Daily Stock Option Tips
While the plethora of choices available in options is the main advantage of trading in options, the same can pose a challenge to a newbie who may have no idea what to choose, despite the nifty option tips. We have herewith compiled six steps that make it easy for anyone to pick the right stock option to trade. However, before you start following these stock future tips you will have to identify an underlying asset or stock you might own. Once you do this, here is what you need to do:
Step #1: Determine investment objective
Before you go ahead using those nifty option tips, you need to determine the purpose behind investing in stock options. Do you wish to make money or is it about speculating the bullish or bearish view of your underlying asset? Assuming you have significant position in a stock that you own, are you trying to hedge the potential downside risk of that stock? Whatever be the objective, it is something that has to be formulated as it is the very foundation for the steps that you are going to take.
Step #2: Identify the Risk-Reward Payoff
Your risk-reward payoff is always based on the kind of appetite you have for risk or risk tolerance. Conservative investors may not want to adopt aggressive strategies such as purchasing a large amount of deep OTM (Out of the money) options or writing naked calls. Behind every option strategy there is always a risk and reward profile that is well-defined. You will have to understand this if you want to find out which strategy to adopt.
Step #3: Check out the Volatility
It is implied volatility that determines the price of an option. Therefore you may have to do a thorough study to determine the level of volatility your option is associated with before following the nifty call put tips. Once you do this, you will have to compare this level with the historical volatility of the stock as well as the general level of stock market volatility. This is going to be a key factor when it comes to deciding on the best option trading strategy.
Step #4: Figure out the events
Events are of two types – market-wide events and stock-specific events. The events that impact the broad markets are called market-wide events. They include the economic data releases, Federal Reserve announcements, and the like. Stock-specific events on the other hand comprise of the spin-offs, product launches, and earnings reports that are specific to the stock. Nevertheless, it is important to consider only the expected events. Events like these, while on the run-up, can affect the level of implied volatility of options. Once they do occur, they end up impacting the price of the stock in a big way. The main idea is to identify such events that can impact your underlying asset so that you can decide on an appropriate expiration for the option trade.
Step #5: Decide upon a strategy
Once you have determined your investment objective, defined your risk-reward payoff, identified the level of implied volatility and figured out the key events that can affect your underlying asset, it becomes easier for you to device an stock option trading strategy that can help you achieve your goal. For instance, if you have a size able stock portfolio and a low risk tolerance, and if you want to make some money before the companies start publishing their quarterly earnings reports, you may want to go with a covered call strategy, where in you can write calls on the stocks that you hold in your portfolio. On the other hand if you are someone who likes to take those long shots and if you are anticipating a big decline in the stock market in the near future, you may want to check out some nifty option tips and settle down on purchasing some deep OTM puts.
Step #6: Specify the option parameters for nifty option tips
Once you are ready with your option trading strategy, you may want to establish a few parameters such as the strike price, expiration of the option, and the option delta, before implementing the same. Let us say you want to purchase a call that has a very long expiration, however at a very low cost. You may then want to look at purchasing an OTM call. However, an ITM option would be better if you wish to go for one with a high option delta.
Following a few best nifty option tips and the above six steps in an orderly manner can make it easier for you to pick the right stop option to trade. Nevertheless, if you have a hard time memorizing these steps, Share Adviser gives you a handy mnemonic to remember – PROVES (P for Parameters, R for Risk/Reward, O for Objective, V for Volatility, E for Events, and S for Strategy). Make sure you remember the order.
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