5 REASONS WHY YOU ARE TRADING OPTIONS WRONG
Trading options can be very profitable. But to be a profitable options trader, we need to give it the seriousness and commitment it deserves. To treat it like you would any other business. Especially in the Indian market, where novice players are getting trapped by professionals. In this article, we look at how to set up a profitable Options Trading business and the 5 ways to ensure you succeed in trading options.
Ever since they were introduced, Options have provided exciting opportunities to traders. Perhaps it’s the technical nature of the investment product, or the high leverage they provide, or perhaps the many possibilities that they offer. Whatever the reason, options traders have always considered themselves a cut above the rest, a sort of “exclusive boy’s club” where entry is provided to only those who are able to achieve the ever-elusive profitability. So, does that mean we mere mortals have no way to get inside? There is a way, and if you are ready to listen, I will take you to the hallowed grounds.
Still with me? Good. Then listen up. To be a profitable options trade, you must treat it like a business. And like every business, to be successful you must have a plan. You see, once you start treating trading as a business, you will likely remove the emotional connection that plagues all traders, especially options traders. By looking at trading as a business you are likely to look at all the components you need BEFORE you start. Which is not what most traders do. Most of us get started and THEN try and figure out what we need to succeed. By that time, however, it’s too late! You are out of trading capital, your confidence is down and you are thoroughly confused. Anything you do now will seem daunting and tiresome. At this time, you are very likely to give up altogether. And most traders do. By looking at all the components and possible scenarios beforehand you will avoid this trap and ensure you succeed.
If you agree with me, then you are probably asking what are the things you need to think about. Well, here they are, the 5 components that ABSOLUTELY need to be part of your trading business:
- Know your strategies!
- All about Risk management
- Testing your trading plan
- How to use market analysis when you trade Options
- Monitoring and adjustment
Let’s delve into each of these components in more detail.
Know your Strategies!
There are many strategies that can be created using options. Some of the popular ones include long calls, long puts, credit spreads, debit spreads, iron condors, and straddles, just to name a few. But that doesn’t mean you need to use all of them. No, you need to understand your specific objective and pick the one that best suits it. Are you looking for income generation, hedging against risk, or capital appreciation? Each strategy has its own characteristics and risk profile, so it’s important to thoroughly understand them before implementing them in your trading business.
Think of options strategies as different tools in a toolbox. Just like a carpenter needs different tools for different tasks, an options trader needs different strategies for different market conditions and objectives. For example, if you believe a stock will rise in price, you can use a bullish strategy like buying a call option. On the other hand, if you expect a stock to decline, a bearish strategy like buying a put option can be employed. By understanding and selecting the right strategy based on your specific objective, you increase your chances of success.
All about Risk Management
Options trading involves inherent risks, and managing those risks is crucial to your long-term success. You should never risk more than you can afford to lose. 
Determining your risk tolerance, setting stop-loss orders, and diversifying your portfolio are some of the key aspects of effective risk management. By implementing proper risk management techniques, you can protect your trading capital and ensure that a few losing trades don’t wipe out your entire account.
Imagine you are a tightrope walker. Every step you take on the tightrope involves risk. To ensure your safety and protect against falling, you use a safety net, a balancing pole, and a harness. Similarly, in options trading, risk management is your safety net. By implementing risk management measures, you protect your trading capital and limit potential losses.
Testing your Plan
Before diving into the real market, testing your trading plan in a simulated or paper trading environment is essential. This allows you to evaluate the effectiveness of your strategies, refine your entry and exit rules, and gain confidence in your trading approach. Testing helps you identify any flaws or weaknesses in your plan and gives you an opportunity to make necessary adjustments without risking real money.
Think of testing your trading plan as a dress rehearsal before a big performance. Actors and musicians spend time rehearsing to fine-tune their skills and ensure flawless performance. Similarly, you should test your trading plan in a simulated or paper trading environment. This allows you to practice executing your strategies, refine your entry and exit rules, and identify any flaws in your plan. By testing your plan, you gain experience, build confidence, and increase your chances of success when you enter the real market.
How to use Market Analysis when you trade Options
Market analysis is a vital component of successful options trading. You need to understand the factors that drive the underlying assets and the broader market conditions.
Technical analysis, fundamental analysis, and sentiment analysis are all valuable tools in your market analysis arsenal. Technical analysis involves studying price charts, patterns, and indicators to identify potential entry and exit points. Fundamental analysis focuses on assessing the financial health and prospects of the underlying asset or company. Sentiment analysis considers market sentiment and investor behaviour to gauge market trends and potential shifts. By combining these different forms of analysis, you can make more informed trading decisions and increase your chances of profitability.
Market analysis in options trading is like a compass that guides you in unfamiliar territory. It helps you understand the current market conditions, identify trends, and predict potential price movements. Just as a hiker looks at weather forecasts, examines the terrain, and reads maps before embarking on a journey into the wilderness, an options trader uses market analysis to make informed trading decisions. For example, technical analysis allows you to analyse price charts, patterns, and indicators to identify potential entry and exit points. Fundamental analysis helps you assess the financial health and prospects of the underlying assets or companies. Sentiment analysis provides insights into market sentiment and investor behaviour. By incorporating these forms of analysis into your trading approach, you can navigate the market with more confidence and increase your chances of success.
Monitoring and Adjustment
Successful options trading requires ongoing monitoring of your positions and the market. You need to stay updated with relevant news, market events, and changes in the underlying assets. Regularly assessing the performance of your trades and making necessary adjustments is crucial. This could involve scaling in or out of positions, adjusting strike prices or expiration dates, or even closing out positions early if they no longer align with your strategy. You can maximise your profits and minimise potential losses by actively managing your trades and adapting to changing market conditions.
Think of options trading as driving a car on a long journey. You constantly monitor the road conditions, check your fuel gauge, and adjust your speed accordingly. Similarly, in options trading, monitoring and adjustment are essential. You need to keep an eye on your positions, market trends, and relevant news. By actively monitoring your trades, you can identify when adjustments are needed. This could involve scaling in or out of positions, adjusting strike prices or expiration dates, or closing out positions early if they no longer align with your strategy. By staying vigilant and making necessary adjustments, you can adapt to changing market conditions and maximize your profits while minimizing potential losses.
Summary
Options trading requires treating it like a business, with careful consideration of its components. Just as a carpenter needs the right tools, a tightrope walker needs safety measures, performers need rehearsals, hikers need navigation tools, and drivers need constant monitoring, options traders need strategies, risk management, testing, market analysis, and monitoring and adjustment.
By treating it as a business, you can eliminate emotional biases and focus on the necessary components for success. Understanding different options strategies, implementing effective risk management, testing your trading plan, conducting market analysis, and actively monitoring and adjusting your trades are all essential elements of a profitable options trading business. By understanding and implementing these components, you can confidently navigate the world of options trading and increase your chances of success. So, embrace these elements, learn from examples and analogies, and embark on your journey to become a skilled options trader. The hallowed grounds of profitability await you; it’s time to make your mark in this exclusive realm.
