There are most effective things sure in lifestyles “death and taxes”. It is true however the list might be augmented for Options Traders as well.
Unlike the standard dialogue on how to tame marketplace uncertainty, let us nowadays communicate approximately a number of the factors of Options Trading, which if omitted should virtually lead to a dent in profitability.
We will bear in mind three such elements followed by way of a precaution or a manner-out to safeguard from each one in all them.
I am setting out with ‘taxes’ to take the listing forward. Normally, STT isn’t a big figure to be reckoned with at some point of the expiry but at the day of expiry, it turns virtually massive for a positive set of options.
All the within the cash alternatives that means, Calls of strikes lower than the present day marketplace rate and Put with strikes higher than CMP might “If permit to run out” appeal to STT = zero.A hundred twenty five percentage of Contract Value (Strike + Premium) * Lot Size for the shoppers of the Options.
Now as intelligent as the market members are, they begin discounting this in the very last hours of the expiry creating a entice for us.
Meaning 27,000 CE with Bank Nifty at 27,one hundred should be buying and selling at the least one hundred (Intrinsic Value) but starts buying and selling at 85-90 discounting a probability of an STT levy of ~34/- (=27,one hundred*0.A hundred twenty five/a hundred).
Solution: Please do no longer indulge in Buying of ‘In The Money’ Options on the day of expiry toward the quit of the day.
Number 2: Event Trading with Long Options
As all of us realize that Known Events like Results/Announcements for Companies and Elections/Policy choices for Indices bring in expectation of turbulence. This gets priced into the Options as they begin trading more luxurious than standard.
Now, this helps the Options Buyers up to the day of the event, once the occasion final results gives itself, the unknown will become recognized.
As a result, we see a dip in all the Option Premiums irrespective of strikes and expiry. This phenomenon creates a dent in profitability regardless of of the fact the view at the underlying is correct.
Solution: If we are predicted to hold on to the Bought Options put up the statement, have a mixture in region so the systemic and extra positive drop in Premiums does now not hurt as lots.
Number 3: Options for Longer Horizons
We have mentioned many times approximately the time fee detail and the reality that because of time cost decay in Options there’s a sure decay in Option Premiums with the passage of time.
Many instances, a exchange took on a Thursday if materializes on coming Tuesday, the real trading periods are simply 4 which include each the times however some of days handed through are about six.
Catch: Time Value Decay is for each Calendar day and not just the Trading Day.
Solution: Keep the Options Bought under vigilance with Dual Stop Loss of Time and Price. Resort to a mixture of a Long and Short strategy if the view is predicted to be panned out over an extended duration than three-4 days.
Keeping the known demons tamed may not upload to additional income however will without a doubt lead to Error-Free Trading.