Always, minimum investments and maximum returns lure traders to invest more in the stock market. Same way, we all are aware of future and options market (F&O). both are derivative instruments. Both the markets have roller coaster rides if you don’t have enough knowledge regarding them.
Let’s discuss futures, for future trading you need to work with margin money of the total amount of future stock/nifty future. But in options trading, you can allocate very much less capital i.e. 1 k or with 5k also. This factor lures most of the retail traders in the stock market.
But retail traders are the disregard of risk in most attracting market i.e. option.
An option is a contract which gives the buyer the right but not the obligation, to buy or sell an underlying asset at a specific strike price. So first understand what is the options trading?
In the options trading, there are two parties, 1. Writers (sellers) 2. Holders (buyers).
For eg. LIC. What is LIC doing? They are taking our risk on themselves through giving (selling) us Insurance policies. They are taking our risk. As in options expiry dates are fixed on last Thursday of any month same way LIC also has an expiry i.e. Death (maximum time until 60 years). When natural calamities happen like earthquake then their risk is high for paying back money to the clients.
But here the main benefit is, this kind of natural calamities are not happening daily and also if someone got dead casually then they need to pay but in front of that there are many who are providing them benefit (Premium paying) to write their risk. Also, they are earning from premium clients are paying.
Which is deciding as per client’s Age + Health + Avg. Income = Premium. So here LIC is the writer of the trade. This is called writing a call. But writers have unlimited risk and limited profits.
And with buyers, are those who buy a contract on specific strike price with unlimited profits and limited risk. So it totally depends on you, that how you maintain your risk in the market? And along with which strategy you are working, bcoz pay off of any trader is different like,
Reasons for losses in options market :
- Time value decay
- Full loss of investments
- Lower liquidity
- Time Value Decay: Unlike, stocks where you can hold your positions till many years and even you can pass it to your child too. But in options trading has fixed expiry dates. So on expiry, your contract will expire automatically if you don’t have to square off.
- Full loss of investments: if you hold your position in option till expiry then your position become zero and if you have to hold it in loss then there are chances that you can lose your whole investment.
- Leverage: if you are in profits and you have taken leverage then it is good. But you are making the loss and you are investing with leverage then you will wipe your whole capital.
- Lower Liquidity: Many individual stock options don’t have much volume. Its volatility depends on future’s volatility but still if future moves with 100-200 points, then the option will move with only 5-15 rs.
So I am saying that options will not help you to make money. It can. But the way of working, how much you are taking the risk, these all the things are affecting your investments.
And still, you need any help then contact our Heroic Investor Management Team. call on: 02230987899
*Professional investors/trader on niftymillionaire platform is Bindul shah. (Sebi Registered) Sebi Registration : INH000003663 (Bindul shah Sebi Registration : INH000003663)