In this article, we will discuss:
- A Closer Look at the Losses Endured by Options Traders
- The Main Difficulty? Analysing Greeks and Identifying the Right Strategy in Time
- So, How Do You Become a More Profitable Options Trader?
- Refine Your Options Strategy Selection with Options Pro from Samco
- Become a Better Options Trader: More Reasons to Choose Samco
Do these names sound familiar to you?
- Long call
- Long put
- Covered call
- Short put
- Iron condor
- Strangle
- Straddle
- Call spreads
If you’ve been trading in the derivatives market for a while now, you may have identified that these are common options trading strategies used in varying market conditions. However, these techniques are only a handful of the thousands of options trading strategies available to traders today. Each strategy requires a thorough analysis of various Options Greeks, implied volatility, market conditions and more.
This essentially means that while options trading may seem like a simple endeavour at first glance, most traders take years to master the art. However, in the time that it takes to learn the ropes and become a pro at options trading, traders remain vulnerable to heavy financial losses.
A Closer Look at the Losses Endured by Options Traders
On the one hand, options trading has been gaining popularity among retail traders, with the number of unique individual F&O traders increasing five-fold between FY19 and FY22. However, the other side of the story presents a grimmer reality, as evidenced by a recent study conducted by the Securities and Exchange Board of India (SEBI). The market regulator’s report found that nearly 90% of active traders in the F&O segment suffered loss-making traders in FY22, with the average loss amounting to ₹1.1 lakhs!
This goes to show us that options trading is extremely difficult because there are various complexities involved. If you too have been trying and failing to carry out profitable options trades, the reasons could be a mix of the following challenges:
Complexity of Options Strategies
Options strategies can range from simple to extremely complex, with each strategy having its own set of risks and rewards. To understand the intricacies of each strategy, you need an in-depth understanding of the market conditions under which a particular strategy can be profitable.
For instance, strategies like iron condors, straddles, strangles and butterflies each have unique payoff structures and are suited to different market conditions. The complexity increases when these strategies are adjusted or combined because you require a high level of expertise and experience to execute them successfully.
Understanding and Managing Greeks
Options Greeks like delta, gamma, theta and vega are all critical if you want to measure the different types of risks associated with options trading. Each Greek gives you insights into the option’s price sensitivity to different aspects like the underlying asset’s price, the rate of change in delta, the time decay and volatility.
However, you also need to factor in how these metrics interact with each other. This brings in additional layers of complexity. For instance, you need to continuously adjust your positions to manage the delta and gamma, while also keeping an eye on theta to ensure the time decay is not eroding any potential profits.
Lack of Access to Advanced Tools
If you want to effectively identify and implement options trading strategies, you need sophisticated analytical tools that offer insights about options Greeks, implied volatility and the right strategies for different market phases. These tools can tell you more about market trends, volatility patterns and how different strategies can potentially impact your returns.
However, most leading options trading platforms do not offer such comprehensive insights. Even the few that do may be difficult to access because they come at a premium. Such a lack of access can put you at a significant disadvantage and limit your ability to analyse complex market data, eventually making losses inevitable.
Difficulty in Executing the Right Strategy Promptly
The options market can be extremely fast-paced, and the success of a strategy often depends greatly on the timing of execution. To identify the right moment to enter or exit a trade and adjust a strategy in response to market movements, you need to make decisions quickly and with precision.
Executing multiple trades simultaneously to establish a complex position can also be extremely challenging. Manually executing options strategies increases the risk of delays or errors, particularly during periods of high market volatility or when you’re executing multi-leg strategies and managing multiple positions.
The Main Difficulty? Analysing Greeks and Identifying the Right Strategy in Time
You may be aware of options strategies in theory. If you are a seasoned trader, you may even have backtested your strategies and executed them in a simulated environment. However, manually implementing suitable options trading strategies in a highly volatile and uncertain market can be difficult at best and impossible at worst.
Analysis, which is a crucial part of options trading, can be extremely challenging to perform in a rapidly moving market. To understand why this is a practical issue, let’s explore a couple of options trading strategies — namely the straddle and the iron condor.
The straddle is a strategy that aims to profit from large price movements in the underlying asset. The move can be in either direction, but it should be large enough to cover and exceed the premium, so you can profit from the change. To set up a straddle, you need to buy a call option and a put option with the same underlying security, strike price and expiry.
However, before entering this position, you need to factor in the options Greeks. And here’s why it can get complex.
The delta values of the call and put options initially offset each other. This creates a delta-neutral position. However, as the underlying asset’s price moves, this changes rapidly and needs to be constantly rebalanced.
In a straddle, high gamma values can be beneficial as they indicate that the options’ values will move significantly when the underlying asset’s price changes. This can accelerate profitability. However, predicting and adjusting for these changes can be complex.
Since you buy options in a straddle, your position is vulnerable to time decay, particularly as expiry approaches. To monitor and calculate the optimal time frame for holding the position, you must perform intricate theta analysis.
Straddles can benefit from increased volatility in the price of the underlying asset. So, to assess the right entry point for this strategy, you need to analyse the vega in conjunction with other market forecasts.
The iron condor is a neutral multi-legged strategy that involves four different positions. You sell one out-of-the-money (OTM) put, buy a further OTM put, sell one OTM call and buy one further OTM call. The goal of this multi-legged position is to profit from low volatility in the underlying asset’s price.
Like the straddle (and every other options trading strategy), the iron condor also requires extensive options Greek analysis. Let’s see why.
Here, you aim for a neutral position. However, the delta shifts with the underlying asset's price. To maintain the initial neutrality, you may need to manually recalculate the delta for all four options in the strategy. This can be time-consuming and requires high precision.
As expiry approaches, the gamma increases — especially for options that are almost at the money. To balance this sensitivity, you need to frequently make adjustments to the strategy and keep track of the rapidly changing risk profiles.
To use the time decay of options to your advantage, you need to time the trade right. This means manually calculating the optimal window to enter or exit a position based on the theta decay for each of the four options — which can be exceptionally challenging.
The iron condor strategy is vulnerable to volatility spikes. So, if you execute this technique, you need to keep a close eye on the vega for all four options in the strategy and manually predict how they will respond to sudden volatility changes.
So, How Do You Become a More Profitable Options Trader?
Given the complexities and intricacies of options trading and strategy building, it is nearly impossible for the average retail trader to profit from this market segment without having access to the necessary tools and insights. Here’s where Samco Securities emerges as a game changer.
At Samco, we have created Options Pro — an effective, industry-first options strategy builder that gives you access to the most ideal strategies within mere seconds. This makes it possible for you to trade smarter and more efficiently. What also sets Options Pro apart is that we offer it to our traders completely free of charge.
So, in a market where it’s impossible to obtain competent and comprehensive analytical tools for options trading — except at a premium — we are setting a new precedent by ensuring that our community of online traders has access to class-leading options trading analytics and tools at their fingertips — all for free.
Refine Your Options Strategy Selection with Options Pro from Samco
As we’ve already seen earlier, the options strategy that you need to choose depends primarily on how you expect the market to move in the period preceding the expiry. While the available strategies themselves may run into the thousands, the possible types of market outlooks are fairly limited. In fact, there are only four potential expectations that you can have, at any given point. They include:
Bullish Outlook
If you anticipate that the price of the underlying asset will rise, you have a bullish outlook. This expectation may be fueled by strong economic reports, positive sectoral news or a general uptrend in market sentiment. It presents an opportunity to capitalise on increasing asset prices. Strategies that work well in this scenario include long calls, covered calls, bull call spreads and bull put spreads.
Bearish Outlook
When you adopt a bearish outlook, it means you expect the price of the underlying asset market to decline. This opinion may be driven by factors like deteriorating economic conditions, poor company earnings or overall market pessimism. To leverage the anticipated price decline, you can make use of strategies like bear put spreads, long puts, protective puts or bear call spreads.
Neutral Outlook
As the name indicates, a neutral outlook means that you only expect the underlying asset’s price to move minimally. This may occur during times of uncertainty or when there is no clearly discernible directional trend. In such conditions, you need to adopt market-neutral strategies that capitalise on stagnant market conditions, like iron condors, butterfly spreads, short straddles and short strangles.
Volatile Outlook
If you have a volatile outlook, it means you expect significant price movements in the underlying asset, but you’re uncertain about the direction of the price changes. This may be triggered by pending announcements, upcoming earnings reports or unresolved geopolitical events. In these scenarios, strategies like long straddles, long strangles and the iron condor may be suitable.
Options Pro, Samco’s strategy builder, takes these expectations into account. All you need to do is choose the options you wish to trade in, select the expiry for the relevant options and choose the direction in which you expect the market to move within the period till the expiry. Once you submit these details, the Options Pro feature will recommend the top 3 strategies that are best suited for the specific market outlook that you chose.
Become a Better Options Trader: More Reasons to Choose Samco
With Samco’s new-gen trading app, you get access to all the analytical tools and insights required to improve your options trading strategies and become a better trader. From the overwhelming array of over 1000+ possible strategy combinations, Samco’s Options Pro narrows down to three optimal strategies. This feature is especially useful when you're unsure which strategy aligns best with current market conditions.
Additionally, our strategy builder also caters to traders of all risk profiles — namely conservative, moderate and aggressive risk takers. So, whether you’re cautious with your investments, looking for balanced risk, or seeking high-reward opportunities, Options Pro lists ideal trading strategies that suit your style.
What’s more, the one-click execution feature in the Samco trading app simplifies the process of strategy execution — where you can execute all the trades in your preferred strategy simultaneously. This means that you don’t miss an opportune entry into the markets due to time lags or delays in strategy execution.
In addition to the benefits of instant strategy building and execution via Options Pro, the Samco trading app also gives you a comprehensive analysis of vital data points like Options Greeks and implied volatility. This level of detail is crucial for understanding the risk-reward profile of each strategy. The best part? This analysis is delivered in mere seconds, so you get up-to-the-minute insights to make timely trading decisions.
To enjoy all these benefits and more, switch to Samco today and become a better and more profitable options trader — all for no additional charges.
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