Myth: Only Experts Can Make Money Through Options Trading

Priyanka Sharma

04 Aug 2017

Options are a type of derivative security. They are derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. 

Given the complex nature of options trading, people believe that only experts can make money through them. However, this is only a myth as you can strike gold in options trading; you just have to know how to do it.

How to make money through options trading?

There are some factors that you have to consider if you wish to make money through options trading: 

1) Options expiry
Options have an expiry date. If your call option's strike price is below the market price or if NIFTY is not trading "in the money", your option may expire worthless. For example, say you seek a 200 point movement (or expect a certain increase in your strike price). You think that this will take 25 days; however, your option expires in 10 days. In such a scenario, you should trade in the next month contract.

2) Trade cycles
You have to be both: careful and patient, when it comes to the trade cycles of NIFTY. Sometimes the market is not doing very well and is quite un-tradeable. In such a situation, you should be aware of when the next trade-able cycle is due and not take any position until then. When the right time comes, you should trade the cycle.

3) Sideways market
You have to understand that NIFTY is in a sideways trend 60-70% of the time. This means that price trend of a certain trading instrument, such as a stock, has been experiencing neither an uptrend nor a downtrend. Thus, you will have to be disciplined while trading in NIFTY options on the buy side. If the sideways drift is expected to remain for a long period of time, you can earn profits by selling options with approaching expiration dates.

 Untitled1

As seen above, it is simple to understand that while uptrends and downtrends create a slope-like pattern, a sideways movement creates a wave-like pattern. It is hence easy to spot even by beginners.

4) Cycle identification
This is one of the simplest and the most effective method to earn money in options trading. If the market is in Bearish mode; i.e. when the price of the option is lower than the previous high, and NIFTY starts moving down breaking the previous low - this would mean that the trend is down. You have to measure the vibration of the cycle by measuring the low to the number of days. For example, if you measure it for 20 days, you have to measure it again for 25 days. It will give you a general idea that there is a high probability for NIFTY to make the next low between 20-25 days; look to cover your shorts in this area. The same thing could be also done for high to high.
Taking into consideration the above-mentioned factors and dedicating a considerable amount of time in taking effective decisions, it will come to light that the popular belief stating that only experts can make money in options trading is nothing more than a myth.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Myth: Only Experts Can Make Money Through Options Trading

Priyanka Sharma

04 Aug 2017

Options are a type of derivative security. They are derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. 

Given the complex nature of options trading, people believe that only experts can make money through them. However, this is only a myth as you can strike gold in options trading; you just have to know how to do it.

How to make money through options trading?

There are some factors that you have to consider if you wish to make money through options trading: 

1) Options expiry
Options have an expiry date. If your call option's strike price is below the market price or if NIFTY is not trading "in the money", your option may expire worthless. For example, say you seek a 200 point movement (or expect a certain increase in your strike price). You think that this will take 25 days; however, your option expires in 10 days. In such a scenario, you should trade in the next month contract.

2) Trade cycles
You have to be both: careful and patient, when it comes to the trade cycles of NIFTY. Sometimes the market is not doing very well and is quite un-tradeable. In such a situation, you should be aware of when the next trade-able cycle is due and not take any position until then. When the right time comes, you should trade the cycle.

3) Sideways market
You have to understand that NIFTY is in a sideways trend 60-70% of the time. This means that price trend of a certain trading instrument, such as a stock, has been experiencing neither an uptrend nor a downtrend. Thus, you will have to be disciplined while trading in NIFTY options on the buy side. If the sideways drift is expected to remain for a long period of time, you can earn profits by selling options with approaching expiration dates.

 Untitled1

As seen above, it is simple to understand that while uptrends and downtrends create a slope-like pattern, a sideways movement creates a wave-like pattern. It is hence easy to spot even by beginners.

4) Cycle identification
This is one of the simplest and the most effective method to earn money in options trading. If the market is in Bearish mode; i.e. when the price of the option is lower than the previous high, and NIFTY starts moving down breaking the previous low - this would mean that the trend is down. You have to measure the vibration of the cycle by measuring the low to the number of days. For example, if you measure it for 20 days, you have to measure it again for 25 days. It will give you a general idea that there is a high probability for NIFTY to make the next low between 20-25 days; look to cover your shorts in this area. The same thing could be also done for high to high.
Taking into consideration the above-mentioned factors and dedicating a considerable amount of time in taking effective decisions, it will come to light that the popular belief stating that only experts can make money in options trading is nothing more than a myth.

Have Referral Code?