5 Rules to Follow for Options Trader with Small Capital | Motilal Oswal
5 Rules to Follow for Options Trader with Small Capital | Motilal Oswal

5 Rules to Follow for Options Trader with Small Capital

In recent years, the Indian market has witnessed a boom in online trading. With an influx of traders looking to try their luck due to last year’s lockdown, there are a lot of newbies on the playing field. In options trading, any trade that is under Rs.2,00,000 is considered small capital and new traders typically only possess small capital. This in turn calls for strategies for low capital which only focus on options that can be both puts and calls. Commodity Options trading in particular can seem a little trickier to understand. Hence, we have compiled a list of five options trading rules or key points that new traders should keep in mind:

1. Learn about Position Sizing:
A common mistake that newbies tend to make is conflating options and stocks. Options have a very short shelf life, which means that deploying all your capital is essentially wasting all of it in a few months. This is why it’s essential to understand position sizing; this concept can help you figure out how much capital to allocate for each trade rather than putting all your eggs in one basket and suffering a loss. This is a very important options trading rule to keep in mind. 

2. Define the holding period for a trade:
While trading single options, one should remember to have a fixed maximum holding period. Holding a trade for longer than is necessary, endangers your chances of profiting off the trade. The main goal should be to take part in breakout zones and move out of the trade fast. If you are carrying the trades, 3 days should be the upper limit for the holding period, but this comes down to intraday in the expiry week. 

3. Calculate the targets and stops: 
Utilize forecasting tools and research in order to ensure your option trades are aligned with the stops and targets. You can use online Option Calculators to calculate the option stops and targets in advance. This can help you avoid losses due to inaccurate calculations and maximize your success through Commodity Options trading

4. Do not fall for bandwagon trading: 
New traders can get lured in by the trending stocks in the news. However, what may seem like positive news, may not be the most accurate indication of the options market. For options trading, it is best to investigate first and rely on your own research rather than simply joining the herd simply. 

5. Avoid taking a gamble:
One of the important options trading rules is, do not to risk trade when the outcome is unknown or the factors are unreliable. Treat options trading like it is a business and does not fall for unknown and volatile events such as fiscal/monetary policies where you can lose despite making educated predictions. 

Conclusion

As new traders, researching and educating yourself is the best way to make headway. Additionally, read up about concepts like option writing or shorting, strategies for multiple open trades and so on. If you are a prospective new trader, you can open broking account online in a few simple steps and get started on your trading journey.

Related Articles: Futures and Options Trading and How to Make Money | All about Options Trading in Commodities | What are Commodity Options and Futures Contracts? | Essential Options Trading Guide and its Benefits | Using Futures as a Form of Margin Trading in Stocks

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