At first glance, options trading may seem like a lucrative opportunity for traders. However, when you dig a little deeper to take a closer look, some startling facts come to light, as highlighted in a recent study by the Securities and Exchange Board of India (SEBI). The report suggests that nearly 90% of F&O traders suffer losses in this market segment. What’s more, the average losses endured by derivatives traders amounted to ₹1.1 lakhs in FY22.
These insights point to comprehensive and multidimensional problems for options traders. Let’s decode what they are and how they contribute to such significant losses in this market segment.
A Closer Look at What’s Troubling Options Traders
Despite its potential to offer high returns, options trading also comes with various challenges that can be overwhelming for traders. They include:
- Complex Nature of Options Trading
Unlike traditional stock trading, options trading involves multiple factors — like the option’s expiration date, strike price and the volatility of the underlying asset — that can affect the outcome. To navigate this complexity, you need to have a deep understanding of various market dynamics.
- Challenges with Data Analysis
In options trading, crucial data points are often scattered across different platforms. So, it becomes cumbersome to perform a comprehensive analysis of market trends, historical data and economic indicators quickly. This is particularly problematic in volatile markets where timely access to information is critical and you need to make split-second decisions.
- Misleading Perceptions
Options trading is also often mistakenly equated with gambling or lottery wins, perhaps due to the high-risk nature of such trades. However, this misleading perception subverts the strategic aspects of options trading and fails to account for the analytical approach required to trade in the F&O markets.
- Inadequate Risk Management
Another major issue contributing to mounting losses for F&O traders is poor risk management. Even when beginner traders focus on basic strategies like buying calls or puts, they frequently overlook the need for comprehensive risk management. This myopic approach can lead to significant losses, especially in unpredictable markets.
Intricate and Complex Analysis: The Core Challenge in Options Strategy Building
To execute options trading strategies successfully, you need to carry out a thorough analysis of various aspects like the options delta, gamma, vega, theta and implied volatility. Furthermore, you need to analyse the market conditions, choose an appropriate strategy, select the ideal strike price and then enter the position.
This issue becomes even more pronounced if you are dealing with multi-legged trading strategies. Let’s examine how these challenges play out in two strategies — the collar and the straddle.
The Options Collar
To execute the collar strategy, you need to first own the underlying stock. Thereafter, you simultaneously buy an out-of-the-money put and sell an out-of-the-money call.
This multi-leg strategy has a unique profile for options Greek variables. For instance, the delta of this position — which measures sensitivity to stock price changes — is affected by both the put and the call options. If the market conditions are rapidly changing, it becomes increasingly complex to analyse how these deltas interact.
The implied volatility (IV) also influences the pricing of the options used in the collar strategy. You may use the collar strategy to hedge against some downside risk, but if the IV fluctuates significantly, it may alter the effectiveness of this hedge.
The Options Straddle
Here, you may buy (long straddle) or sell (short straddle) a call and a put option of the same underlying asset, with the same strike price and expiry.
This strategy is also highly sensitive to changes in the Greeks, particularly the gamma (i.e. the rate of change of delta) and the vega (i.e. the option’s sensitivity to changes in IV). To balance these aspects and successfully execute the strategy, you need to analyse the different Greeks thoroughly.
Assessing the implied volatility is also crucial for a straddle because this strategy typically profits from large price movements. A High IV may raise the premiums and potentially improve profits if the stock price moves significantly. However, if the stock remains stagnant, the straddle can suffer from time decay (theta).
Samco’s Options Pro: The Secret to Redefining Options Strategy Building
The examples discussed above reveal how difficult it is for the average trader to factor in various Greeks and the IV for each strategy. Given the volatility of the options market, such in-depth analysis is often beyond human capability, especially if you are executing multiple strategies using different options contracts.
Here’s where Options Pro — the new feature in the Samco Securities trading app — can make a world of difference. With this revolutionary, industry-first feature, you can easily find the three best options strategies curated specifically for you based on your market outlook.
Here’s how you can leverage this feature to elevate your options trading:
- Step 1: Log into the Samco trading app.
- Step 2: Select the ‘Options Pro’ feature.
- Step 3: Search for the options that you wish to trade in.
- Step 4: Select the expiry for the options.
- Step 5: Then, choose your view about the underlying stock or index from the available options, namely bullish, bearish, neutral and volatile.
- Step 6: If you have a bullish or a bearish outlook, select the target you expect the underlying asset to hit.
- Step 7: Submit your inputs to receive suggestions about the top three options trading strategies that align with your outlook.
5 Reasons Samco’s Options Pro is a Game Changer for Options Traders
Here are the top reasons why Options Pro, the new feature in Samco’s trading app, is revolutionary for options traders across India.
- Optimal Recommendations from 1,000+ Strategies
Samco’s Options Pro stands out for its ability to sift through over 1,000 different options strategies to recommend the most optimal options for you. This vast repository means that you have access to a wide range of strategies that cater to various market conditions and trading styles.
- Flexibility to Filter Strategies According to Your Requirements
You can tailor your search based on various factors like the funds available, your tolerance for the maximum loss, and even the expected probability of profit. This level of customisation can upgrade your options trading strategies tremendously because it aligns with your unique risk appetite and financial goals.
- Detailed Inputs for the Strategies Recommended
Samco’s Options Pro provides comprehensive details for each recommended strategy — like the probability of profits, estimated margin requirements, maximum profit and loss potentials, the different legs of the strategy and their associated risk levels. You can also see if a strategy is conservative, moderate or aggressive in terms of risk.
- Comprehensive Analysis of Each Strategy
The app also gives you an in-depth analysis of each strategy. It incorporates statistical data, payoff charts, probability of profit, the unique Samco Risk Reward ratio, breakeven points, maximum profit and loss, and even the Greeks for the strategy. This extensive analysis helps you understand the nuances of each technique.
- One-Click Strategy Execution
Samco’s Options Pro allows you to execute your preferred strategy with just one click. In markets as volatile as the F&O segment, this significantly enhances trading efficiency and saves time. You can capitalise on market opportunities as and when they arise, without getting bogged down by cumbersome multi-stage execution processes.
If you are looking for an effective way to improve your options trading outcomes, the Options Pro feature on the Samco trading app may be just what you need. This feature is especially beneficial in volatile markets, where speed can make the difference between profits and losses. With the best trading strategies recommended to you at the click of a button, this new industry-first feature helps you keep pace with the market and improve the outcomes of your options trades.