Future and Options is a tricky segment.
Yet, people are still
searching for the best options strategy
and the best ways to make money online.
It is a common misconception that the
markets are a place to bet for the odds
and make money. This strategy here is
designed for both Option buyers and sellers.
Day traders and positional traders can both make
tremendous opportunities out of this setup.
However, this is neither a magic pill nor a piece
of investment advice. One should do the due
diligence backtest and definitely
paper trade during market trading hours.
Proper risk management and a good combination
of knowledge and patience are what has worked
for most successful traders, There are cases
where there has been a good strategy that
has been sold in the name of ‘the best
strategy’ for an option buyer or seller.
The same strategy had been used by
multiple traders, but only a handful has
been profitable. The reason that this
keeps on happening is that there are
multiple ways in which a day trader sees
the market. Trading is a place of probability.
This makes it a very high-skill game and not
everyone’s cup of tea. One should be really
focused on each and every aspect of the
system to make a profitable streak.
It seems daunting but when done with
proper risk management it is quite crackable.
Most people try to shy away from anything
that is beyond stocks and shares of a
company In fact many newcomers don’t
know about all the ways to trade. In the
financial markets, there is hardly any
strategy that will give you a positive
return at all times. However, one should
know that they can make money when the
market is going up, down, or sideways.
In all these three situations there are multiple
ways in which a day trader can participate.
All this jargon and the overall universe is
really overwhelming. The rules and parameters
really seem confusing and over-consuming.
Especially the world of Options is really
convoluted and there are a lot of ways in
which a trader can make money.
Some platforms come with ready-made
option strategies and good trading platforms,
you can check out and weigh your options
accordingly. There are other traders who are
looking out for a brokerage-free option.
This really helps you in the scalp and make
smaller profits along the way to make a bigger
impact. Some prefer trading directly from the
chart and that really gives them, a lot of confidence
boost. The best part is that you can get all
your brokerage (up to a certain limit) if you win
a 30-day challenge. Basically one has to make
Rs 1000 at the end of 30 days from intraday
to be qualified for this. Go out and explore
what options suit you best and deploy
strategies as per your needs.
The way trade happens, depends on the
kind of market sentiment a market
participant carries. However, before
proceeding with the strategy you
should know well that options
are a high-reward space. However,
the risks associated with this financial
instrument are also on the very higher side.
One should get into options only when the trader
has been a market participant for a very
significant amount of time. A profitable
trader like an investor should be diversified
in his approach to make money out of the capital.
However, if anyone is looking for a get-rich-quick
strategy is probably welcoming opportunities to
get scammed very soon.
The good part about the strategy
we are going to discuss is that
it works for various kinds of
traders. This means that it works both for
option buyers and option sellers.
First, let’s find out about the insurance
buyer or the buyer of an Option.
The strategy is known as a Long
straddle. In this one buys a call
Option and a Put Option both.
Before you start worrying about
the theta decay, let’s get to the
details of the strategy first.
The Options should be of the
same underlying asset.
It should not represent two different assets.
Two different indices or two different stocks either.
Both the scrips should be derived of the same Asset.
Hoping this point is clear, we move on to the next.
The options you choose should be of the same expiry.
It should also belong to the same strike price.
To put it in simple words, you should choose your levels
very clearly before moving on to another step with this strategy.
This is called a long straddle strategy.
There could be three cases in point once you deploy the strategy.
You will make the most losses if the market ceases to move
anyways at expiration at-the-money.
If it moves anyways on either the call or the put side.
One makes money. This is usually to be calculated
with respect to the premium paid for one
side and it is lost on the other side.
Remember in this strategy time is against you.
There will be theta decay and that can significantly
affect your position. So even if the market moves
in your direction you may not make a good return.
As the day of expiry comes,
your option decays like a melting block of ice.
THE MOST IMP POINT TO REMEMBER
It is very important for the long straddle
to work for you on a statistical level.
When you start the strategy do not get
into a situation where there is high
volatility in the market.
This happens near an event or a major
announcement date like results or policy updates.
Do not buy premiums at higher costs and sell at a lower price.
Always check the IV or implied volatility before
making a move. Many start looking for zero-to-hero
strategies and look at more robust options.
The idea is to have your market move in a
specific direction. No matter whichever side
that can be. It has to be a sudden violent spike for
you to get the benefit of the volatility. The idea is to
have the volatility increase once you are already
in the trade this will level your chances of winning.
An option buyer makes money when the asset
value increases and you should find all ways
to make that part assured.
This is where this strategy does not even
seem like a good idea. Because eventually,
you are having double trouble at the other
end of your trend. You are fighting both the
time decay and lack of volatility. While gap ups
and gap downs could be good, a flat market would
mean that you could lose money on both sides.
So this is where the other alternative comes into
the picture.
Many would prefer to do sectoral analysis to
determine the spots where there is massive action.
Instead of buying, Sell both the Call and Put options.
The first remains the same. The Options should
be of the same underlying asset. It should not
represent two different assets. Two different
indices or two different stocks either. Both the
scrips should be derived of the same Asset.
Hoping this point is clear, we move on to the next.
The options you choose should be of the same expiry.
It should also belong to the same strike price.
To put it in simple words, you should choose your
levels very clearly before moving on to another step
with this strategy. This is called a short straddle strategy.
There could be multiple cases in point once
you deploy the strategy. You will make the most
profits if the market ceases to move anyways
at expiration at-the-money. If it moves anyways
on either the call or the put side. One loses money
based on the intrinsic value of the call or put option.
This is usually to be calculated with respect to the
premium earned for one side and calculating
how much of it is lost on the other side.
Remember in this strategy time is earning for you.
There will be theta decay and that can significantly
affect your position for good. As the day of expiry
comes, your option decays like a melting block
of ice. But, there is a big downside to this
strategy as well.
THE MOST IMP POINT TO REMEMBER
It is very important for the short straddle
to work for you on a statistical level.
You lose money as the market moves
away from the at-the-money area.
As the market can go anyways for any
number of points. The loss can be
unlimited in theoretical terms. One can lose
it all on a single trade without proper trade
management. Sell with high volatility market
scenario. Big event dates and sudden news or
rumors can create volatility. This shoots the price
of an option up. Right after the event as the seller
sees the volatility cooling up the premium price,
falls and the trader makes money. Many traders
use such strategy on the day of expiry.
For Habit Creation and stacking
CONCLUSION
Remember in the buying or the selling
this strategy is very subjective for interpretation.
Confidence can be built through rigorous backtesting
and live market mistakes. Be that in paper trade or
for real. One needs to always follow real money
management skills to make money. It can be in
the form of hedging or trying other statistical data-oriented
strategies. Practice more to get more ideas and answers.
More than any strategy, one should first focus
on simple actionable steps like this.
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