Options Strategy

Introduction

Now you can combine your chart skills with options. The simplest options swing trading strategy is: buy calls on buy setups and buy puts on sell setups. This lesson shows how to plan, size and manage these trades.

The Strategy in One Line

• Buy setup (3-day pullback + support + bullish candle) = Buy an ATM call.
• Sell setup (3-day rally + resistance + bearish candle) = Buy an ATM put.

Shares vs Call Option Comparison

KLM Ltd at Rs 500. Buy setup confirmed. Target Rs 525. Assume lot size 1,000.

Step-by-Step Trade Plan

• Step 1: Find the setup on the daily stock chart, not the option chart.
• Step 2: Mark the chart target and chart stop-loss on the stock.
• Step 3: Choose an ATM or slightly ITM option with at least 2 to 3 weeks to expiry.
• Step 4: Decide the maximum premium loss you will accept, for example 35%.
• Step 5: Size the trade so that loss equals only 1% to 2% of your capital.
• Step 6: Place a Limit buy order.
• Step 7: Exit at the chart target, chart stop-loss or premium stop, whichever comes first.

Position Sizing for Options

Capital Rs 3,00,000. Risk per trade 1.5% = Rs 4,500. Premium stop is 35% of a Rs 15 premium, about Rs 5.25 per unit. One lot of 1,000 risks Rs 5,250, which is slightly above your limit, so either choose a cheaper strike, a smaller lot stock or accept 1.75% risk consciously. Never buy many lots just because premiums look cheap.

Complete Example: Put on a Sell Setup

Nifty has risen 4 days into a resistance zone and forms a shooting star.

• Buy 1 lot of an ATM Nifty put with about 3 weeks to expiry.
• Chart stop: above the shooting star high.
• Chart target: the previous support zone.
• Nifty falls to the target in 4 days. Put premium rises about 60%. Exit and book profit.

Managing Winning Trades

• Book partial profits at the first target if you hold multiple lots.
• Trail your chart stop-loss as the stock moves.
• Do not hold bought options into the last few days of expiry, when time decay is fastest.

Common Mistakes

• Buying cheap far-OTM options hoping for a jackpot.
• Buying options just before results when premiums are inflated.
• Trading too many lots because capital needed looks small.
• Holding losing options till expiry hoping for recovery.

On GoPocket

Analyse the stock chart on GoPocket's advanced charts, then switch to the F&O segment to select the right strike and expiry. Start with one lot and a clear exit plan.

Frequently Asked Questions

Should I use stock options or index options?

Index options like Nifty are more liquid. Stock options can be less liquid and have wider spreads.

Can I sell options instead of buying them?

Option selling carries much larger risk and higher margin. Learn buying first.

Key Takeaways

• Calls for buy setups, puts for sell setups.
• Use stock charts to decide, options to execute.
• Size positions by risk, not by how cheap the premium looks.

Disclaimer: Illustrative example only. Derivatives involve high risk.