Adopt Best Practices to Make Money in Options

Option trading is often considered lucrative by traders as there is always a chance to book abnormal returns in the short term. Option trading is also popular because it requires less amount of capital. However, majority of investors ignore the most important aspects of option trading and commit some common mistakes on a regular basis, thus making it difficult to make money consistently. Yogesh Supekar introduces the concept of implied volatility while Karan Bhojwani highlights the importance of implied volatility in option trading and shares some of the most popular and useful option trading strategies that can be used by option traders

- Karan Bhojwani

Option trading gains momentum when the markets become volatile. In fact, increased volatility is a perfect opportunity for option traders to cash in on the price movement and make some quick bucks. However, options trading is not something that will produce positive results without adopting some of the best trading practices. Says Mohit Sharma, an options trader who also believes in momentum trading: “In my initial trading days I use to trade a lot in the option instrument. I realized that in spite of several highly profitable trades I was not making much money. I used to usually buy out of the money options just because they were cheap. The other mistake that I use to do was that I use to buy options when the volatility was very high.”

“After spending several years in the market, I now know that writing options when the volatility is at its peak is better that purchasing options. One of the most important realisations I have had over the years is that trading options without tracking and understanding the implied volatility is a no-win situation. Studying implied volatility is the key to making money in options trading. Almost all of your strategies should be based only after observing the implied volatility.” Implied volatility (IV) is important for retail traders because it is forward-looking. IV is different from the historical volatility. IV is not calculated based on the historical data and in fact, it tells us what the marketplace is ‘implying’ in terms of volatility of the underlying in the future.