How to do Intraday Options Trading!5 min read
Trading intraday options can be a great way to benefit from short-term market fluctuations and make quick money. Before you dive headfirst into the fast-paced world of intraday options, it’s important to have a sound strategy with an understanding of risks and rewards. So buckle up, and let’s take a deep dive into the world of intraday options trading!
Which should you choose first—index options or stock options?
A trader can trade in Index or Stock options. Index options are options contracts based on the value of an underlying index (such as the Nifty 50, Bank Nifty or FinNifty)*. We have index options that expire on a weekly and monthly basis. Stock options are option contracts based on individual stocks.
From an intraday perspective, stock options are more volatile than index options, as the price of a stock can fluctuate more than the price of an entire index. This increased volatility pushes the risk-return trade-off further northward for the traders.
The second important point is liquidity. Index options are more liquid than stock options due to the broad participation of traders. As a result, it may be simpler to enter and exit positions quickly, which is crucial for traders looking to profit from short-term market fluctuations.
Intraday Option Strategies-
1. Directional strategies:
Trading intraday options is known to be much riskier due to the high volatility of the option price, or premium. Intraday option buying is solely based on momentum, with precise entry and exit points identified using Technical Analysis and other option indicators. Traders can use 15-minute timeframe charts for trading, as well as a daily chart to confirm the move.
Consider the following factors before executing the trade:
- Trading system: Using indicators and price patterns or price action to identify the entry points.
- Risk Management: The trader must decide how much he is willing to risk for each trade and base his position size on that. When trading, always use stop-loss orders.
- Plan: Before executing a trade, plan it down to the smallest detail and execute it exactly as planned. This trading method is known as rule-based trading.
- Mindset: Options trading needs an extremely fast decision-making mindset. Every trader is not psychologically equipped to trade options.
2. Intraday options trading matrix:
|Types of Options|
|Bullish||Buy ATM Call||Sell OTM Put|
|Bearish||Sell OTM Call||Buy ATM Put|
Step 1: Identify potential stock/index for day-trading
To begin, you must identify potential trades. Look for stocks that are experiencing or are expected to experience significant price movements, either up or down. It could be a momentum trade or a breakout trade. You can use technical analysis tools such as moving averages, MACD, and the Relative Strength Index (RSI) for stock or index trades.
Step 2: Choose the right options
Choosing the appropriate options contract is the next step after identifying the opportunity. Look for options with a short expiration date, usually within a week; choose options that have a high trading volume and high liquidity, which makes it easier to enter and exit positions quickly. ATM or one-step ITM options are ideal as there will be less time decay. OTM options are risky as they expire worthless at the expiry, trade cautiously.
Step 3: Determine entry and exit points
After identifying the trade, you have to fix your entry and exit points. Your exit points will be your target level or stop loss level. For intraday trading, it’s important to have a stop loss in place to minimize potential losses. You can set your stop loss at a predetermined percentage or rupee amount below or above your entry point, depending on the trade.
It is important to have a profit target in mind before you execute your trade. You can use technical analysis tools to help identify potential profit targets.
Step 4: Place the trade
The next step is to execute your planned trade. Since options are very volatile instruments, it is ideal to place a bracket order with trailing stop loss. Bracket orders allow you to place three orders at once: an entry order, a target order, and a stop loss order. This protects your trade from any unexpected price changes.
Step 5: Monitor the trade
After executing your trade, monitor it closely. Keep an eye on the underlying stock’s price movements and be ready to adjust your stop loss and profit target as needed. If the price action is not what you expected, it is important to get out of the trade.
Step 6: Exit the trade
Do not hesitate in squaring off your positions. If the trade is profitable, you can sell the options and take your profits. If the trade is unprofitable, you should square off your positions and cut your losses.
Finally, with proper trade execution and a strong risk-management strategy, intraday option trading can help you generate profits using short-term market fluctuations. Just remember that trading intraday options requires a high level of expertise. The risk and reward for successful intraday options trading are both high. Always keep a close eye on your trades and be prepared to re-evaluate or change your trading strategy if necessary.
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