There are a lot of traders who want to trade intraday or in other word indulge in day trading involving options.
There is nothing wrong with this except the problem is they want to do this while having a day job.
Do you know I was caught red-handed doing day trading in my office and was sacked immediately the day I was caught in the office doing day trading.
So if you want to day trade its fine but make sure you are doing it in your mobile and safely from the eyes of your boss – else the results can be bad.
With limited loss capability option buying intraday trading looks like a great idea, but even if direction is right sometimes the option may not increase as much as possible. Option does not increase as per the stock’s direction is because of the time value component. You can read about time value in options here. The time value has so much power that it can dampen any price movement – and if wrong the trader suffers more.
Near-the-money options are mostly traded for intraday purposes. Near the money options have the benefit of intrinsic value going up with the underlying stock price, but to some extend this gain is offset by the loss of time value. So the trader never sees a one point rise in option with a one point gain in the stock. Some traders therefore shift trading to futures. This is again a mistake.
In some options strikes especially the Out of The Money (OTM) options due to liquidity issues there is a big difference between ask and bid prices thus affecting the option premiums. In India the bid-ask spreads are usually wider in stocks, sometimes up to 2-3 points. This reduces the profit potential of the Intraday trader.
So if you are planning to do intraday trade options, you must overcome these two problems.
How to overcome these problems?
1. Index options like Nifty and Bank Nifty are very liquid – so its advisable to trade them rather than stocks.
2. If you still want to trade stocks look for liquidity first in the option strike then decide the trade. If a particular option is not traded much, its better to ignore that option. in that case you may have to stock to the strike that’s being traded more for that day.
3. Trade near the money options – they have a balance time value and intrinsic value if In the Money. Of course risk is more which can be tackled by a stop loss but profit potential will also be more.
4. Set up a target and stop loss in the system so that you do not have to manually take a stop loss or profit.
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Dilip Shaw, Founder
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