First let me make you clear about "Hero Or Hero". This principle is valid when you are trading option systematically, that does't mean that there is no loss yes there would be loss but it can be managed. Those who are trading option like gambling for them principle of "Hero Or Zero" is valid. If you are taking risk to the extent Rs.500 to Rs.1000 on expiry then we can say it is "Hero Or Zero" trade. Today whatever i am going to share you is all about systematic and pure planned option trading.
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| Gambling V/s Systematic Trading |
"Option Trading" is only segment which can give you consistent profit with low risk, if you follow few rules and remain stick to that. It is completely based on Probability factor. Like other trading segments like Equity, Future this required proper planning and execution for that discipline is mandatory. Without discipline you can not generate consistency.
It is pure planned game where in maximum time you have to spent on designing the strategy and then execution. Once you completed that then you only have to monitor your trade that's it. Now, you think that what's new because in all trade we have to do the same activity. Yes in all trade we follow the same step but here is secret which you may know but not experienced yet. While you are doing intraday trading in Equity and Future, are you sure about your end of the day outcome?. Only 50% probability for your estimated outcome. And there is 50% probability that your Stop loss get triggered, not only that again there is 70% probability that after hitting your Stop loss your trade hit your Target towards end of the day. And then what we say???... This only happens with me. Hahahahah... Right...?!!
Now let's think why this happens with us?. Because we are chasing price where majority of traders are looking and operator are focusing on that price, majority of traders take position at breakout or breakdown point right, then what you think big players will allow you to take that profit, no not at all, they know very well that where we are going to take entry and what will be our Stop Loss, so they first take your Stop Loss and then hit your target. Again i am clearly saying that probability of such instance is 50%, i am not saying every time. But important point is that we have been cheated even though we have predicted everything well. So if we continue with same trading style then our 50% trades would be easily converted to loss by the operator.
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| Operator V/s Day Trader |
But if you have gone through Option Trading then your probability of losing trade is only 20% and that is not because of Stop Loss hunting but only in case of market sentiments changed. There is 0% probability of your Stop Loss hunting in option. Interesting right. More interesting is about to come, keep reading..๐
Why we lose in trading ? Because of Fear and Greed both. Yes both are responsible for our maximum failure in trading. While in option there is only discipline No Fear No Greed. The beauty of Option Trading is that here you would be well aware about your maximum profit and loss in advance and then you are taking entry, while in Equity & Future we are not clear about maximum profit and loss and therefore we have to face Fear and Greed kind of situation.
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| Discipline Trader |
And biggest benefit of Option Trading is that you can earn in any market structure whether it is trending or not. While in Equity and Future you only gain when market is trending and during sideways/range bound market chances of Stop Loss is high.
It is know in market that you should have at least minimum 60%-70% accuracy level if you are Equity or Future trader, while in Option you can make consistent profit even at 30% accuracy level.
I hope you will be now clear about difference between Option Trading Vs Equity & Future.✅
What is Option Trading???
Basically both Option & Futures are designed for hedging instrument which are used by big market players to hedge their long term position in Equity. And traders like you and me use it as Trading Instrument. Hope you will be clear with what is Hedging?. It is nothing but using mask to protect from Corona. Hahahaha..!!! Just part of joke only.
Hedging means safeguarding probable loss of Equity. If market sentiments are negative then Fund house hedge through either shorting call option or buying put option for particular period OR for expiry. Similarly if sentiments are positive then they short put option or buy call option. So by doing this they maintain their portfolio healthy. But for us it is trading instrument so we have to just think for that point of view only.
Let's start Understanding the Secrets of option Trading. ๐
"Option Trading" is purely probability based systematic trading. Higher the probability higher would be the profit and lower the probability lower would be the profit. At least you would be in profit. And only in case when market starts trading beyond your expected range or if there is sudden change in market sentiments then only you have to end up your trade in loss. But probability of such instance is very less say 10%-20% only. That much risk we have to take.
Before moving into that we have to clear all below points.
1. You should be technically sound. Means you should have ability to identify the market trend.
2. You should be well aware about the market structure and its probability.
3. You should be aware about the Impact of Volatility on Option Pricing. (I will discuss).
4. You should be well aware about the maximum profit and loss at the time of designing your Option Strategy.
If you clear about above points then option trading will be very easy for you. And if you are not aware about it then please request you to do first paper trading and then only go live.
What is market structure?
Market Structure means market movement either up or down, etc. As per my experience i have listed four market structure and at any given point of time market will be in any of the four structure. Below are that four structure.
1. Up Trend.
2. Down Trend.
3. Sideways/ Range Bound.
4. Breakout / Breakdown.
Now our role start here. We have to keep ready our option strategy as per the Market Structure. There are many Option strategies are available. (I have shared book below in which all strategies are beautifully explained with example).
Below are the steps that you have to follow to design your Option Trading Strategy.
1. Identify Market Trend. (Up, Down, Sideways).
2. Identify market range. (Maximum Downside at Support, Maximum Upside at Resistance).
3. Select Strike Price keeping in Mind Upper and Lower range.
4. Risk to Reward Ratio must be at least 1:3.
After following above step now you have to execute the trade and monitor the same. Those who are new in Option Market they only think from Option Buying point of view, means they either buy Call or Put but never think about shorting side and that is where maximum profit is. They all feel that Option is very cheaper and we can earn lot through buying Option either Put or Call, but in reality buying only Put or Call is one of the risky strategy in Option.
There is some misunderstanding regarding margin requirement among the new trader. Many traders are in view that to sell option you have to pay higher margin up to Rs.1.25 Lac for 1 Lot of Nifty. But that is only when you are shorting naked Option, means if you trade Option selling with combination of Buying call option you can easily reduce the margin requirement from 1.25 Lac to 25K. Go through below example to understand it in detail. That is the main secret of Option Trading that nobody will tells you.
See below image of margin calculation of Zerodha. I have shorted 2 Lots of Nifty and against that i have bought 2 Lots of Nifty. Now in this case i have saved Margin of 2.24 Lac. If you want to check the you can click here.
On a same way using such margin calculation (Depending upon your broker) you can design your strategy and take the advantage of margin.
Let's take a practical example to understand it.
On 21st Sep'20 Nifty did breakdown below 11500 in afternoon and at the end of the day closed at 11250. Considering above points i took entry when nifty started trading below 11470. My view was bearish for current expiry, and stop loss at 11500. Keeping in mind i have drafted below Option Strategy. (Note: You Need At Least 1Lac to 80K capital to execute best risk reward strategy). In below strategy capital requirement was 80K and margin used 55K.
From Above table you may understand it quickly. In above table if i shorted Nifty Future on 21-9-2020 then i need margin of 1.3 Lac on which profit would be Rs. 24,600. And if I Bought 12000 Put at 505 then i have to pay premium of Rs.37,875 on which profit would be Rs.23,775. So this is also one strategy you can use while drafting option set up.
Those who wants to trade in Bitcoin they can learn from here.
Those who wants to use SAR technical indicator they can check from here.
Some of my learning Post if you have not yet visited then please visit now.
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How to do the "Price Action Analysis "of Stock/Commodity for Trading ?
(Disclaimers:- Above Post is for educational & learning purpose only)
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