Equiminions Inc

Option Buying: The Right & Systematic Approach

Have you been consistently losing money in option buying but still do it again
and again?

Well, after reading this article, we assure you that the probability of taking up the trades on the wrong side will be less, and can improve your odds of a profitable
journey as an option buyer.

The majority of the retail traders lose money in derivatives, and the major reason
behind that is that they analyze indices and trade derivatives just like the way
they trade stocks which leads to a sure-shot way of failure.

When it comes to options, buying is very fascinating compared to selling as
it gives leverage – the ability to get exposure to large trading positions with a
small amount. Plus, because of the big fluctuations, the trading seems like a
roller coaster ride and develops greed in a hope of making money rapidly.

After years of trading options profitably as a buyer, we have summarised the
learnings in the following points, which can help you to reduce risk and improve
the odds of profiting as an option buyer.

KEY TAKEAWAYS TO MAKE MONEY AS AN OPTION BUYER

  • Execution: Execute trades on Breakouts, Breakdowns, and often in a reversal.
  • Time Frame: 1H, 30M & 15M TF works best.
  • Strike Price: Go for Deep ITM & avoid OTM, until and unless you are expecting blast moves.
  • Risk Management: Use a max of 30% of total capital with a maximum risk of 10-20%. The quantity of lots doesn’t matter.
  • Win size: You don’t need a rally, you need a few big candles. Upside brings 50%- 80% moves quite often.
  • Direction: You have to be right in the right direction.
  • Hedging: Hedge to avoid theta decay & sharp reversal spike.
  • Position Sizing: Start with a 20% position on BO/BD, add a further 30% on confirmation, and further.
  • Trading time: Mostly 9:15- 11:30 & 2-3:30 brings momentum, and so is your time, leave the rest for option sellers.
  • Trading days: Monday, Thursday & Friday bring you more opportunities. Avoid Wednesdays, as traders plan for the expiry.
  • Profit Booking: Always trail SLs or do the partial profit booking. One red candle during the bullish rally eats up all the gains.
  • Trade frequency: Limit it. Time (Theta Decay) is your enemy. Big blast moves often come but usually do come twice a week.

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