Sponsored
Learn the top 4 mistakes to avoid in options trading. Understand call and put options in the Indian market to improve your trading performance.
Traders have become common in trading call options and put options to hedge or earn returns in the derivatives market. These financial instruments, in reality, give traders the right but not an obligation to buy or sell an asset at a particular price within a certain time frame. Even though opportunities arise from these derivatives, often novice or sophisticated traders make mistakes that are bound to affect their performance in the end. What follows next is a listing of the top 4 mistakes traders should avoid in options trading, especially in the Indian market.
Market volatility has the maximum impact on both call option prices and put prices. Traders who do not take into account volatility make decisions that are unsuitable according to present market conditions. For example, one of the major reasons why traders buy options during periods of low volatility and swaying in prices is that it leaves lower chances of the option trading being profitable during low price swings. Likewise, in high volatility without adequate hedging, traders selling options expose themselves further to risk.
Implied and historical volatility explain implied and past understanding, which is important for traders to make informed decisions about trading with options. This has a lot of importance for Indian traders, as sudden price movements in the market owing to events like election results, budget announcements, or global economic updates cause volatility.
Traders commit yet another blunder by ignoring trading hours in India. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) function from 9.15 AM to 3.30 PM from Monday to Friday. However, derivatives like the call option or put option mentioned have time sensitivity, and thus, price movements during specific hours can prove to be crucial.
Many traders ignore this, as they do not regard opening and closing hours as opportunities to enter or exit positions. Traders commonly consider the first hour after market opening and the last hour before market close as the most active, which directly influences the option premium. Aligned strategies with trading hours in India only improve the quality of decision-making and risk management.
While MCX deals mainly with commodities, its holidays have a mirror effect on sentiment towards trading in India overall. On MCX holidays, commodity market activity comes to a standstill, causing lower participation rates in other segments such as equities and derivatives.
Options traders also ignore these holidays, resulting in poor liquidity and a wider bid-ask spread at both the entry and exit points of a call option and put option contract. To plan trades effectively, these traders should refer to an official MCX holiday calendar. Understanding how MCX holidays affect their trading strategies can prepare new traders to expect light activities in the market and make the necessary adjustments to their positions.
Another example of a trade error involves traders mistakenly determining what determines the value of the option premium. The price of a call option and a put option isn’t dictated purely by the price changes in the underlying asset. Other influential factors that significantly matter include time decay (theta), volatility (vega), and the strike price to the underlying price.
Most traders will thus purchase high-priced options or sell those that do not merit the risk without considering price movement. Prior to entering any trade, traders need to analyze the option Greeks to ensure that they are taking a balanced approach to options trading.
Avoiding these mistakes enables traders to participate in call option and put option trading with a structured approach. Awareness about trading hours in India, the impact of MCX holidays, and understanding how MCX holidays affect their trading strategies can further improve sound trading practices. Options offer leeway when trading, but sheer careful planning and awareness of the market are key to navigating this particular segment efficiently.
© 2024 Crivva - Business Promotion. All rights reserved.
