How to be a successful options trader?

How to be a successful options trader?

Dear Options,

I need your help. How do I turn my trades profitable? I want to be a successful options trader. But for some reason, things aren't panning out to be great for me. I am finding it difficult to earn profits. Please tell me what I need to do to achieve this. Won't you help out a friend?


Options trader

Dear Options Trader,

Of course, I'd help out a friend. In order for me to start addressing you as a successful options trader, first and foremost you need to get the basics right. Come on, you can do it. I believe in you. Here is a checklist of option trading tips:

  • Know your risk appetite

Ask yourself how much losses you can bear on your trades. This right here will tell you where you lie on the spectrum of risk averse to risk taker. Once you know this, jump only on those trades that are in tandem with your risk appetite. This is the first important decision that you need to make.

  • Clear entry and exit points

Clearly define your entry and exit points. This is what you are supposed to do every time. Have clarity as to when you need to jump aboard and when to leave a sinking ship. Because again; logic: you don't wait for a ship to sink and drown yourself. You use a lifeboat and get out of there. This brings me to stop losses.

  • Using Stop Losses

Stick a handmade poster on your desk or better yet set it as your wallpaper on your phone. Always use Stop Losses when you take a position. Bold. Italic. Underlined and Highlighted. You get the drift. It's a must on all trades. If you don't, it's the equivalent of going aboard a ship that intends on unanchoring and leaving shore without lifeboats and not doing safety checks. And I know that you are smart. So you won't do this. So remember to always use stop losses.

  • Leveraging and not over leveraging

Options are leveraged products. Use them smartly. You have the opportunity to trade without paying the full contract value. The premium is the only amount deployed by you. It’s your capital. So preserve it. Don't be a spendthrift and throw money down the drain by waiting for your entire capital to erode by over leveraging.

  • Checkin liquidity

Only if an option is liquid, i.e. if a lot of  people trade it, will you be able to get a correct entry and exit price. Or else the opportunity will pass and you will be left hanging. So be careful and be on a safer side by always checking options liquidity before trading.

  • Staying up-to-date on new events

Events such as elections, change in RBI monetary policy, energy crisis in Europe etc. all have an effect on the financial market. So it is important to stay updated. So keep your binoculars ready and be on the lookout!

  • Diversifying your portfolio

Imagine if you had kept ₹1,00,000 cash in a bag and that bag got stolen. Is there anything that you can do except file a police complaint and wait for the thief to be caught? No, right. So instead if you had kept ₹10,000 in 10 different bags and one of them was stolen, then you would have still had ₹90,000 with you. Which of these is a preferable scenario for you? The second one, right? So use that same logic while investing and don't put all your eggs in one basket and diversify your portfolio.

  • Position sizing

Position sizing refers to that amount which you are investing, in any stock or trade. As previously mentioned, options are leveraged products so they can very easily wipe out your entire capital. So when you buy options, do not hold them for too long,because if there is no movement in your stock, your option might expire at zero. And if you have put all your money in one position and that goes downhill. Adios, Money! So make informed choices about your position sizing.

  • Use of option strategies

Option strategies such as Call backspread, Bull spread, Iron Condor etc are all that have stood the test of time and are thus option trading tricks used by pros. So that right there is a great tool to use. 

That's all from my side. Now the ball's in your court. It's up to you, what you do with this information.

Wishing you the best!