The Pitfalls in Option Trading
Ever since option trading was introduced in Indian bourses the investors have made a beeline to make a fast buck, And going by the size of the volume of turnover it may concluded that this form of trading has come to stay. But the risks inherent in this form of could be ignored only to risk bankruptcy. The options should be only looked at as a tool for risk management. For instance an investor going long on a particular stock can cover himself well by going short on it in option and thereby succeeds in substantially eliminating his risks in case of wild swings in market prices or excessive volatility. Although it is all most impossible to shield yourself 100%, this potential and powerful tool if used imaginatively and knowledgeably could be a boon for investors. Decisions to buy a call or a put should always be guided by a host of pragmatic considerations. If you decide to buy an index Option, the state of the market,the activities of the Foreign Financial Institutions and Domestic FIIs, the movement of dollar and other parameters should come under the scanner.
Perhaps the decisions involving buying of calls or puts in stock option pose the greatest challenge. Whenever you are going for a stock specific purchase you are taking up a position on its performance which is a dynamic element. A company doing otherwise well may find itself at the receiving end on a sudden adverse element. So one has to be extremely careful in this respect.
One more danger in this form of trading arises out of taking naked positon the other side. In a sustained bull market buying a call pays rich dividends but once it snaps its bullish streak and bears taking control of the market, can expose one to avoidable great financial loss which could be avoided by doing a two-way trade.
Another important aspect of option trading is the time element. As you you may be knowing that option are just contracts with time specific expiry. The longer the life of the contract,the higher is its premium.
Finally its suitability as a form of invest would mainly depend on financial resources,your risk appetite and level of knowledge in this field.
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