How to become profitable trading F&O Segment
Hi TV Community,
DISCLOSURE: This article is aimed at those Indian Intraday / Swing traders who are struggling to be profitable while trading Options - especially with Options Buying in NSE.
If you are successful trading Options, then this article may not be for you.
So, here are my observations on trading F&O - especially Options Buying and an idea for an alternative approach to becoming profitable trading the markets.
OPTIONS BUYING
The Fact
Statistics reveal that most Option Buyers lose money on their trades because right from the word Go, every trade is stacked against them. So in order to win, the market must move fast in their direction otherwise the probability of loss increases with every next tick and passing minute.
Perils in Options Buying
Option buyers chose to "Buy Options" because of Low Capital Requirement - and this "low entry barrier" is in fact designed to lure them in and put them into loss while giving them occasional wins.
The reason to Buy Options for many traders is not because as a Strategy it is effective for producing winning trades, but rather the Low Capital Requirement - which means anyone with even 1000 Capital can trade Options. This Low Capital Requirement is so enticing that traders forget that the Odds of winning with Buying Options are always against them and they are more likely to lose than win.
Furthermore, many traders buy far out of money Options because it is available for cheap and thus make yet another mistake which puts them in greater risk of a losing trade.
And since they lose small portions of capital from their trades, the magnitude of their losses is not felt until one day they find themselves deep in loss. Since most Option buyers trade with low capital, they don't put in the efforts to inculcate discipline or give the activity of Trading the required discipline it demands and do not follow a set of rules that are essential for engaging in this activity day-after-day.
As Capital gets eroded with every losing trade while desperation to recover lost capital becomes strong, traders pump good money after bad money while being in denial frame of mind that they can not only recoup their losses but actually make profits!
And revenge and reckless trading contribute to their own share of losses.
In other activities that we engage in our real lives, we exhibit more careful behaviour, but with Options Buying the low entry barrier is what pulls in many traders and they trade Options just as they would trade the underlying asset by buying Naked Options without considering other important factors that impact Options prices!
Trading Options is a complex activity requiring years of deep understanding of the subject - but most Option Buyers just go and buy Naked Options because that is what is possible with Low Capital. The fact that Option Buyers have to be right both about direction and momentum so as to win is lost on most Option Buyers!
OPTIONS SELLING
Advantages of Option Sellers
Option Sellers on the other hand have great advantages over Buyers. On most trades they end up on the winning side. Especially as Expiry day nears, Time Decay assists Sellers and ensures that their chances of winning increases. Option buyers do not get any such "outside" support.
However, Option Selling requires Full margin and Bigger Capital. It is for those traders who can deploy big money. It's like a Club for the Elite. Options Selling means taking potentially unlimited risk and traders who trade with their own capital cannot afford to take such an unlimited risk and thus avoid Options Selling.
The requirement of Full Margin and Bigger Capital coupled with taking potentially unlimited risk drives away most Options Traders towards the "cheaper" choice of Options Buying.
YouTuber Menace
YouTube is a platform that notorious YouTubers exploit. Through their 'Doctored' Videos they speak about Options Buying as if it is a simple trading technique that even a monkey can master and make money! Gullible traders fall prey to such videos and take to Options Buying and eventually join the list of traders who lose money trading Options.
When watching a few videos wherein the YouTuber says that he has come up with yet another profitable strategy, both amuses and angers me. If your earlier strategy shared yesterday is profitable, then where is the need for a new strategy today?
But as these YouTubers make money from YouTube, creating more videos is necessary for them and through their click-baits pull in viewers. They actually make money from YouTube and not from the financial markets. Barring a few, the quality of Technical Analysis is so poor that less said, the better. So avoid those "Gurus" of YouTube - rather, spend time studying as many charts as you can instead to get a grip on trading!
Why are you in the Markets?
Obviously, your answer is to make money. However, you realise that to win in the market you have to play with Bigger capital than what Option Buying Demands.
If you don't have or unwilling to deploy bigger capital, then my advise to you would be to stay away from the markets. No point in donating money to strangers through Options trading.
But yes, if you have and are willing to deploy more Capital, read on.
TRADING FUTURES
If you wish to operate in the F&O Segment, then Trading Futures is what I suggest over Options Buying or Selling.
Since it is clear to you that Bigger Capital is required and Options Buying is more riskier than you thought and chances of losing your money is high and not profitable in long run, the choice available to you is to buy/sell Futures Contract of the Asset. Say for example, BankNifty Futures over BankNifty Options.
Advantages of trading Futures
Once you've decided to trade Futures, here are your advantages.
Practice
To see if Trading Futures is for you, do paper trading of Futures and a chosen Option to study the results in a set period of time before taking the Leap.
Conclulsion
So, if you recognise that Options Buying is not going to be profitable in the long run and by shifting to trading Futures, you at least stand a chance of making money in the markets, you will do yourself a great favour making this change. So, if you are losing in Options, before you inflict more harm on yourself and burn your Capital, consider the thoughts shared above and also read articles written by others on the subject so as to take an informed call.
While there is, of course, more to being profitable in trading, if you put in the required time and efforts in studying Technical Analysis, charts, price action etc., in the long run being successful in the financial markets is an attainable goal.
Just remember, if you sow the same seeds, you will reap the same harvest!
CAUTION
This is not my advise to take to Trading Futures but as you are already trading Options, I am merely pointing you to explore a different approach.
The thoughts shared are based on my knowledge on this subject and I am willing to stand corrected and I fully understand that you don't have to agree with any of the views expressed by me.
Hope some of you find the shared information useful. Feel free to comment/correct and reach out.
All the best with your trading!
PRICECATCH
DISCLOSURE: This article is aimed at those Indian Intraday / Swing traders who are struggling to be profitable while trading Options - especially with Options Buying in NSE.
If you are successful trading Options, then this article may not be for you.
So, here are my observations on trading F&O - especially Options Buying and an idea for an alternative approach to becoming profitable trading the markets.
OPTIONS BUYING
The Fact
Statistics reveal that most Option Buyers lose money on their trades because right from the word Go, every trade is stacked against them. So in order to win, the market must move fast in their direction otherwise the probability of loss increases with every next tick and passing minute.
Perils in Options Buying
Option buyers chose to "Buy Options" because of Low Capital Requirement - and this "low entry barrier" is in fact designed to lure them in and put them into loss while giving them occasional wins.
The reason to Buy Options for many traders is not because as a Strategy it is effective for producing winning trades, but rather the Low Capital Requirement - which means anyone with even 1000 Capital can trade Options. This Low Capital Requirement is so enticing that traders forget that the Odds of winning with Buying Options are always against them and they are more likely to lose than win.
Furthermore, many traders buy far out of money Options because it is available for cheap and thus make yet another mistake which puts them in greater risk of a losing trade.
And since they lose small portions of capital from their trades, the magnitude of their losses is not felt until one day they find themselves deep in loss. Since most Option buyers trade with low capital, they don't put in the efforts to inculcate discipline or give the activity of Trading the required discipline it demands and do not follow a set of rules that are essential for engaging in this activity day-after-day.
As Capital gets eroded with every losing trade while desperation to recover lost capital becomes strong, traders pump good money after bad money while being in denial frame of mind that they can not only recoup their losses but actually make profits!
And revenge and reckless trading contribute to their own share of losses.
In other activities that we engage in our real lives, we exhibit more careful behaviour, but with Options Buying the low entry barrier is what pulls in many traders and they trade Options just as they would trade the underlying asset by buying Naked Options without considering other important factors that impact Options prices!
Trading Options is a complex activity requiring years of deep understanding of the subject - but most Option Buyers just go and buy Naked Options because that is what is possible with Low Capital. The fact that Option Buyers have to be right both about direction and momentum so as to win is lost on most Option Buyers!
OPTIONS SELLING
Advantages of Option Sellers
Option Sellers on the other hand have great advantages over Buyers. On most trades they end up on the winning side. Especially as Expiry day nears, Time Decay assists Sellers and ensures that their chances of winning increases. Option buyers do not get any such "outside" support.
However, Option Selling requires Full margin and Bigger Capital. It is for those traders who can deploy big money. It's like a Club for the Elite. Options Selling means taking potentially unlimited risk and traders who trade with their own capital cannot afford to take such an unlimited risk and thus avoid Options Selling.
The requirement of Full Margin and Bigger Capital coupled with taking potentially unlimited risk drives away most Options Traders towards the "cheaper" choice of Options Buying.
YouTuber Menace
YouTube is a platform that notorious YouTubers exploit. Through their 'Doctored' Videos they speak about Options Buying as if it is a simple trading technique that even a monkey can master and make money! Gullible traders fall prey to such videos and take to Options Buying and eventually join the list of traders who lose money trading Options.
When watching a few videos wherein the YouTuber says that he has come up with yet another profitable strategy, both amuses and angers me. If your earlier strategy shared yesterday is profitable, then where is the need for a new strategy today?
But as these YouTubers make money from YouTube, creating more videos is necessary for them and through their click-baits pull in viewers. They actually make money from YouTube and not from the financial markets. Barring a few, the quality of Technical Analysis is so poor that less said, the better. So avoid those "Gurus" of YouTube - rather, spend time studying as many charts as you can instead to get a grip on trading!
Why are you in the Markets?
Obviously, your answer is to make money. However, you realise that to win in the market you have to play with Bigger capital than what Option Buying Demands.
If you don't have or unwilling to deploy bigger capital, then my advise to you would be to stay away from the markets. No point in donating money to strangers through Options trading.
But yes, if you have and are willing to deploy more Capital, read on.
TRADING FUTURES
If you wish to operate in the F&O Segment, then Trading Futures is what I suggest over Options Buying or Selling.
Since it is clear to you that Bigger Capital is required and Options Buying is more riskier than you thought and chances of losing your money is high and not profitable in long run, the choice available to you is to buy/sell Futures Contract of the Asset. Say for example, BankNifty Futures over BankNifty Options.
Advantages of trading Futures
Once you've decided to trade Futures, here are your advantages.
- First and foremost Time Decay. You don't have to worry over that with Futures.
- Secondly, price of Futures is not as volatile as an Options Contract. In Options, a small drop in price of underlying can drastically drop price of an Option. But that does not happen with Futures and it reflects almost similar volatility as that of the underlying asset.
- A ranging day or day of low volatility does not drastically impact price.
- Futures price on expiry day does not expire worthless or zero.
- Since only Monthly Futures are available (as yet), you just have to focus on the chosen Monthly Contract.
- Solid volumes ensure adequate liquidity in BankNifty and Nifty.
- As Bigger capital is required, you will be protected from buying multiple lots and over-trading.
- Risk is under your control and you can cap it based on your risk appetite.
- You can build your entire trading career by simply focusing on BankNifty / Nifty Futures.
Practice
To see if Trading Futures is for you, do paper trading of Futures and a chosen Option to study the results in a set period of time before taking the Leap.
Conclulsion
So, if you recognise that Options Buying is not going to be profitable in the long run and by shifting to trading Futures, you at least stand a chance of making money in the markets, you will do yourself a great favour making this change. So, if you are losing in Options, before you inflict more harm on yourself and burn your Capital, consider the thoughts shared above and also read articles written by others on the subject so as to take an informed call.
While there is, of course, more to being profitable in trading, if you put in the required time and efforts in studying Technical Analysis, charts, price action etc., in the long run being successful in the financial markets is an attainable goal.
Just remember, if you sow the same seeds, you will reap the same harvest!
CAUTION
This is not my advise to take to Trading Futures but as you are already trading Options, I am merely pointing you to explore a different approach.
The thoughts shared are based on my knowledge on this subject and I am willing to stand corrected and I fully understand that you don't have to agree with any of the views expressed by me.
Hope some of you find the shared information useful. Feel free to comment/correct and reach out.
All the best with your trading!
PRICECATCH
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