5 yr experienced option trader, never take a low probability trade,master pay-off curve.
no1- what type option trader ,u want to be and on what condition of nifty/stock that happens in india.
spread strategy easily playable.
if u could find out some event may not happen,very low probability - practice underwrite option.
pl use any software or good platform like IB where strategy can be checked .
mind it - option can not be applied everywhere,-actual price move within expiry definitely limited.
AT support/resistance or imp pivot futuristic scenario preparation helps.
normal expectation by participant in form of implied volatility mostly wrong -learn to trade against it, ie. high IV sell option ,low IV buy option.Use volatility expansion -contraction cycle.
EFFICIENT MARKET WHICH NOW COMING TO INDIA, will provide great opportunity to swing based option trader.
ROLLING CONCEPT IN OPTION to be learnt last ,after profitable strategy implementation.
INTRADAY option is very easy to convert from successful intraday trader- simply define the day quickly , UP PLAY CALL,downday -use put , last week ,we get excellent opportunity both put and call respectively, formation of trend = use option.
but if u r not already a successful intraday ,nor a swing - trying in option will bring bigger loss, - math base arbitrage or delta neutral strategy u can try , provided gone through 6 month software based paper trade.
warning : OPTION IS A WEALTH DESTRUCTION TOOL
............................................................
As per TNSN2345-.. the first step in trading is first be a conventional trader(use TA/mm/stoploss)...from a successful conventional trader then try to reach out for mastery in financial product like OPTION trading.
It trains then your mind Risk/reward - reason behind potential trade,if trade behaves NOT correct -how to take RECTIFICATION . Then mathematical analysis with scenario preparation will be EASIER to implement , as well as then u will be trained to quicker action , based on time sensitive product - also with leverage product ,U MUST derisk better.
It helps-How to convert your losing trades into winners
- Capital guaranteed trading.
Yes in OPTION ,ur outlook has to be changed.
So for simplicity ,when we start from stock trade,we have only two views to profit, bullish or bearish . It is just a plain view of the Underlyings reaching a particular price up in case of bullish view and a particular price down in case of bearish view and by a 'specific time'. For every system of ours, this is important that the view has to be till a specific time, either 10 mins, 30 mins, till EOD, for 3 days, a week, a month etc.
But since we are no God, we can't exactly define the end of the 'specific time' nor can we define that our entry is just the right time and move will happen exactly after we have taken a position.So we need a confirmation too that we have indeed caught the best entry position and that too WITHOUT incurring loss..so the question is how do we do it.
When we arrive at a decision point (and say our view is bullish) we generally enter long, we generally enter at a point where the bears have just thrown out but are the bulls ready to charge ?generally no. Though ideally we should have entered after a pause to let the exhausted bears, breathe easy and cool down and just as the bulls show signs of charging.
But most of the traders are not so paitent to do so, and since we want to be in the market, we take long position just when the bears have climaxed and then hold on our position till the bulls start charging....this waiting period of waiting and hoping that our position will flourish is the culprit and lot of things keep running in our minds during this time.......hence even when there is small up move, we tend to exit as we are restless, particularly we were kept waiting for so long for the bulls to charge.
Alternatively if the bears decide to march further down south, there are high chances that the position is held on using hope, since you are married to the position as you have been holding it and pray- the holding strategy does not allow you to exit even you know that the movement is not in your desired direction.
Best thing(theoretical plan) is to enter just when the bulls are ready to charge (in case of bullish view) or just when bears are ready to attack (in case of bearish view), in actual we can succumb to our urge to enter the market and 'Get into the Action' and 'Get the first hand feel'
This can be controlled /modified by ENTERING NEUTRAL POSITIONS. Yes ENTER NEUTRAL.
So by a 2way trade( like writing AT THE MONEY -call & put) I initiate the trades in Neutral Gear that means that the ignition of my car is ON and I am standby in a Netural Gear. I may have a view, but since I did not for sure knew when that would likely be triggered, I entered Neutral - so I am in the market and already in the action.....till the time the market is moving in a limited range,(small range bound market) my setups were not in much loss nor in much profit.
As the time passes, and conviction as per my system, charts and price action suggest that the desired directional movement has started,crossing an initiation period , I CLOSE THE LOSS MAKING POSITION And than now I have a directional position, as per the trend in the market.
So I do not spend my time and energy to keep analysing, which side is right and then move to that side, BUT I AM IN THERE sitting on the fence all the times with one leg on each side, and swings my legs merrying in the air. The moment one side shows action, I pull out my leg from the other side Quickly.
this Netural position help you to be in the market, but without bearing any loss as you are market Neutral,As you exit your loss making position Quickly. you develop habit of exiting trades in early loss - another requirement to be a successful trader.
- It helps to hold your positions for long time, since after an move in your direction, if there is a pause, you can reinitiate the opposite position and then again get back to the market neutral position, keeping the original position in profit.
Most important: when you are having a market Netural position, and the movement subsequently happens in the OPPOSITE direction of your anticipation, you can exit your loss making position (the position which you originally wanted to hold ) and continue with you NOW profit making position (originally which you did not anticipate to be in profit). This is how due to Flexibility ,original loss making directional bias,can turn into profits. This is despite the movement happening in the opposited direction to your anticipation.Thus the original set up was exited midway and loss making trades where shun out, holding just the directional profit making position and profiting from the momemtum of the fall or in some other cases would be a bull run.
So flexibility ,thinking out of box is key theme for option trader.The above techinques given large room to accomodate, right decision making errors and hence would advise it to starters, till they have developed a good strike rate sytem which gives high probablity of right signals on entry. Even today, I am stuck on lot of occasion when my system though it me some indications and I do not have conviction on that indication, I enter a Netural Trade first only to then release the loss making trade out and continue holding the profit making trade till the end of holding period.
.................................................. ...
With a comment from Xray27, i am concluding views as option learner. Enough hints on how to trade option given-(personally i trade directional bias)
TOP 10 TRAITS OF SUCCESSFUL OPTION TRADERS
1.They Are Properly Capitalized
2.They Have A Low Tolerance For Risk:The best options traders will only trade when there is a low risk high reward scenario.
3.They Trade Only When The Market Provides An Opportunity
4.They Have A Trading Plan
5.They Have A Risk Management Plan
6.They Can Control Emotions.
7.They Are Incredibly Disciplined
8.They Are Focused
9.They Are Committed: Options trading takes a great deal of commitment. Any time you have your hard earned money at risk, you should be trying to get the most out of your investment
10.They Have Back Tested Their Strategy
resent study on nifty, steam is less for bull, it takes very small upmove and immidiate sell is coming. i read it as distribution(i may be wrong ) so i am buying 8500 and 8400 put. As i still believe last upmove so expect support around 8000-8100 . So exact trade is debit spread with put underwrite @ 8000 -8100.