Options - Best & Worst Trading Instrument

NSE:NIFTY   Nifty 50 Index
Options (Index & stock) have been double edged sword. In the hands of experienced traders, it has resulted into multi fold growth of capital but at the same time for beginners or new traders, it has been capital killer.

Over the last 5 years, I have had opportunity to speak to hundreds of traders most of which have lost their hard earned money by trading options. Some of them have even gone to extent that they borrowed money from friends or banks to trade and only to lose it all by gambling in options.

Lets review some of important factors which has given helped experienced traders earn lakhs or even crore daily from options while most are just losing out their capital.

Factors resulting in losses for New Traders.
1. Lack of Technical Knowledge
Most of so called traders ignore the importance of Technical Analysis and directly jump into option trading. Most are either following news or tips from various platform with zero understanding of when to trade, when to book profit & most of all when to book loss. Its like jumping into water without knowing how to swim. Technical Analysis understanding is very important as it will give an edge to trader and help them analyze key factors related to entry, stop loss & target. Even though their is no 100% success formula in trading but having correct knowledge can increase your success chances from 50% to 70-80%.

2. Random Trading
Random or boredom trading is also another factor for failure of most option traders. Market gives us 1-2 good trading opportunity but many of us are part time traders who want to earn from market based on our availability and do not wish to wait for right opportunity given by market. Some will start the day with proper plan and only to get bored after couple of hours and then they will start trading randomly.

3. No Risk Management
The most key aspect for a good trader is risk management. But all new option traders will initiate trade first and then think about SL/Target. They have no knowledge about position sizing and will risk all the capital on a hero or zero trade on weekly expiry. Most of new traders will keep their losing trades with the hope of recovery while book small profits due to fear of losing.

4. Use of High Leverage
Unfortunately their are new trading platforms which float rules set by SEBI and provide High Leverage to attract new clients. People with small capital of 10-20K can buy 2-5 lots on an index option which can erode their capital in just 1-2 trades. Leverage trading can accelerate your losses 5-10 times which is another blunder for new traders.

5. Social Media Influence
Nowadays we regularly see people making lakhs or crores of profits on daily basis and all social media platforms are full of such screenshots. Many of them may be great traders who are actually making money and others may have just put a doctored screenshot but this influence/attract new traders to directly jump into Option trading with the hope that they will also replicate this success.
New Option traders completely ignore the hard work, analysis & planned work done by most successful traders and they only focus on money aspect which is main reason for their downfall.

6. Get Rich Quick Mentality
Every one of us want to earn money and have luxurious life. But most of us forget about hard work & practice which is required to reach their. Everyone is now directly jumping into Option trading with mindset to double or triple their capital in a short span without even putting a month of effort. When I have discussed expected monthly returns by most new Option traders, most common answer is 30-40% return on the capital in a month which translate into 350-500% return in a year. When we get 5-6% return in a year from fixed deposits, people are not happy with 5-7% return per month from trading.

Experienced Traders on other hand have following attributes which makes them winner.
1. Technical Expertise
All pro traders have a setup, strategy or proper knowledge of Technical Analysis which they have practiced over and over again for many years. It is not about having hundred strategies but have 2-3 strategies which you have practiced countless times in Live Market.

2. Trading Plan
All good traders have a plan w.r.t. maximum number of trades in a day/week/month. Maximum loss or profit their are willing to take before they close the system. They have understood that it is important to stick to a plan for long term success in trading.

3. Only Trade Right Opportunities
Patience is the key in trading and experienced traders knows this well. They wait for stock/index to come to their defined levels & form right setup before they initiate the trade. They are like sniper who patiently wait till all the factors are right to take the shot.

4. Focus on Risk Management
Risk management is by far most crucial aspect of trading. Importance of Risk Management is only understood by those who have been in market for some time. Although most think that it is the winning strategy of setup which will earn your money but only few focus on psychology building which include not taking revenge trade, do proper position sizing so that you are not under influence of fear or greed.

In the end, I only want to pass the message that Option trading is the last instrument which a new trader should jump into. Anyone starting trading should start with Equity as it has less volatility compared to Options and person can try their strategies for smaller risks.
Do you resonate with any of the factors above? Share your inputs on how you have grown to be a successful Option Trader.

Piyush Gupta
Learn & Earn

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