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Options is a boon for small investors. But only for those who are not looking for "effortless success".
A learner has to invest from 2 years (if can source an experienced and real trader as a mentor) to 10 years (by trial-and-error practice) in acquiring skills to trade options profitably.
Options actually provide two streams of speculative income.
You can buy an low-priced OTM option with about 10% delta and sell it at 50% delta for a small gain. It is trading for a limited purpose. For this kind of trading you are not particularly looking at a significant movement in the price of the underlying instrument than a change in the sentiment towards the volatility and increase in momentum.
If you are looking to trade for a significant movement in the price of the underlying , you have a few choices:
Position trading: Buy deep in the money (ITM) options with 85%+ which has negligible component of Theta (time-decay). Expiry of 60 days and more. Buying ITM will give you good leverage and the ability to be right in spite of getting a few times wrong without losing money in one shot like a stop loss.
Day-trading: Go for short-dated weekly or bi-weekly options. Theta will be quite higher ( by 3 to 4 times) on a per day basis than what you otherwise would be paying for an option with 60 days time.
But consider this: You are actually paying quite a small price to greatly multiply the power of your starting capital without having any margin facility or without paying any borrowing fees. With leverage it's possible to turn relatively small amounts of capital into significant profits. But options brokers mostly don't allow every trader to borrow funds to take a SELL position or write contracts.
Options contracts themselves are a source of leverage, and the exchange allows it when you buy options outright and they don't have to monitor your account. If you buy short-dated OTM options, the leverage can be anywhere from 100% to 2000%.
Some brokers extend borrowing facility to options buyers as well with a stop loss position locked to protect their lending. Brokers need not only income from brokerage but also from lending funds to traders. I know of brokers in India who do provide financing for option buyers.
In any case you don't buy options unless YOU HAVE A FIRM DIRECTIONAL BIAS and have an idea about the probability of the time it will take to happen..
Please keep this in mind:
- The whole purpose of trading for a small guy is to be right in direction since he/she lack deep pockets or don't want to use them.
- The whole objective of trading short-dated options is to get high leverage and only those who have skill of spotting quick directional momentum should go for it.
A risk-averse investor has to work on acquisition of prediction skills acquisition instead of relying on the money to generate an income.
Basically, you have to be clear as to the direction of the market and the time period it will last. The intention is to hit the outlier quickly and without suffering the psychological pain. An Outlier is a statistical term. It refers to observations in a distribution of data that deviates from the normal.
Only those who are not looking for "effortless success" will make it. A learner has to invest from 2 years (if have access to a real trader as mentor) to 5-10 years (by trial and error method) in acquiring skills .
Any small guy attempting to enter big and uncertain world of financial trading has to practice playing the probability game in real environment and it may take a few years to attain proficiency in required skills.
I have devoted 10 years just on practicing and acquiring this skill which comes from real trading.
Can you become a pilot, driver or sports person just by reading books?
By the time, you finish reading this site, you would be in a position to become a beginning self-directed independent index futures options trader. You don't have to pay anyone for any beginner courses. You are getting what all you need ALL FREE OF COST. It should not take you more than 3 hours to finish reading the site.
Essentially, you should work on acquiring skills to
- Pick trading ideas and identify opportunities by high probability and risk/reward ratio.
- Quickly determine whether the futures underlying asset (Nifty 50 for example) is likely to soar, break down, remain neutral or move in a trading range,
- How quickly the target can be met ? Or how quickly you should get out if you can't finish this job. This is very important if you don't want to lose money by way of Time decay.
- Execute transactions on the broker's trading platforms. Any of your choice.
- Source free or inexpensive online sources of (a) big picture market analysis (b) specific market instrument option chain analysis and (c) Pricing and analysis tools and advisors (like India's Sensibull, USA's QuikStrike. etc.)
- Are there any requirements or prerequisites for trading options?
Sufficient capital for investing in at least 1 contract will be required. Buyers don't have to post any margin to brokers. Though brokers might have their own minimum capital required to open an account with them. The exchange does not impose such requirements.
No particular academic qualification is required.
Laptop or desktop computer is required as long as you don't find an app which can take care of the tasks mentioned here.
You don't have to be tech-savvy. Smartphone can be used for executing trades. And if you are able to find an app which can help your analysis work and provide you analytics like India's Sensibull provides, then you don't need laptop or desktop
Prior six months knowledge of financial trading and some experience in any kind of paper or real financial trading is essential. Experienced equity options traders are also welcome.
An understanding of the concepts of insurance, investment, profit, loss and expenses is needed.
Do I need to have any knowledge of analyzing charts, indicators , trends or market sentiment?
It is very basic. All the brokers or exchanges provide these tools free of cost. The tools cover Option premium quote ( or option chain), trade probability assessment scanner and scenario or performance analysis to determine risk and break-even point for the option bought and margin needed (for sellers) and post-trade performance monitor. Option chain analysis need statistics of Open Interest and Volume and an understanding of how those are interpreted.
What should be the daily routine?
On an evening prior to trading watch good free Youtube analysts and read big picture analysis provided by maximum of any two sites - not more than 60 minutes. The study will also cover the previous day's performance analysis
On the day of trading, do scenario and break-even analysis, take trading decisions and execute on the broker's platform. Maximum of 30 minutes for Opening hour of the market and another 30 minutes prior to closing hour of the market.
All over the world, weekly options are gaining popularity. Futures Exchanges supplement the existing monthly index options. Hong Kong exchanges, HSI and HSCEI, aim to provide risk management tools for investors to manage their short-term risks on the exposure of HSI and HSCEI positions by using weekly index options contracts. Weekly index options are similar to the monthly index options except that they expire on the last business day of every week instead of the second last business day of the month.
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