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If you are looking to trade in options I would suggest you should trade in Nifty or any other index option only like the Bank Nifty.
Here Are Some Reasons Why:
- Nifty Options Are Highly Liquid:
Highly liquid means you will find people to buy or sell at the price you want. If there are no people willing to buy what you sell, or sell what you want to buy, you will never be able to trade at the price you want. What happens in a less-liquid stock is that you rarely get people who want to buy at a price that you want to sell and vice-versa. For example if you want to sell an option for 100, there might be some one willing to buy at 95 only. So if you have opened a market order to sell, even though the price of the option you might be seeing at 100, will actually sell at 95. Remember that the exchange house doesn’t pay you for the option that you want to sell, its some person willing to buy that option will pay you. If you want to sell it at 100 only, they may not be willing to buy at that price. You will have only two options then, either sell it at 95 or wait till someone is willing to buy it at 100. This problem would never have occurred if the stock, or the exchange were with full of people who want to trade. Even then you may not get the exact rate but it will be very close and if you are willing to wait a little you should get the exact rate that you want.
Lets take an example:
Suppose Nifty ATM (At The Money) Call is currently at 72.15 and you want to buy it at the market price. You will get it at 72.15 or at most 72.30. However in a less-liquid stock you may not get the option at the price you want. I have seen huge difference. Once in a mid-cap stock I was willing to buy a call at 1.00 when the price of that option was at 1.20, however there was only one seller who was willing to sell at 2.00. If I would have hit market (and not limit) while buying the option by mistake I would have got that highly priced option for 2.00. Unfortunately I would have then sold it for a loss.
It also means that sometimes even if you are making a profit, you may not be able to realize it at that price if there are no one willing to buy at the price you want to sell. Your assumption was right, the stock moved in that direction, but still you will not be able to make a good profit out of it – because there are no buyers. But in Nifty you will never have to bother about liquidity. You will always get the buy or sell price you want even for the next month series.
- Margin Required Is Less In Nifty Options:
Compared to stock options, margin required to short on lot options in Nifty or Bank Nifty is almost 40% less. For some stocks margin required to short an option or trade futures exceeds Rs.1 Lakh. This is a big amount to trade for many retail traders.
There is a formula to calculate margins but I will not get into the details of it as I just want to say that in Nifty futures or option selling your margin blocked will be much less. Since margin blocked is much less you can trade in more lots if you are absolutely sure about the direction of Nifty – and make more money too.
- Nifty Does Not Swing Too Much:
Unlike stocks nifty will not swing too much in a day or even the next day. Which means you will get enough time to exit the position if its going against you without loosing too much cash. Ideally you should put a stop-loss in the system, but what if it opens gap up/down against your position? For that you must learn hedging.
On Apr 12, 2013 Infosys fell almost 21%, but on that day Nifty fell just 1.17%. Imagine someone who bought Infosys futures or sold an ATM put without any hedging – he would have lost his entire margin. Lets do some calculations. On Apr 11, 2013 Infosys closed at 2917. On the next day it closed at 2295. One lot of Infosys was 125 shares in Apr 2013. If somebody would have bought one lot of Infy at 2917 and sold at 2295 his losses = (2295-2917) * 125 = -2,33,250. A loss of more than 2 lacs in one lot. He would have got a margin call from his broker. Most retailers would have bought thinking that Infy will rise after the results. Yes some were lucky to have sold it and made a windfall of cash. But how many times does that happens to us? Therefore we must hedge our position. It may cost something but it will ensure you stay in the market and do not lose your home. Yes some people have lost so much – that money can buy a 2 BHK flat in many cities in India even in 2018.
Are Doing Speculative Trading or Trading On Tips Without Hedging? If Yes Something Like The Above Might Happen Someday And You may Lose So Much That You Will NEVER Be Able To Recover Your Money EVER – STOP Speculative Trading Today
Had someone bought Nifty Future his losses would have been small and bearable. Therefore I strongly suggest one should trade options/futures in Nifty/Bank Nifty but with proper hedging.
- Nifty Moves 80% of the Time Range-Bound
See Feb-2016 to Feb-2018, two years graph of Nifty 50, though is was volatile still the volatility was not sharp. It was manageable. There is not a huge drop or rise:
These are some of the reasons why I think retailers should trade in Nifty only.
What You Can Do If You Are Losing Money Trading Speculative Options or Taking Tips and Losing Money?
You can do my conservative option course. You will learn proper hedging methods, risk management, adjustments and 5 strategies and a bonus trade to make 2-3% per month easily without any speculations or worrying about the direction of Nifty. You need not leave your job for that. Your options will make money for you while you work in your office. Contact me to know more.
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