The more traders engage in options, the more they start believing the myths around options trading. This is especially true if you don't thoroughly learn about options before you start trading in them. So, let's debunk some of the common myths associated with options trading.
1) Options are very confusing
Options are highly versatile instruments, and like everything else, they too require a bit of learning and practice. All the jargon can be daunting to grasp initially, but once you understand the way in which price moves, you begin to master options. As you progress, you realise that they provide enough opportunities to make money through different market strategies as per the trend.
2) It is easy to make money using options
Many traders jump into options trading with high hopes of making big money in a short span of time. This, even though possible, remains highly improbable. Options trading requires a good understanding of market trends, the instruments themselves and most importantly, a high degree of self-awareness to navigate the ups and downs. All good things take time and patience to master and deliver results. The same goes for options trading as well.
3) Options strategies need a lot of margin money
It's true, option selling requires a high margin. It is done to protect the interests of small traders and investors who might accidentally enter a transaction they don’t fully understand. However, with the help of options strategies, the margin requirements can be brought down by deploying a appropriate hedge.
4) Buying call and put options is highly profitable
If you have learned about options trading, you are probably aware that your loss is limited when you buy options, but your profits can be “unlimited” (potentially). This skewed payoff often entices new and experienced traders to buy a lot of options only to realise later that things are very different in theory and practice. Like any other trade, you must get your market/stock view right to make money, but in options trading, you must also know how time decay and volatility work against the option buyer.
5) Selling call and put options is highly profitable
You have probably read on the internet that “90% of the options expire worthless or zero”. Many option sellers rely on this logic to favour options selling. Given how volatile markets can be, sometimes, if the trader's view goes wrong, such trades have the potential to dent minimum 3 months of profit. Thus, the same tactic or strategy will not work in all market scenarios. Traders need to be smart and sharp to adapt to the ever-changing market trends.
6) Options are great trading instruments
Nothing can be far from the truth. Options, and derivatives in general, were developed as hedging instruments. Big institutions and high net worth individuals (HNIs) still use them for hedging. So in a way, speculative traders are market makers for hedgers. The best way to trade in options is hedging via options strategies. The sooner traders start understanding and deploying these strategies, the sooner they improve their profit/loss situation.
Which of these options trading myths did you believe in? It’s time to UP your knowledge and further simplify your options trading experience. Upstox will soon launch its options strategy builder for all its platforms to give you a disciplined approach, better downside protection, automated P & L calculations, and above all, a hassle-free multi-leg order placement in just 3 clicks. So, stay tuned.