10 Traits Of A Successful Options Trader.
Options are one of the most versatile instruments in the financial markets. They are flexible in that they allow you to leverage your position to boost returns, manage risk by using them for hedging, or to make profit from upside, downside and sideways movement in the market.
Despite its many benefits, options trading carries substantial risk of loss, and it is very speculative in nature. It's not for everyone and not everyone can become a successful options trader. Like any other business, becoming a successful options trader requires a certain skillset, personality type and attitude. This article will help you understand the 10 must-have characteristics that you need to become successful at options trading. (From picking the right type of stock to setting stop-losses, learn how to trade wisely)
[If you're interested in going beyond just 10 must-have characteristics and skills, and learning tried and true options strategies used by professional, check out Investopedia Academy's Options Trading Course. With on demand video trainings and classes, you'll have access to the knowledge to put the odds in your favor with options.]
Numeracy - Keep Sharpening Your Quantitative Skills.
Options are high-risk instruments, and it is important for traders to recognize how much risk they have at any point in time. What is the maximum downside of the trade? What is the implicit or explicit position with respect to volatility? How much of my capital is allocated to the trade? These are some of the questions that traders will always have to keep in their minds. Traders also need to take appropriate measures to control the risk. In particular, if you are a short-term options trader, you will regularly come across loss-making trades. For example, if you hold a position overnight, your bet may go bad because of adverse news. At any time, you need to be able to minimize the risk of your positions. Some traders do so by limiting their trade size and diversifying into many different trades so that not all their eggs are in the same basket. An options trader also has to be an excellent money manager. They need to use their capital wisely. For example, it wouldn't be wise to block 90% of your capital in a single trade. Whatever the strategy you adopt, risk management and money management cannot be ignored. (Risk is inseparable from return. For more, see Measuring And Managing Investment Risk. )
2. Be good with numbers:
While trading in options, you are always dealing with numbers. What's the implied volatility? Is the option in the money, or out of the money? What's the breakeven of the trade? Options traders are always answering these questions. They also refer to option Greeks, such as the delta, gamma, vega and theta of their options trades. For example, a trader would want to know if his trade is short gamma. It is important for the traders to be able to easily calculate and interpret numbers. You don't need to be a rocket scientist, but you should train as an aspiring "quant jock." (Understanding price influences on options positions requires learning delta, theta, vega and gamma. For more, see Getting To Know The "Greeks." )
Behavioral – Develop the Right Attitude.
To become successful, the options traders must practice discipline. Doing extensive research, identifying opportunities, setting up the right trade, forming and sticking to a strategy, setting up goals, and forming an exit strategy are all part of the discipline. A simple example of deviating from the discipline is to go with the advice of the herd. Never trust an opinion without doing your own research. You can't skip your homework and blame the herd for your losses. Instead, you must devise an independent trading strategy that works for your situation.
Patience is one quality that all options traders have. Patient investors are willing to wait for the market to provide the right opportunity, rather than trying to make a big win on every market movement. You will often see traders sitting idle and just watching the market, waiting for the perfect timing to enter or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control their emotions, and they will be quick to enter and exit trades.
5. Match your trading style with your personality:
Each trader has a different personality; therefore, each trader should adopt a trading style that suits his or her traits. Some traders may be good at day trading, where they buy and sell options several times during the day in order to make small profits. Others may be more comfortable with position trading, where they form trading strategies to take advantage of unique opportunities, such as time decay and volatility. And others may be more comfortable with swing trading, where traders make bets on price movement over periods lasting five to 30 days. (For related reading, see The Importance Of Time Value In Options Trading. )
Learning – Become an Active Learner.
6. Read and understand news:
It is crucial for traders to be able to interpret the news, separate hype from reality, and make appropriate decisions based on this knowledge. You will find many traders who will be eager to put their capital in an option with promising news, and the next day they will move on to the next big news. This distracts them from identifying bigger trends in the market. Most successful traders will be honest with themselves and make sound personal decisions, rather than just going by the top stories in the news.
7. Learn from losses:
The Chicago Board of Trade recently reported that 90% of options traders make losses. What separates successful traders from average ones is that successful traders are able to learn from their losses and implement what they learn in their trading strategies. (For related reading, see Options Trading Strategies: Understanding Position Delta. )
8. Be an active learner:
The financial markets are constantly changing and evolving; you need to have a clear understanding of what's happening and how it all works. By becoming an active learner, you will not only become good at your current trading strategies, but you will also be able to identify newer opportunities that others might not see or that they may pass over.
Administrative – Develop the Right Routine.
9. Plan your trades:
An options trader who plans is more likely to succeed than one who flies on instinct and feel. If you don't have a plan, you will place random trades, and consequently, you'll be directionless. On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about what your goals are and how you plan to achieve them. You will also know how to cover your losses or when to book profits. You can see how the plan has worked (or not worked) for you. All these steps are essential to developing a strong trading strategy.
10. Maintain records:
Most successful options traders keep diligent records of their trades. Maintaining proper trade records is an essential habit that can help you avoid making costly decisions. The history of your trade records also provides a wealth of information that can help you improve your odds of success. (For related reading, see Make Better Options Trades With The Average Monthly Range. )
Top options traders get a thrill from scouting and watching their trades. Sure, it's great to see a pick come out on top, but much like sports fans, options traders enjoy watching the whole game unfold, not just finding out the final score. These characteristics will not guarantee your success in the options trading world, but they will definitely increase your chances at it.
Option Strategies for Directionless Markets.
Options trading allows you to profit from any type of market, whether it's moving up, moving down or treading water. An option strategy involves combining several different contracts into a single trade, and you may buy some and sell others to produce a profit if the market moves as predicted. About three dozen different, creatively named strategies can be used, requiring you to just select the specific options you want to use, designate the strategy in your brokerage account and place the trade.
Puts and Calls, Buying and Selling.
Options come in two flavors. Calls give the buyer the right to buy a stock at a preset share price, and puts come with the right to sell at the designated price. Options are time limited, and a single stock, exchange-traded fund or stock index will have many different puts and calls trading with different strike prices and expiration dates. Traders can take either side of an options trade, buying options to get the rights or selling to receive the cost or premium with the obligation to deliver or buy shares if the buyer chooses to exercise her rights.
Covered Call Strategy.
The covered call options strategy is considered the most conservative of all options strategies and is the starting point for many new option traders. Using covered calls will put extra income into your account during directionless periods in the market. The strategy consists of buying shares of stock and selling call options against those shares. One option is for 100 shares, so for every 100 shares you buy, you sell one call. The calls typically have a strike price just above the current share price. If the stock moves above the strike price by the expiration date, you keep the sold option premium and get a little more for your shares than you paid when they are called away. If the stock stays below the strike price, you keep the stock shares and the option premiums and sell some more calls, repeating the trade.
Straddles and Strangles.
The straddle and strangle strategies involve the simultaneous selling of both calls and puts. You put the premiums received from the sales in your brokerage account with an outlook that the stock price will not stray far from the option strike prices. With a straddle, the puts and calls have the same strike price, requiring precision stock price forecasting. The strangle spreads out the strike prices, leaving a range the stock can be in at expiration to produce a profit. These are high-risk strategies with potential losses that are theoretically unlimited. Your broker will only authorize them for experienced and well-capitalized traders. With a market going nowhere, these strategies produce profits when a stock trades in a narrow range.
Iron Butterfly, Iron Condor.
The iron butterfly and iron condor strategies add two more option positions to the straddle and strangle to limit the losses if the underlying stock price does make a move out of the directionless price range. Along with selling calls and puts, the iron strategies add in the purchase of cheaper calls and puts to backstop the sold option positions. With these strategies, you net less in option premiums than with a straddle or strangle, but your maximum potential loss is known in advance. A broker will approve these types of strategies for traders with a limited amount of trading experience -- or even no experience.
Visualizing Option Strategies.
Your online brokerage account will provide a couple of options trading tools that demonstrate how a particular options strategy will work. A graph that shows where a strategy is profitable and where it loses money in relation to the different strike prices shows you where you want the stock to be at expiration to maximize your profits. Use the graph to see how a strategy will profit if stock prices are range bound. A potential profit vs. loss calculator puts the same information into dollar terms and lets you adjust strike prices and number of contracts per leg to get a potential risk-reward ratio you like.
References.
About the Author.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch and various other websites. Plaehn has a bachelor's degree in mathematics from the U. S. Air Force Academy.
Photo Credits.
Creatas Images/Creatas/Getty Images.
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Directionless and Riskfree FNO Trading Strategy.
Strategy Performance by Underlying.
Strategy Performance by End-Date.
Buy 5 Lots of OCT 4800 PUT : 92.00.
SELL 5 Lots of NOV 5000 CALL : 220.60.
SELL 4 Lots of NOV 4800 PUT : 155.
Buy 1 Lot of Nifty Future at CMP: 4967.
If Nifty closes at 4300 – Profit Rs 820×50.
If Nifty closes at 4400 – Profit Rs 802×50.
If Nifty closes at 4500 – Profit Rs 761×50.
If Nifty closes at 4600 – Profit Rs 680×50.
If Nifty closes at 4700 – Profit Rs 551×50.
If Nifty closes at 4800 – Profit Rs 325×50.
If Nifty closes at 4900 – Profit Rs 460×50.
If Nifty closes at 5000 – Profit Rs 447×50.
If Nifty closes at 5100 – Profit Rs 270×50.
If Nifty closes at 5200 – Loss Rs -0.09×50.
If Nifty closes at 5300 – Profit Rs 144×50.
If Nifty closes at 5400 – Profit Rs 263×50.
If Nifty closes at 5500 – Profit Rs 370×50.
If Nifty closes at 5600 – Profit Rs 471×50.
If Nifty closes at 5700 – Profit Rs 567×50.
If Nifty closes at 5800 – Profit Rs 672×50.
All the above values are approx figures.
Related Readings and Observations.
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About Rajandran.
Rajandran is a Full time trader and founder of Marketcalls, hugely interested in building timing models, algos , discretionary trading concepts and Trading Sentimental analysis. He now instructs users all over the world, from experienced traders, professional traders to individual traders.
Rajandran attended college in the Chennai where he earned a BE in Electronics and Communications. Rajandran has a broad understanding of trading softwares like Amibroker, Ninjatrader, Esignal, Metastock, Motivewave, Market Analyst(Optuma),Metatrader, Tradingivew, Python and understands individual needs of traders and investors utilizing a wide range of methodologies.
Future this month or october or november please mention sir.
CHANNAVEERAYA WM says.
Hi, Pls can you eloborate how the maximum loss risk is limited to 0.07% (Rs.250) ??Have you considered commission expenses also??Please reply.. Also please specify which software ar you using for getting option charts??
Commision Expenses are not included in this strategy. Iam using Options oracle to generate this strategy.
BoopaThe Trade is between 25 SEP 2009 to 29 OCT 2009And trade can be close anytime before 29 OCT Expiry. If Nifty is exactly at 5200 at OCT 2009 Expiry you maximum loss is Rs 250Else Possibly you would be in profit regardless of nifty direction.
rajandran, in which conditions the profit is infinity?
5200 we will be in loss. total premium cr. 45500loss in 5200 call(assuming 4800 ce oct rate)=275*50*5=68750.gain in nf=235*50=11750loss in nov 4800pe(assuming 4600pe oct)=40*50*4=8000thus, (45500+11750)-(68750+8000)=-19500correct me if i m wrong.
loss is in 5000 ce nov not in 5200 ce, sorry for typo.
SIR, YOUR GANN CHART STUDY IS OFF THE MARK. YOU RECOMMENDED THAT TATA STEEL AROUND 415 WAS HEADING TOWARDS 300.I TRUSTED AND SHORTED TISCO THAT CAUSED ME GREAT LOSS.
AbishekPosition will be closed on or before OCT Expiry.
SukhlalGANN lines are the Stop Losses for your trade. When tata steel closes below the GANN Support line 420. I thought that probably it would test the next support zone of 300. But it surpassed above 420 i. e above the GANN line which denotes that the stock is out of bearishness. Which probably also makes the trade fail.
Hai Rajandran can u eloborate what will be investment for the above trade.
Rajandran Rajarathinam says.
Some Problem with the strategy tool. Looks some problem with the strategy. Now Option oracle is showing 5% risk 🙁
hi buddy why should you select 5 lots is there any reasons for it?, and buy oct call at 5200,4800 put how did you determine that values and the same as sell at nov 5000 call and 4800 put?
Current Maximum Loss will be -5.64%Return if unchanged will be -1.84%What is meant by Lower breakeven and upper breakeven then? Please advise. Thanks.
sir i want to know that how u calculate this profit and loss>
rajendran can u pls re-correct the bugs cause while implementing it in the directionless-and-riskfree-fno-trading-strategy which u posted on september 2009!! so that like me a small trader and newbie would beniefit a lot!! and earn a decent income !! pls help us by correcting the startergy or if u find its not much correct then pls provide as such type of startergy for regular income !! pls support us. thanks ganesh.
please advise on above strategy with corrections.
Rajendran Sir, Can you guide for some Risk free option Strategy which may not give profit for 6 months in a year and give a decent profit for 6 months in a year.
what are the rules of trading month wise this strategy please elaborate.
sateesh bhagwat says.
Since you have to close positions at expiry of October 2009 series, you would be required to buy back the November 5000 call & November 4800 put which you had sold. How can you project profit or loss from the strategy without knowing what will be price of these options when you buy them back on October expiry?
Price of these November options will depend on where nifty spot is trading on October expiry. Also it is to be noted that decay in time value of November options may not be substantial during October as whole November would still have to go.
Could you Please Explain the above strategy as it’s sound interesting and will be helpful for all of us. I am trading from last 2Years in F&O some month profit but some in loss, not a stable income actually I am looking for small gain but no risk strategy or Very Low risk Strategy as like you shown above.
So that I cound earn in any directional mkt without predict.
anita ugale says.
Ravindra Nagare says.
I read your direction less and risk free strategy I like it now nifty future cmp is 9118 if buy 5 lot of 9300call of current month sell 4 lot 9100 next month buy 5 lot 8900put current month sell next month 8900put 4 lot and buy nifty future cmp 9118 can I use this strategy for profit.
what you get after investing 6 lacs is rs 4000 max per month. ie rs 50000 per year which amounts 8%. not worth calling a strategy.
can we make profit in f&o without any loss with your risk free f & o trading strategy.
I THINK APPROX. 1.5 % CAN BE MAKE EASILY IF WE ARE TAKING AN RISK APPETITE OF 5 % LOSS OF TOTAL CAPITAL AND SOME ARE TAKING IN 75 % AS COLLATERAL WHERE YOU CAN PARK IN MUTUAL FUNDS AND 25 % IN CASH.
AND SIMULTANEOUSLY WE ARE GETTING DOUBLE RETURN 1.5 % ON TOTAL CAPITAL AND RETURN ON MUTUAL FUND AS WELL.
APPROX. RETURN PROVIDER ARE AVAILABLE IN MARKET. PERFORMING WELL.
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Option Strategies for Directionless Markets.
By Anthony Saliba.
Individual chapters analyze and explain in detail the four principal option strategies featured in the book: the butterfly spread, which Saliba helped popularize decades ago, the condor, the iron butterfly and the iron condor. Each chapter starts with a thorough introduction to the basics and then adds variations and contingencies. Crisp graphics and instructive worksheets illustrate the mechanics and logic of each strategy.
Two chapters are devoted to the options statistics famously known as the Greeks: delta, gamma, theta, and vega. Saliba shows how these defining parameters of option price behavior vary by time, implied volatility and proximity of the underlying to the strike price. An omnibus chapter is devoted to hybrid-option structures like broken-wing butterflies, pterodactyls and iron pterodactyls. Each chapter concludes with a helpful summary. All discussions of option logic and math end with a detailed quiz to test your understanding. You don't have to be a math whiz to answer the questions, but you’ll most likely need a calculator.
Where appropriate, Saliba uses his technical skills and vast experience to pour cold water on some widely held but misplaced beliefs about options. For instance, contrary to the wishful thinking of some fans of credit spreads, Saliba shows that the risk, reward and breakeven levels are identical for a synthetically equivalent debit spread. Saliba uses the same expertise to debunk the idea that you have to be an options quant to trade spreads. "It is not necessary to have a strong understanding of the Greeks. overanalyzing the Greeks can sometimes be counterproductive."
The final chapter consists of an absorbing interview with Saliba himself. Here the author recalls highlights of his days on the trading floor while sharing unique insights and perspectives on spread trading. All in all, a welcome coda. An appendix offers a "final exam" consisting of 100 questions and exercises and an answer key. A second appendix offers a useful glossary.
All the spread methods Saliba discusses are optimal for directionless markets, meaning the strategies profit from positive time decay. So how do you know when a market is poised to go sideways? Saliba doesn’t really say. He suggests using technical tools such as bar charts, candlesticks and Fibonacci retracement levels, among others. Saliba says little about how to implement these methods. Not only do you need to forecast price action, but the projected time frame needs to be factored in. No word on how to do that either.
Saliba’s prose is a model of clarity and rigor. In the nearly 200 large-format pages I could not find a single misspelling. Options Strategies for Directionless Markets is a welcome survey of advanced spread techniques from one of the foremost authorities in the field.
Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds, and commodities. Formula Research serves systematic traders and institutional money managers in 27 countries.
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