In this video, we are going to find out, whether trading option is a good idea? Can we make living trading options? Can options make you rich? Let’s get into it now.
Well, options were originally designed as risk management instruments. People who were having big exposures to these futures or big exposure to stocks. Let’s say someone is a partner in the company and he holds a lot of stock of that company or someone is a farmer and he’s growing wheat and he has a lot of wheat that is coming out of his field.
These guys have a lot of exposure to these underlying. To minimize the risk, like if a farmer gets a bumper crop of wheat but the price drops drastically, he won’t benefit as much from it.
Let’s say you are a partner, you hold a lot of stock and for some reason, some bad news, some government policy, whatever it is, the market comes crashing down on your stock price reduces. That exposes you to a lot of risks.
And to manage those risk options were designed. And obviously we are going to go into great detail and see how exactly these risks are managed. But that was the basic purpose of the options.
Now, traders being traders, they found out that they can see good trading opportunities in options and you can pay much less as compared to acquiring the complete stock or paying the futures margin.
You have to pay much less if you’re buying a call option or put option. Also, they went one step ahead and they designed complex strategies where they buy a certain strike option and sell certain strike option against them. So they are getting benefits of both the words.
There are certain advantages of selling options and certain advantages to buying options and they combine both, by creating these complicated strategies.
A trader will always look for an opportunity to make some money. And these instruments, which were originally designed to manage risk, traders found a way to trade them.
Whenever the underlying moves, the options move. And they, instead of trading the underlying, they started trading the options. Now you can do the same. In fact, in recent times and all these mentors have come up who have glamorized these options concept and a lot of incorrect concepts are flying around in the markets. But you can trade options and make consistent money if you understand them well.
So my objective here is to help you understand this complicated concept and then help you with certain strategies, certain ways of trading these auctions so that you can make money safely from these leveraged instruments.
Now, obviously it can. And you must have heard about the horror stories of options traders who lost more than they had in their account. So when you bring these two things together, on one side, you have traders who are making consistent money with options.
On the other side, there are horror stories of traders blowing up, losing a lot of money than they plan to lose by using option. So what is the catch here? The catch is you can become rich by trading options if you manage your risks in your trades correctly.
Whether you are using options to manage risk in your portfolio or you are using complicated options strategies, to use options only, to make money in the markets. In both scenarios, you can make money if you understand and manage your risk that that is precisely what options are a risk management tool.
Now you stay tuned for more technical discussions on options strategies forming a market view on the underlying so that you can select appropriate options and options strategies. All those things are coming up.
Now that is a realistic question, much more realistic than can you become rich trading options. And the answer is absolutely, yes, you can make a consistent living using options strategies, but there are certain things that you need to take care of before you start trading options.
The first is sufficient capital in your account to take a decent-sized trades. Obviously the lesser risk you take, the smaller will be your profit potential. To increase your profit potential or the amount of money you make, you will have to take larger option positions. To take a larger option position will need sufficient capital in your account.
Now, if you come to the markets with a very, very small account, let’s say 50 thousand or 1 lakh and you are dreaming of making tons of money, using options, then that is not a sustainable strategy and you might face serious problems very soon.
So the first step is to have sufficient capital in your account. How much capital? We will discuss on that very soon.
The second point is you must have a deep understanding of the concept of options, how they work, as well as the markets overall. So if you have just started trading and you again are planning on trading options and making a lot of money, I mean, you can get lucky for a while, but smart money won’t really let you get much ahead in the game.
And then you will end up paying back much more than you made with your initial luck. So deep understanding of option concepts as well as overall market is a must.
You will need a lot of screen time, a lot of experience with trading options. Now, there is no shortcut around that. No matter whether you are listening to me or any other mentor, if you are not spending sufficient time in front of a screen or observing how the market reacts or observing how the options react in different situations, especially in case of extreme volatility, it will be very difficult for you to trade options consistently from the profitable side.
And lastly, you will need a consistent framework to help you nail points number 2 and 3, that of deep understanding of options as well as markets overall. And secondly, the patience, the screentime, the ability to be calm under pressure in times of extreme volatility. All that will come if you have a reliable, sound, logical framework to base your trading decisions on.
Well, they certainly are cheaper than buying the full amount of stock or paying the futures margin, but they are not necessarily safe. They will become safe if you understand them and use appropriate strategies where you are hedging your risks.
If you keep your options position open, then there are certain risks associated with that position and you can manage risk very well by using combinations of options, long option, short options, put options, call options, all those things we are going to study in detail.
But you can use combinations of these and then make options much, much safer than plain buying or selling a stock or buying and selling the futures position. So, yes, they are safer than stocks or futures, but only if you understand them. So we are going to answer many such questions going forward in this series. So stay tuned and I will bring a ton of content on options going forward for you.
So thank you for reading this post till the end. And here is the suggestion for the next post you should read and I’ll see you in the next one.
First Part: Options Trading For Beginners Step By Step Guide
Secodn Part: How to trade options for beginners?