“My main problem is the risk-reward ratio in option buying. For example, in one trade, my entry was at 174, my stop loss was 153, and my target was 240. The premium moved up and touched 207, but then reversed and came back. In this type of situation, what should I do? Should I book partial profit, trail the stop loss, or hold the trade according to the original target?”
The biggest mistake is putting stop loss in an options trade.
I know many will not agree, but I feel one should never have an SL for an options buy trade.
Then position size have to be really small - if it does print, gamma will do the job of increasing your size. If you’re betting more than 5% of your trading capital in a trade, SL is must.
Who can tell? That’s the same as asking: Do you think it’ll go down even more? Do you market will reverse? Should I close my position with this profit? I guess the essence of it boils down to “Do I want to I risk the profit to get more profit?”
Without a definitive edge and a strategy to execute it, if you feel compelled to trade.
Just do spreads instead and hold till expiry.
Honestly, option buying has only 33% probability of being profitable. If you have less than 2-3 years in derivative market ,its better to think twice. SEBI data proves 91% retailors loose in options trading.
Use a debit spread so that the maximum profits and losses are well defined.
Then position size have to be really small
Exactly.
When trader has stop loss, they do two mistakes:
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Take trade with large quantity
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Take trades too frequently, daily options or weekly options.
Try to find trades where risk reward is good, for example if i feel an option can go 3x or 5x, i will buy it and keep stop loss as zero. Amount will be something i am okay to lose.
1st thing u shd not be bying a nifty option @ 180 since it is renitence for any strike on nifty, it might go even higher but u better go for next strike .in my experience u shd buy around 80 -100 with a stop of 67 .
24000ce bought today around 80-100 hit an intra day low of 63. So SL hit?
Option pricing have too many things in it. You can’t generalise them.
Yup,correct it has so many issues ,out of all those highest RR is the abv price range when vix is around 18,it came from experience ,just take it r lv it.
The core issue here isn’t the trade management decision it’s the framework being used to make it.
Setting a target of 240 and SL of 153 purely on the option premium is a bit like navigating by the shadow instead of the object casting it. Options are derivatives and their price is a function of the underlying’s move, implied volatility, and time decay (theta). When you buy an option, you’re essentially taking a view on one or more of these, not on the premium itself.
So the right questions before entry are:
- What spot level or move you’re betting on? What’s your target/SL on the underlying?
- What’s your IV assumption and are you buying cheap vol or expensive vol?
- How much theta you’re bleeding per day, and does the expected move justify it within the timeframe?
In your example, premium hitting 207 from 174 could mean the underlying moved in your favour, or IV spiked, or both. When it reversed, was it because spot reversed? Or did IV crush after an event? These are completely different situations requiring different responses but you can’t tell if you’re only watching the premium.
On the trail vs. partial booking of profit there’s no universal answer, but it becomes much cleaner when your SL/target is defined on the underlying + vol, not the option price.
This is exactly the kind of scenario analysis- how your position behaves across different spot and vol combinations that most retail traders ignore. I’m actually building something to solve exactly this- Thetix (thetix.trade), built for options traders visualises your Greeks and P&L across spot and vol scenarios before and during a trade, so decisions like yours aren’t gut calls. Worth checking out if you’re serious about this. Thread here
Partial profit when the premium doubles removes the emotional pressure of watching it reverse, then trail your stop to breakeven on the remainder so worst case you exit flat. Also worth asking whether your original target was based on a structural level or just a round number, because if price reversed before hitting it that tells you something about the setup quality.