Is Option Trading Profitable

Option trading can give you 10-20% or even more return in a day but can also wipe away your whole capital in a matter of seconds. So, the risk involved in options trading raises a question, is option trading profitable?

In this blog, let’s get into the details to determine the potential profits and risk involved in options trading and how you can reap the best opportunity out of it.

Is Option Trading Profitable in India?

Let’s begin with a brief understanding of options trading.

So, in simple terms options are the kind of derivative contracts that gives a buyer a right but not an obligation to trade in an underlying asset on expiry.

Now, to gain this right, the buyer has to pay a premium to the seller, which could be the maximum loss of buyer and profit of seller.

Other than this, there are other advantages of options trading, that make it popular form of trading among traders and helps them to gain profit:

1. High Leverage

The first and foremost advantage of options trading is that it allows a buyer to take a big position with the minimum amount that is equal to premium amount.

This allows them to gain more profit if the market moves in their predicted direction.

2. Diverse Strategies

One can make use of multiple options strategies to trade in both directional and sideways markets. Also, the experienced trader can create their own strategies to minimize their losses and to maximize their gains in option trading.

Strategies like Covered Call and Protective Put give another level to minimize their losses and to determine the maximum profit in the positions taken in the equity market.

3. High Returns

Other than this, as discussed options trading offers an opportunity to gain high returns in trading.

Taking the position on the call or put side in the trending market increases the premium amount thus making it profitable for option buyers.

On the other hand, taking a position just before any event or news helps in gaining a good return on position because of the increase in premium amount.

Thus a quick and correct analysis can help you in earning profit in the options trading hence making it profitable.

However along with these advantages, there are some disadvantages too like:

1. Time Decay

Unlike equity trading, options have expiration that results in declining premium value with each passing day.

This time decay erodes profit and can sometimes leads to bigger losses than expected. However, theta decay works in favor of seller understand how by referring option buying vs option selling.

2. Volatility Risk

Another risk of trading in options is the volatility risk. One one side, higher IV can increase the premium value, a sudden decline can lead to bigger losses as well.

Thus, one must keep a check of IV and its impact of the selected strike price and expiry.

3. Complex to Understand

Last but not the least, the major reason for losses in options is less understanding. No doubt options are complex and some traders enter into it without proper knowledge or just by looking at a few Youtube videos.

Well! This is of course not enough. Options are complex and demand proper time and dedication before you plan to invest your capital in it.

But unfortunately, most people don’t consider it important and eventually lose their hard-earned money by practicing wrong trading setups in the market.

To minimize losses, and to make option trading profitable, it is important to learn and understand the risk involved and how to develop a proper mindset before stepping into options trade.

Also, you can reduce your losses by keeping a track of your trading activities. It can be done through various means and one such options is provided by one of the features of Samco App, ‘My Trade Story.’

This app provides you the insights of your profitable and loss making trades and calculate probability success ratio on that basis.

The feature shows the ‘Andekha Sach’ that helps you in calculating your strike rate on the basis of profit and loss trades done in the past.

The strike rate further helps you in determining your level and provides you tip to become a profitable trader.

How to Make Money in Options?

To make money in options trading one must first need to develop a strong trading psychology.

Let’s make it simpler for you.

Just answer this question: Why do you want to do options trading?

If the answer is that you get influenced by seeing the huge profit of influencers on social media and now want to gain all that richness, then you are on the wrong path.

It is better to stop option trading and actually any format of trading.

Options trading is a game of skill, knowledge and strong mindset.

Just like everyone has their own risk, investment plans, and goals, so does the option trading. You can’t win just by copying others.

However, if you are passionate about trading and want to be a serious trader, then here are some of the tips that can make you a profitable trader:

1. Gain In Depth Knowledge

A serious trader is the one who invests time in learning options and understanding market moves.

Gain a thorough understanding of the market by learning technical analysis, price action, option chain analysis and start implementing your learning in real-time by doing paper trader and later real-trades with low capital.

2. Learn to Manage Risk

After you gain knowledge the next important step is to learn when to exit the position especially when the market moves in the opposite direction.

Smart traders do not take quick actions in such cases and wait for the right time and value that they set by doing their proper analysis and research.

3. Stay Updated with Market News & Events

Not all days are favorable for options trading and hence one must keep check of the events and news that might increase market volatility and risk.

It is always better not to trade than to trade in unfavorable market conditions.

Conclusion

So, if you understand the technicalities and complexities of the market, then can easily avoid doing common options trading mistakes and make it as one of the favorable and profitable trading options for yourself.

Learn to find the potential risk involved and stick to your trading plan to get the best from the setup you designed for taking position in the option trading.

Wish to start trading? For that, you need to have a demat account. Refer to the form below