What is Options Trading?

Options Trading gives an opportunity to benefit from changes in stock prices without actually buying the stock. Only a premium amount is to be paid. Thus, it offers flexibility to the trader.

However, most traders suffer losses in options trading due to a lack of understanding of the do’s and don’t of options trading. One should always get a complete understanding of options trading before investing in it.

Two kinds of trading need to be understood by the trader-

1. Call option is where the trader has the right to buy the asset.

2. Put option is where the trader has the right to sell the asset.

Strategies of Option Trading

1. Long Call

When a trader predicts that the price of an underlying asset will rise, they buy a call option on or before the expiry date.

2. Short Call

Here, traders sell a call option without owning an underlying asset when they predict the price of an underlying asset will remain stable or decrease.

The trader is bound to sell the underlying asset at the strike price if the buyer utilises their authority.

3.Long Put

The trader buys a put option, giving them the right to sell the underlying asset at the strike price when they predict a significant drop in its price.

4. Short Put

The trader sells a put option without owning an underlying asset when they predict the price of an underlying asset will remain stable or increase.

The trader is bound to buy the underlying asset at the strike price if the buyer utilises their authority.

5.Long Straddle

The trader buys both a call option and a put option having the same strike price & expiration date when they predict a noticeable price movement in the underlying asset but are uncertain of the direction (up or down).

6. Short Straddle

The trader sells both a call option and a put option having the same strike price & expiration date when they predict the prices of an underlying asset to remain relatively stable within a specific range.

Rules of Options Trading with Small Capital

In recent years, there has been an increase in the number of people indulging in online Trading. The minimum amount required for Options Trading in India can be less than Rs.2,00,000. Trading needs to be done carefully when the capital is small so that the risk of losses is decreased and the return potential of the trades increases.

Thus, traders need to learn strategies and techniques to handle low capital. They need to focus on the points that can be both puts and calls. The trader needs to have a better understanding of Option Trading Rules. Here are a few Rules of Option Trading:

1. Position Sizing

Options should not be confused with Stocks. All the money should be invested in something other than Options as they have a very short life. Position sizing is what helps here. position sizing can help you figure out how much capital should be invested in each trade instead of investing all the money in just one trade. Thus, position sizing is a concept that needs to be mastered if one wants to be a successful trader.

2.Calculating the Risk

The trader needs to calculate their targets and make sure that the options trade they are planning to invest in are aligned with these targets. There is much research available for this task. One can also use the Option Calculators that calculate the Options in advance. These methods can help avoid loss due to wrong calculations and help gains through Options Trading.

3.Joining the herd

In Options Trading, the trader should not follow what others are investing in. They should conduct their research based on their targets and goals.

4. Uncertain Results

One thing that a trader should always keep in mind is, “Never invest when the results are uncertain”. Options Trading should be taken as a business, and there is no business with investments in unknown events. A trader should be careful of policies that can incur losses even after investing on the basis of research.

5. Holding Period

The trader should decide the Holding Period of a trade before investing in it. The chances of profit decrease if the trade is being held for a longer period than required. They should only take part in breakout zones and then move out. A trade should be held for a maximum of 3 days. In case of a trade-in, its expiry week, this holding limit comes down within a day.

Conclusion

Options Trading provides opportunities for investors to capitalise on stock price fluctuations with minimal capital. However, it needs to be understood thoroughly. Strategies like Long Call and Short Put offer diverse approaches, while rules such as Position Sizing and Calculating Risk are vital for prudent trading, especially with limited capital.