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Option traders must be very smart before they put their money on risk trading options.
In this post I will discuss some things what an option trader must look at before trading.
No 1 question should be – “Does This Fit My Portfolio?”
Before trading you must know your max risk in the trade. If your max risk is more than what you can afford its better to avoid trading. Do not trade against your portfolio size.
No 2 is – “What Plan I Have If My Trade Goes Wrong?”
Do not hesitate to take a stop loss if the position goes against you. However on the contrary traders seems to average out a bad position.
Here is an example. Nifty option bought at 50 goes down to 30. The trader buys another option to average out at 40. However this is a mistake. If you have 5 long trades its foolish to add more bullish trades if the strategy is losing money. Its better to keep some money to go short if the long trade is going wrong. If you do not have money to go against the losing trade no one is stopping you to exit the trade and take a stop loss.
No 3 – Check Liquidity Before Trading
You cannot do business in a marketplace where there are no buyers/sellers. So you must check liquidity of that strike before trading. If there is less liquidity change the strike to trade in a liquid strike. You cannot scale a trade that doesn’t have enough liquidity. If you become a good trader and want to become a full time trader you cannot do that with one or two lots. You may have to increase the lot size to make a substantial income.
If checking liquidity becomes a habit then it will be good for your future. A strike with good liquidity can be easily traded with “Market Orders”. However in strikes where there is less liquidity you may find difficulty getting out of positions even if you are in good profit.
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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. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.