Lesson: 2 Identify These 7 Answers Before You Put An Order of Options Trade

Key Points from Today's Lesson:

1. Fit My Portfolio?

1. A lot of people use to trade based on emotion or wishes as trade looks good.
2. Every time all trade might not suit the portfolio requirement before entering in any position make sure best possible requirement of portfolio Example: Many people trade SUZLON CE option to have feeling of sudden up move. In fact, Portfolio requires Cross Hedging or needs to add position which favors more or add such position which is complimentary of current Position.

Example: I have 10 Lot of Nifty 11200 CE and nifty going down, My buying of 11200 CE is in loss, better to not add more instead Create bearish trade so my existing position will balance out.

2. Does the Stock or Index Have Enough Liquidity?

1. For any trader Liquidity plays a vital role for success why? If the trade doesn't have enough Liquidity why to enter in such trade. Impact cost should be minimum for my selection of stock or index.
2. You can't trade more as liquidity constraints in the selected stock or Index.
3. There is no use of trade where Open Interest is very minimal like 10-20 lots, Instead of trading such Underlying select such liquid underlying where no quotation problem lying, huge Open Interest.
4. One can easily Average out liquid position at low cost. Example: what Jobbers do in option market, Jobbers continues trade in one strike with thin Stop loss and stand for big profit. Suppose, Nifty is trading at 11000 and view of Nifty is positive Jobber start with 11200 CE @ 50 in weekly Expiry Buy 10 Lot @ 50, Put Stop loss near 49.1 and stand for upside till day in case CE option value goes to 55 they set Stop loss at 54 trail Stop loss till it hits. so, In loss per trade they Bear 750 Rs. and in profit they keep position open till trial Stop loss hits or day end. Such trade is possible where huge Open interest lying plus Liquidity should be more.

3. Implied Volatility Analysis?

1. First, Identity IV analysis of particular stock as well as Index. VIX shows volatility of overall market situation.
2. It provide fair idea of how market will react what we can expect overall movement of Market.
3. Do complete analysis of overall market and international news also.
4. Make sure keep light position when IV of individual stock seems at low
5. Even during panic time IV will spike up much more and easy to hedge or average out position. Example: IBULL HOUSING is the stock 1 week ago on 26th JULY trading at 65 IV sudden news and twitter highlighted stock in news, moreover Result of earning on 6th Aug sudden spike came to IV and it reach at 110 almost 80% increase in the IV.
6. Basically IV analysis is key for trader to get clear view for creating position in stock or index.
7. One should start keeping Base IV of each stock or index, Sooner or Later IV will reach at base rate except some big restricting or News Stock where big announcement yet to come. Lower the rate of Stock, Higher will be IV and vice versa. Even we can't compare between stock and index value like Nifty V/S Eicher Motor.

4.  Expiration Period of  Trade?

1. Keep Monthly contract open in screen, as main expiry have good volume plus premium.
2. It doesn't mean not to trade in weekly expiry of Nifty and Bank nifty do trade but keep more focus on Monthly expiry.
3. Period of selection do trade in Weekly expiry far from current one. Example: Trade in Aug 15th Expiry from 5th to 9th Aug. In simple words do trade in next week option, many time on expiry day huge movement use to seen, better to have position on next week option and Monthly expiration.
4. Typically, Index trade try to short weekly option and make Long position in Monthly Expiry so Maximum Theta gain can be made out of position in case of any spike in IV came, Monthly expiry have bigger VEGA value so loss can minimize

5. Define Strategy Be Using?

1. Keep in Mind Option selling strategy you use mostly.
2. It doesn't mean you can't buy option, but do buying for hedging purpose. Example: I sold Reliance PE option of 1200 Strike @ 30 and Reliance moves to 1160 I am in net Loss, Start selling call Option of 1200 or 1220 strike. Moreover, Many trader buy  Far OTM PE like 15-20% far from current rate in case of sudden move came, Entire Position will switch over to Long position and create profit.
3. when Option trade near normal range trader should have net option selling in portfolio.
4. You should do Straddles, Strangles, Butterflies, Credit spread, etc

6.  Position Size?

1. Position size is very much important for all option trader, double check size of position and enter the trade.
2. It is ultimately last thing to do practically have full control on size of portfolio.
3. Keep checking simulation Continues and try to maximize risk of entire position.
4. It is one of the most crucial area where most of option trader fail.
5. Keep 5% allocation in stocks and 30% in Index have enough cash lying with trader.
6. Option trading is Probability game where small position make huge return if position is designed in fair and efficient manner.
7. Many times trader play like betting on any stock, Buying PE or CE in huge quantity ultimately expire worthless create big panic in mind of trader.

7. Define Motive of trade?

1. This is most important question each trader has to ask before placing trade.
2. My motive behind trading this trade is to Earn Time value of option, Or IV gain or Delta gain, Or adjusting my current position to minimize risk.
3. Everyone should define motive of each trade and strict to it, selling Nifty option and earning Time value, keep doing what If analysis if nifty having huge Movement, keep countable loss in case any worst- case happen.
4. Make sure trading in Low beta Stock always good, but small move may create panic due to low IV and small Straddle.

These are few steps to be successful trader, keep ready answer and start trading professionally. Option market is full of money each success trade gives huge return compare to false one.

Happy Reading
Derivativelearn.