10 Tips for Options Trading: In recent years, the number of retail investors in the Indian stock market has been steadily increasing. According to a report released in March 2024, the number of demat/trading accounts in India has reached 150 million. Along with this growing number, the number of options traders in the market is also increasing. However, most options traders end up losing money. Despite warnings from SEBI (Securities and Exchange Board of India) that 9 out of 10 options traders incur losses of up to ₹50,000, the number of options traders continues to rise. We are here to share 10 tips for options traders that, if followed, can help avoid significant losses and survive longer in the market.
10 Tips for Options Trading
Educate Yourself and Keep Learning
Continuously educate yourself about the intricacies of the stock market. Understand the principles of options trading, how options work, which strategies to adopt in the market, how to choose strike prices in options trading, and how much risk is involved in a trade. Learn these aspects consistently from the market.
Risk Management
Options trading involves high risk. You should know how much loss you can afford before taking a trade. Only invest money that you can afford to lose. If you manage risk in options trading, consider that you have won half the battle. Therefore, managing risk and avoiding high risk are crucial.
Use Stop Loss Order System
Options traders know that a spike in option prices can be disastrous. To prevent this, always place a stop-loss order in the system after taking a trade, otherwise the market will give you more loss than you anticipated. Therefore, the stop-loss should be in the broker’s system, not just in your mind.
Stay Updated with the Market
You should know every news that is essential for a trader. You can stay updated by following our website, The Economic Times. Keep an eye on market news, economic indicators, and stay updated.
Avoid Overtrading
Options trading is like a sniper shot. Aim to be accurate in one or two attempts. Whether you are buying options or selling them, avoid overtrading. Trade no more than two or three times a day. Remember, the market is here today and tomorrow. The question is, will you have funds for tomorrow? This is also part of risk management.
Quantity in Options Trading
Never keep the quantity in options trading more than your capital. Manage trading quantities so that if a stop-loss occurs, you do not incur more than 3 to 5 percent loss on your capital in a day. Five percent is a significant amount, but this is being said for small capital. As soon as your capital reaches ₹1 lakh or more, your daily stop loss should not exceed 3 percent. Never trade with margin or leverage, trade only with your own money.
Place Limit Orders
Trade with limit orders in options trading. With market orders, you will buy at a higher price and sell at a lower price. This happens when there is a multiple order set. Place limit orders, execute perfectly, and avoid extra risk.
Seek Advice from Professionals
There is a famous quote, “Trading is not a destination, it’s a journey.” If you are new to options trading or unsure about some strategies, consider seeking advice from a financial advisor or a seasoned professional in options trading.
Choose the Right Strike Price
The movement of option prices in options trading depends on the strike price you have chosen. If you are an option buyer and have traded at out-of-the-money or at-the-money strike prices, then over time, the theta of your option premium will decay, which can work against you. Therefore, option buyers should always select in-the-money strike prices.
Understand the Nature of the Index
Options trading in the Indian stock market is done in different indexes. Such as Nifty, Bank Nifty, Fin Nifty, Sensex, Midcap. Start with the Nifty index. Write and learn from its volatility. If you start trading in volatile indexes like Bank Nifty or Fin Nifty, you could fall victim to their volatility. Therefore, you can start with the Nifty index.
Following these tips can help you navigate the world of options trading with more confidence and potentially improve your chances of success. Remember, the key to successful trading is continuous learning, effective risk management, and staying informed about market trends and news.
