What are some basic points that we must know before going for options trading?
Here are few pointers before you start option trading: -
Option Trading is a game of probabilities and money management.
There is no such thing as unlimited profit and unlimited risk in option trading. Unlimited profit is same as hitting a lottery and we all know what happens to lottery buyers. There is no unlimited risk if you know what you are doing.
Buy Calls when bullish. Sell Calls when bearish.
Buy Puts when bearish. Sell puts when bullish.
Hedging is used to save your self from potential losses. Learn it for various scenarios. One can hedge for every situation if applied properly.
Option prices moves based on underlying and futures. Analyzing the underlying is as important.
Each scenario has a different trading strategy. Execute the trades only when you know whats the risk reward and worst case and best case scenario.
Whenever India Vix starts moving up, markets go into high volatility and selling mode. Only when Vix is stable, markets become bullish.
Learn the difference between equity options and index options. There is no limit to equity prices falling. Index on the other hand has a circuit limit.
Trade only liquid options. Every paisa saved on bid offer matters.
Option Selling, if done properly is always rewarding. Option buying is always losing. You can win in a while, but in the long run, you will lose.
When taking option spreads, execute both the legs at the same time.
Do not trade naked options.
Never deploy all capital in one go. Despite all technical, fundamental analysis or a call from God, things can go wrong. Deploying money in tranches with changing scenario is the key.
Learn to identify when the market are sideways. Sideways market can eat up profit from all the bull or bear runs.
In a bear market, do not catch a falling knife.
Open Interest is an interesting aspect of option trading. Learn it.
Strangle and Straddles are useful only for short duration near the expiry.
Avoid trading when some major news announcement is pending which will impact market or particular stocks.
These are all based on my personal experience with Options.