Risk reward for option buying

F&O
1

I am a intraday trader , I am into options buying recently practicing with 1 lot , can some one let me know how to manage 1 lot . because of huge volatality , sl are being hit frequently . can anyone guide me , what should be capital , necessary things to keep in mind, risk reward

2

If you are begining, then stay away. Do what works for you. Option buying requires lot of patience and skill to execute trades and in the long run you will lose everything.

3

Stick close to ATM options or use ITM strikes close to ATM. You have better liquidity in these strikes so you can get in and out with out much slippage.

Volatility is part of the market. It is not a problem. Look in to your strategy to see what is ailing in that strategy.

Quantify your trading system be it systematic or discretionary. Generate accuracy, risk reward, max trade and system drawdown figures. Ask your self what is the max drawdown % on capital that you are ok with and size your capital based on that and your system drawdown.

4

This is true to trading with any strategy or instrument and depends on the individual punching in the orders.

5

For Option buying:

  1. Momentum is the key. Look for entry area from where momentum is likely to come. Eg. Supply and Demand zones, Strong Support and resistance.

  2. Always go for IMT or ATM.

  3. Always prefer Monthly expiry.

  4. R:R = 1:3 OR greater (MOST IMPORTANT).

  5. Option Buying is the game of skill and Option selling is the game of capital. For Option buying practice on chats as much as you can. Do Back-testing and forward testing.

  6. Have fixed Rules for entry and exit.

  7. For starting out expecting 50% Win rate is ok. Later on it can be improvised.

1 Like
6

why not weekly?

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7

With weekly option we need only lesser capital owing to lesser premium. Also movement is more in weekly relative to monthly.

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8

Monthly options have less time decay effect. Weekly options are more volatile than monthly option. SL will get hit easily in weekly options.

Although, weekly options are cheap but monthly option will surely increase your win rate and probability. And it is very important to have probability on your side in case of option buying.

Hope you get my point.

1 Like
9

For intraday trading theta decay is not really a problem. Even on a Thursday if we see the near ITM close to ATM there is negligible time value left to decay.

Also with intraday option buying my guess is that some one is trying to capture market momentum. Weeklies have better gamma and delta increases as we approach expiry day.

As a side note theta, delta etc can also be beneficial or made neutral depending on parameters of one’s trading system.

Everything is in the price. I guess its better not to clutter the mind with greeks the calculation of which itself is questionable.

2 Likes
10

Weekly is fine! Theta is no match for a good delta. As an option buyer you should look for quick entry and exit (max 2 days, unless its a huge trend ofc).

1 Like
11

yes ITM options have less theta effect , but the problem is impact cost , while i am trying to close the trade ,when i am in profits , it will always exit at 2-3 points below , resulting in less profits . While im in losses , when trying to exit , it will always exit at 2-3 points below , resulting in even bigger losses … any scalping strategies