Table of contents
- How to trade options with less capital?
- How to start trading with a small investment?
- How to choose the most accurate holding period for options trading?
- Can the number of stops and targets be predefined?
- How not to give in to the ‘hot tips’ and impulsive buys?
- How to trade in liquid options?
- Choosing the right expiry date for options trading
- How to utilise the stop-loss orders?
- Should you give the relatively “unknown” a try?
- Go with the practical approach
There was a time when very few Indians would take the “risk” of investing in the stock market. Accordingly, investing in options with low investment has become a popular trend. Ever wondered why newbies in the investment world try options trading over others?
The following could be the answer to why and how to trade in options.
How to trade options with less capital?
In trading options lingo, you can call any trade which is under Rs. 2,00,000 a small amount of capital. As the market trend shows, young investors primarily concentrate on options, which can be either calls or puts.
Irrespective of your experience in online trades, if you wonder how to do option trading in the right manner, then the following takeaways could be helpful.
How to start trading with a small investment?
Before you commence trading, decide on the amount of money you can comfortably part with. When starting with limited capital, try not to put everything you have into this investment.
Rather, identify your risk appetite and utilise capital of 10%-20%. What you should not forget is that many investors consider options to be wasting assets. That is the reason why they do not have a long shelf life, as well. Hence, here’s a small tip – keep limited exposure.
How to choose the most accurate holding period for options trading?
The period of holding is important to determine the profit amount that you might earn from options trading. Holding the position for a longer period can enhance the chance of losing on this trade. Even if you feel like continuing a trade because it has good earning potential, try not to hold it for more than three days.
Choosing options with a relatively short holding period can be a smart move for any investor. This can be helpful to break down or break out zones. This makes it easier to exit the trade immediately when needed.
Can the number of stops and targets be predefined?
As a part of minimum-to-trade futures (having a certain amount of money in your account to trade futures contracts), you can use different online calculators to work out your ideal range of target and stop. You can align the options to these analysed and calculated targets and stops. This can help to maximise gains and minimise losses.
How not to give in to the ‘hot tips’ and impulsive buys?
When a stock surges, its contract may follow suit. You might blame its shorter shelf life, but options trading does not always match stock price forecasts.
Beware of “hot tips” from self-proclaimed experts and analysts; conduct your own study before investing.
How to trade in liquid options?
The shortcut is to concentrate on the frequently traded options. Also, focus on the ones that have high volume. Such options are most likely to have near-accurate pricing. Moreover, take care of the difference that lies between the maximum price that the purchaser agrees to pay and the lowest price that the seller agrees to. It is better known as the bid-ask spread among investors.
Choosing the right expiry date for options trading
A smart move is to let go of options that would expire within a few days. Investing in them can be a real risk. On the contrary, options that have a few months’ shelf life can help you see how they react to the various market movements.
How to utilise the stop-loss orders?
Basically, these orders allow you to access any opportunity at a pre-decided rate. It triggers whenever the price goes below the already set level. Setting orders for stop-loss can help keep your losses under check. It is particularly helpful when the price of any option plummets below a certain level.
Should you give the relatively “unknown” a try?
There will always be a threat of unknown derivatives and stocks in the market. There could be events going on that might have a little-known market impact. If you trade during such events, it can lead to a big loss.
Go with the practical approach
While you might start options trading for an amount less than INR 2 lakhs, there is a need to keep a careful eye on where and how you put the money. The key to making it big in trading is to, however, get the right education and utilise your practical experience.
The seller has to have around ₹1 lakh in the trading account to sell even one lot of Nifty. So, one may purchase options, but selling options with a small investment of ₹1000 is usually impractical.
The synthetic call strategy is the most ideal selling approach if you want to make high profits while taking on a little risk. The trader uses this approach to buy put options on stocks they own and believe will grow in value in the future.
It is vital to understand that there is no assured no-loss approach to high-profit option trading. Trading options entail risk, and traders must always be prepared to take on losses. However, you may use strategies like iron condor, butterfly spread, and covered call to minimise risk.
Yes. One possible place to start trading options is with small-cap options. You may, however, lose all of your investment in a matter of weeks or months if you place a wrong bet. Investing for the long term and building money gradually is a safer approach.