Trading option is highly challenging wherein a wrong move without adequate knowledge will lead to the loss of the investment.
An option is a contract providing the buyer a right to buy or sell an underlying asset on or before a certain date at the agreed price.
The specific price is denoted by the term, strike price.
The option gets automatically converted into a wasted asset on the expiry of the agreed time frame.
Trading in options demand a presence of in-depth knowledge of the way it works and the strategy to obtain maximum return.
But many consider option trading like a gamble, resulting in the loss of money invested.
Like the gamble, they may make the return at times, but not on a regular basis.
One has to be aware of the risks involved to make money and avoid mistakes while trading options.
One best approach to successfully manage the risk in trading options is to employ the various strategies meant for each market.
If the player of the options possesses the essential expertise to predict the turn to be taken by the market, then he can go for the bullish strategies or bearish strategies.
Bullish strategies are ideal for a market that is to display a rise in the future.
Through the identification of how far the prices will rise, he can define his strategy.
In a highly volatile market, the trader can go for a long straddle, long strangle, short condor or short butterfly.
But in a highly bearish market scenario, he can go for short straddle, short strangle, ratio spreads, long condor or long butterfly into minimize the loss.
In a market where the player is unable to make trend predictions, he is to employ guts, butterfly, condor, and straddle, strangle, or risk reversal.
Another option that lies before individual trading options is to attempt day trading.
The trader has to keep a close monitor over the market movement and take advantage of the same for his benefit.
The entry and exit has to be well planned to ensure exit before the expiry of the option.
It is sometimes wiser to stop loss and make the exit to prevent disastrous losses.
While trading options, timing, and volatility of the stock, liquidity enjoyed by it and the price movements have to be given proper attention to reap maximum profit.
For example, playing with volatile stocks, though riskier, provides greater probability for maximum returns.
Stay away from illiquid assets as the number of stocks exchanged in the market will be lower, making it highly risky.
Trading options of stocks with significant price movements provide maximum financial leverage.
Over and above, never let your emotions guide you while trading options.