Скачать или смотреть Beginner Options Mistakes To Avoid (Part 3) | Bottom Fishing | Buying OTM Call Options

Link to our Telegram Channel - https://t.me/niftybn
Link to our Twitter Profile -   / niftybn  

Beginner Options Mistakes To Avoid (Part 1) -    • Beginner Options Mistakes To Avoid (P...  
Beginner Options Mistakes To Avoid (Part 2) -    • Beginner Options Mistakes To Avoid (P...  

This is the third part of the series, Beginner options mistakes to avoid. You will find a link to the first and second parts in the description below.

Mistake 8: Trying to master all trading strategies

The key to trading is becoming a master of a few (not all) trading strategies. In order to truly excel as a trader, we need to focus on a few trading strategies and learn the nuances. That can help avoid stress, anxiety, confusion and ambiguity involved with trying to do everything at once.

We need to identify strategies that suit our risk tolerance or schedule, back test them and only then apply them to the live market environment. Remember that you are here to make money and not be a know-all.

As a beginner, you should stay away from complex strategies with multiple legs, as these would be tough to enter and exit.

In my trading account, I just implement the following trading strategies:

Bullish Installment Collar on Nifty, only at the right levels. That is, when Nifty is at a long term support zone and/or in an oversold state.

Cash Secured Puts on selected stocks. That is, only on the stocks that are sector leaders and/or a part of the Nifty 50 index.

Short Butterfly on Bank Nifty, only on certain occasions. That is, only during earnings calls of major constituents of the Bank Nifty index every quarter or during major RBI announcements.

Mistake 9: Bottom fishing

It is virtually impossible to gauge how low a stock can go. Just because a stock is trading at a historical low or just because a stock’s current price to earnings ratio is below its multi year average does not make it a good buy.

Investors need to understand the importance of catching the falling knife for value. More times than not, it is the retailers and first time investors who get trapped at higher prices.

Remember that bargain hunting works for shopping and not for trading/investing. To understand it better, let's look at an example of Yes Bank.

Yes Bank was at an all-time high level of ₹404 in August 2018. When it dipped to a low of ₹146.75 in November 2018, it looked like a good buy to many investors.

But the stock continued its downward march and reached a low of ₹29 in October 2019.

But if you thought this was the lowest Yes Bank can go, you are mistaken. The stock is currently trading below ₹20 after hitting an all time low of ₹5.65 on March 6th, 2020. So, think twice before your next bargain hunt.

Mistake 10: Buying OTM Call options

Many beginners get attracted to buying cheap OTM call contracts without knowing the mechanics of options. What they do not understand is buying cheap OTM calls is like buying a lottery ticket.

The truth is, lottery tickets can make you a lot of money if you hit them, but more often than not, you lose 100 percent of your money, and you have to be very careful. The same is true with OTM call options.

An option buyer has to be right about the direction, volatility, and timing of a stock’s move in order to profit, while an option seller only has to be right about the timing. The biggest enemy of an option buyer is the time value decay or theta decay.

Let’s look at an example to understand this concept better.

On June 25h, the closing price of Bajaj Finance Ltd. was ₹3005.35. Say you are bullish on the stock but do not want to spend much. So on June 26th, you bought a 30th July expiry 3500 call option at 103.95.

At the end of expiry, that is, on 30th July, the stock ended at ₹3218.30 and your 3500 call option expired worthless as it expired OTM. And you ended up losing 100% of your investment on the trade.

What's important to understand here is that you were right about the direction but the choice of the strike price was incorrect. As even if the stock ended at ₹3499.90 the option would have expired worthless.

One more important thing to remember is that every option has an expiration date which defines the term or the duration of the option. And when you buy an option you have to be right about the direction by that expiry date.

In a study, it is found that 90 percent of all options expire worthless . So, statistically, option sellers have an advantage in the form of a bias towards options expiring OTM (worthless).

For Call options, any option strike above the last traded price on expiry day expires worthless and any strikes below the ltp expire in the money, and it’s just the opposite for put options.