Hi
My answer will be a bit complexer as the one from Taurus.
To avoid losses in such scenarios you have to analyze the current market situation you want to enter and you have to know under certain conditions,
what kind of option trader you are. To stay simple: Are you a directional option trader or are you a strategical option trader? Some of the following points can be used in both trading styles or you even can start with one style and during the period of trade and market behavior you change to the other style. This comments also perfectly fit for Nifty option trading. It is a bit playing around with the ideas and possibilities, but it is not some thing which not could be done in your market. It is finally only a question about knowledge and specially about being able to calculate option prices. Any option calculator will do that.
Facts you have to consider and if done the right way, your option trading will improve drastically. Beside that you will be able to avoid losses which can occur by what Taurus has mentioned.
- First:
Direction of the market. Is there any direction or are we in a sideway moving market? Some simple chart reading will/can do that part. If market is in an up or down trend, then entry point is may not so important, as market will/should move further in the given direction. To improve the entry price here, we can try to enter when market has a pull back or vise versa in a down trend. An other way to improve entries prices is to use some kind of TA or a strict predefined entry plan system for bigger amounts of options. Each personal choice with many different ways and systems.
If market is in a sideway move, support and resistance levels are to consider for any kind of our option entries. All of this ideas can be uses in both: Directional and strategical option trading. For strategical option traders, this could be the first leg. ( Could, as there are more possibilities, specially in sideway markets )
- Second:
Volatility: We have to value the volatility in the market. Why? If we know the volatility, we are able to choose the strategy we want to implement. High volatility means selling strategies and low volatility means buying strategies. If we not want to implement a strategy but only a directional simple trade, we still have to choose what kind of option strike we use for our trade and this depends again on the volatility and for sure on the market price level. For both scenarios, high vola and low vola, we have the possibility for otm, atm and itm options.
Pure directional traders will have to consider the following: If we have very high vola, you even could choose an otm option ( cheaper prices ) and if vola is low, we are better served with itm options. Why? Answer : Itm options reflect in a better way what the underlying is doing. If vola is low and we have an otm options, this option may never have any real intrinsic value as it never gets itm.
Strategical option traders will have to consider the following: Important here for strategical option trader is to know, that vola in the middle of a range is lowest and at S and R the highest. What doe's this mean? Answer: Do not buy calls at resistance and do not buy puts at support. Buy them in the middle of the range or play the contraries game.
Both kind of traders still can do pure trading only with otm, atm and itm options. Means: If you start a strategy with otm option and after time it does not get in the money, just move on to play your strategy only with otm options and if you did a directional trade with otm options, you sell the otm options.
Third:
How long do you plan to be in the market with this trade. We have to plan the time frame we want to be in the market. This step can be done for example by checking the time market used in the past to make the move which is in our plan. This check you can do on any time frame. As bigger the time frame as longer the live of the option has to be.
Having a clear idea about market targets will help us for:
-The exit strategy,
-For our stop loss strategy
-For when to add more options to our directional existing trade, if planed or
-When we plan to implement a whole complexer strategy, our leg in and leg out points.
If market not reaches any of your targets in a predefined time, you know you have to leave the market now, as the options looses value on a daily basis and that is your personal loss. Here is the end for the directional traders trade! Out of the market and take an other chance. It is waiting of you
As strategical option trader: Depending on how we entered the strategy at begin ( One leg, two legs, three legs or what ever ), we can close the trade or we adjust the strategy or we change to an other strategy by adding or taking away legs.
One way to avoid fast time decay is to use options which have a live of more than 30 days. As far as I know, this is until what was explained the only point, which is a bit a problem in your market because of the bad bid ask spread which your market offers on such options.
Only solution then can be to go for smaller targets in shorter time frames. Here you even can set targets through pivot points or just pure math models.
Having now the results of all the above:
-
Direction of the market
-
Volatility
-
How long do you plan to be in the market with this trade
we choose the strike level from the option we like to trade, independent if we now are pure directional option traders or if we are more in strategical option trading. For directional traders: When choosing a strike level, check the OI on that level and the Implied Volatility on that level. For strategical traders: Beside the OI and IV, compare the prices from put and calls in case your strategy has some thing to do with delta trading.
If you want to add some more stuff to the mentioned here, please post it so we can have a look at it.
Good luck
DanPickUp
