What Does a Successful Option Buyer Need to Know?
Being right about market direction is only one part of the equation. In option buying, timing, volatility, strike selection and risk management can make the difference between a winning idea and a losing trade.
Direction Is Right… But What About Timing?
If I have to say it in just one line, then understand this to become a successful Option Buyer.
“Money in Option Buying is not made just by being right, but by being right at the right time.”
I know it might not make sense yet. Read the full post.
In Option Buying, knowing the right Direction is not enough. It took me time to understand this too.
Because just like you, in the beginning I also thought:
If NIFTY goes up, I will Buy a Call.
If it goes down, I will Buy a Put.
Direction is right, so Profit should happen automatically.
But the Market very quickly taught me that even when the Direction is right, an Option Buyer can still make a Loss. And this is where real Option Trading begins.
Not Direction. Timing.
Suppose NIFTY is at 24000. You are completely confident that NIFTY will go to 24100.
You bought 24000 CE.
NIFTY did move from 24000 to 24100, but if this move happened slowly and Expiry kept getting closer, your Option may not increase as much as you expected.
Because an Option Buyer is not fighting only with Price. He is also fighting with Time.
Time Decay — The Invisible Enemy
Time decay is one of the biggest invisible enemies of an Option Buyer.
Your Analysis can be right, but if the Market does not move in your Direction on time, the Option Premium can slowly melt away.
In Option Buying, “Where will it go?” is less important than “By when will it go?”
Understanding this difference is very important.
Volatility — The Hidden Factor
Many new Traders only look at the NIFTY Chart, but Implied Volatility (IV) also works behind the Option Premium.
Suppose you bought an Option before a major Event. Fear in the Market is high and IV is also very high. You bought the Premium at an expensive price.
After the Event, the Market did move a little in your Direction, but IV fell.
And you are thinking: “NIFTY went in my Direction, then why didn't the Option increase?”
The Underlying being right and the Option Trade being right are two different things.
Strike Selection — Don't Buy Blindly
Another big mistake:
NIFTY is Bullish, so just Buy any Call.
No.
ATM, ITM and OTM Options behave differently.
Many times, an OTM Option that looks cheap is not actually cheap.
It only looks cheap because the probability of it becoming ITM is lower.
Instead, first ask: Why is this Option ₹20?
Price Action — Watch the Underlying
In my opinion, an Option Buyer should pay the most attention to the Underlying Chart, not the Option Premium Chart.
Because the real story is written by NIFTY or the Stock. The Option Premium is only showing its reaction.
If NIFTY is stuck below Resistance and Volume is not supporting it, the Breakout is failing again and again, and still you are Buying a Call just because the Premium looks cheap...
The 5 Things Every Option Buyer Should Understand
Timing
Being right too late can still result in a losing option trade.
Time Decay
Every passing day can work against the option buyer, especially as expiry approaches.
Volatility
Changes in implied volatility can affect option premiums even when the underlying moves in your direction.
Strike Selection
ATM, ITM and OTM options carry different characteristics, probabilities and risk profiles.
Price Action
The underlying chart should guide the setup rather than simply choosing an option because its premium looks cheap.
The Real Advantage of an Option Buyer
And there is one more thing that very few people understand...
The biggest advantage of an Option Buyer is not Unlimited Profit.
Rather, the real advantage is finding a big Reward with Limited Risk.
But there is one condition.
You don't need to look for a big Profit in every Trade. Because if you try to turn 10 into 100 every time, your entire Capital can be at risk in just a few Trades.
Over time, I have learned just one thing — in Option Buying, Survival should be the first Target. Profit will come after that.
The Most Underrated Skill: Knowing When NOT to Trade
And perhaps the most important thing...
A successful Option Buyer should also know how to “Not Take a Trade.”
- Market is Sideways.
- Momentum is not there.
- Volatility is confusing.
- Setup is not clear.
Then Buying an Option just because you have to do something today... this is not Trading.
And there is a huge difference between Activity and Profitability.
What Makes a Successful Option Buyer?
From my experience, I would just say one thing...
A Successful Option Buyer is not someone whose every Direction is right.
Rather, a Successful Option Buyer is someone who knows:
- When to Buy
- What to Buy
- For how long to Buy
- How much Risk to take
- And most importantly — When not to Buy