The Reality Of Very Far OTM Out Of Money Options

by Dilip Shaw Date: June 6, 2017

in Nifty Options

Sponsored Ad: Click Here to Open a FREE Demat Account Online in ZERODHA and Pay ZERO Brokerage to Buy and Sell Shares. Also get services of Sensibull, Tijori Finance, Smallcase, Streak and many others worth ₹2500+/- per month for FREE!!!

Lots of traders trade only out of the money options. Read to know the reality of trading Out of The Money OTM options.

There are two types of speculative option traders:

1. Those who trade only ATM (At The Money) options, and
2. Those who trade only OTM (Out of The Money) options.

Very few trade In The Money ITM options.

Most traders start with At The Money options then move to Out of The Money Options to try their luck.

Buyers when they lose become sellers and sellers when they lose become buyers. And most option traders start trading with Index options. In India Nifty Options is the most traded options.

Therefore there is rarely low liquidity in Nifty Options trading.

Option Buying or Selling is a Game of Probability

NSE spot price is 9,642.15 as on 01.01 pm, 06-June-2017.

Today NSE is falling, so for most traders probability of success of selling Call Options is more than that of probability of success of selling Put Options.

Tomorrow the story may change.

To avoid taking chances traders try to sell very far Out Of The Money options, especially near expiry. This is more fun oriented than logic oriented.

One plunge down on expiry day can even push far out of the money options into at the money options and it may take away years of profits of the far out of the money option sellers.

Story is same with far out of the money option buyers.

They get attracted by low premium and low risk options. On expiry day or a few days before expiry when option premiums are low, these traders buy very far out of the money options hoping the stock may take a drastic move and they can make a lot of money.

Most of the times it does not happen and they end up losing money.

When move actually comes they are either not trading that side, or they exit in a small profit.

Buying low premiums out of the money options is like buying a lottery. At least if they win a lottery, they end up making a few lakhs or even crore, but in options trading maximum profit also has a limit. One trade cannot make lakhs of profits.

Unfortunately by the time a trader understands it’s too late.

Once they realize they are doing a mistake they look for tips – again a huge mistake and they lose more.

Then they start looking to educate themselves or do a course. Some of my clients have been though the above hell then did my course.

Conclusion:

Educated yourself before trading options and getting into the game of speculative trading or playing the game of probability.

COPYRIGHT INFRINGEMENT: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.

INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However, every trade depends on the trader and his level of risk-taking capability, knowledge and experience. Moreover, stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.

DISCLAIMER: I am NOT an Investment Adviser (IA). I do not give tips or advisory services by SMS, Email, WhatsApp or any other forms of social media. I strictly adhere to the laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles on this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given on this website. I am not responsible for any investment decision you take after reading an article on this website. Click here to read the disclaimer in full.

My student gets the Winner's Certificate of Zerodha 60-day Challenge - Click here and Open Stock Buy and Sell Free Account with Them Today!!!

About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.