The volume of the options market including the indices and individual stocks is around 78%or Rs 85,000 Cr of the daily volumes on the National Stock Exchange where 94% of the market volumes come from the derivatives segment, as the share market news confirms.
To have good options trading, it is important to avoid mistakes. Some of the most common mistakes a trader makes in the option market are discussed here.
- Inability to understand the options: Most of the trader’sventure into the options trading without an appropriate knowledge of the same. They have less understanding on the movement of options and the associated calculations. A less knowledge on important details such as how much does an option move with respect to the underlying share or index, the Greeks that are used for calculation of option prices etc.leads to their failure. Only a handful of the traders know which strike price provides the best risk reward trading opportunity.
- Buying out-of-the-money options: Due to lack of understanding of the options, the retail traders end up buying options which are out of the money just because they are not expensive. They think that an occasional win can get them profits in the future as well and hence they resort to the buying of the out of the money options. But, mostly the trader faces the loses in the money by buying the out-of-the-money option. This kind of option also needs the trader to be sharp and fast, then only out of the money option will be lucrative for the options trader.
- Using same strategy always: It is one of the most common mistake and ignorance an options trader commits and have. They do not understand several option strategies and the investors end up trading in only plain call and put options in Nifty option chain and then lose money. Many brokerages offer different option trading strategies as well, but investors do not utilize these services.
- No exit plan: The traders also lose money as they do not know when and how to exit from an option position. They do not understand that holding on to the same position for a long time diminishes the value of the option.
- No event calendar: The option prices are known to over-react if a big event is nearing. The investors notice the increasing value in the options as a signal of a big move.
- Selling options without risk management: A beginner trader often behaves like a professional trader and gets into the selling of the option where the returns are limited but the risk is unlimited. A professional trader is properly hedged in his position and also keeps his risk management system right, but a novice does not.
- No understanding of time: With time, the options loses value. Many traders keep up their trade when the expiry nears, as the option prices are cheaper at this time. But later they lose money since the amount involved is small, but the loss is big for them.