Option Trading seems to be the most attractive and lucrative method of trading for Beginners, which is also often, seems a Trap for them. Option gives you the power of holding a Bigger Asset just by paying a Smaller Amount called Premium. What seems as Limited Loss can be turned into Total Loss. People generally treat Option as Stock or Future where we only play on Direction of Price up or Down, no matter when the movement comes. They generally do not consider the Factor of Time and Implied Volatility when Trading in Options. This is where Trap lies and how Broker fools you by saying that it is Safe to trade in Options. Normally Brokers charge very Heavy Brokerage in Options and that is there Interest only and why they make Beginners trade in Futures and Options. Futures also give Heavy Brokerage because you are trading in Big Volumes. If Price stays at a Level for Few Days then also it will make the Premium to reduce which does not give you Any Profit or Enough Profit. Also if Implied Volatility goes against you it can give you Huge Losses even if you are Right in Direction. Future and Options is called Leverage Trading and is to be done at the Last. Before you start to trade in Options you need to make sure about Price Direction of Stock because if Direction goes wrong then you can lose Full Premium you paid. If you Buy Call or Put, you are in a position of Limited Loss and Unlimited Profit. Many People like to just Sell Options and Collect Premium which is Preferable Strategy for Most of the People and it is done near End of Month, but here also Price Direction is Most Important because you are in a Position of Limited Profit and Unlimited Loss.
Benefits of Options Trading:
- Can start with Very little capital
- Ability to generate Short term income
- Ability to protect Long-Term Wealth (Portfolio), Also called as Hedging Position
- Variety of Strategies like- According to Market Conditions
- Bullish Strategies
But in Indian Market, Not All Stocks are Option able because of Liquidity issue and Wide Spreads between Bid and Ask Price.