Many people ask me above question while they call me and ask me about Options. First of all, I simply reply…

Whatever Business you do… Either it is a Stationary Business or a Stock Market Business…
If you do without knowledge… You will definitely lose your money…

This is a Thumb Rule. Knowledge is the master key to success in any business. Knowledge makes our vision clear. It also helps us to make a proper decision in worst scenario. It also gives a new level of strength and confidence when we need the best from ourselves.Let’s come back to our topic… Why learning Options…

Reason 1: Behavior of Options…
Equity and Futures are trading on Demand and Supply Rule. While Demand rises and supply falls, share price will rise. While Demand falls and supply rises, share price will fall. That’s why you can get buying – selling signals on charts with the help of technical indicators in Equity / Futures. Whenever I speak with Technical Analyst, they normally speaks one common line… “My technical indicators’ settings gives me the best result in Equity & Future but always fails in Options… I don’t know why?”

This is because Options’ behavior is little different from Equity and Futures. Options are not working on Demand and supply rule. But there are five different factors which are playing great role to make an Options Premium. Those are…

1. Spot Price
2. Strike Price
3. Time to Maturity
4. Volatility &
5. Rate of Interest.

Options Premium changes as and when a little bit change happens in any of above five factors. Secondly, each factors are having different measurement system i.e. Spot Price and Strike Price are measured in Rupee term. Volatility and Rate of Interest are measured in Percentage term while Time to Maturity is measured in Day Term. So, before you start trading in Options, first of all you need to understand the behavior of above factors & their effects on Options Premium.

Reason 2: Options’ Volatility

Many Time people ask me below question…
“Sometime I see that NIFTY moves for 30 to 40 points in just 5 minutes but Option Premium remains stuck and does not give much movement… Why this happens?”

Answer is Volatility… Volatility plays a major role to change Options premium. Volatility shows the strength of movement in Options Premium. Whenever Volatility falls it decreases the Options premium. Even each Options are having their own Volatility. Volatility of two different strikes (Same Underlying) are also related with each other. You can easily analyze whether the Option is cheap or expensive just by looking at their Volatility. Remember, An Option with Premium of Rs. 50 may be cheaper than an Option with premium of Rs. 5 only. You can understand it easily only by understanding Options Volatility. We should learn and understand the depth of Options’ Volatility to understand Options Behavior properly.

Reason 3: Time Effect

As you know Options premium decreases as time passes. It means, there is a great opportunity to earn Time Value. It is just like “Invest in Time and Time will Pay You”. You should learn strategies like Short Gamma, Ratio Spread etc. which facilitate you to earn Time Value from Options.

Reason 4: Strategy Game

There is a big difference in trading pattern of Equity, Futures & Options.
Let’s have a look…

1. Equity: If you are trading in Equity, you won’t be able to take short position for next day. That means you can play only bullish game in Equity. You can neither play Bearish nor Movement games in Equity. For Example, if you are sure that RELIANCE Equity will fall for next 3 to 4 days then also you can’t stay short in RELIANCE Equity. And it is the biggest limitation of Equity trading… Be Only Bullish, Nothing Else…
2. Futures: You will get one more choice in Futures Trading. You can play both Bullish and Bearish Game in Futures Trading. You can take Long / Short position of any Future Contract till expiry. That means you can take a benefits of Bullish as well as Bearish Market. But Now the question is …
   1. You know that NIFTY Future will not break the range of 8200 to 8700 during this expiry. But you don’t know what movement will give NIFTY on a specific day. What trading decisions will you take in this scenario? Can you play a range bound game in Future? Answer: No.
   2. You are sure that BANKNIFTY will not close in range of 19000 to 20000 at the time of expiry. But you are not sure about the trend of Market. What trading decisions will you take in this scenario? Can you play a Volatile game in Futures or Equity? Answer : No.
      Here I want to tell you that if you are sure that any Underlying will trade in a particular range or out of a particular range, then you will need an instrument that allows you to trade for a range bound market and volatile market… And that is why options are required.
3. Options: Options are the best instrument for trading. It allows you to play strategies as per your view and risk profile. Here you can use strategies for…
   • Bullish market
   • Heavily bullish market
   • Bearish market
   • Heavily bearish market
   • Range bound market
   • Volatile market
   • Low risk trading
   • Medium risk trading
   • High risk trading
   • Intraday trading
   • Short term trading
   • Long term trading

Options trading is a pure strategy game. It allows you to choose your desired strategy from a large amount of verity. You can choose several combinations of Options and trade strategies like…

• Bullish Spread
• Bearish Spread
• Straddle
• Strangle
• Ratio Spread
• Butterfly
• Condor
• Calendar Spread
• Put Call Parity
• Gamma Long
• Gamma Short
• Delta Neutral etc. and many more…

These strategies give you an oceans of opportunities to earn in derivatives market. Think of any view and apply strategy accordingly. But you have to learn entry – exit point as well as risk management in these strategies.

Reason 5: Options Behavior

Options shows different behavior at starting of the Month, at Middle of Month and at the time of Expiry. Options premium reduces slowly at starting of expiry and decrease heavily near to Expiry. Even behavior of Options is different in current month, next month and far month expiries. Options behavior is also different for normal trading day and event specific day (e.g. Budget day). That’s why we have to understand and implement different strategies for such different behavior. E.g. Ratio Spread and Long Gamma Strategies are fine for some time while Short Gamma Strategies are best for some other time.

Despite of these reasons for Options Trader, Future Trader also need to learn Options Trading and strategies. As you know Future contract trading includes high risk, you need one tool that gives you protection against such risk. Options can provide you the best hedge positions against the risk of Future contracts.

Hence, there are lots of reasons and requirements to learn Options before trading in Options. The best time to learn Options trading and strategy is NOW only because delaying learning is equal to decreasing profits. We recommend you to go for following courses from FinIdeas.

Beginner Level Courses:
Basic Options Trader || Smart Future’s Trader || Professional Excellence in Excel

Intermediate Level Courses:
Greek Options Trader || Expert Options Writer

Expert Level Course:
Vol Spread Trader

Course for HNI clients
Residential Program on Options Trading || Advanced Options Greeks for Retail Trading || Advanced Options Greeks for Arbitrage Desk.

You can get details about these course at www.finideas.com

Happy Trading.