We know how hard it is to make money in stock markets.It takes a lot of hard work in the form of research,mental toughness and fight with human emotions before you come out as a winner.You can’t just buy shares and later sell those shares and make money in stock markets.
Every time before you enter the markets,you should have a clear trading strategy to succeed.Different strategies work at different times.To adopt these strategies,you have different set of tools in markets like Cash and Futures & Options.
You can use Option Trading to make easy money in stock markets.Here your trading strategy should be to sell the Options.You can choose to sell Call Options or Put Options,depending upon your view on markets.Selling Call Options is called as Call Writing (bearish view) and for Put Options it is Put Writing (bullish view).
When you sell or write Options,your objective is to sell the Options at higher price and then close your trading position by buying back the same Option at lower price.The difference between selling and buying price is your profit.
If you know the factors upon which the Option price depends,you would recognise that Option prices tend to go lower as we approach towards the monthly contract expiry date.This is due to Time Decay in Option prices while we assume all the other factors constant.
For example a stock X is trading at ₹ 100 and its 110 Strike Call Option is trading at ₹ 10 when there are 15 days left in contract expiry.For the next one week,the stock trades range bound within a range of 1-2% and after one week,it is again trading at ₹ 100 or 101.
You would see the Call Option price shall be lower around 8 or 9 now than the price of previous week.This happens due to Time Decay in Option price as now time left in contract expiry is 7 days after one week.
Time Decay is much faster in higher strike Options or out-of-the money Options when we are nearing the contract expiry.You may choose to sell Call Options of strike which are above the resistance price of a stock or Put Options of strike which are below the support price for that stock.
Most traders prefer to sell Options when the markets are expected to trade range bound and there is no clear trend in markets.At that time Option buying is not that good strategy because the Time Decay is causing price erosion in Option prices while markets or stocks are not giving any substantial move in either direction and you loose money on your trade.
You can also sell Options when markets are in a strong trend.If they are up trending,you may sell lower strike Put options and when markets are in strong down trend,you may choose to sell higher strike Call options.When volatility is to high in the markets,again it is good opportunity to sell Options.When volatility cools down,there is sharp decline in Option prices leading to profits.
You should be aware that writing or selling options involves more risk to your trading capital than buying options.Selling Options has unlimited risk and limited profit potentials while in Option buying it is other way around.
Selling Options requires more capital to trade than buying options where you pay only the Premium.By selling Options,you get the Premium as your profit.
Though selling Options is risky and requires more capital to trade,even then most of the traders prefer to sell Options to ride on Time Decay.It is said that smart traders sell Options,they don’t buy Options.
To make strategy of selling options work best,prefer to sell out-of-the money Options when you are nearing the expiry.If you are seeing a long weekend in the markets due to trading holidays,just sell the Options.Time decay shall work in your favour.