December 7, 2019

Asit Baran Pati | An options buyer journey to financial freedom

............. The ‘Probability of Profit’ also known as POP in the trading world is only around 30 percent for an option buyer. POP is the probability of an option closing ITM on expiry. It also indicates that a trader will make a profit or barely breakeven only 30 percent of the time. This is also the reason why option selling is catching up as their POP is 70 percent.

In trading, POP is all that matters. For an option buyer, it goes down with time and for an option seller, it increases with time. Thus, for an option buyer, it becomes imperative to trade only when the momentum is good. The Greek gods that an option buyer can worship are Delta and Gamma while Theta is their biggest enemy.

An option buyer should not hold his position for a long time as Theta or time decay starts playing on the position and erodes its value. Secondly, an option buyer should buy such an option which has more intrinsic value than extrinsic value – which means a slightly in-the-money (ITM) contract. Further, your timing should be such that the momentum is strong and is building up. One needs to exit the trade as the momentum slows down. The only way an option buyer can end up with a winning trade is if the underlying stock or index moves significantly in his direction.

If you are buying option in a trending market the Greeks Delta and Gamma in an option premium will ensure that they not only nullify the effect of Theta but also overpower it. I always enter a trade where the momentum is about to enter an active zone..........


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