In an interesting session as part of the highly popular MarketShala series conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder Elearnmarkets, and Mr. Chetan Panchamia a prolific intraday trader and trainer with many years of experience came together to decode how to make money by buying options.
Here is a short discussion of this session. If you want to get a practical understanding of how to make money by buying options, watch the full video at the end of this blog.
An option buyer has limited risk and loss is limited to the premium which he had paid. On the other hand, option sellers have unlimited losses.
It is seen that the Options buyers usually lose money 95% times but. It is not always true that as an option buyer you always lose money but they can also make money.
Let’s discuss in details:
What is Trending Day?
When the opening price is near or almost equal to the low price and the prices start moving up by aggressive buying of the buyers then it is referred to as the up trending day.
On the other hand, when the opening price is near or almost equal to the high price and the prices start moving down by aggressive selling of the sellers then it is referred to as the down trending day.
Whether the trending day will be bullish or bearish, it is identified in the first 15-30 minutes of the candlestick chart which shows the aggression of the buyer or seller.
When any budget or any news comes in the market, then the next day big moves come.
Let us take an example:
Let us take the example of the chart of 5th July, when the budget had come. We can see that the market Is choppy and no big move had come on the budget day.
On the next day, we can see a gap down and in heavy volume, there is selling in the market.
A down trending day is usually characterized by a gap down and breakout from the low levels.
We can see that on the next day of the budget announcement, the opening price is near or almost equal to the high price and the market kept falling after that with heavy selling volume.
On the trending day, the range of the candlestick is between 10-15%. So on these kinds of days, option buyers can make money as they can get 100-200 points for trading.
But these types of trending day come only 4-5 days in the month and the option buyers should know how to identify the trending day in the first 15-30 minutes.
Those who option actively trade in the market must know the concept of implied volatility, which means there is a relationship between the volatility and underlying price.
Whenever there is an event in the market, so volatility rises because of which the premium prices also increases.
And when the even because of volatility there is crash in the market, in this case how can option buyer hedge his risk.
In this case after 1-2 days of the end of the event traders should not be an option buyer as that is the time when the implied volatility crashes.
How can option buyers make money in the weekly expiry contracts?
It is always seen that the option buyer has the benefit of Gamma which is on the last day of the expiry.
So as the option buyers if you want to trade and see then when there is a big move, then they should try after 1 pm on the expiry day. Bank Nifty can give 7-9 points if there is a big move after 1 pm on the expiry day.
As we have discussed above the profit of the option sellers is limited to the premium that he sells whereas the chances of the option buyers are less but when he makes profits that is the multiple times of his investments.
You can watch the full video from here:
Read more about Options buying here Put Options – Buying, Selling, Formula & Trading Put Options
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