Is it possible to make money buying options in the long term? Is option buying why most retail trader in loss?
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Yes. Note that option buying is not a strategy in itself. You need to have an analysis system that will give you the direction of the underlying. Also profitable traders operate within the profitable contours of option buying with respect to time value erosion.
Position sizing is key and this is true.
Several times I have been asked why I keep so much capital idle. I always say the trading capital is not the per trade capital and its the per strategy capital - the capital required to run a strategy for a fair amount of time with enough cushion to absorb the losing streaks, drawdowns etc.
Staying ITM is also important. Going OTM will significantly modify the metrics of the underlying directional strategy.
Unless one has good capital it is nearly impossible to option sell into financial freedom. Option buying allows to do so from a smaller capital base. Also as we scale, liquidity crunch will hit option sellers much faster than option buyers.
how much roi one can able to make it in option buying?
No limit of profit and loss in option buying
its a zero sum game
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That depends on u r strategy to predict the directional movement of the underlying. Like I noted before option buying is not a strategy in itself.
Super difficult. You lose about Rs 250 every hour you hold a position. So for option buying to work - the markets should move in your direction within 1 hour or you are paying theta to option sellers.
Actually option selling is a risky strategy as well. A classic strategy is to sell out of money options as a straddle and wait to collect theta.
So why people still do it ?
- Its fun to see money evaporate … not really. Sorry being sarcastic.
- You have a high frequency strategy that can predict market in short term
- Option sellers need buyers
- You hedge your portfolio by buying puts. For example - you can buy puts at about 2-3% of the value of the portfolio and if you think markets can go down more than that - it can save you a lot of money. This is probably the only sensible thing to do.
But lets look at the history. Option selling is more than 5000 years old. See here
Things to consider when deciding an options strategy
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Even if you are right, the option can deep in the money and there will be no liquidity left. Then you basically pay theta till you can settle it with the exchange expiry.
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You need to believe in weak market hypothesis. This says prices and volume has latent information which can be used to predict direction of markets. Technical Trading is built around this philosophy. If you dont believe this, dont even consider technical trading. Investing is all about faith as no one knows the future.
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If you must - buy data, backtest. Also build a performance cone - which is the max gain and max loss plottted in time over your expected holding period. This will ensure if you strategy is performing within expected backtest limits when deployed.
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Trading is a full time skill. Many really smart people are working across the world to take your money. So unless you feel you have one up on them - stay invested for long term.
Hope this helps.
What stategy you are using sir?
My own proprietary…
Option Buying depends on Winsize and Option Selling depends on Winrate.
(If the market is trending, Option Buyers make a lot of money and if Market is non trending Option sellers make good profit)
Most people say Option Buying is risky, yes it is risky if you deploy capital without any risk management. But as Option Selling is about eating premiums, you make small small profits and if market turns round you one day you’ll lose all those collected premiums. Like Nithin once said in a tweet “Eat like an ant and poop like an elephant!”.
You can make profit in both depending on market conditions and how well you handle the risk.