Open a FREE Share Trading Account with ZERO Brokerage - Buy and Sell Stocks without Brokerage - Set on System and ForgetTraditional brokers charge a lot on brokerage, however this broker does not charge anything for stock buying and selling. Also, you can set a Good Till Cancelled order after buying stock so that the system can sell the stock automatically at your desired price even if you are not monitoring the market. Plus only 25k is blocked for option selling. It takes 5 minutes to open an account online. Click here and Open Free Account with Them Today >>
Yesterday I got this email on buying OTM – Out of The Money Options, and I thought it’s a good topic to share my thoughts on this. In this post you will learn whether it is a good idea to buy OTM – Out of The Money Options.
This was his email:
Need your analyses regarding Nifty options
I am -name deleted – (CA Student) , I am avid reader of your website articles . I started nifty options trading from last 2 months . it’s actually mock trading but with small amount like RS 1000.
I would like to join your course as soon as I started earning and to my best of knowledge all of your articles are very informative and educative.
Thanks a lot, you introduced me to the best broker in India (greatest platform for all kind of traders in India).
Sir, today I came across a situation where my nifty call option didn’t increase but the next call options was increased .
I will explain in detail.
I bought Nifty July 8900 CE at Rs 5 one lot. At that time Nifty July 8900 CE was 3.75 only. At the end of the day my option was at 5.25 and 9000 CE option was at 6.90.
Literally I can’t believe my eyes. Because 8900 option opens at 6.15 and 9000 option at 4.35. But at the end of the day trading, 8900 option is at 5.25 and 9000 option is at 6.15.
How is this possible?
What is this Dilip Sir? I am looking for true answer. I need your analyses because I believe you.
I am attaching you the screen short also for your reference.
— Name Deleted —-
First of all let me tell you why buying deep OTM (Out of The Money) options is a bug trap to lose money buying options.
What are Out Of The Money – OTM Options?
Out of The Money Call Option is any option with a strike price that is above or higher than the current value or price of the stock. For example at the time of writing Nifty is at 8109. So any strike above 8100 is Out of The Money for Call Options. For example 8150, 8200, 8250, 8300 etc are all right now OTM – Out of Money.
Out of The Money Put Option is any option with a strike price that is below or lower than the current value or price of the stock. For example at the time of writing Nifty is at 8109. So any strike below 8100 is Out of The Money for Put Options. For example 8050, 8000, 7950, 7900 etc are all right now OTM – Out of Money Put Options.
What are Deep Out of The Money options?
Those that are pretty far, so far that chances of reaching that option strike for the underlying stock is nearly impossible within the expiry.
In the above example this person – a CA student, has bought a 8900 Call. So to make a reasonable profit Nifty has to move at least 8300+ within next few days for this option to at least double in value. In fact if it goes till 8900 and does not cross 8900 by July expiry then also this option will expire worthless. All money gone.
So what’s the major problem buying Out of The Money Options?
1. You are racing against time therefore taking more risk. Like an option 10% or more away has 90% of chances of expiring worthless. So in other words the chances of falling in this trade is 90% or more. Why take so much of risk to make money when other better ways are there in options trading?
2. Even if correct if a swift move doesn’t come time will not allow these options to move fast. Assuming a 1% move up comes in 3-4 days but do not forget that there is time value in options that keep eating premiums of all options. So that far OTM options may still show negative return or be in the same place they were 3-4 days back.
3. You cannot compound your money with these kind of very risky and dangerous strategies. This person is taking a risk of only 1000 rupees buying that risky option. If he makes a 10% profit he makes a 100 rupees and if it expires worthless he losses 1000. That is it. But ask him to buy this option for 40-50 lakhs. Even after 10 successful trades his mind will tumble before risking 40-50 lakhs buying a deep out of the money option. For me a trade or a strategy is useless if I cannot compound the profits I make with them and grow my wealth. If you cannot risk 10 lakhs in a trade then even if it is a brilliant strategy it’s a waste of time for me. What will I do with 1000 rupees a month if I cannot increase my trading capacity on that trade?
4. Because risk is more your health suffers: For me health happiness and peaceful living is MORE important than just making money. I should know why I am making money and what are my goals.
To give you an example last week I got a call from someone in Delhi. He is a very successful businessman worth more than 1 crore. Just 12th pass but having more than 1 crore is quite an achievement. He told me he trades Intraday in stocks with 17 computers in a different room. I asked him who looks at his business then? He said there are people who are paid to take care of his business, but he suffers from 9.15 am to 3.30 pm everyday in that room alone with 17 computers switched on with showing those stocks that he trades every day. My next question was obvious – how much profit you make every day. He said one day I make about 10000, next day I lose the same amount. So made nothing in the last 2 years. Then I asked him are you able to give time to your family? He said no. He has a daughter who complains that he never gives time to her. I told him a straight forward thing – you are doing a SIN. If someday you die your kids will not regret because you never loved them, what’s the point you lived or not? Then he said Sir, you have opened my eyes. Thank You. I will give time to them from now onward. My health is also suffering due to constantly watching the monitors and I have become very irritant also. There is no peace in my life.
My next question was – Ok great to hear that, how much money will make you happy? You already have Rs. 1 crore and a great business how much more do you want?
You know what his answer was? Nothing – he kept silent and was not able to figure out how much money will make him happy. Then I told him did you see you were running after something that you do not even know will make you happy or not and you lost the time which will never come back. He thanked me and instantly bought the course.
I hope you got the point – all those who trade Intraday and sit in front of monitors from 9 am to 4 pm (some more who even trade commodity), ask yourself this simple question – is this the way you want to spend your entire life? People who earn less than you but are living a peaceful life are better than you. Because they are more happy in life than you.
I stopped Intraday trading due to this single reason alone. I hated the stress I was getting from it. What’s the point in making money if you think about it 24 hours a day? Are people around you more important or money more important?
Did you notice I did not promote my product to this person to make 5000. I first told him the truth so that he becomes more happy in life and not even once I asked him to pay for my course – but still he paid instantly.
Actually its the same with everyone. I get lots of calls and Whats App messages every day. If I want I can keep an employee, pay him 10000 a month and ask him to call people to buy my course. But I will NEVER do that.
Whoever is enrolling in my course is enrolling out of his own interest not out some phone call marketing. Did even one of you got a phone call back from me asking to buy my course? Once you call me I talk to you give you an honest answer and forget the call. Never call back ever. If you pay fine, if you do not pay still fine. I cannot sacrifice my peace to get money.
Remember this – Peace cannot be bought by money. It is a big myth that more money means more peace – its not.
5. Buying OTM option is NOT trading its gambling: People buy OTM options because they think it’s cheap , and can easily be doubled if a move comes. What they forget is that move has to come in their direction very fast. Even if 3-4 days goes away forget the profits – you will book your losses and come out.
Let me take an example. Assuming you bought a deep OTM option for 5 worth Rs. 5 lakhs. That night you will not be able to sleep well. Next day that option opened at 4. You are sitting at a loss of 1 lakh. You will surly lose patience and book 1 lakh loss and come out – only to see an hour later that the option is trading at 6. You then hit yourself hard for booking a loss. In frustration you buy that option again for 4 lakhs. But within 1 hour that option is back at 4, you again get frustrated and again book losses. This is life of an OTM option buyer.
Time Lost, Money Lost, Frustration Got.
You do not sleep well, you do not talk to people properly due to frustration and you keep losing whatever you made out of a business or job. Is this the kind of life you are looking for? Let’s assume you are a good trader and making 50k a month buying OTM options. But your life is still full of stress, what’s the point of making that money when one day you will give 50% of what you made to the doctors?
Stop gambling please learn to trade. Trading is a business, gambling is not.
Now coming to his question of why deeper OTM option was trading at a higher value?
Please remember that an out of the money option has no intrinsic value, but only extrinsic or time value. As a result, the value of an out of the money option erodes quickly with time as it gets closer to expiry. If it is still out of the money at expiry, the option will expire worthless.
But other factors also come into play. Like the ask and bid prices. There could be less traders on 9000 Call – this is obvious. In that case may be that option was trading at lower level but the best seller quoted a higher price than what the software was showing. Whether anyone traded it or not, is a different issue – but if that is the best seller all buyers will see that price. Now it depends on the buyer to buy or not but since there are no sellers below that price – the software will show that price confusing the buyers like the one who had written to me.
Obviously if buyers are more and sellers less, the sellers will try to maximize their profits so the asking prices goes up irrespective of the real value of the option.
Hope you have understood. If there are more question please write in the comments section.
You Can Read More On My Site
Click to Share this website with your friends on WhatsApp
COPYRIGHT INFRINGEMENT: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However, every trade depends on the trader and his level of risk-taking capability, knowledge and experience. Moreover, stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. I do not give tips or advisory services by SMS, Email, WhatsApp or any other forms of social media. I strictly adhere to the laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles on this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given on this website. I am not responsible for any investment decision you take after reading an article on this website. Click here to read the disclaimer in full.
Course 1: Conservative Option Course | Course 2: Bank Nifty Weekly Options Course
Course Testimonials Year Wise: | 2015 | 2015 Page 2 | 2015 Page 3 | 2015-16 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | Instant Reaction After Reading My Course | Emotional Testimonial | 25,000 Per Week | Bank Nifty Course Testimonials