Now let us come to the second point. If you are trading options for a longer term as in a buy-hold till expiry or advanced strategies like spreads, ratios etc (will be covered in details some other time), DO look at weekly and monthly charts. The reason is that if you want to make money in buying options, the underlying stock better be in a strong trend or else you will not be able to cover the option price and make a profit. When a option seller writes an option (selling and writing are the same thing), he uses sophisticated pricing model to ensure that there is a high probability that the underlying will not move too adversely against his position. No options pricing model is 100% accurate, even though there are automated systems in the US which quote option bid/ask rates depending on the change in tick value of the underlying. Moreover just the minute after your trade is executed, the conditions may change resulting in change in prices. In India, other than Nifty Options that are traded by a lot of big guys and a few other large caps, very few options are traded according to their fair value or deviations (overpriced/underpriced) around it. Lot of sentiment value is added which puts the option price above or below its fair value.
Even though I told that I will not go into maths part, partly due to the complexity and partly due to my intellectual inability, for those who are interested let me give u a pointer. If you take most of the common pricing models like Black Scholes etc, the basic anomaly is that it takes into account normal distribution. Even if it approaches ND in theory over a longer term, the most liquid options in India are only for a month...and hence SKEWNESS in the distribution is a big reality...and hence a lot of sentimental value is added on whether the market is bullish or bearish.
Anyway coming back to the longer form of waiting till expiry, this is not the most efficient way of trading, but you do make serious money here. However on the FLIP SIDE, this is the strategy where most of you will LOSE MOST OF YOUR MONEY.If you buy a call or a put without having adequate knowledge about the overall market condition, the sector and the stock mostly you will lose money as your options will expire worthless. Hence it is essential to look at the weekly and monthly charts to INCREASE your probability of winning. There are different forms of profitable options trading...but that we will discuss later.
Another important aspect of this form of trading that I call buy-hold is your mental state. Right from the beginning be sure that you are entering a BH or a multilegged (buy-Sell spread, Ratio, butterfly etc) that you will hold till the end. So as soon as the price starts going against you by a few ticks or more you dont panic and run to adjust your position. Have very well defined CLOSING points on the UNDERLYING based on which you adjust your position or abandon your position. Otherwise Intraday volatility will kill you. You can look at the closing price of the day or even the closing price of the week.
For example You buy XYZ 100 CA for 5 and sell XYZ 110 for 2 when the underlying is at 100. Now during the day the underlying moves to say 98.90 and you suddenly see that the 100 CA is trading at 4.25 only while the 110CA is trading at 1.80. A typical reaction is oh no! I have already lost Re0.50 on my bought call...now what do I do? THIS IS WHERE MOST OF US DO ALL KIND OF NONSENSE. Wait till the close...check the chart for price and volume and otherrelevant stuff and then plan for your next set of actions. And remember that when you enter the contract have a good reason to do so. Once you have entered, tell yourself that it was the best thing to do under those conditions. Dont say shi* why didnt I wait? Now the market has turned...I could have got more/less..blah blah...Instead think what can happen now and compare with your plan of action.